Kao Corp Ord

Now let me present the financial results for the first half of this year. Thank you very much for coming despite your very busy schedules. First, please turn to page 4. This year is positioned as the year to achieve two goals in parallel. to improve earning power and solidify our operations in Japan, and to use the profits earned from these efforts to build a foundation for global expansion in growth and focus areas. Looking back on the first half of the year from this perspective, we were able to achieve solid results as planned. As you see here, the three main contributors to solidifying business in Japan are continued market share expansion in fabric and home care, improved profitability in cosmetics, and significant growth in the high premium hair care area. We also rolled out measures for global growth in focus areas such as UV care and cosmetics. Based on the positive feedback that the plan is progressing well, we have revised upward our full year operating income forecast for fiscal year 2025 from the 160 billion yen announced at the Q1 results meeting to 165 billion yen. At the same time, the company also resolved today to repurchase up to 15 million shares, or a total amount of 80 billion yen. This capital policy is based on a comprehensive assessment of capital efficiency improvement and shareholder return. We will continue to focus on creating shareholder value by maintaining the necessary financial flexibility while continuing to emphasize investments in future growth. Now please turn to page six. Net sales increased 2.7% to reach 809 billion yen. Excluding the effective currency translation, net sales increased 3.7%. Gross margin was 38.5%, the same level as the same period of the previous year. But for the GC business alone, an improvement of 1.2 points was achieved. Operating income was 69.5 billion yen, an increase of 11.5 billion yen from the same period last year, and the operating margin improved to 8.6%. Net income attributable to owners of the parent was 49.6 billion yen, an increase of 14.3% or 6.2 billion yen from the same period last year. Earnings per share was 106.85 yen, an increase of 14.4% from the same period last year. The interim dividend will be 77 yen per share, an increase of 1 yen per share as initially planned. Please turn to page 8. Net sales increased by 3.7%, operating income increased by 11.5 billion yen, and ROIC improved by 0.5 points from the same period last year to reach 8.0%. The improvement in the operating margin is a result of improved profitability of cosmetics as well as fabric and home care, which is the foundation of the company's business. This indicates that our earning power continues to steadily improve. The improvement in ROIC was due to increased profits and efforts to improve invested capital efficiency, such as by streamlining the sanitary business. For Q3 onwards, we will continue to revise prices by adding further value to our products in the GC business in Japan. As for the US tariff policy, the direct effect of tariff increase is expected to be about 1.5 billion yen, 0.5 billion yen less than the assumption shown at the Q1 results meeting due to the revision of tariff rates. Based on the favorable progress of the plan as described above, we have increased our full year forecast for net sales by 20 billion yen to 1 trillion 690 billion yen, and for operating income by 5 billion yen to 165 billion yen. Now please turn to page 9. First, we sold the pet care and beverage businesses last year, and the percentages excluding these businesses are shown in green. Today's explanation will use these suggested figures. Overall, the GC business posted a 1.8% increase in net sales. By region, competition intensified in Asia, the Americas and Europe. In Europe and the United States in particular, the market itself is in a difficult environment, with consumers being more cost-conscious. Net sales in the first half declined, and overseas sales declined by 4.1%. However, sales in Japan grew by 5.2%, and overall sales in the GC business increased by 1.8%. In the chemical business, net sales increased in all regions. In Japan, Cosmetic sales increased 6.7%. Both fabric and home care and health beauty care grew strongly by 5.6%. Please turn to page 10. I would like to explain the business performance by segment. Hygiene living