U.S. Markets closed

Edited Transcript of 4452.T earnings conference call or presentation 31-Jul-19 10:59am GMT

Half Year 2019 Kao Corp Earnings Call

Tokyo Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Kao Corp earnings conference call or presentation Wednesday, July 31, 2019 at 10:59:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Kenichi Yamauchi

Kao Corporation - Executive Officer and Senior VP of Global Finance & Accounting

* Michitaka Sawada

Kao Corporation - CEO, President & Representative Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Kenichi Yamauchi, Kao Corporation - Executive Officer and Senior VP of Global Finance & Accounting [1]

--------------------------------------------------------------------------------

My name is Kenichi Yamauchi, Executive Officer, Senior Vice President, Accounting and Finance. I would like to briefly provide you the Q2 results and the full year guidance as I have done in the past.

I will touch upon the content of pages 3 and 4 in my presentation. So please skip to Page 5.

Let's start with the state of the market. Growth of household and personal care market. The green line denotes the SRI POS, point-of-sale data, which are the estimates based on POS data from retail outlets. And it was not so terrible at year-on-year, 2% growth. However, if you were to look at Q2 on a standalone basis, the growth was flat. So the results were not great either. The orange line denotes the SCI survey, which includes e-commerce but excludes inbound sales, was trending firm at 4% year-on-year growth.

Next, the growth of cosmetics market on the top right of the page. This is trending flat. And considering the inclusion of inbound sales in SRI POS data, the growth was weak. This figure, however, excludes the data from the department stores channel. The chart on the bottom shows the consumer purchase price per unit, and it continues to be on the rise in comparison to the historical number.

Page 6 highlights the consolidated financial results. Net sales was down by 1% year-on-year to JPY 721.4 billion. Like-for-like figure, excluding the effect of currency translation, was a decline by 0.2%. Consumer Products Business, excluding Cosmetics Business, grew by about 2%. However, in the Chemicals segment, selling prices had to be lowered due to the decline in the raw material prices. The impact was fairly large, with 6% to 7% decrease in the selling prices of chemicals. The volume chemicals also dropped due to the downturn in the economy. So the revenue decline in Chemicals was a major drag.

Operating income was down year-on-year by JPY 4.4 billion to JPY 86.4 billion, a drop that was slightly more than our expected decline of JPY 122 billion. Adverse weather conditions should not be blamed entirely for this. However, in fact, June recorded rainy days for almost the entire month, resulting in poor sales for UV care products, cooling sheets and deodorants. On the other hand, the JPY 4.4 billion decrease, had in turn, has made us more determined to make a solid recovery in Q3 and Q4.

Net income was JPY 58.2 billion and net income attributable to owners of the parent decreased by JPY 5.5 billion to JPY 57.3 billion. The after-tax net increase/decrease was slightly more than the pretax income due to the absence of last year's tax credits for salary growth. Cash dividend was increased by JPY 5 to JPY 65 as guided. Cash flow numbers are stated in the lower box. JPY 50 billion share buybacks was completed as planned in June. A resolution to retire the shares was made in June. And the actual retirement was conducted in the beginning of July.

Page 7 shows the consolidated net sales by segment. The pink bar graph on the far left denotes the net sales of Cosmetics in Japan, marking a growth of 7.8% to JPY 107.5 billion. And the steady growth continues. Perhaps there was a slowdown in comparison to the Q1 growth of 9.8%, however, the sales was firm as the growth in Q2 alone was more than 6%. SUQQU, Curél and freeplus, the brands we commonly refer to, continue to fare well. In addition, our confidence was further boosted with KATE, and especially, SOFINA iP was a steady growth in Q2.

Primavista and ALBLANC, which are part of Sofina or the former Kao business, are trending positively. So we have high expectations for the development.

Next up, Cosmetics in Asia is growing without a limit led by Curél and freeplus, delivering 30% like-for-like increase on a continued basis.

Moving on to Americas. The sales of JPY 2.7 billion is small, comprised mostly of Curél in the U.S. It is unclear whether Curél should be categorized as Cosmetics. But in any case, Curél posted the greatest impact.

Next is Europe. Cosmetics sales increased by 5.5% led by firm growth of SENSAI. In fact, SENSAI will be introduced in Japan in the second half of this year as another positive development to look forward to.

The next segment is Skin Care and Hair Care, where, unfortunately, our estimates missed. Skin Care sales decreased from last year, contrary to our plans to strongly grow this year. We have a very good and well-received line of Bioré UV care products, such as Athlizm and Aqua Rich. However, the sun did not shine at all during this period due to adverse weather conditions, resulting in poor sales. It is already August, but the sales of UV care products should start to pick up from now on. Skin Care did not fare well in Asia either, with growth stopping at 2.7%. Likewise, with Americas and Europe, Skin Care sales remained poor. There were positive developments in parts of the segment, such as John Frieda starting to improve in Europe or Oribe performing strong in the U.S., however, the overall trend is weak. However, the launch of new products and improved products are planned for the second half. So we expect to see a recovery.

