Kao Corporation (4452) Earnings Call Transcript

This is Hirozumi from Dalwa Securities. Can you hear me?

Yes.

Just 1 question. Please help me in regard to your forecast for this year's in profit. You explained that you plan to actually spend as much as JPY 15 billion for marketing activities. And also besides another JPY 50 billion for the digital as well as the communication of the capabilities, put them together, JPY 30 billion.

Well, I will call this investment is going to be kind an aggressive investment plan. I'm just wondering whether or not this is going to have negative impact on the plan the slight increase in terms of the profit.

Actually, may I remind you that during the midterm plan explanation, you gave to us last time. Actually, I asked my questions. I'd like to ask you to actually ensure your thoughts looking into FY '22 as well as in FY '23. In terms of the growth of the profit, I'd like to ask you to actually expand on these aspects, how you're going to generate profit?

Allow me to respond to your questions. First, in regard to the budget for this fiscal year, actually, we plan to spend about JPY 30 billion.

Yes, you're right.

Again, as you see here, in order to achieve the JPY 48 billion positive number for the top line, we need to actually make investments vis-a-vis the marketing as well as additional capabilities. This investment will be lasting probably for 1 year or 2 years to come. I think this is going to become a driver for our -- the growth opportunities going forward.

How long this investment process is going to be lasting.

I don't believe that it will be lasting as long as 3 or 4 years. That's probably, we may be able to get some benefits in the second half of this year. So we have some expectation there. And earlier, we talked about the profit situations. Yes, we are committing ourselves into this minimum level and talking about profit.

But that certainly don't know we are now faced with COVID-19 pandemic. How we can actually drive more strongly profit opportunities going forward.

We need to look into the return on the investment we have made. When we can actually have those returns realized. Talking about corona situation. Well, this is my personal view. I don't believe that the decision will be lasting 2 years or 3 years, more years to come. Yes, definitely, we've been hit hardest this year. But even this year, we may be able to get to see the light in the second half of this year or moving into the next year. So I think we need to actually build a kind of the baseline upon which we can actually make a good jump for profit.

Okay. Could you further expand on this marketing activities? And you are making reference to the digital investment. What are you talking about? It's kind of fuzzy.

May I remind you of that sketch I made earlier, well, probably the digital investment could be associated with software and all the efforts, including smart mirrors and others. But here now, we are now looking at the completed all the tool, the digital capabilities. Again, we are talking about precision health care. Actually, this is going to be quite important for order on Kao, but also this is going to be also important for the rebound on Kao. It's very important for us to be able to actually accumulate the quality data and that data needs to be well connected. Of course, we have to actually depend upon the software as well as in human power to some extent. And it is going to be in a kind of proprietary on the technology and our capability. And with that in place, we should be able to expect have the growth in return in terms of the profit. This is what we call "digital". I hope you understand that point. Hirozumi, are you fine with that explanation? Are you fine?

So you're talking about infrastructure as well as digital platforms, right?

Yes.

If that's the case, I'm fine.

Let us now move on to the next question. Here we have Ms. Wakako Sato from the Mitsubishi UFJ Morgan Stanley Securities.

This is Sato speaking. Can you hear me?

Yes, we are hearing you.

Since we're having Mr. Murakami, I'd like to ask questions concerning the cosmetics business. Your -- the operating margin actually showed 1% at the end of the fiscal year. But you compare with other companies, of course, and other companies are working on the business models and trying to reduce the cost. And also, observing the interest in [indiscernible], are actually varying the labor costs, depending upon the area in regard to the beauty advisers. Also, they try to increase the rate of the skin care. And also then a breakdown between the Japan business as well as the overseas business. So how you are going to actually grow the operating margin from 1% going forward? What kind of target do you have in mind? And I do understand that you have become the leader of the digital transformation center? And what are the important ideas behind that?

Yes. You have specifically asked Mr. Murakami to respond to your questions. And I'm quite happy to have Mr. Murakami.