care continued to improve its earning power and posted an increase of ¥1.4 billion in operating income. Excluding the gain on the sale of the pet care business in Q2 of last year, operating income increased by ¥5.7 billion. Fabric and home care achieved an increase of ¥2.9 billion in operating income by promoting high-value added products and enhancing customer loyalty. which also contributed to price revisions. Operating margin improved by 1.1 points and reached 17.3%. In sanitary products, the reform of earning power was implemented in a multifaceted manner through scrum-style management and price revisions, resulting in an operating income of ¥4.5 billion. an increase of 2.8 billion yen. In the health beauty care business, sales of skin care and high premium hair care products in Japan grew significantly, contributing to a 1.6% increase in net sales due to volume growth, while continuing to build a foundation for future growth. In the skincare business, marketing expenses were also significant due to the aggressive global deployment of UV care products in particular. So excluding the impact of last year's hair salon business structural reforms, income was 300 million yen lower than the same period of the previous year. In the cosmetics business, sales in Japan increased significantly as a result of the concentration of resources on six focused brands. Streamlining of the business was also successful, resulting in a significant improvement in operating income of 6.5 billion yen, and the company returned to first-half profitability for the first time in three fiscal years. In business-connected, KPS or Kao Professional Services, which develops business products, is the core business. Excluding sales in the same period last year of the beverage business, which was sold last year in August, sales was almost flat year on year, but profits increased by ¥1.4 billion due to the elimination of the loss in the beverage business. In chemicals, sales volume was slightly lower than the previous year, but the company responded to soaring prices of raw materials for oils and fats by revising selling prices. As a result, sales increased 11.0%. However, profit decreased due to lower demand in the automotive-related sector in the second quarter, economic slowdown in Europe, and elimination of unrealized profit on Oleo products. As a result, operating margin on a company-wide basis was 8.6%. Turn to page 13, please. I will now analyze the factors behind the 11.5 billion yen difference in operating income for the first half of 2024 and 2025. I will explain from the three perspectives of earning power, growth and fixed cost reduction effects from structural reforms, which I presented at the previous earnings announcement. First, as for the earning power effect, the GC business as a whole saw an increase in profit of about 5 billion yen. Although an increase in selling prices did not fully absorb the rise in raw material prices, cost of sales reductions contributed to the increase. Second, in terms of growth, the GC business as a whole saw a 4.5 billion yen increase due to volume growth. If we subtract part of the increase in SG&A expenses from that, it comes to about 1.5 billion yen. Fixed cost reductions due to structural reforms will amount to approximately ¥4 billion. The total of these factors plus the impact of currency translation and the negative impact of the chemicals business will amount to ¥11.5 billion. In terms of SG&A expenses, Approximately 3.0 billion yen is the increase in marketing and personal expenses, which is offset by a fixed cost decrease of approximately 3.0 billion yen due to human capital structural reforms. Please turn to page 14. In the GC business, profit margin improved as cost increases due to high raw material prices were absorbed by proactive introduction of high value-added products and aggressive cost reduction activities. The gross margin for the entire company, including chemicals, remained flat at 38.5% compared to the first half of 2024, but the GC business, which targets a 1% per year improvement, showed a steady improvement of 1.2 points. Please look at the box on the right-hand side. We believe that we can achieve an improvement rate of 1.0 points or more by continuing these activities and introducing new high-value-added products from the third quarter onwards.

