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Fiscal 2010 Performance
Business Initiatives
While we saw a continued moderate recovery in the global economy, full-fledged recovery in Japan remained elusive, with persistent deflation and employment uncertainty. In addition, the March 11 Great East Japan Earthquake inflicted immense damage on people's everyday lives and a range of industries.
In the household and personal care products market in Japan, the core market for the Kao Group, consumer purchase prices fell in comparison with the previous fiscal year as budget-strapped consumers remained reluctant to spend. Despite this, the market grew by one percent on a value basis due to an increase in volume. In this environment, the Kao Group launched and fostered high-value-added products that respond effectively to changing consumer lifestyle values and purchasing behaviors. We also took measures to rebuild our prestige cosmetics business in Japan and to reduce costs.
Our Consumer Products Business expanded in Asia and Oceania as we rolled out new products developed with the Kao Group's unique technologies and enhanced marketing and sales activities.
In the Chemical Business, which operates globally, we took steps to offset rising raw material prices and expand sales volume.
Business Results
As a result of these business initiatives, net sales increased 0.2 percent compared with the previous fiscal year to ¥1,186.8 billion. Excluding the effect of currency translation, net sales would have increased 2.0 percent. Operating income was ¥104.6 billion, an increase of ¥10.6 billion.
The Kao Group recorded a loss of ¥4.1 billion related to the impact of the Great East Japan Earthquake, resulting in net income of ¥46.7 billion, an increase of ¥6.2 billion over the previous fiscal year. Operating income before amortization of goodwill and other items related to acquisitions (EBITA) was ¥139.1 billion, equivalent to 11.7 percent of net sales.
Net income per share increased ¥12.12 to ¥87.69 from ¥75.57 in the previous fiscal year. ROE improved 1.2 percentage points to 8.5 percent, reflecting the increase in net income and efforts to reduce total equity, including repurchases of stock with a total value of ¥30.0 billion.
Response to Current Challenges
Impact of the Great East Japan Earthquake
Kao Group's manufacturing and research centers in Tochigi and Kashima sustained damage from the Great East Japan Earthquake and, as a result, production lines for items including sanitary and chemical products were temporarily shut down. At our sales and logistics centers in the disaster-stricken area, damage to buildings and facilities and disruption of the transportation network also temporarily halted business activities.
The Kao Group's Corporate Social Responsibility as a Manufacturer
For me, this major earthquake was an acute reminder of the foremost mission of the Kao Group as a manufacturer of daily necessities: to ensure a timely and stable supply of products that are vital to the everyday lives of consumers, especially those affected by the disaster. I therefore urged all employees to mobilize the full resources of the Kao Group to restore our business operations.
I am pleased to report that the diligent efforts of our employees, especially those in the disaster area, and the generous support of our customers and suppliers allowed our recovery to progress faster than originally expected and we have resumed stable supply of almost all products.
Three Consumer Changes in Japan
Looking at the issues currently facing the Kao Group in Japan -- our key market and largest source of profit -- it is essential that we gear our business activities to respond to changing consumer lifestyle values and the related changes in product purchasing behavior.
In particular, I believe that our responses to the following three emerging themes in consumer change will be critically important.
1. Growing Environmental Consciousness
The first theme that requires our response is a growing environmental consciousness.
We will work to nurture and strengthen environmentally conscious products developed with the Kao Group's unique technologies. One example is Attack Neo, an ultra-concentrated liquid laundry detergent that helps to conserve energy and water because it requires only one rinse cycle.
In addition, the Eco-Technology Research Center started operation at the beginning of June 2011. Located within our Wakayama Complex, the center is to become the linchpin of the Kao Group's eco-innovation, fostering the creation of distinctive, environmentally conscious products.
2. Increasing Health Consciousness
The second theme to which we must respond is increasing health consciousness among consumers.
Our lineup of Healthya beverages, which are approved as Foods for Specified Health Uses, contains concentrated tea catechins to promote body fat utilization. With this series we have focused on communication that not only recommends the product but also encourages consumers to walk more in their daily lives. This approach has won enthusiastic support and we will strengthen our commitment to this type of initiative in the future.
The Megurhythm series of steam-generating thermo pads, derived from the Kao Group's research and insight, has created a whole new market as it has been warmly welcomed by consumers who suffer from stress in their daily lives. We will continue to work to develop and enhance similar daily health care products.*
* The scope of daily health care products does not include pharmaceuticals.
3. Changing Attitudes in an Aging Society
The third theme is changing consumer attitudes in an aging society, an area in which we must strengthen our response.
Our most important response to these changing attitudes will be developing products for "active seniors" -- people who want to lead healthy, active lifestyles regardless of age.