Thank you. This is [ Murakami ] speaking. Again, I'm working on the cosmetics business. Thank you again for questions. Again, I would like to actually share some of the important initiatives for this -- the cosmetic business. For this well, we are causing you a lots of concerns in regard to our cosmetic business. And actually, the K25 consists of 4 important pillars. We started our efforts there. Far left the first item, actually, they started back in 2018. And this is a part of new growth strategy. Definitely, we are going to work on this continuously. And as Hasebe San mentioned -- explained this, it's very important for us to actually nurture those are useful as well as the beneficial brands and as carefully as possible. That's what we have to do. And that said, again, we have been okay up until FY '19, and we had some tough time last year. But that -- as of January 1 and this year, actually, we announced this. Actually, we acquired KANEBO back in 2006. And for the past 15 years, we have not actually changed the organization in a big way. But for the first time in 15 years, KANEBO and SOFINA, and Quickle, actually, those -- the branch actually we decided to be eliminated. And actually, we have changed our strategies, brand strategies. Actually, Global 11 consists of 2 categories and prestige. And also, we are having the regional brands and actually massage. So it's very important for us to accelerate these strategic activities as much as possible. And next, I'd like to talk about next -- the innovation, which has been discussed earlier. The growth is going to be quite important. Of course, it's very important for us to grow on H1 of these products, selected products. Now 2 aspects to here. Actually, precision health care, explained by Hesebe San earlier. Actually, for the cosmetic and for Kao Group, of course, precision is going to be quite important for the skin care space. And of course, it is related to the action. And we need to have actually monitoring capabilities and to the kind possible, we would like to be quite unique in covering this important area. Another 1 is surgery cosmetics. Actually, this is another idea we are considering right now. And we'd like to actually offer really good benefits, which is going to be as good as cosmetic, the plastic surgery. We actually released this -- the technologies for the nasolabial [indiscernible] in November last year. Definitely, this is going to give us an awesome performance. Yes. This is 1 of the important things. We have to further work hard in order to help our customers because people are going to leave as long as 100 years. And in regard to the 3 things on the right-hand side, well, we are now faced with the COVID-19 initiations. Actually, we are having this apparent issues and problems, and we have to address them. One of them is having to do with structural reform. As Ms. Sato indicated at this point earlier, actually, we tend to have many number of the beauty advisers. And also the costs involved in the makeup, the technician seems to be rather high. So we have to address them. Actually, this has in relation today, actually, as of April 1 -- actually, these two companies had its own cosmetic companies, and these 2 companies are going to be merged into one. So [indiscernible] and actually, each organization has actually had a collection of a big number of the beauty advisers. But merging them into 1 company, we should be able to nurture really good efficiency. We should be able to avoid the overlap in terms of resources and also in order to have the full coverage in regard to these areas. We tend to actually recruit many people, but we should be able to avoid these issues going forward. And also, we need to actually modify the business model for the makeup activities. Actually, we started this activity. Kickoff actually started as of last year. So we are working on consolidation of the brands. Another point is that, for example, [indiscernible]. Actually, this is a new business model we started this year. And talking about makeup the services, of course, we tend to actually have lots of mass production. Practically, we'll end up with returns. And actually, we had to dispose them. This is not friendly to the earth planet. But now we'd like to actually change this business model. We'd like to actually go for smaller production based upon really good ideas for each season. And actually, we started this kind of effort. And for your further information, talking about digital transformation, actually, we have created the digital transformation functions within the entire consumer products. And this TX and actual consumer product and [ sebum ] are going to be linked with each other, and I'm quite happy given this responsibility. And actually, we had to go beyond just making the products. We have to actually enable digital capabilities vis-à-vis in our products, whatever the products we are going to make. So the UX user experience is going to be quite important for us to challenge. It may be rather difficult for you to understand this. Actually, 2 days ago actually, we actually announced [indiscernible] makeup lab. And I hope that you go there to take a close look at whatever we can offer to them. And this is the kind of thing we like to actually offer more actively. Talking about China and too much dependent on the inbound business. So it's very important for us to gain local business opportunities. And also, the social commerce actually is another important activity we are going to start this year. And also due to the pharmaceutical fee as low, actually, we are way behind schedule in regard to the business opportunities in Hainan. But again, this is going to be accelerated further. So we'd like to actually work on these new models, working on these platforms. And so I spend too much time to explain all these factors, but you seem to be quite concerned as to the consumer business, and that is why I spend too much time responding to your questions.