Next, please turn to page 15. The primary reason for the continued strong performance of the GC business is the uninterrupted launch of competitive products into the marketplace. Please look at the top graph. Since July 2023, around the time when we announced the K-27 and structural reforms, cow's share in the toiletry market has increased compared to the same month of the previous year for 24 consecutive months. Contributing greatly to this share expansion are the laundry detergent and in-bath hair care categories. In laundry detergents, the use of digital transformation and swarm-based product development have enabled us to significantly accelerate the launch of new and improved products such as ATT&CK Zero, Anti-Bacterial EX, Perfect Stick, and New Beads. We achieved number one category share in June 23 and continue to grow our share. At the end of June this year, we made price adjustments for antibacterial EX in line with its enhanced value. We expect its effects to materialize even more strongly in the second half. We have also seen a significant increase in market share in the in-buff hair care category since we entered the high premium market in 2024. Page 16, Hair Care Business Reform. Under the basic vision, here, the power of life, we restructured our brand formation, which had previously been built around functional value, to focus instead on fundamental human emotional needs as shown in the diagram. While focusing on emotional needs, we also leverage our 100 years of expertise in hair care research, incorporating cutting-edge technology into each brand to drive product development. As a result, both the first and second product offerings achieved about twice the planned sales in the first half of 2025. We successfully captured sharply defined target consumers with substantial increase in both trial and repeat purchases. Users have given high reviews that the concept, naming, user experience, fragrance, and finish all come together at a high level. The answer, won 27 best cosmetics awards at AtCosme, Japan's largest online beauty and cosmetics portal, including the grand prize, the first time a hair care product was bestowed with the top prize. Of the six parts, we haven't been able to fill the red part. That is what we will target with our third offering. This will complete our hair care brand formation and further strengthen Kawa's presence in the market. Next, please turn to page 17. In the cosmetics business undergoing structural reform under a new organization since January this year, we clarified the issues to address and implemented a scrum approach across organizational barriers, which led to profitability in the first half for the first time in three years. In Japan, by focusing investment and sales activities on six focus brands, we succeeded in creating a strong in-store presence. New products such as Curel and Sofina IP are performing well. We also focused on expanding our own e-commerce to strengthen our base in the channel. As a result of these efforts, sales of the six focus brands increased 115% year-on-year, and directly operated e-commerce sales grew substantially by 134%. Meanwhile, through steam-riding efforts such as the organizational restructuring carried out since last year, we reduced fixed costs by ¥3.8 billion. Regarding our global expansion focus, we have qualified three directions. First, expansion in ASEAN. Second, rollout in Europe. And third, the introduction of brands from Europe into Asia. We are building the necessary foundation for this. For expansion in ASEAN, sales of the six focus brands progressed steadily reaching 111% year-on-year. In Thailand, where we are putting particular focus, sales grew significantly, reaching 127%. For our expansion in Europe, we have begun rolling out Curel, leveraging the brand assets built through Sensai. Also, we are accelerating the introduction of the European-grown sensor into Asia around a flagship store in China. We have built an integrated operational structure for Japan, China, and PR, travel, retail, and with steadily The introduction into Indonesia sales in Asia increased 2.4 times year-on-year. Our China business is generally progressing well. Sell-out is growing as planned, and selling prices at unofficial e-commerce stores are moving within the expected range. Locally produced products that we are cultivating have also grown 1.8 times year-on-year, indicating steady overall growth of the China businesses. Next, please turn to page 19. From here, I will explain the earnings forecast for fiscal 2025. In light of the strong results in the first half, we have revised our full year forecast upward. Net sales forecast is up by 20 billion to 1,690,000,000 yen and operating income is up by 5 billion to 165 billion yen. With the planned share repurchase, ROE is projected to improve by 0.9 points from the original plan to 11.7%, and earnings per share are expected to increase 13% year-on-year to 262 yen. Please turn to page 20. In Japan, we aim to further enhance profitability through offering high value-added products in public care and health care outside japan we are working for recovery through growth in cosmetics and new product offerings in health beauty care among other measures the 20 million upward revision of full year net sales is due to strong sales in japan page 21 Regarding raw material prices, the expected ¥10 billion cost increase in Q1 has been revised down to ¥9 billion due to falling domestic NAFSA prices, which are linked to crude oil markets. On a year-on-year basis, though, prices for natural fat and