Moving on to Human Health Care segment. Japan seems to have decreased significantly by 11.8%. But in fact, Q1 drop was 15.5% and Q2 standalone decrease was 8.5%. So it is a recovery. Resales are not expected to increase going forward. So we are starting to make an improvement. Business negotiations are already underway for Q3 and Q4. So we expect to make a dramatic recovery.

Human Health Care in Asia, which is comprised mainly of baby diapers, is transitioning to positive growth, making an improvement from Q1's negative 4% growth. 7.6% growth was recorded for Q2 on a standalone basis. China is finally trending positive year-on-year, making a positive movement. Indonesia continues to grow firm by over 30%. We are finally starting to see a positive development. Therefore, you are welcome to have positive expectations for Q3 and Q4.

The spike in Americas is an abnormality caused by test sales and others. So please disregard this figure.

Next is Fabric and Home Care in Japan. We intended to grow at a stronger rate, yet the increase stopped at 3.4%, which was the same level as Q1.

As you may be aware, we attempted to increase our market share at once through Attack ZERO. However, it is taking more time and finally getting traction now. So we hope to reach our target share in the second half of this year. The share increase did not occur dramatically at once. However, it is gradually increasing in reality. So second half will be our decisive period.

Marketing methods are changing to more digital, and various expertise is accumulated through a variety of initiatives. Some initiatives work and some don't. It is indeed a back-and-forth process.

Fabric and Home Care in Asia did not perform well. Americas' inflated figure reflects the acquisition of WSI, Washing Systems, LLC, last August. So please regard this as an abnormality.

Next is Chemicals segment. As mentioned, because of the decreased raw materials prices, our selling prices had to be lowered accordingly, thereby resulting in sluggish sales. Moreover, various headwinds, including U.S.-China trade war, led to sluggish economy, posing a negative impact on the volume and further depressing the sales.

Page 8 shows the consolidated results by segment. The left charts represent the segment-wide figure, combining the different geographic areas. Cosmetics grew by 10.3%, and we expect this firm momentum to continue in the second half of the year with the launch of prestige products, such as SENSAI and est.

Skin Care and Hair Care resulted in 0.6% decrease, but we intend to make a recovery after this. Human Health Care decreased by 7.1%. However, improvement was made from Q1's negative 10.8% growth. We expect to make a recovery and reach breakeven in Q3. Fabric and Home Care increased by 6.1%, which included the impact of WSI. And the growth would have been around 3% without WSI, and we would like to grow this slightly more. Chemicals was down by 6.6%.

The bar graphs on the right show the operating income by segment. Cosmetics OP increased by JPY 7.4 billion to JPY 14.7 billion, marking the OP margin at 10.5%. We believe the OP margin should be raised by another 1% to 2% or so. We may not grow as strongly in the second half as last year since substantial profits were already booked in the second half last year, however, we should be able to accumulate a certain level of profit.

Skin Care and Hair Care is next, and this figure is not satisfactory. And we intend to accumulate several billions of yen on top of this JPY 0.3 billion. Human Health Care was down by JPY 10.8 billion. Q1 was minus JPY 8 billion, and it went down by JPY 2.8 billion more in Q2. But the decline in profits is shrinking, and we expect profit growth to turn positive from the third quarter. Ultimately, we may not be able to be flat year-on-year, but we will strive to make the orange bar substantially smaller.

For Fabric and Home Care, we spent advanced marketing expenses and sales were slightly below what we were hoping for. But we are seeing a pickup in sales now, and we expect the business to recover by several billions of yen going forward. The Chemicals segment is challenging. We will strive to maintain sales at this level or try to grow it slightly.

Looking at Page 10, which explains the analysis of change in consolidated operating income. The increase in sales volume was negative. Actually, consumer products volume increased, but this was offset due to the decline in prices of diapers and old Attack products. So the decline in Chemicals directly had an effect, and the result was minus JPY 2 billion. As for the impact from change in raw material prices, it was only the Chemicals Business that benefited. And for Consumer Products, although natural fats and oils were lower, we were not able to benefit from the decline in crude oil prices. Lately, we have started to benefit, but the impact is confined to this level as other raw material prices increased, such as fragrances and pulp.

TCR, total cost reduction, was plus JPY 3 billion. For SG&A expenses, as we adhered to the aim of raising employee compensation and engaged in more sales promotion activities as well as made higher capital investments, this led to the minus JPY 5 billion, which was originally planned for.

Freight and logistics expenses increased slightly, which had a minus JPY 1 billion impact. As for currency translations, when the Chinese yuan is weak, it hits us negatively because we are basically running an import business where we import and sell Merries in China. Hence, a stronger yuan would be advantageous for us. So the impact from this was a total of minus JPY 4.4 billion.

Regarding initiatives and forecasts on Page 11. I'll briefly explain each of our businesses. For Cosmetics, going forward, prestige skin care brands such as SENSAI and est will be expanded. Furthermore, brands such as freeplus, Curél and SOFINA iP will be enhanced. SOFINA iP, in particular, is doing well, and we are expecting it to grow substantially. For Skin Care and Hair Care, with the weather expected to improve, we are looking forward to its performance, especially Bioré u. We're going through a major update. It's an update that is obvious and is different from slight improvements.