Products we will continue to develop and strengthen in this area include the Grace Sofina line of cosmetics, which launched a rich skin lotion and cream for women in their 60s and above, and the Segreta hair care series.
Prestige Cosmetics Business in Japan
As we have seen a shift toward lower-priced products and changes in consumer purchasing attitudes over several years in the Japanese cosmetics market, the Kao Group has responded by rebuilding its prestige cosmetics business.
Concentrating resources on a select number of brands and improving efficiency in marketing, personnel and other areas are beginning to yield results in cost reductions. These initiatives will continue to be a key focus in fiscal 2011.
Mid-Term Tactics to Realize Our Global Growth Strategy
Global Growth Strategy
Achieving global growth is crucial to the future advancement of the Kao Group. By continuing to grow profitably in the Japanese market, our profit base, and investing these earnings to accelerate our overseas business development, we will create a broad global presence for the Kao Group.
Our core principle in achieving this will be to leverage the innovative research and development capabilities the Kao Group has built up over the years for application in mature markets ranging from North America and Europe to Taiwan, Hong Kong and Singapore, as well as in growth markets such as China and the ASEAN region.
Tactics in Mature Markets
In mature markets, shifting lifestyle values and product purchasing attitudes are changing consumer needs significantly, and we will work to provide high-value-added products that respond to new needs.
This will include initiatives such as the introduction of foam hair color products developed with the Kao Group's unique technologies. After enjoying strong consumer support for foam hair color in Japan and other Asian countries, we introduced the product from the end of 2010 in quick succession in the United Kingdom, the Netherlands and the United States under the John Frieda brand, and initial sales have significantly exceeded expectations.
Tactics in Growth Markets
In growth markets with large populations and high rates of expansion such as China and Indonesia, we will target the ballooning segment of mid-tier consumers and work to provide cost-competitive products developed with the Kao Group's unique technologies in categories with sizable markets, such as laundry detergent, baby diapers and sanitary napkins.
In September 2010, we launched Attack Instant Clean Liquid detergent in China, leveraging the same technology as Attack Neo. We have also begun construction of a local production facility for a full-scale launch of Merries baby diapers, which already enjoy enthusiastic consumer support as an import from Japan.
As we launch products in growth markets, it is also essential that we foster a sense of trust and reassurance among local consumers by clearly communicating how the Kao Group can contribute to society and what we can offer to make people's lives better.
In China, for example, as we launch products in categories such as laundry detergent, baby diapers and sanitary napkins -- categories related to cleanliness, one of the Kao Group's fundamental business domains -- we will also undertake to enhance our corporate image as part of our efforts to win the support and trust of consumers.
Tactics in the Chemical Business
The Chemical Business is the Kao Group business that has made the greatest progress in globalization. Working in close cooperation with the new Eco-Technology Research Center, the Chemical Business anticipates additional growth from environmentally conscious products developed through the application of technologies such as advanced biomass. We will closely monitor market trends in our ongoing pursuit of global business opportunities across areas including information materials such as toner and toner binder for copiers and printers and polishing agents for hard disks, as well as oleo chemicals developed with the Kao Group's unique technologies.
Shareholder Returns
Basic Policies Regarding Distribution of Profits and Dividends for Fiscal 2010
In order to achieve profitable growth, Kao Corporation secures an internal reserve for capital investment and acquisitions from a medium-to-long-term management perspective and places priority on providing shareholders with steady and continuous dividends. We also take into account the repurchase and retirement of shares from the standpoint of improving capital efficiency.
In accordance with these policies, Kao Corporation announced a year-end dividend for fiscal 2010 of ¥29.00 per share, the same as the previous fiscal year. As a result, total cash dividends for fiscal 2010 increased ¥1.00 per share compared with the previous fiscal year to a total of ¥58.00 per share, a consolidated payout ratio of 66.1 percent.
To improve capital efficiency, Kao Corporation repurchased 13.9 million shares of its common stock from the market during fiscal 2010, at an aggregate cost of ¥30.0 billion. Aggregate share repurchases to March 31, 2011 totaled 137.6 million shares with a total value of ¥363.8 billion.
Toward future growth from an EVA standpoint, the Kao Group prioritizes the effective use of free cash flow, defined as net cash provided by operating activities plus net cash used in investing activities.
Conclusion
The Kao Group has embarked on a clear course toward achieving global business growth, and all Group companies will combine their strengths to accelerate business expansion around the world. Our shift to an ecology-centered management unique to the Kao Group and initiatives to establish a strong corporate identity will be integral to our corporate strategy as we redouble our efforts to enrich the lives of local consumers in various countries and markets. I hope that I have helped you understand the position of the Kao Group, and I sincerely request your ongoing support.
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