oils remain high, and in the second half we expect ¥3 billion higher cost over last year. Please turn to page 22. Now I will explain the ¥18.4 billion increase in operating income between ¥146.6 billion in FY24 to ¥165 billion revised FY25 forecast, which has been raised by ¥5 billion. First, regarding earning power, we expect the rise in raw material costs by ¥9 billion to be offset by ¥15 billion in gains from pricing adjustments, There is further improvement of about 10 billion yen from cost of sales reductions. As a result, we expect profit increase by enhanced earning power to be more than 16 billion yen. In the growth category, including cosmetics, we expect a positive impact of about 20 billion yen from higher volume. After deducting higher marketing, personnel, and other general administrative expenses, we forecast a net gain of around 4 billion yen. Cost reductions from structural reforms will be about 5.5 billion yen. Also, there is 1 billion increase for the chemicals and a negative impact of 7 billion yen in currency translation and others. A negative impact of 1 billion yen for the GC business has been factored in as the direct effect of tariff revisions in the U.S. of the 12 billion yen increase in scna about 10 billion yen is related to marketing investment the remaining 2 billion includes higher personnel and operating expenses and fixed cost reductions from structural reforms For chemical, we factor in a direct tariff-related risk of around 500 million yen. We revised our earnings forecast slightly downward based on first-half results and recent market degradation, but the promotion of higher-value ad and customer acquisitions for the new Tesla Amine Fund in the U.S. in Q4 onward are progressing smoothly. Negative impact of currency translation and others is mainly due to the absence of one-time gains from asset sales recorded in the previous year. Page 23. This chart shows the three business areas year-on-year changes for sales growth rate, operating income improvement, and ROIC improvement in the first half. In the stable earnings, sales grew by 3.5%, operating income increased by 3.8 billion yen, and ROIC improved by 2.4 points. In the gross driver, sales rose by 5.4%, operating income increased by 4.1 billion yen, and ROIC improved by 0.5 points. In the business transformation, sales remained almost flat at minus 0.1%, but operating income rose by 2.2 billion yen and ROIC improved by 1.4 points. Overall, each area is progressing largely in line with expectations. Going forward, toward the full year, we will steadily proceed toward achieving ROIC targets in each area, focusing on capital efficiency improvements. Page 24. With today's upward revision of operating income and the implementation of a share repurchase of up to 80 billion yen, ROIC is expected to reach double digits at 10%, and EVA is projected to significantly exceed 40 billion yen. We are making steady progress toward achieving the goals of K27, and we intend to continue driving profitable growth. Lastly, please turn to page 25. You see the progress toward the K27 targets in the graph when the revised outlook for fiscal 25 is applied. I believe this clearly shows that we are making steady progress. That concludes my explanation. Thank you for your attention. Now, our President and CEO, Hasebe, will speak about our further strategic initiatives.

Good afternoon. Thank you very much for coming despite your busy schedules. I will explain the progress of our Mid-Term Plan K27, including the strategic mechanisms we have introduced for K27 and the results for 2024. This slide shows our net sales and operating income trends since 2019 when we posted record profits. Since the announcement of K27 in 2023, we have achieved a steady and significant improvement in our operating income. Structure reform through K-27 helped us offset major impacts of the macro environment such as COVID-19 and soaring raw material prices. Please turn to page 28. Next, let me explain how we are reforming our management structure from the business structure as of 2019 when we achieved record profits. The chart on the left shows the operating income structure by business in 2019. At that time, we were highly dependent on the Chinese market, which made us vulnerable to changes in international affairs. The fabric and home care and skin care, hair care segments, which were mainly focused on Asian markets including Japan, was facing slower growth due to a lack of countermeasures against competitors' moves. Under these circumstances, there were three major management issues to address. Global growth, earning power, and human capital revitalization. The challenges that became apparent were external factors, including the disappearance of inbound demand and soaring raw material prices, and internal factors such as insufficient allocation to strategic investments. To address these issues, we implemented business portfolio management, value-based pricing, in other words, strategic price increases, and ROIC management to push forward well-balanced and focused management reform. We also focused on loyalty marketing to increase support from customers and monitored the results of such marketing through data-driven management. The driving force behind these efforts is the company-wide Scrum-style activities. To achieve these goals, we have set clear KPIs for each management issue and formulated the K27 plan. Please turn to page 29. Here, we share the concept of a well-balanced and focused business strategy portfolio Cow's focus is on customer perspective and business