KAOOY - Kao Corporation (KAOCF) Q3 2023 Earnings Call Transcript

2023-11-11 13:11:03 ET

Kao Corporation (KAOCF)

Q3 2023 Earnings Conference Call

November 8, 2023, 2:00 AM ET

Company Participants

Masakazu Negoro - Senior Managing Executive Officer, Responsible, Management Finance

Conference Call Participants

Presentation

Masakazu Negoro

Hello. I am Negoro. Now, if you have the presentation material on hand, please turn to page seven to begin with. I would like to begin with the highlights of the consolidated financial results.

Net sales was JPY1,125.9 billion, down 0.2%. Excluding forex impact, net sales was down 2.9%. Core operating income was JPY70.8 billion, down 8% from the same period last year, a significant improvement from second quarter cumulative of minus 36%. As a result, the core operating margin was 6.3%. The difference between core operating income and operating income, JPY70.8 billion and JPY50.7 billion, the difference of JPY20.1 billion accounts for the cumulative structural reform expenses up to the third quarter. Net income attributable to the parent company was JPY50.2 billion, a decrease of 13.9% from the same period last year. Basic earnings per share was JPY108.02, down 12.8% year-over-year.

Now, continuing on to page eight, please refer to the third quarter consolidated financial highlights. This is a highlight of the consolidated earnings for the third quarter only. We would like to draw your attention to core operating income here. The second line from the top.

Core operating income was JPY36.6 billion, up JPY13.1 billion year-over-year. Core operating profit margin improved from 5.9% to 9.4%.

Please continue on to page nine. So here, the key points of the financial results. At the second quarter results meeting, I mentioned that we had reached a turning point, and I believe that in the third quarter, we are moving into a growth trajectory, driven by our mainstay Household and Personal Care business.

In particular, the Fabric and Home Care business, a stable profit area, made a significant contribution to profit improvement, while maintaining the top market share by promoting strategic price increases and high value-added products. In addition, efforts to reduce inventories also contributed to improve cash flow.

In the Skin Care business, a growth driver, we worked together with the sales division to revitalize the market by proposing high value-added products as the spring and summer season extended due to rising temperatures. As a result, we were able to maintain the top market share for UV care products and other products, contributing significantly to improved profits.

In the Cosmetic business, while Japanese market is on the recovery trend, G11, a focus brand, achieved significant growth. On the other hand, overall, core operating income fell short of the plan due to lower sales in China where sales were affected by the Treated Water Discharge program and sales promotion activities were also curbed.

In the Chemical business, while sales in the United States and Japan are recovering, sales and profits in Europe fell below the previous year’s levels. Although they improved from the second quarter due to intensified competition, amid declining demand.

As for structural transformation, which I will explain later, we recorded expenses of JPY11.5 billion mainly for the reorganization of domestic production of disposable baby diapers for a cumulative total of JPY20.1 billion.

Now, let us continue on to page 13. This page shows the third quarter results by segment. Please refer to Consumer Products business on the third line from the bottom. Overall sales in the Consumer Products business increased 0.6%. The breakdown of 3.8% increase in price hike and a 3.2% decrease in volume and others.

Core operating income was JPY28.8 billion, a significant increase of JPY12.5 billion year-over-year and the core operating margin recovered to 9.4%. This was driven by the Hygiene and Living Care and Health and Beauty Care businesses.

The Hygiene and Living Care business was the one that made the most progress in improving profits led by strategic price increases and others with core business profit of JPY14 billion, an increase of JPY8.2 billion year-over-year.

The Health and Beauty Care business improved profits by increasing the volume of high value-added products, posted core operating income of JPY14.5 billion, up JPY5.5 billion year-over-year.

The Cosmetic business was down 1.8% in sales to JPY59.3 billion. While positive in Japan, it was a big negative in Asia, especially in China. Core operating income was JPY400 million overall as a result of a significant decrease in sales, partly due to the curtailment of sales promotion activities using KOLs and others due to the Treated Water Discharge issue.

