Kao Corporation (KAOCF) Q1 2023 Earnings Call Transcript

Kao Corporation (OTCPK:KAOCF) Q1 2023 Results Conference Call May 10, 2023 3:00 AM ET

Company Participants

Masakazu Negoro - Managing Executive Officer

Masakazu Negoro

Please look at the slides and turn to Page 5, which is the highlights of consolidated financial results. Net sales grew by 0.3% and was ¥347.8 billion. Excluding the effect of currency translation, this is a 3.8% like-for-like reduction. Operating income was ¥7.3 billion, which is a reduction of 68.3% year-on-year. Operating margin was 2.1%.

Net income attributable to owners of the parent was ¥4.8 billion, which is a year-on-year decline of 73.6%. Basic earnings per share was ¥10.36, which is a reduction of 73.1% year-on-year. Now please turn to Page 6, key points of Q1 results. Looking back on the first quarter, operating income declined significantly from the previous year. In the Household and Personal Care Business, price increases offset 90% of the impact of high material prices.

However, due to decrease in sales in underperforming categories and the impact of consumers stocking up on products following the year-end campaign, volume decreased and that led to a decrease in profits. In the Cosmetics Business, the Japanese market was on a recovery trajectory, and G11 posted two-digit growth.

But in the Chinese market, operating income declined because of the curb on shipments of existing products. In the Chemicals Business, because of the disruption in logistics last year, especially in the Americas and Europe and the ensuing slowdown in the economy, inventory built up and demand became sluggish. And because of that, there was a significant decline from the previous year.

For profits in the Consumer Products Business, it was as planned and in the Chemicals business, it aggravated more than we had expected. I will talk about the analysis and the measures to be taken from the second quarter onwards to achieve the disclosed targets later on in the presentation. Please turn to Page 7 for the sales results. This is a by segment, by area, consolidated net sales by segment and geographic regions of the total of ¥347.8 billion in net sales. This is shown in a table format.

And for the Consumer Products Business overall, the total was ¥265.3 billion, which is a 2.3% decline on a like-for-like basis. The Chemical Business was ¥93.2 billion, which is a like-for-like decline of 7.4%. The Chemicals Business sales reduction includes the reduction of oil and fat prices. In the Consumer Products business, following last year, Asian and Chinese market diaper business was struggling and the cosmetics rebranding leading to a curb on shipments had a major effect on the decline in profits. On the other hand, the Health and Beauty Care Business in Americas and Europe for both skin care and salon businesses, we saw a major increase because of the bad results of the previous year.

Please turn to Page 8 for the consolidated results by segment. Because of the soaring material prices, we have been increasing prices since the second quarter of 2022. But in order to make the effect of price increases clearer, we decided to disclose the like-for-like change in volume and price for each segment. Hygiene and Living Care Business is impacted most by soaring material prices. And the contribution of prices to net sales is increasing in this business, which shows that we are implementing price increases steadily.

The breakdown of the ¥7.3 billion in operating income is shown by segment. In the first quarter, the Life Care Business and Cosmetics Businesses posted losses. The analysis of year-on-year change will be shown in detail in the next page. So I will omit the details here. Now please turn to Page 9, which is the analysis of change in operating income for the first quarter, which is the analysis of operating income decline of ¥15.7 Billion.

The increases are shown in green, decreases are shown in grey. As you can see, in the Household and Personal Care Business, there was a negative impact of ¥5.5 billion of the soaring material prices, but ¥5 billion of that was offset by the increase in prices. On the other hand, the decrease in sales in underperforming categories and the impact of consumers stocking up on products had a major impact. Volume had a negative impact of ¥4 billion; in total, a negative impact of ¥4.5 billion. For Cosmetics, because of reduced shipments and sales of existing products at reduced prices before the freeplus branding, in total, there was an impact of minus ¥4 billion.

The marginal profit of the Chemical Business was reduced by ¥6 billion, and the Cosmetics Business structural reform cost had an impact of ¥1 billion in total, leading to ¥7.3 billion. Please turn to Page 10 for the forecast of changes in operating income. For the second quarter, material prices are expected to continue to increase from the previous year. We see the second quarter as a transition period in which we implement strategic price increases and pursue volume as well. In the second quarter, in the Household and Personal Care Business, the material prices will increase ¥4 billion, and the price increases will have a positive impact of ¥6 billion, and the volume will push up the results by ¥1 billion.

In the Cosmetics Business, likewise, the material increase will be ¥500 million and the price increase will have an impact of ¥1 billion. The volume, because of the freeplus branding and the new products, expansion in sales will lead to an increase of ¥3.5 billion year-on-year. In the Chemicals Business, the Americas and Europe inventory reduction will be promoted. In Q2, there will be -- and Q2 will be a transition period. Last year's results were very good, and therefore, we'll not go back to the previous level.

However, under this situation, the marketing costs in the SG&A will increase. And we will proactively capture opportunities arising from market recovery. As a result, ¥24.7 billion, which is a decrease for ¥6 billion from the previous year. For the first half compared to the previous year, it will be ¥21.7 billion. But as we have been saying, we will be catching up in the second half.