characteristics. Here, Kao's business categories are organized from the consumer's perspective. On the far left is cosmetics, the main beauty care category. On the right is sanitary. In hygiene, living care, on the right, the priority is to solve the challenges of or eliminate the pain points in cleanliness and hygiene. So specific products tend to be chosen continuously. Consumers' choice is based on absolute benefit of products rather than comparison to others. On the other hand, in cosmetics and health beauty care, consumers tend to try many products because they are looking for new experiences and satisfaction of curiosity or something to gain. So consumer loyalty tends to be lower. consumers want to compare and find the product most suitable for themselves. Furthermore, in general, the categories on the right tend to have heavier capital investment burdens while those on the left tend to have heavier marketing burdens. Therefore, in the problem-solving categories on the right, we will strengthen basic functions and improve consumer loyalty in areas where the brand has high penetration. On the other hand, in categories on the left where switches are more likely to occur, we adopt a lean startup approach. First, we find and focus on features that we are sure appeals to the consumer and expand based on initial learnings. Once what makes the product a must-have is identified, the consumer can no longer do without the product because of its benefits, which leads to enhanced consumer loyalty. We call this the gain to pain strategy. Our technical capability will be perceived as high quality by the customer, and once they experience it, they will continue to choose it. Because we are confident about this, we can take this strategy. Please turn to page 30. Here are some examples of our success, although not exhaustive. The two on the left in green, social significance and exclusive uniqueness, are the strategic pillars which demonstrate Kao's strengths leading to competitive advantage. Lean startup and gain-to-paying tactics on the right are essential to expand each area globally. As necessary, the tactics will change, but social significance and exclusive uniqueness on the left-hand side will not change, because they are our strengths, the foundation of our business. B-O-R-A-U-V, Q-Rail, MELT, and the answer. are all proposed as very attractive offerings by Kao. Once customers try them and experience a quality, the products become paying products, which they cannot do without, leading to expansion of business. Please turn to page 31. Once again, we present the concept of Kao's global sharp top strategy. Global refers to scale of sales. Sharp refers to loyalty ratio and profitability. And top refers to presence or market share. With these three, we intend to establish a global presence. Today, I would like to talk about three growth businesses. Please turn to page 32. I will now talk about a category that will be a growth driver based on this strategy, the scheme protection category. Demand for skin protection from environmental factors such as global warming is growing. Today is hot with strong sunshine. This is not just in Japan, but this is a globally expanding trend. External factors that are relevant in protecting the skin include sunlight, heat, and pests. Demand for higher protection against these will increase. And cosmetic factors related to beautification include tanning and brightening. These two factors would be skin care and makeup for the face. But they apply to body care as well and are complementary to each other. From this perspective, Kao's brand assets, Juergens and Bondi Sands, together hold an overwhelming global sharp top position. The share in the United States is 51%, and globally it is 20%. A 20% share globally is very high for Kao's business lineup. Biore is a top brand in Japan in UV care and thermal stress care, which fights against sunlight and heat. Unfortunately, the brand is not strong globally. How to combine these two assets is strategically important. We are leveraging our exclusively unique technologies to develop synergistic and complementary businesses in potential core market areas.

Please turn to page 33. Next is one of our growth drivers, the chemical business. The chemical business is well suited for the global sharp top strategy as strategies for each business segment can be clearly defined. On the far left, there are global top businesses that are facing increasing price competition. In these areas, we aim to enhance value by further sharpening features. In a lower rate, we have sharp top businesses with strong domestic presence. While they are top in the core market of Japan, global rollout is insufficient. We are therefore accelerating expansion in overseas markets. For globally sharp but small scale businesses such as inkjet and asphalt, we are focusing on securing large strategic customers. For every business, we are aiming to be global shop top and we are implementing initiatives to strengthen their positions. Each category is steadily moving forward with a clear strategy. Please turn to page 34. I will briefly explain the cosmetic spaces reform and growth strategy. In the cosmetics business, we are aiming to build a self-sustaining cycle of capital acquisition and investment for sustained growth. We are first working on the optimization of production systems and enhancement of operational efficiency. With cross-sectional use of our assets, we are aiming to create and develop strategic star products. This is to become more sharp. While these two initiatives are