In the Chemical business, core operating income was JPY7.4 billion, an increase of JPY700 million year-over-year and the core operating income margin improved by 0.4 percentage points from the second quarter despite the decrease in sales due to a decline in the market.

Now please continue on to page 14. Changes from the first half to the third quarter and analysis of changes in operating income are provided here on this page. Now first, please refer to the graph below. In the third quarter, the right end shows JPY24.8 billion and the left end shows JPY23.3 billion, which is the difference in operating income between the last year and this year.

Excluding the JPY11.5 billion in restructuring costs, the total income was JPY36.3 billion, an increase of JPY13 billion, compared to JPY23.3 billion in the previous year. Positive values are shown in green and negative values in gray. Adding the gain on raw materials of JPY2 billion and the price increase of JPY11.5 billion, we arrive at JPY13.5 billion. These two factors have created an increase in profit.

Cosmetics volume was down by JPY1 billion year-over-year, while Chemicals marginal profit decreased by JPY1 billion versus the prior year. Compared to the first half, Chemical sales have improved significantly. SG&A expenses increased JPY1.5 billion, due in part to costs on marketing expenses in China and Southeast Asia.

Please continue on to page 15 for an analysis of changes in cumulative to the third quarter operating income. The chart shows the cumulative total from January to September. The JPY23 billion in price increases absorbed JPY8 billion in raw material price hikes and thanks to excess amount of JPY15 billion, the majority of the JPY6 billion volume decline in first Other Household and Personal Care business and the JPY11 billion decline in marginal profit from Chemicals was offset. Structural reform expenses totaled JPY20.1 billion and TCR effects amounted to JPY9 billion.

I will now explain our structural reform. Please turn to page 23. Structural reforms are being carried out just as planned and have entered a climax from the fourth quarter. Today, I would like to discuss a little more details on the topic. The total cost of JPY60 billion shared in the second quarter is in line with our expectation at this point in time. Therefore, we plan to record about JPY40 billion in the fourth quarter.

Now first, regarding disposable baby diapers, as we have recently announced that our factory in China is proceeding with procedures for closure. We are currently in the process of selecting a transferee for the assets and land use rights, which is expected to be completed by the end of this year. As a result, we expect to incur expenses of about JPY5 billion in the fourth quarter, including the retirement or sales of some fixed assets related to China.

In the third quarter, the company recorded an impairment loss on its domestic facilities as a result of the reorganization of domestic diaper production. Baby diapers would account for about 40% of the total restructuring cost.

Next, regarding the Cosmetics, we will accelerate to narrow down on the key Cosmetic brands. In the Other Household and Personal Care and the Chemical businesses, we plan to conduct consolidation, divestment of the low profit fixed assets and reduction of the inventories.

The decrease in the gross profit caused by this product consolidation has already been incorporated in the midterm plan and is not included in the current structure reform expenses. We allocate about 20% of the total expenses in this field as a net amount, assuming the sales of some assets. We expect that the Cosmetics will account for more than 50% of the total expenses.

The human capital structure reforms are intended only to maximize our employees’ passion and will to work. Our future is unpredictable because that we plan to review non-profitable businesses. The company has earmarked budget for strengthening the care carrier support program. We have already provided an overview of the project internally and we will continue to promote the project overseas. The amount of the expenses are still unknown, but we are committed to motivate our employees. We estimate that the structure reform expenses in this area will account for about 40% of the total expenses.

Page 25, operating income increase and decrease factors. Please look at the upper graph. We expect an additional JPY3.0 billion impact from the raw materials in the fourth quarter and an JPY11 billion price pass-through or price increase in the fourth quarter.

In order to achieve the annual target of the JPY120 billion in core operating profit, we need JPY49.2 billion in core operating profit in the fourth quarter. Of the JPY16 billion difference from the actual JPY33.2 billion, we plan to cover about 90% or JPY14 billion with those two profits.