I have further question concerning this operating margin forecast you are making. Well, back in 2019, actually, we have achieved 14%. Back then, we were helped by the inbound. We do not have to spend too much money for marketing. So we actually had rather a large opening margin. But in terms of true capabilities, and probably it is going to be 12% to 13%. So by 2025, we'd like to naturally achieve 12%, 13%. And furthermore we'd like to aim at 15%, as has been discussed. So this has become a part of our business plan.

I got it. Thank you very much for that response.

Next, I would like to move on to the next question. From BofA Securities, we have Mr. Kuwahara, please go ahead.

This is Kuwahara speaking from the BofA Securities. Thanks again for your information, Sharon. One question allowed. Since you have President, Mr. Hasebe, I'd like to ask you to share your thoughts how you are looking into the non-Japanese overseas markets. Of course, you received several questions concerning the midterm plan. You seem to have lots of action technologies. However, you are not necessarily good enough -- fast enough to deploy those technologies into an overseas market. Of course, I do understand that you have lots of good products. But again, how are you going to address this issue? Again, your initiatives vis-à-vis on overseas activities. Maybe to the difficult for you to actually talk about this in terms of KPI. Again, I'd like to ask you to share your thoughts and breakdown between the Japan business and overseas. Actually, on the JPY 30 billion investment you talked about, whether or not, that doesn't include the money including for you to accelerate your business opportunities outside of Japan.

Thank you again for your question. Allow me to respond to your question. Actually, the so-called global operations, again on the products are going to be delivered, and those products are going to be sold. In other words, here and we have tendency to talk about those products and categories. I think this picture says it all. Actually, when we go outside Japan, actually, it's not just delivering on shipping the products. Rather than we have to actually go into the overseas markets, actually having this digital platform. In other words, we need to have really good relationship vis-à-vis the retailers and also the easier platforms, thanks to this digital platform. Let me further expand on this. For example, China. And non-China, for example, actually, talking about the digital platform, actually, there seems to be lots of similarities. Allow me to further expand on this. U.S. and Europe and also in the Asian countries. So actually investment vis-à-vis in Asia, of course, 2 regions, big investment vis-à-vis China and also another big investment vis-à-vis the non-China and global areas. In other words, each area has its own database, including the genetic information and also the large style related information. It's important for us to have the depth of those pieces of data. And actually, how data is going to be used. It's going to be varying depending upon the area and location. Again, when we are going to launch new services, of course, those services are going to be offered within and so on. In the past, actually, emphasis has been placed on Japan. But from now on, it's got to be data-driven. The way we're going to compete is going to be totally different going forward. And that is why it was rather difficult for me to have the separate presentation on global operations back in December. What's including here now would be, again, as an example hygiene in our living, the bacterias and viruses in daily lives. Actually, we can actually look into the targeted viruses. And that information actually -- is going to benefit the other areas of the health and beauty care or, it can be actually benefiting our life care and our business operations and others, and that this kind of spillover effect can be expected. This is something new as our new weapon. Actually, the fact is that we are just selling all in household and products we are not just selling only in the cosmetics products. Again, we are having all these mixed capabilities, and that is going to give us a lot more competitiveness. In the living and additionally, actually, it's very important for us to actually have different types of data. And actually, those data needs to be well integrated for the better understanding. So collecting and gathering of data. Actually, we have a lot of history in this area, and this is going to naturally give us competitiveness. We are not able to break this out by geographies such as the U.S. being this amount or how much we are going to invest into a certain region. Because the platform itself is going to become our earnings power. So globally, unfortunately, we are not able to break it down by region. I hope that answers your question.

