Kao Corp Ord

Hello, I am Nagoro. Now, if you have the presentation material on hand, please turn to page 7 to begin with. I would like to begin with the highlights of the consolidated financial results. Net sales was 1 trillion 125.9 billion yen, down 0.2%. Excluding forex impact, net sales was down 2.9%. Co-operating income was 70.8 billion yen, down 8% from the same period last year, a significant improvement from second quarter cumulative of minus 36%. As a result, the co-operating margin was 6.3%. The difference between core operating income and operating income, 70.8 billion yen and 50.7 billion yen, the difference of 20.1 billion yen accounts for the cumulative structure reform expenses up to the third quarter. Net income attributable to the parent company was 50.2 billion yen, a decrease of 13.9% from the same period last year. Basic core earnings per share was 108.02 yen, down 12.8% year over year. Now, continuing on to page 8, 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 co-operating income here, the second line from the top. Co-operating income was 36.6 billion yen, up 13.1 billion yen year over year. Co-operating profit margin improved from 5.9% to 9.4%. Please continue on to page 9. 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 improved cash flow. In the skin care business at 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 11.5 billion yen, mainly for the reorganization of domestic production of disposable baby diapers, for a cumulative total of 20.1 billion yen. 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 28.8 billion yen, a significant increase of 12.5 billion yen 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 14 billion yen, an increase of 8.2 billion yen 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 14.5 billion yen, up 5.5 billion yen year over year. The cosmetic business was down 1.8% in sales to 59.3 billion yen. While positive in Japan, it was a big negative in Asia, especially in China. Co-operating income was 400 million yen 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, cooperating income was 7.4 billion yen, an increase of 700 million yen year over year, and the cooperating 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 ¥24.8 billion and the left end shows ¥23.3 billion, which is the difference in operating income between the last year and this year. Excluding the ¥11.5 billion in restructuring costs, the total income was ¥36.3 billion, an increase of ¥13 billion compared to ¥23.3 billion in the previous year. Positive values are shown in green and negative values in gray. Adding the gain on raw materials of 2 billion yen and the price increase of 11.5 billion yen, we arrive at 13.5 billion yen. These two factors have created an increase in profit. Cosmetics volume was down by 1 billion yen year over year, while chemicals' marginal profit decreased by 1 billion yen versus the prior year. Compared to the first half, chemical sales have improved significantly. SG&A expenses increased 1.5 billion yen due in part to carbs on marketing expenses in China and Southeast Asia. Please continue on to page 15 for an analysis of changes in cumulative the third quarter operating income. The chart shows the cumulative total from January to September. The 23 billion yen price increases absorbed 8 billion yen in raw material price hikes, and thanks to excess amount of 15 billion yen, the majority of the 6 billion yen volume decline in first household and personal care business and the 11 billion yen decline in marginal profit from chemicals was offset. Structural reform expenses totaled 20.1 billion yen and TCR effects amounted to 9 billion yen. 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 60 billion yen shared in the second quarter is in line with our expectation at this point in time. Therefore, we plan to record about 40 billion yen 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 5 billion yen 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 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 we plan to review non-profitable businesses. The company has earmarked budget for strengthening the career 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 structural 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 3.0 billion yen impact from the raw materials in the fourth quarter and an 11 billion yen price pass-through or price increase in the fourth quarter. In order to achieve the annual target of the 120 billion yen in core operating profit, we need the 49.2 billion yen in core operating profit in the fourth quarter. Of the 16 billion yen difference from the actual 33.2 billion yen, we plan to cover about 90% or 14 billion yen with those two profits. while the chemical business is on a recovery track after a sharp decline in profits from the second half of 2022. We plan to increase the profits by 4.0 billion yen year-on-year, mainly due to increased sales of the expanded products lineups, although there are uncertainties such as the 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 5 billion yen from the same period of the previous year. Increase in the SG&A expenses are offset by the foreign exchange gains and additional TCR of the 3 billion yen. Please see the graph below. Core operating income is expected to be 120 billion yen for the year, with no change, and the 10 billion yen increase over 2022. In order to carry out the structural reforms, we expect the operating income to decline by 50 billion yen to 60 billion yen. 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 am going to discuss the measures from the fourth quarter in three business areas. First, household and personal care business. Fourth quarter PHPC 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. Kaoh will continue to improve the profits through these measures. New products have performed well in the current fiscal year. Page 32-33 of the document introduce our main new fabric and home care products, which have been steadily increasing their market share 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 Free Plus rebranded products and QL's mainstay products, Sensai, will also sell aggressively at the flagship stores. In Europe, Sensai and Morton Brown are entering their best sales season. Lastly, page 29, Chemical Business. Many of the major global chemical companies in Europe and North America have revised their full-year sales and profit forecasts downward. Economic recovery in European countries is sluggish, and the demand remains stagnant. In the oil and the 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 Cowell'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 the high-profit products and the high-value-added products, specifically which are 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.