While the Chemical business is on a recovery track after a sharp decline in the profits from the second half of 2022, we plan to increase the profits by JPY4.0 billion year-on-year, mainly due to increased sales of the expanded products lineups, although there are uncertainties such as economic trend in Europe.

How much of the impact of China’s volume decline in the Cosmetics products will be absorbed in Japan? This is indeed a key point. The forecast is minus JPY5 billion from the same period of the previous year. Increase in the SG&A expenses are offset by the foreign exchange gains and the additional TCR of the JPY3 billion.

Please see the graph below. Core operating income is expected to be JPY120 billion for the year, with no change in the JPY10 billion increase over 2022. In order to carry out the structural reforms, we expect the operating income to decline by JPY50 billion to JPY60 billion. The number shown in orange at the bottom of the graph shows the difference from the figure introduced during the second quarter briefing.

Next, page 26, raw material price trends and the price increase effects. The graph on the left shows the impact of the raw material price hikes starting in 2021. The chart shows that the impact of the strategic price hikes and the extent to which such increases have offset the impact of the raw material costs.

We plan to cover 90% by the end of this year. The bar graph on the right shows a ratio of the major raw materials compared to what it was in the fiscal year 2022. Areas surrounded by the bar graphs represent the improvement in the profitability. Thanks to the price increase, the Consumer Products business started to generate more profit than the previous year since second quarter.

Page 27, I’m going to discuss the measures from the fourth quarter in three business areas. First, Household and Personal Care business. Fourth quarter PHBC market in Japan will remain steady.

In China, we expect the economy continues to stagnate. The impact of the economic slump and the Treated Water issue will continue at least through the first quarter next year. In this environment, we will continue to implement strategic price increases and will also continue to promote high value-added products. Kao will continue to improve the profits through these measures. New products have performed well in the current fiscal year.

Page 30 to 33 of the document introduce our main new Fabric and Home Care products, which have been steadily increasing their market shares since their launches. In the Hair Care business, which has been a challenge, we are now preparing for a turnaround from the next fiscal year.

Page 28, Cosmetic business. We expect the domestic market to continue to expand and inbound sales and the makeup market to recover following the third quarter. In the Chinese market, we expect a low-digit growth in the first half of the year, but we continue to have a sense of uncertainty regarding the Japanese brands.

Europe is entering its peak sales season, but we do not expect significant growth due to inflation. In such a situation, the key point of our policy is to focus on expanding the sales of prestigious brands in the Japanese market. Many of our products will keep winning the best cosmetics awards for the second half of the year following the first year. We intend to take advantage of this opportunity.

In the recovery makeup market, the KATE’s new products and the limited edition launches are expected to boost us into by far the top sellers position. We will aim to become number one in Japan. We will also focus on expanding the sales in Japan by focusing on the inbound sales.

In the Chinese market, although there is a sense of uncertainty, KOL, which has been suspended, has resumed its operation and the freeplus rebranded products and Curél’s mainstay products SENSAI will also sell aggressively at the flagship stores. In Europe, SENSAI and MOLTON BROWN are entering their best sales season.

Lastly, page 29, Chemical business. Many of the major global chemical companies in Europe and America have revised their full year sales and profit forecast downward. Economic recovery in European countries is sluggish and the demand remains stagnant.

In the oil and fats-related field, recovery has begun in the United States, but the recovery in the high value-added information, business related industry, which include the personal computer and the cell phones, and is Kao’s target market has been slow.

Against such a backdrop, there is no significant change in our policies from the end of the previous quarter due to the sluggish demand and El Nino-induced oil price fluctuation, the product prices would not recover significantly. But we are determined to make steady recovery in the fourth quarter by expanding the sales of high profit products and high value-added products, specifically tertiary amines and aromatic chemicals.

The materials on pages 30 to 34 will not be covered for the interest of the time, but they are included as supplementary materials. This concludes my presentation. Ladies and gentlemen, thank you.

Question-and-Answer Session

Q -

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