Kao Corp Ord

Thank you for attending our financial results briefing for the three months ended March 31, 2024. I will walk through the materials in your hand in order. First of all, please turn to page 5. To summarize the first quarter, we have achieved profits that exceeded the plan as K-27 progressed smoothly after the structural reform. The following four points are the results of our efforts since last year. First, we generated profits through structural reforms. the effect of reducing fixed costs in Mary's has begun to emerge, and the adjusted selling prices through high-value added products are beginning to penetrate, which means that the earning power is starting to recover. Secondly, by focusing on marketing and increasing customer loyalty, we were able to improve the competitive advantage of the core brands. As a result, ATT&CK and QQt have not only kept their top market positions, but further gained market shares and profit margins. And thanks to the success of new marketing activities, Laurier's market share and profits have also increased. Thirdly, we ramped up global rollout of high-value added products. I will explain this in more detail later in the section on the progress of three areas. Fourthly, Chemical business turned around and contributed to profits as planned. This is not simply about a recovery in demand, but also a proof of the fruits of our efforts since last year, including high-value added products and capital investment. Please turn to page 6. Net sales increased by 5.2% to 365.8 billion yen. Without currency effect, sales increased by 0.4%. Operating income was 22 billion yen, which was higher by 14.7 billion yen year-on-year. Operating margin was 6.0%. Net income attributable to owners of the parent was 16.5 billion yen, rising by 11.7 billion yen. Earnings per share was 35.43 yen, an increase of 241.9% over the previous year. Please refer to page 7. Key points of the results. In the first quarter, operating income increased by 14.7 billion year-on-year to 22 billion yen. The emergence of the effects of structural reform, including selling price adjustments from the shift to high-value products, has made a significant contribution. Operating margin of fabric and home care recovered to 16.1%, while the sanitary products returned to profitability. These two improved the operating income by 10.5 billion yen. Cosmetic businesses were in line with the plan, with sales growing at 2%. We are focusing on global brand development. In the chemical business, operating margin recovered to 8.6% and operating income rose by 4 billion yen. We will continue to strengthen our portfolio management to achieve ROIC and EVA targets in Q2 onward. In addition, we will accelerate the transformation of our hair care business and continue to strengthen global expansion in skin protection business. Please turn to page 8. Net sales were 365.8 billion yen, higher by 0.4% in real terms. Overall sales of consumer products business rose by 2.2%. By geography, sales in Japan grew substantially by 6.2%, while strong sales of hair care and cosmetic products in Europe led to plus 8.5%. Meanwhile, first quarter in Americas was affected by a rebound from the temporary demand for hair salon products following a price hike in Q2 last year. However, from Q2 onward, we plan to expand Juergen's natural glow, BRA UV, and body scents. In addition, new hair care products such as John Frida are off to a good start. In Asia, due to the continued impact of Alps-treated water in China, as well as profit-prioritizing measures in Indonesia and Thailand during the transition to ROIC-oriented management, sales were down 10%. In chemical business, sales decreased due to the impact of sales price adjustments following the decline in fat and oil prices, but volume and profit increased with the operation of new facilities for tertiary admins and other products. Please refer to page 9 next. Let me explain the key points of Q1 segment performance, focusing especially on the operating income. Please refer to the third row from the bottom. As for the breakdown of 2.2% rise in the sales of entire consumer products business, volume was down 0.5% due to the impact of Mary's and Healthia, and the 2.6% hike in sales price contributed to a substantial rise in operating income of plus 11.4 billion yen year-on-year to 14.8 billion yen. Operating margin improved by 4 percentage points to 5.3%. In particular, contributions from hygiene and living care business was significant. Operating margin of fabric and home care improved by 8.1 percentage points to 16.1%. Sanitary products achieved profitability thanks to the effects of structural reforms. In health and beauty care business, results were slightly negative in terms of pricing due partly to the impact of product mix. However, higher volume contributed to improved profit. In life care business, sales declined because of the beverage business, but profits improved. Cosmetic business posted a 2% increase in sales due to price hikes and other factors, but profits were flat year-on-year due to lower sales in China. The impact of structural reforms, including career support, are