There are three points. First, further strategic increases in price; second, recovery of Cosmetics; and third, the price increase in Chemicals Business. Now please turn to Page 11 for the changes in raw material prices and effects of price increases. We have two graphs here. There are three points here.

Please turn to the left-hand side graph. The left-hand side graph is a line graph, which shows you an image. The second quarter is a transition period. And from July onwards, the material cost will decrease from the previous year. And furthermore, we will increase prices for more products, and we are planning to increase our profits by ¥13 billion.

The second point is a bar graph. From Q3, inorganic and other materials' material costs will come down significantly compared to the previous year. In this area, the Hygiene and Living Care Business will contribute to an improvement in margin. The third point is the graph on the right-hand side. As of the end of this year, the price increases will cover only 60% of raw material price increases since 2021.

Currently, the price negotiations are proceeding smoothly with the understanding of retailers. Please turn to Page 12 for the measures from Q2 onwards for the Household and Personal Care Business. In the market, partly due to the normalization after COVID, we are seeing recovery globally. In Japan, there are more opportunities to go out. And we saw an increase year-on-year of two digits in UV care products, and makeup removers and styling products grew by 5%.

Under this situation in the Household and Personal Care Business, Kao's original new value offering from laundry -- for laundry will be presented at the time of new product launch. With it, we are planning to realize market revitalization and high value add. So please look forward to these measures.

In addition to that, currently, the sunscreen market is growing over 40% and Bioré grew by over 80% and share is expanding as well. In particular, Bioré UV Mist is a big hit. As a single product, it is number one in the market in terms of sales. Bioré New Oil Makeup Remover achieved the annual target in the second week since launch. In the entire category of market removers, we are expecting double-digit growth from the previous year.

For Invest products, Essential Barrier Shampoo showed a very good start, achieving twice the share of the target at multiple major drug stores. We will continue to launch and develop high value add and new or improved products to expand profits. Please turn to Page 13 for the increases in market share and unit price from high value added products and marketing innovations. House major products, Attack, [Tokito] and Bioré UV have steadily increased value add. And as a result, they increased both share and unit price.

For Laurier, with the renewal in marketing initiatives, we were able to enhance brand resonance and share increase as a result. As I mentioned, when I talked about increases in material prices, as the prices are now stabilizing compared to the previous year, the profitability of these major products will turn to recovery. Now please turn to Page 14, which shows the measures from Q2 onwards for the Cosmetics Business. The cosmetics market with the progress toward end of mask wearing is seeing recovery in the makeup market. In particular, the lipstick market was down to 40% over 2019, but now it is back to 60% or more.

The makeup base market was down to 60% over the 2019 level. However, now it is back to around 80%. If you look at the inbound demand, Chinese visitors to Japan is still 11% of 2019. However, inbound demand at department stores is on the rise. So measures for Q2 onwards, in Japan, the priority is growth of prestige brands.

KANEBO is showing good results after rebranding. With the hits of UV serum and clean foundation products launched last year, KANEBO is seeing an increase in customers. And lotion that was launched last year is further enhancing that trend. LUNASOL is continuing to do well in eyeshadow products. And RMK, new foundation, is doing well as well.

For LIP MONSTER, because of shortage in stock, we caused inconveniences to our customers. However, we will increase the production capacity by 50%. Communication for Primavista was strengthened from April. And we will establish a position for Primavista as the makeup-based brand. In China, because of the freeplus rebranding and strengthening of evidence-based marketing, we will target two-digit growth.

Page 15 is measures from Q2 onward for the Chemicals Business. In the Chemicals Business, the challenge is demand in Americas and Europe. Q2 is a transition period, and we expect recovery from Q3 onwards. For measures for Q2 onwards, by adding facilities for high-profit products, we will strengthen supply of over demand markets and increase profits. In the global market in tertiary amines, Kao has a number one position.

Jasmine fragrance MDJ, or methyl dihydrojasmonate, is a product in which we have a number two position globally. We will start to expand capacity from Q3 to expand sales and we will improve profitability for information, materials and others. And at the same time, increase prices for surfactants to improve profitability. Highly durable asphalt modifiers are contributing to ESG. So this product and adjuvants for aerial spraying of agrochemicals will contribute to expansion of business.

Last year -- in the second half of last year in the Chemicals Business, we saw this deceleration of the economy and the sudden decrease in oil and fat prices, and that led to valuation loss and inventory. And that aggravated profitability very quickly. This year, we will implement the measures I mentioned. And we are planning for recovery up to the level that is slightly above the average year. Next is the upcoming events.

On August 3, we will have the Q2 results meeting. And at the same time, we will have midterm plan progress, growth strategy and structural reform briefing sessions at the same time. And before -- or after that, we will have a briefing session on the three business areas in the growth driver area.

That is all from my side. Thank you.

Question-and-Answer Session

End of Q&A