Full Year 2019 Kao Corp Earnings Call
Tokyo Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Kao Corp earnings conference call or presentation Tuesday, February 4, 2020 at 10:59:00am GMT
TEXT version of Transcript
* Kenichi Yamauchi
Kao Corporation - Executive Officer and Senior VP of Global Finance & Accounting
* Michitaka Sawada
Kao Corporation - CEO, President & Representative Director
Kenichi Yamauchi, Kao Corporation - Executive Officer and Senior VP of Global Finance & Accounting 
So now we would like to get started with the financial results briefing for the fiscal 2019. I'm Yamauchi, Senior Vice President of Accounting and Finance.
So please take a look at Page 4 of your presentation. Let me go through the figures first.
So please look at the middle portion. We achieved 10th consecutive fiscal year of increases in OP and seventh consecutive year of record high OP that fell short to forecast. So at the end of Q3, we held a brief meeting. And we thought we could do more than this, but -- so we managed to ensure the operating income.
Regarding the sales, it looks like to have declined, but for the like-for-like result, it increased by 0.7%, excluding FX impact. Excluding -- for the Consumer Product business, the like-for-like growth was 2.9%. The chemical, so the decline in the prices for natural fats and oils and affected by the economy, so Chemical Business decreased by 6.6%.
So overall, we saw the sluggish situation. But in reality, we saw increases in the sales.
At the very bottom, we managed to ensure the OP increase. So as we mentioned, to increase JPY 10 of dividend. So as planned, we decided to go with JPY 130 dividend and 30th consecutive fiscal year of increase in dividends.
On Page 5, the Business Strategies and Progress, let me briefly touch on this. For Cosmetics Business, the K20 target sales of JPY 300 billion and 10% OP margin was achieved. It was achieved 1 year ahead. Also G11 and R8 brands, we see some difference among different brands. But overall, they all went and performed strongly.
In Europe, SENSAI was rebranded, and we had a strong start, and we also began sales in Japan.
Skin Care and Hair Care business. During the summer, UVs and sheet products saw difficulties for Bioré products. But now we have introduced a Bioré u The Body products. This is the foam body cleanser product, and they were performing quite strong and contributed to the sales. Sales were firm in Asia. In the Americas, we faced a difficult situation due to the competition.
Hair care products. We saw a recovery in hair care products. Liese foam color product, it's not for the gray hair. It's for fashion coloring, and it's getting better. In the Americas, we have Oribe for the high-end hair salons. They are going strong. Shampoos, conditioner business, the largest market, but the mass market has been shrinking. We do have premium shampoos, conditioners in the market, but mass market business is larger where we can gain much bigger volume. So we are affected a lot for the shrinking market.
Human Health Care business. It's basically the Merries business. We stopped the declining. However, the Merries hasn't started to come back. And this year, we will be taking various measures so that we can gain an opportunity to come back once again. And we were also exposed to the depreciation of yuan and also price competition. There are many other factors affecting the business, but we want to go -- get through this situation so that we can start recovering back.
But actually, the Laurier, the sanitary napkins, grew significantly. It's going to be a part of one of the major brands in the near term.
Fabric and Home Care business, we have Attack ZERO. We had huge expectations for this product, but seems like it hasn't really meeting our expectations. The overall detergent business saw growth in sales. And we also have other products such as CuCute or Magiclean. Even though we see the strong competition in the market, these products are quite strong to go against them. Then with these products, we were able to secure the sales growth.
The Chemical Business saw the decline in the price for natural fats and oil, so that's been also putting pressure on the pricing. But on the income level, because of the drop in raw material, we managed to ensure the profit increase.
On Page 6, the market conditions. This is the average result, so it might be difficult to understand. But when you look at SRI, this is the data from POS from a storefront. It was at 101%. So it's including inbound purchases, but we are seeing some impact. So because of the tax hike, we saw the huge increase at the end of September, but then putting pressure in October and November, and this came up as an average number. SCI is from the purchasing data from the consumer monitors. This is covering e-commerce numbers, mainly on Japanese consumers. It's slightly higher maybe, but that's also covering the growth supported by the tax hike.