strongly oriented toward improved soundness, the gains they generate allow us to invest in business expansion. We are focusing on six focus brands as global growth drivers and working to establish their presence in each market. This cycle is now beginning to work effectively. global expansion the development of sharp uniquely focused brands and well-honed business streamlining to achieve global top these three are now starting to move in a cycle this system is a very backbone of our global sharp top strategy for cosmetics Its positive effects have already begun to appear in 2025 and we expect the momentum to grow further toward 2027. Page 35. I will now explain the current progress of our portfolio management and our vision for K27. Currently, we are managing our businesses categorized in three areas. In the stable earnings, performance is exceeding expectations. In the growth driver, we are applying lean startup style tactics, which require time to generate results. In the business transformation, we are beginning to see positive outcomes from business reform in the hair care and sanitary businesses. However, as we indicate with triangles in skincare, global expansion is taking time. Likewise, expansion of hair salon business in Europe is also requiring more time than expected. Nevertheless, we are committed to achieving global expansion through both the stable earnings and growth driver areas towards the K27. Page 36 toward achieving the k27 target for overseas sales we are aiming to grow by more than 95 billion yen over three years with contributions coming equally from the three segments this approach includes cosmetics health beauty care and chemical hygiene living care each playing a role with the shares shown here On the right, you'll find a table listing the main initiatives and the regions to be strengthened. We have about two years and five months remaining, and at this stage, I believe we are progressing well. Day 37. I'd like to speak about our target for operating income. We are now in a positive where we can discuss our outlook with some confidence. We are targeting over 65 billion yen in operating income growth over three years, with contributions from the three segments expected to be fairly evenly weighted. That said, the meaning behind the breakdown differs slightly from what I mentioned earlier about sales. On the right side of the slide, you'll find a table of our main initiatives and regions to be strengthened. Please refer to them later. As mentioned earlier by Megoro, profit recovery in the cosmetics business is progressing very well. Cosmetics inherently have high gross margins, and this recovery is a strong source of encouragement for us. Cosmetics and health beauty care together account for about 60% of beauty care, and the core part of these would always include not only Japan but global growth as well. We believe this area will serve as a testing stone of our success. We encourage you to closely monitor our progress here as a benchmark. Page 38. To summarize what I have shared so far, this is how we look at the profit structure. 2019 and 2024 are actual structure and it shows how we envision in 2027. While we are aiming to achieve operating income in 2027 that exceeds that of 2019, the structure is entirely different. As I mentioned at the beginning, 2019 was our strongest year in terms of performance. but it was also marked by considerable uncertainty in social conditions. In contrast, what we aim for in 2027 is a strong, stable foundation in the global market, with a structure adaptable to changing social conditions. and management system that promotes cutting-edge digital transformation. I believe that our advanced management system is now operating at a top-tier level within the industry. If you look at this year's progress in cosmetics reform and business growth in skincare and hair care, I believe you will feel a strong sense of confidence in our ability to achieve the K27 targets. Page 39 This slide is one we share regularly, but I'd like to re-emphasize the importance of the global sharp top strategy. We are strengthening our efforts in R&D, DX investment, and the use of AI, and we are fully united as a company in our pursuit of the K27 goals. Each of the strategies listed here has been carefully selected as the direction we are confident will lead us to the successful achievement of K27. Please turn to page 40. This was explained earlier by Negoro. I will not repeat the same points. However, I'd like to reiterate that the core of the K27 strategy is transforming to build robust business through investment. This includes enhancing our exclusive uniqueness through R&D, making essential DX investment for global expansion, and driving various business transformations using AI. At present, many employees are working in a scrum, doing high-level work in a speedy manner. I am confident that we are regaining our earning power and shifting firmly toward growth potential. With about 2 years and 5 months remaining to achieve K27, I believe we are not only on track but progressing at an even faster pace. Finally, please turn to the next page. Our Cosmetics business is now gaining strong momentum. We plan to hold a cosmetics business strategy briefing on September 19th. Our new leader, Executive Officer Tomoko Uchiyama, will be presenting at the event. Today, I touched on cosmetics with just a single slide, but I believe she will be able to provide full insights into the areas you are most interested in. Please look forward to that briefing. Thank you very much for your attention.