All right. Let me just confirm 1 point that you said. Earlier, you mentioned that you're going to spend JPY 30 billion, of which JPY 15 billion is for marketing and the other JPY 15 billion for digital. In particular, by spending the JPY 15 billion, does this mean that global sales growth may accelerate from the second half of this year, as you've been referring to the second half of the year earlier?

For the precision health care platform itself, contribution is going to be a little bit further down the road. But by applying digitalization, we'll be using data to transform our business model. So for those areas that are going to change, will change more and more. For example, in mass beauty care in the U.S. We are engaging in digital communication, an e-commerce platform relationship building. As we are working on this platform, so contribution at earliest may be the second half of this year, hopefully. However, like I've been repeating. COVID-19 has made things uncertain. So I am not able to commit to anything.

So let's move on to the next person. Ms. Tsunoda from JPMorgan Securities.

This is Tsunoda from JPMorgan. Can you hear me?

Yes, we can.

Because I'm limited to 1 question, I also have a question about your strategic investments. Regarding the strategic investments of JPY 30 billion for this fiscal year, you mentioned that it's going to continue for a year or 2. So for this fiscal year's investment level, will this amount be the highest? Will this fiscal year be the peak? And are investments going to be lower next fiscal year and the following fiscal year? Or are we going to see an increase in investments? Because you are going through a large transformation of the business model. Compared to what you are planning to achieve, I kind of felt that JPY 30 billion was slightly low. So can you give me more explanation on that? Also, when do you expect to monetize this or see an impact on earnings? Furthermore, in the midterm plan that was announced. You mentioned that 1 of the targets would be an operating margin of 15%. So what are your thoughts around achieving this target as a result of strategic investments? Can you elaborate a little more about this? Including what is on your mind?

All right. Let me explain. For the first round of investments, we are anticipating this to be over approximately 2 years. That would be for marketing and digital investments. And we are thinking about a 2-year time horizon. You may feel that this is a low amount. But when you think about sales, we are going to strive for growth. Through making unrivaled products. So we would like to use the investments in a minimal manner, but with efficiency, so as to grow sales. And in the next year or 2, we would like to see sales grow substantially. So first, we will address the engine. But once sales increases, Kao will be able to exert its strength in that phase. We have been able to increase profitability with good manufacturing practices and TCR and offering high added value in the past. We are confident about it. But in the past, unfortunately, when the customer base became smaller in scale, we became too busy with managing profitability of the business at hand. So the big reason why we're going to be investing for the next 2 years is so that we can increase our customer base substantially. And the investments we are going to make is going to be JPY 30 billion this time around. And by making these investments, we would like to gain momentum. In K25, 1 of the ultimate results that I'm looking for is JPY 1.8 trillion in sales and JPY 250 billion in operating profit. Doing the math, this will not reach operating margins of 15% at this point, but it is a number that we haven't seen in the past. We would like to make this change in 5 years' time. And considering that we grew JPY 300 billion over 10 years in the past, I think this will be quite a challenge. Moreover, for this part, we are not thinking about doing it alone. I did mention that we're going to strengthen the business through investments but our policy is to do this in a bold manner through joint ventures and M&A. In the next 5 years, we expect to do this intensively. So there will be a part that we will do alone. And grow and also strengthen our platform. And we will use our capabilities to expand in a substantial manner and turn it into our new foundation. I hope that answers your question.

So may I confirm that this fiscal year is going to be the highest for investments.

Yes. Currently, that's what we are anticipating for now.

The next person will be Ms. Miyasako from Jefferies Securities.