expected to be realized in the second half of the year. Also in chemical business, sales dropped due to the lower selling price following the decline in the natural fat and oil prices. Operating income, however, was better at 8.1 billion yen because of price revisions and focus on high value-added functional materials and other products. Operating margin improved by 4.1 percentage points to 8.6%. Please turn to page 10. This chart analyzes the breakdown of plus 14.2 billion yen, which is the difference in the core operating income in Q1 2023 and operating income in Q1 2024. In consumer products, while raw material prices rose by 2 billion yen, price revisions, including focus on high-value added products and structural reforms, made a big contribution. The effect of structural reforms are distributed to selling price section on the chart as improved earnings power and to other costs of sales. These contribute to about half of the increase in profit. In addition, the recovery of demand in the chemicals industry, higher value-added products, and selling prices adjustments, which led to 4 billion yen improvement in gross profit, are also contributing to higher profit. Please turn to page 11 next. As a result of the structural reform, gross margin improved by 4.4 points year-on-year. Price revisions through high-value-added products, change in the product mix, and reduction of depreciation and amortization, personnel, and fixed costs. These are the evidences of our efforts since last year. From Q2 onward, we will implement strategic price increases to pass on the expected rise in raw material prices and other costs. In addition, we will also promote price revisions through high-value added products in order to secure profits. In the meantime, with regards to reforming our earnings power, which we will work on in a multifaceted way, we will visualize the contents and monitor them precisely. In order to achieve our ROIC and EVA targets set out in K27, we will continue to improve on efficiency by streamlining SKUs and reducing fixed assets, including inventories. With the structure we form as a starting point, we will achieve a V-shaped recovery.

Please turn to page 12. As announced, we expect the operating income to be 130 billion yen. This chart shows a comparison of core operating income for 2023 and the forecast for 2024 based on the results of the first quarter. Effects of structural reforms are expected to be more than the initial forecast of 18 billion yen. Marketing expenses will be effectively deployed, but are planned to be increased for global expansion. Other risks such as raw material price hikes based on geopolitical risks and the Chinese market are taken into account. Let me explain the details. As mentioned on the next page, we expect raw material prices to rise from the second quarter onward and see an annual increase of 8 billion yen. We will pass on this 8 billion yen in price increases to and add another 12.5 billion yen to profit per year by setting prices according to high values added. That would bring up profit by a total of 20.5 billion yen through price adjustments. In addition, contribution of 12 billion yen is expected from the increase in the volume of consumer products, including new products. Other costs of sales include the effects of the impairment loss of Mary's, booked in 2023, and lower labor costs of beauty advisors. In chemicals, tertiary amine and fragrance production facilities that started operation in Europe will contribute for the full year, and volumes of performance chemicals and information materials are also expected to increase, including higher value-added products. In addition, the gross profit margin will improve by 12 billion yen due to an improvement in the profit of oleochemicals as a result of higher prices of fats and oils. In addition, SG&A expenses are expected to increase by 8.5 billion yen from the previous forecast to 25.5 billion yen, incorporating the spending on marketing for skin protection and cosmetics to ramp up global rollout and increases in personnel and other expenses to cope with inflation. As a result, the operating income is expected to be 130 billion yen. Please turn to page 13, which shows the forecast of raw material prices. Raw material prices in the consumer products business fell from a year before by 2 billion yen in the first quarter, but will increase year on year from the second quarter onward. In addition to natural fats and oils, crude oil and domestic NAFTA prices will rise. For packaging materials, in addition to higher NAFTA prices, higher labor costs for processing will be taken into account. Energy and logistics costs are also expected to rise, resulting in an increase of approximately 10 billion yen from the second quarter onward, or 8 billion yen for a full year. We plan not only to pass on those increases in prices, but also to increase profits by reforming our earning power, for instance through adding higher value. Please turn to page 14. From here, I will explain about ramping up of global rollout of high-value added products using three slides. On page 14, our skin protection business