A similar situation for the cosmetics market. The bottom half is showing the price trend. And since we see more premium products, so that's been also pushing up the price trend.
And let me go over more details. Market situation on a monthly basis, the bottom half is shown in the results for the previous consumption tax hike. And the top half, it's showing this time. Now we saw a smaller spike, so we didn't have a momentum as strong as we used to see in the past. We did see some spike, but not as strong as we thought, but the plot was as large as we saw in a previous tax hike. So we haven't really come back fully yet. And we will need to see how long this situation will continue after January. Whether this was because of the reaction of a tax hike or not, but the Cosmetics Business is exposed to a difficult market. That's what we can tell at this point.
And let me go to Page 8 for the figures. As I mentioned earlier, net sales was JPY 1.5022 trillion. It's down by 0.4%, but like-for-like was positive 0.7%. Operating income was JPY 211.7 billion. It's up by JPY 4 billion year-on-year. Net income was JPY 150.3 billion. It's down by JPY 5 billion year-on-year. It wasn't because that we paid more taxes in 2019. The reason why we see the difference in net income was because, in 2018, we enjoyed the tax break impact of the income expansion regulation. And so because of that, we had a high comp, which we don't have for the fiscal 2019, and that's what caused this difference.
Regarding return on equity, because of the decline in net income, it came out to be 17.6%. And we intend to increase this number furthermore. At the bottom in the box, the free cash flow was JPY 128.5 billion, so this is a number deducting the net cash flow from investing activities from the operating activities. The rest of money is spent for the dividend and share buybacks, so pretty much utilized for the return to shareholders.
On Page 9, this is showing our sales results. As you see, Cosmetics in Japan, in Asia, we see the firm, strong business. Also in Europe, because of the SENSAI and Molton Brown, we saw growth. In Skin Care and Hair Care business, it wasn't really meeting our expectations. But in the latter half of the year, because of the body cleanser, we saw some recovery in this business, so trying to manage increasing the profit in Asia and Japan. However, we still see very fierce competition in Western countries.
Japan's net sales in Human Health Care business were down by 6.6% year-on-year. Laurier was performing well, but the effects of Merries were negative. Sales in Asia were up by 1.9% year-on-year. China's situation was tough, but we managed to increase sales, thanks to the positive performance of Merries in Indonesia. Fabric and Home Care sales in Japan increased 3% year-on-year. Although there were various factors, we managed to increase sales. Asia also grew by 2.3%.
The outlier in the Americas is due to the acquisition of WSI, a company that provides wash products to commercial laundry market, which was consolidated in August 2018. And as you can see, Chemical Business was affected by falling prices and the economy. We were impacted by the sluggish trend in the automobile industry.
Page 10 shows the consolidated results by segment. The left-hand side shows the breakdown of net sales by business unit or segment. Sales of Cosmetics increased 9%. Skin Care and Hair Care increased 1.1%. Human Health Care decreased 3.5%. Fabric and Home Care increased 4.6%, and Chemical decreased 6.6%. On the other hand, Cosmetics operating income grew JPY 13.7 billion year-on-year to JPY 41.4 billion. And the OP margin rose strongly to 13.7%. We were expecting a stronger performance in Skin Care and Hair Care, but the profit was just over JPY 700 million, so we want to make a recovery this fiscal term. Human Health Care has been down for some time, and we were trying to reduce the negative profit, but it did not trend well, and the situation remained tough. Fabric and Home Care managed to increase profits by JPY 500 million, and Chemicals increased profit by JPY 200 million. There was a striking difference in the performance among segments last year.
Page 12 shows the analysis of change in consolidated operating income. The increase in sales volume and others were down by JPY 5 billion. It would have been an increase if they were simply the quantity factor, but it decreased because the prices of consumer products had fallen due to the increased competition for Merries and disposal of old products and detergents. The impact from change in raw material prices net proved beneficial with a positive JPY 11 billion, and the breakdown was JPY 3 billion for Consumer Products and JPY 8 billion for Chemical. Chemical segment managed to maintain prices, but the volume did not grow as expected due to sluggish economy, resulting in this figure.