This is Miyasako from Jefferies Securities. Regarding the digital part in precision health care, I'm not really able to fully understand it yet. In order to grow sales, does this mean that you are going to make great products. Or are you going to deliver something great to the customers? I'm not really sure about how you are going to leverage this to grow your sales. Also for cosmetics, I think it's fairly easy to capture data from consumers. But when it comes to daily goods, I think it's harder so maybe my question doesn't make sense, but how are you going to capture data? And also, does your company have good talent that are able to do the digital developments that are necessary. You said you personally were well versed in digital technology when you presented the midterm plan. But do you actually have talent internally? Or are you going to bring people in from outside of your company?

First of all, for digital talent, we do have quite a lot of digital talent internally already because we used to have an information business in the past. If you remember, and back then, there were quite a lot of people who are engaged in the information business. We also have been engaged in various related businesses. So there are quite a lot of people that have a high IT literacy level. But of course, we do understand that this would not be sufficient. Therefore, we would like to partner with good advanced companies in order to grow our business. It's not as if a group of amateurs will join a digital company and try to make things work. Rather, we have IT professionals that know how to manufacture goods and develop a business. And they will be working together with external companies. So as to develop a new digital platform, or to go through digital transformation like Mr. Murakami was saying. Mr. Murakami, in fact, last year, gathered a lot of our digital talent, and I was surprised to see so many. So when it comes to internal digital talent, I don't think you need to be that concerned as for precision health care, we are well aware that we are talking about something that is hard to understand if it's an easy-to-understand platform, anyone will be able to come up with the idea. Therefore, often people tell us that it's difficult to understand, and it still happens many times. But in order for you to get a better idea, I'd like to give a specific example. For example, in Hygiene and Living Care, let's say that we were able to identify where viruses exist and bacterias exist, and we're able to specify the coordinates at the gene level. And when the bacteria or viruses enters the body of human beings, let's say we can monitor how it transmits and how we can stop it. And let's say, the factors in order to prevent this.

Has it went into your body? How can you prevent it?

Nowadays, we have PCR tests, but let's say you could do something like that at home right now, because of COVID-19 there are higher needs for being diagnosed at home. And for treatment 2, the mechanisms available are becoming increasingly open. So when it comes to infectious and intractable diseases, if you intervene at an early stage, there are various ways to cure it. But if you can't intervene at an early stage, you will need to medically treat those diseases even more. So if we have a platform and build a network, with know how regarding how we can prevent it. The network information can be provided to hospitals, pharmaceutical companies or to hair salons that many people go to or restaurants, won't we need the data? That data that they need can be provided by us and associated to that, at various phases, we can capture feedback on digital data through this platform. And we can continue to ask questions to the customer about our future policies. So as to gain more visibility regarding future product making as well as developing solutions. To that end, research of materials, which is the cause of harm, is important. And being able to extensively capture information in an accurate manner will help build the precision health care business. This will be a new business model. And of course, it might just sound like a dream at this moment. But through this, there may be interactions that people may pay money for or get paid for and then the money that used to be spent in marketing, for example, may not be spent there any longer and it may be spent elsewhere. I often say maximum if minimum. It's about openly partnering with other entities efficiently. And on a digital basis, delivering the greatest products to the customers. So that is why we have come up with the digital platform. It's not about looking at the current conditions, but we will forecast change based off data. And we would like to change the way we compete globally. But people often ask us how we are trying to realize this model. We have no intention of doing this alone and would like to partner with other medical entities and platformers in order to realize this concept. I hope that answers your question.

Just briefly, simply put, does that mean that I'm going to get a lot of your company's information on my smartphone?

It will be great if that happens. Ms. Miyasako, does that answer your question?

Yes.

So the next person is Ms. Miyake from Morgan Stanley MUFG Securities.