As for Hair Care, the premium lines of mass brands are finally all in place, such as and and, Merit Pyuan and Essential flat. And we believe that we can turn around the business going forward. So we look forward to the Hair Care business in the second half as well.

Regarding Human Health Care. It's about Merries. With the super-premium product launched in China, we will now aim to expand the business through stronger sales promotion. The segment was down by JPY 10.8 billion year-on-year, but the key will be how much we can recover going forward.

For Fabric and Home Care, we will work to better communicate the benefits of Attack ZERO so as to increase market share. Market share is already higher than before, but we'd like to grow it further as the plan is even higher. Apart from Attack, a fashionable version of dishwashing liquid, Kyukyutto, called Relax Days, has been well received. So we would like to ensure that products as such perform firmly as well.

With respect to our corporate strategy, we will conduct activities based on our ESG strategy called the Kirei Lifestyle Plan. At Kao, we will strive to well converge business with ESG and integrate ESG into our business model.

Furthermore, we announced 5 key technologies the other day. And Fine Fiber, which is one of them, is now close to commercialization. So we hope to make it a spectacular launch. We also have been talking about the upcoming consumption tax hike from before. We already have built up inventory in preparation, and we hope to sell through it. If things go in line with plan, we are planning to pay dividends of JPY 130 a share, up by JPY 10.

On Page 12, the assumptions are shown. As we have not changed the outlook, there are no large changes. Raw material prices are actually better off compared to the beginning-of-year outlook. However, sales prices have declined for Consumer Products and Chemicals was not able to reap the complete benefit from this.

In any case, we would like to ensure that we managed to achieve the announced outlook. Of course, it will be a challenge as sales has declined, but we will strive to do so. Although the numbers haven't changed, the outlook is on Page 13. We will strive to achieve JPY 225 billion for operating income.

This concludes my part.

--------------------------------------------------------------------------------

Michitaka Sawada, Kao Corporation - CEO, President & Representative Director [2]

--------------------------------------------------------------------------------

Hello. This is Michitaka Sawada, President and CEO. Thank you, everyone, for coming today. I will speak without any presentation material. Based off the overview that was just presented, I will talk about the background to what was explained, then we can go into details during Q&A. First of all, the image of earnings trends we had for this year was that in Q1, profits will fall slightly. In Q2, we will manage to bring it up to breakeven, increase profit substantially in Q3 and reduce the drop-off expected in Q4. Overall, we were aiming for JPY 225 billion in profits, an increase of JPY 17.3 billion. This is what we were envisioning. At the end of Q2, the profit decline increased from Q1, which we acknowledge as a challenging result. However, after March, in the months of April and May, we were actually trending positively on a year-over-year basis.

Moving on to June. The long-term weather forecast was not looking good, and Attack ZERO's market share increase was slow compared to the marketing investments that were being made. Raising market share before last-minute demand kicks in as a prerequisite, so we additionally increased marketing expenses in the month of June for not only Attack ZERO but for other products too. We also tried to complete product return bookings during the first half of the year. So basically, we engaged in a variety of measures. However, for sales, Skin Care was sluggish. The 4-day traffic restrictions in Osaka during the G20 meetings impacted us by a certain degree, too.

Another thing are the demonstrations in Hong Kong. Resolution of the issue is yet to be seen, but I hope it settles down soon. But that is starting to have an impact by a few percentage points on sales. But realistically, sales and profits were lower than expected for June; expenses increased, although this is expected to have a positive impact in Q3; and returns were recognized. Together with the profit decline in June, results came out to be what they were. We were in line with plan up until May, but June was a month that didn't do as well as anticipated. The expenses spent in June will have a positive impact on Q3 to a certain extent. But of course, there are other reasons for the sale decline as well. We need to revisit the way we do business so that we'll be able to address and make up for various adverse situations, such as poor weather conditions, as we can't blame the weather all the time. I admit that we could have done more and acknowledge that the results were poor.

In light of what happened, management already had discussions, and we formulated strategies for the second half of the year, such as growing sales by JPY 10 billion more than the original plan or to make expenses efficient as well as offset the negatives from the first half. All we have to do now is to steadily execute on what we decided. We will obviously do what was originally planned, but we have had discussions and the revisions were made. With that, we started July. However, July also suffered from poor weather in Japan. And overall, it felt like consumption was down. We already had an idea that seasonal products would perform poorly based off the medium-term forecast. But I am more concerned about a decline in last-minute demand due to the slowdown in consumption. But even if last-minute demand trends were to be a half of what we anticipated, our mentality is to increase sales through other measures. And this is basically how we analyzed first half numbers in numerous ways in order to formulate a strategy for the second half. Of course, seasonal factors have actually started to improve from the end of July, and we have started to see this materialize in the last 2 days as well. But you never know, a typhoon may hit us, and you can't just rely on weather. That's why I wanted to speak to you about what we've been doing differently as the presentation didn't give a complete picture.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]