Cost reduction, TCR, was a positive of JPY 8 billion. SG&A expenses, which include personnel expenses, research expenses and IT investments, were down by JPY 3 billion, primarily due to R&D and IT expenses. Freight and logistics expenses rose, resulting in a negative JPY 4 billion impact. As for product mix, impact of currency translation and others, the depreciation of yuan had post a negative impact when importing Merries into China, resulting in minus JPY 3 billion. Everything combined, operating income increased by JPY 4 billion year-on-year.
Page 14 shows the major assumptions for FY 2020 forecast. As President Sawada will explain later, it is difficult to read the market trends. Hence, we expect a flat year-on-year growth rate. Since sales are difficult to foresee at the beginning of the year. They are indicated in a range.
For the full year, sales are expected to be in the range between JPY 1.51 trillion to JPY 1.53 trillion, but the target is basically JPY 1.53 trillion. Among them, the effect of currency translation is expected to increase by 0.6% to JPY 8.3 billion. As for the impact of change in the method of recognizing sales, some transactions used the net amount method where we sell the goods at the purchase amount. Due to the strict sales recognition method under IFRS, we plan to change our method to book only the commissions under contract as net sales. This will be carried out in consultation with our audit firm. This effect is worth minus 2.3%. If the actual sales result in JPY 1.53 trillion, like-for-like growth excluding above impact will be plus 3.6%. So we expect a fairly large increase in sales. As for the impact of raw material price fluctuations, we forecast gross impact of minus JPY 6 billion and net impact of minus JPY 1 billion due to a slight rise in prices of natural fats and oils. This would generally post a negative effect, but it will be positive for some parts of the Chemical segment. All in all, minus JPY 1 billion of the net impact would mean JPY 2 billion profit decrease in Chemicals.
Consumer products are expected to increase profits by around JPY 1 billion because the prices of petrochemical raw materials are falling. TCR, our total cost reduction, is expected to be around JPY 6 billion. Capital investment will be at a high level of JPY 90 billion. Depreciation and amortization expenses are expected to be JPY 72 billion because investment levels have been high for some time. There will be no change in the state where an increase in fixed costs will be covered by increased sales.
On Page 15, the consolidated operating results are forecasted with sales ranging from JPY 1.51 trillion to JPY 1.53 trillion and the operating income ranging from JPY 220 billion to JPY 230 billion, and we would like to aim for OP of JPY 230 billion.
We would like to touch on the reason for setting the range later in the explanation from President Sawada and during the Q&A session. Since some parts of the businesses are affected by inbounds, et cetera, the figures are shown in a range.
Net income attributable to owners of the parent is expected to range from JPY 154 billion to JPY 161 billion, with an interval of about JPY 7 billion. The range for net sales are JPY 20 billion, JPY 10 billion for operating income, JPY 7 billion for net income. The dividend is planned to increase by JPY 10 to JPY 140. The sales forecast for FY 2020 on Page 16 shows where we expect to grow our business, but the impact of inbound and other factors is unclear. The current target is to increase the Cosmetics Business by 5.1%, Skin Care and Hair Care Business by 2.8%, Human Health Care Business by 2.7% and Fabric and Home Care Business by 2.6%. Chemical Business plans to increase by 7.1% due to the rising prices of natural fats and oils. The company forecasts a 3.6% increase in consolidated sales if we reach JPY 1.53 trillion.
This concludes my explanation.
Michitaka Sawada, Kao Corporation - CEO, President & Representative Director 
Thank you very much for coming to this meeting albeit busy schedule. I am Sawada, the President and CEO of the company. I have a lot to talk, but I need to also save some time for Q&A.