I am Miyake from Morgan Stanley. You talked about the life care segment. And you were saying that you would like people to feel the determination of the company by carving out that segment. According to your guidance, it is expected to reach around close to JPY 60 billion this fiscal year. But in the medium-term plan that was announced the other day, as Another Kao in 2025, you are planning to reach approximately JPY 150 billion in sales. Does this represent the Lifecare segment entirely or is Another Kao comprised by various segments that will fall under this category. And in association with that, based on the new segments, can you give us an idea of how each segment's profitability was back in fiscal 2020? And also, what kind of margins are you thinking about for the Life Care segment in 2025? Can you show the list please?

So please show page 16. I hope you can see this slide. This slide shows the outlook for consolidated sales for the year ending December 2021. Hygiene and living care, health and beauty care, lifecare and cosmetics are all listed up. As you can see, consolidated net sales for hygiene and living care continues to be the largest by far. And net growth rates are also shown here. We would like to selectively focus on growth areas. We will focus on areas that are expected to grow. That's going to grow large and there will be other areas where we are going to be less focused, to be honest, which is reflected in this outlook. So we would like to strive to become stronger by being selective. For health and beauty care, sales and profits will presumably increase in a brisk manner. As Mr. Murakami said, for the cosmetics business, we are confident that it will be the next driver. So that is why it's at 6.7%. And that's why we call it Reborn Kao, but for Another Kao, right in the middle of it is the Lifecare business. Currently, it's at 11.1%, and it's small. But compared to the JPY 58 billion outlook. People may say that it's hard to reach JPY 150 billion or even JPY 100 billion. Of course, we have no intention of growing organically. We are thinking about doing this through a new structure. So this new structure goes back to the previous picture where we talked about medical. We would like to incorporate medical entities from a different point of view, separate from the investments that we made in the past. This part of the business growing means that these 4 businesses will be about the same size. And if you include chemical, we will see about JPY 300 billion to JPY 500 billion in size. That is how I would like to manage the company. I hope that answers your question.

So out of the JPY 58 billion forecast for this fiscal year, the driver for Japan is expected to be commercial use products for the fiscal year. But I'm sure that, that's not going to stay the driver perpetually. And that is where medical will come into the picture. But my sense was that you were thinking about the impact to materialize in 4 to 5 years' time compared to 1 or 2 years, then in that case, how should we look at profitability? Can you sort things out for us and also for medical?

It will be a business domain that you are currently not in right now. I believe that this is a category that not only other household and personal care companies are interested in, but companies from other industries may enter too. So aligning with other companies to grow the business is 1 way of doing it.

But I think that creating a good network to sell into that business domain will be critical. So my question is, what is going to enable you to bring this to fruition? I guess it will come down to creating a sales network but can you elaborate a little bit more about how you are going to do this.

Please turn to page 22. Thank you for your question. As I do not want to be misleading, I would like to use this slide. It said on the left, infectious and intractable diseases and saving lives. I'm not saying that we are going to do everything that's related to medical or pharmaceutical. For example, looking at the technologies we have, there is chlorogenic acid, which has an impact on dementia. We also have RNA monitoring. You may know this, but from a person's sebum, you're able to diagnose at early stage, signs of diseases, they are likely to develop, and this can be done in a noninvasive way. From now on, Parkinson's disease is set to increase. Also dementia and atopic dermatitis will be increasing. Those are called intractable diseases. There is a causality in those diseases. But if you intervene at early stage, you can manage. But in pathology research, it's very difficult to catch it up at the early stage because pathology research focuses on the treatment of sick people. What we have is surrounding that. And we have many in this area.

When we talk about medical, you mentioned distribution channel. But in infectious diseases and intractable diseases, those are very difficult area. There are some companies who are challenging those. So what kind of relationship can we build with those companies in the medical area?

We are not thinking about building the distribution network. So in that sense, if you have an image that we will set up the sales companies to sell medical products, that is on a misunderstanding. Rather, what we are trying to do is to extend our businesses. Which can be stronger, and we would like to build a strong platform. So that is the positioning of Another Kao and Reborn Kao. Did I answer your question?