consisting of UV care and self-tanning as a prime example of our global sharp top strategy will be accelerated starting this year. Driven by Bondi Sands Joining Cow Group and China, sales grew by 30% year-on-year. As for Biore UV Care in China, Aqua Rich Aqua Protect Mist and Aqua Rich Aqua Protect Lotion Water Layer Pack, which were very well received in Japan last year, were quickly launched, resulting in a 24% increase in sales year-on-year. We are promoting the use of UV cameras to visualize unevenness in application and other digital contents to attract new customers in younger generation. In Bondi sense, we will promote brand awareness, expansion and trial use this year, especially in North America, focusing on digital marketing measures through social media. We will also ramp up global rollout of high-value added products in each of other regions. Please turn to page 15. Regarding Sensai, in various regions, Sensai is steadily consolidating its position as a luxury skincare brand, especially among wealthy customers. In Europe, our main market, In Germany in particular, iAir Essence, a new product launched this fiscal year, and masks in the highest price range have been performing well, and we achieved the number one market share in the mask category and number two ranking in the skincare category. Next is Q-Row, where we aim to be the world's most useful brand for people with dry and sensitive skin. In China, the essence launched at the end of February as a locally produced and consumed product increased 30% in sales compared to the plan. It received a trend award from a beauty magazine and an award from the Chinese Society of Dermatology. Q-Row is a brand that is very popular in the world. Finally, for Kate, we are promoting Kate's unique worldview and products to young customers mainly through digital marketing in each region. In the first quarter results in our mainstay Japanese market, we achieved the number one share in the lipstick, eyeshadow, eyeliner, and eyebrow categories and secured the number one position in the self-selection makeup market for 21 consecutive years, solidifying her position as the number one brand. Please turn to page 16. In the Japanese market, we have started a transformation of our hair care business. In our effort to reorganize the formation of hair care brands, in addition to strengthening the existing three mass brands through rebranding, we have started full-fledged entry of high premium brands into the expanding high-price segments. Through these efforts, we will enhance our overwhelming number one position in the Japanese bath products market. As the first offering for a full-fledged entry into the expanding high premium market, we started selling Melt, a new hair care brand that proposes beauty care for relaxing moments to care for hair problems. while unwinding in some stores since March. In terms of milk marketing, we are developing real-world experience sites and various measures targeting consumers with a high sensitivity to beauty using distal technologies. The brand has been rising steadily in sales and was received by retailers, although there has been only a short period of time since its launch. We will continue to nurture the brand and develop it into a representative brand of high-premium products. Oribe, a prestige brand for hair salons, continues to grow steadily. In the European region, a particular target for expansion, sales grew by 60% year-on-year. In terms of our position in the U.S. market, we have built the number two market share in shampoos and conditioners and number one in styling agents in the high-end market, respectively. And in addition, we have built a strong positioning as number two in the e-commerce tunnels and number one in department stores. The key to those successes is Oribe's community creation activities through the luxury experience. We'll expand this successful model globally in the future. We will build a model that will lead to increased loyalty and repeat business by enhancing empathy for both Oribe and Melt. Please move to page 17. Key highlights explain that the outset are shown again here. We are on track to achieve K27. In the first quarter, I believe we were able to demonstrate the profit generation through structural reforms. This effect will continue in the future. On the other hand, We will steadily reform our earning power, starting with the Japanese market, by improving the competitive advantage of our core brands. Then, we will ramp up global rollout of high-value added products, including chemical business, which we hope will lead to further growth. Please take a look at page 18. This is the last page and describes the major upcoming events. As mentioned in today's presentation, marketing strategies utilizing DX are important for ramping up global rollout in the future. We will hold a briefing on DX strategies in June. Furthermore, in the second half of the year, we also plan to hold a briefing on strategies for the healthcare business, which we have positioned as a business transformation area. I look forward to your participation. This concludes my presentation. Thank you for attention.