So 2019 was a decisive year for Kao, that's what we have announced and we started 2019, a year ago. So we were quite active, both financially and nonfinancially. Well, putting aside the results, but for the past 12 months, we were exposed to a very difficult year. But we tried many things and we challenged in different businesses. So of course, for example, we addressed tax hike. And we also expanded Cosmetics Business. We activated challenged businesses such as baby diapers, health care -- hair care business, consumer products in U.S. and Europe. We succeeded in new products, improved products such as Attack ZERO. We promoted high value-added chemical business, and we proposed new business projects. For now, financial areas, we try to steer into ESG, and we also try to realize the technological innovations, which we explained last year at this meeting.
Let me go to the nonfinancial activities first. We announced the ESG strategies in April. We showed determination to implement them in September. For realizing technological innovations, we have fine fiber RNA monitoring and Bio IOS. So we took actions to address them one after another, we were able to make announcement of them. And we promote women's participation advancement in the workplace, and we have expanded GENKI Project to help supporting the health, and we enhanced social contribution activities. So we shouldn't be complacent about all these activities. So we need to have how we are viewed from a third-party perspective.
And our various awards we received as well, and here's a list. From a global perspective, things like Dow Jones DJSI, MSCI and FTSE. I think now we are selected in a better position at this point, so we are seeing certain results. Regarding CDP, some of them have not been announced yet. But we saw the improvement from A- to A, so we're also getting good results and evaluation. Bloomberg, we are now selected since 2 years ago. So they appreciated our efforts to address gender equality. And the most important index, World Most Ethical Companies, we are selected to be part of that for 13 years in a row. This year, it's not been announced yet. We hope to see a good result. The main awards in Japan are listed here, and we are also getting various awards, for example, Health and Productivity Management Brand, the Leading Companies Where Women Shine, Green Sustainable Chemistry Awards, UMIGOMI Zero Awards, 3Rs Promotion Merit Awards, and especially, we were awarded with the Best IR Award. We received this award after 17 years. So we started to see the results of all our efforts to work with you. And if we are able to get this Best IR Award for 3 years in a row, we would be receiving the IR Grand Prix, which we have to obtain. So we will continue to make efforts. So this is not complete. But of course, we want to make progress little by little, and that's what we saw these past 12 months.
And regarding the financial activities, Yamauchi explained them, all these figures, so I won't go too much in details. But we started to have -- this year with expectations so as a decisive year. But unfortunately, we saw a disappointing result. I think it was a result for not meeting your expectations fully. So based on the lessons learned from this year and also the knowledge and results we learned from this year, we want to improve furthermore next year. We will share what exactly happened with more details and to explain you how we will move into 2020.
So I saw the 2020 forecast numbers as a range. So we have been making profit increase of JPY 304 billion for the last year. So you might wonder whether we can really achieve JPY 18 billion increase in the last year, so we need to explain that, how we achieve them. But regarding operating income, we continue to increase the income for 10 years in a row, and we posted record-high OP for 7 years in a row. It's all a result of the efforts made by our staff as well as with your cooperation, and we hope to continue making these records for this year as well.
Looking back on 2019, let me go through what we did for each item we went through earlier. Regarding tax hike action, so we only captured 50% of the last-minute demand that we planned. But drop-wise, it was about 70% of the plan after the tax hike. Since we captured a little over 50% of the last-minute demands, so it would have been better if you only had half of the drop compared to the plan, but we had more than that. So the difference would have been about JPY 10 billion. And this JPY 10 billion would mean about JPY 5 billion on the gross profit level. That was quite big on impact.
So expansion of Cosmetic Business, I think it went much better than what we had expected. Murakami took a lead in this effort and for 2 years in a row, generating over JPY 10 billion profit. So that was a good result. And they were aiming to reach 10% margin, but they came actually going over 13% margin. So now it will be a challenge how to maintain this level. But I guess, we had a really good result in Cosmetics.
For challenged businesses, it would have been better to see a recovery by now. However, baby diaper business started to see a recovery trend, but it hasn't really reached the last year level. In 2018, we had a high start and then started to decline gradually. And including cross-border e-commerce business, we tried not to make too much effort. That was the fiscal '18, and that's why we started in fiscal '19. Now we see recovery in cross-border e-commerce, we started to see a recovery. And by doing so, we wanted to bring us back to a breakeven level. However, we still haven't come back to the last year level, so the upside that we have with Cosmetics was almost offset by this baby diaper business that was not expected by us.
We can talk more details in the Q&A session. Hair Care Business, it has come back to the last year level, so it was okay, but we wanted to actually do more and we have been aggressively introducing the products. However, it wasn't strong enough. The consumer products in Western countries, John Frieda went quite strong so far. However, it hasn't really boosted up to bring us back on an increasing trend. It wasn't that bad, but we actually thought we could do much better. So those challenged businesses are not really activated as much as we have to see.
So the new products and improved products. Attack ZERO, it exceeded last year and it's going in line with the market growth, but we have very high expectations to introduce this product. With this launch, we spent a lot in marketing activities. So it had to go much stronger, but it wasn't also strong enough to reach the level we expected.
However, luckily, in December, we started to see the market share growth. So compared to the beginning of the year, we are actually seeing a gradual improvement. And towards the end of the fiscal year, we should be in the direction which we expected, although it's a year behind. For new UV care business and because of the new EC law implementation in China and there were irregular weather, so we wanted to have much more growth but didn't grow that much. And we also saw irregular weather conditions during the summer, so the growth wasn't as strong as we thought. And that was the major reason for not seeing much growth in Skin Care business. But at the end of the year, we now have this new body cleanser product, which brought a much better result than we had expected. Without this, maybe we would have been -- we would have seen a much more difficult situation.
So the Chemical Business, I think we were able to see good results. For the Chemical, we saw the decline in the raw material cost -- raw materials. And all this should have been posted as the upside in a profit. However, we weren't able to enjoy the benefit of the added value of the product. This is because of the drop in volume. Nonconsumer products, we saw the decline in Chemical. That was affected by the FX. Also, the price in raw material, the prices for natural fats and oil declined to put pressure on the pricing of the products, but there was also impact of volume decline. So this net positive, because of the decline in raw material, was not completely gone, but the majority was offset by the decline of volume as well. That was unfortunate.
We wanted to see maybe JPY 1 billion or JPY 2 billion increase. However, we couldn't get it. But we are in a direction of providing more high value-added products in Chemicals. Still to come for the new business projects. We have infectious disease prevention product for the throat care, in part this is temporarily coloring agent in Asia and those will launch as planned. So we will see how they trend this year, but we are not expecting also big sales, but I think this will be quite influential to the market.
So by taking a different look on our forecast. So we had a difference of JPY 78 billion from a forecasted sales. So I analyzed how we came up with this difference so that -- let me explain this first so that it makes it easier for you to ask questions. Excluding FX and Chemical Business, Consumer Product Business had a difference of JPY 30 billion out of the JPY 78 billion. So if it ended up being only half of that, then that actually has resulted a profit growth of JPY 8 billion. So the CP business with high-margin business, we saw a big difference. That is the reason why we saw the weakness in profit. The negatives that was the misforecast or the misprediction before and after the tax hike, and that was about 1 -- JPY 10 billion, roughly. It's not -- it's a rough number, just -- and so you get the image.
And there was a delay in recovery in baby diapers as well. This is also overlapping with the negatives brought by before and after the tax hike. So we wouldn't be able to separate them, but there was a certain amount of impact of the delay in recovery. And we also saw the sluggishness in seasonal products and also not enough impact of new and improved products in Fabric and Hair Care. So those resulted to -- those have resulted to have a difference of JPY 30 billion. However, Cosmetics actually would have exceeded by JPY 10 billion compared to what we had forecasted, so the actual negative impact must have been about JPY 40 billion. So maybe not the whole amount, but if we could minimize the impact by half of that, and that would have changed the whole situation. That was a major reason for having such a result in profit. That's something we need to improve for the future. This is the impact on the sales.
On a profit-wise after the first half, we saw declines both in sales and profit. However, the profit was generated much more than what we had expected. And we thought if things went as planned in Q3 and Q4, we thought we would be able to achieve the plan. But at the end of Q3, we saw increases both in profit and sales. The profit increased by JPY 8.8 billion year-on-year. But I may have mentioned this somewhere else, but in Q3, we -- by exceeding the plan in Q3, even though we see a slight drop in Q4, then we will be achieving the original plan performed at level at the end of Q3. I guess we were shorted by about JPY 10 billion. So we didn't have enough last-minute demand.
There was also a potential of not having not much of a drop in after the tax hike, and we thought there will be new products in Cosmetics, and we plan to launch large products in the fall. So we were hoping to see some better results to come. So at the end of Q3, we didn't -- we were shorted by JPY 10 billion, but still, including going above this JPY 10 billion, and all in all, instead of having a year-on-year drop, we thought we could have a year-on-year growth. That's why we challenged for the quarter. But as a result, in Q4, we are on a declining trend. The year ended with a JPY 4.8 billion decrease to year-on-year JPY 4 billion plus. At the end of Q3, we did not give up on our target and continue to exert our best, including various measures. But at the end, the turnover of standard products had fallen. So deployed measures did not prove effective.
The issue existed not at the stores but at the trade inventory level. In anticipation of last-minute demand prior to consumption tax hike, we produced products in large volume, yet they did not sell as expected, which resulted in the pileup of trade inventory. As the movement of standard products was sluggish, not much was replenished, resulting in poor real-term turnover.
On the other hand, e-commerce has gained traction. Therefore, it may be necessary to raise the e-commerce ratio a little more. We do not have the full grasp of e-commerce data. However, that was our general impression. We did not assume the situation at the end of Q3 and the result of our hard work was seen in figures. The situation was explained in detail as we began FY 2020.
The budget was achieved once at the end of September last year. However, there were gaps in our last-minute demand forecast in October and November, and some businesses were not trending as expected. We factored those elements in, and we built the budget again in November. In January of this year, the budget was revised once more due to the outbreak of the coronavirus. This was the first time that we revised our forecast in 3 stages, and here are the numbers that came out. We will exert our outmost effort to achieve these numbers. We do not take these sales and profits slightly but rather take them seriously, and we adjust the budget in several steps. Where there is too much stretch, we reduce the target, whereas the number is raised where there is a room to put more effort. This will be explained later.
That said, if you look at this gap from a different light, if baby diapers trended as planned, the gap would have been eliminated. What we need to do now for FY 2020 is to stop the 2-year declining trend of baby diapers since the fall in baby diapers would cancel the positive factors elsewhere. From a different perspective, if the drop in baby diapers could be stopped, the overall business would grow favorably. However, we were not able to squeeze out the entire [exudate] last year. Around July last year, the yuan depreciated further, and sales in Japan fell by about 10% overall.
We booked billions of negative impact. This phenomenon didn't occur in the first half of last year. Therefore, the impact will be seen in the first half of FY 2020. This means that even if the situation in the previous term continues, we would see billions of negative impact. The plan was formulated on the premise that the company will manage the situation so that sales and profits will remain the same as the previous year.
With this in mind, let's talk about our forecast for consolidated business results for FY 2020. The forecasts have a wide range, and the company plans a maximum sales of JPY 1.53 trillion under the assumption that inbound demand do remain sluggish. The lower end of the guided sales is based on the assumption that domestic inbound demand will be close to none due to the impact of the new coronavirus. This is the reason why the guidance has a range. Normally, we should announce the upper limit figure with confidence, but the situation remains uncertain. We should be able to have more clarity at the end of the first half. So at that time, we should be able to share the full year outlook with you.
Chemical Business has been significantly affected by falling natural fats and oil prices for the second consecutive year. As we mentioned before, baby diapers have been down significantly for the second consecutive year. Even if the sales continue to accumulate, the K20 target of growing sales by 5% CAGR will not be reached, so we revised it to 3% CAGR this time. However, we want to keep an operating margin of 15%. As management, we strongly wish to increase sales and profits, even at the lower end of the range. The point is whether the baby diaper business would stop declining or hopefully would recover slightly. For this reason, there are limited plans to launch new products this year. We are planning to launch various measures next year. And we hope to front-load the timing as much as possible, but we can't expect too much at this moment. We intend to strengthen e-commerce, which is the largest sales channel, and promote high value-added products. For instance, we tried selling the high-end diapers, Tender Love, last year and gained some insights. And it will be favorable if we can source them in Japan. The launch of new large-scale products are scheduled for 2021. We would like to launch products that will be appreciated by the market as early as Q4, but we will not keep our hopes too high since our prime goal is to stop the decline of the baby diaper business.
The Cosmetics Business has built up sales and profits. But in some areas, profits have grown due to increased efficiency. This has continued for 2 years, but it is not likely to last. Even without these efficiency measures, some areas need to be grown a little more. If questions are posed later, we will ask Mr. Murakami and others to answer them. But we will make an effort to give a certain impact even if we cannot increase the profit as much as before.
The third topic is the Skin Care business. Since UV care sales were slower than expected last year, we expect this year to go beyond expectations. The products to counter hot summer climate will be very important in the Tokyo 2020 Olympic and Paralympic Games. With the absence of the games last year, the Skin Care business is expected to increase with considerable weight. In the fabric care business, market share for Attack ZERO has been increasing, although the timing was delayed a little. Although the schedule has been somewhat pushed back, we aim to expand our market share. Last year, we spent a lot of marketing costs. So this year, the product will become more established, resulting in less spending this year. The strategy is to increase Cosmetics, grow Skin Care and fabric care, manage the human health business centered on babies and drive the positively trending sanitary napkins and personal health products in order to increase the operating income by JPY 18 billion year-on-year.
We would explain the reason why the lower limit for our guidance must be set. As you all know, Chinese visitors to Japan account for about 30% of the total inbound visitors. However, Chinese visitors account for 70% to 75% of the total inbound visitor purchases, including cosmetics. The upper range assumption assumes that 20% of Chinese group and individual package travel will diminish. The new coronavirus, which we hope to see its conversion soon, unfortunately, is still spreading. Therefore, we have reduced sales forecast by JPY 20 billion on the assumption that the remaining 50% of personal travel arrangements from China will fall. The percentage of inbound sales in Kao's total sales is not known in detail, but it is estimated to be just over 2%. Sales were fall by JPY 20 billion, and operating profits were dropped by about JPY 20 billion from JPY 230 billion to JPY 220 billion, considering the gross margins. The whole world needs to work together to resolve this issue, but the guidance does not factor in forecast that the virus would affect the overall economy. The previous numbers are based on these assumptions.
At the end of January, purchasing masks has become difficult. Now hand sanitizers and hand wash are disappearing from store shelves. Aside from MegRhythm masks, Kao do not sell general masks, but we use our collective strengths to deploy hygiene products useful to society. This includes hand wash, hand gels, finger and hand disinfectants, Bioré disinfecting wet sheets of alcoholic preparations and Joan, a product that can disinfect kitchen and table while using a new technology called fermented lactic acids. Chlorine-based bleach, Haiter, for kitchen would also be useful.
Looking at the sales day by day, we should be mindful of products outside of our current offerings. We would like to provide support with our products, not only in Japan but also in China, if requested. We are already operating at full capacity, and it would be best if we can grow profit through sourcing in Japan, China and Asia as a whole. We are committed to this initiative. One concern is that the launch of UV care and products may be hampered if the virus continues to spread and becomes a larger issue.
In the Cosmetics Business, demand in China is moderate regardless of inbound demand. However, if people choose to travel less and stay indoors because of the virus, sales may fall. This effect is not factored into the disclosed figures. We will do as much as we can to connect our businesses while helping the society. We may also consider manufacturing products in China, which are not done currently, while keeping in mind there are laws and regulations in place. There are initiatives that only companies with comprehensive strengths can implement, and we will pursue it at the best of our ability.
This would conclude my explanation.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]