Material and marketing costs hit Kao profits

By Simon Pitman

- Last updated on GMT

Global personal care giant Kao has announced that its year-on-year
six monthly profits fell by nearly 1 percent as costs mounted, a
result that takes into consideration trading under its newly
acquired Kanebo Cosmetics business for the first time.

For the full six months ending September 30, the company reported net sales of ¥654.46bn ($5.67bn), compared to ¥602.53 for the same period in 2006, a rise of 8.6 percent. Breaking the figures down, the inclusion of the Kanebo results meant that the company's Beauty Care division sales grew by 9 percent on a like-for-like basis over the six month period to reach ¥311.6bn, almost half of the company's total sales. Indeed, the purchase of Kanebo Cosmetics made Kao the second largest cosmetics player in Japan, behind Shiseido, and also helped to expand the company's reach on a global basis, particularly in other areas of Asia and in Europe. However, despite the boost in sales, driven partly by the Kanebo acquisition, profits were down 0.9 percent, from ¥29.57bn for the first six months of 2006, to reach ¥29.31bn for the same period this year. This figure reflected the fact that cost of sales rose 11.4 percent to reach ¥272.8bn during the period, a figure that was impacted by costs of raw materials, namely natural oils, fats and petrochemicals. This increase in cost of sales came despite the company's efforts to promote further cost reductions throughout the company's manufacturing operations. Likewise selling and general administrative expenses rose by 9 percent to ¥326.0bn, an increase the company said was largely attributable to the impact of the consolidation period for Kanebo Cosmetics, together with higher freight and warehouse costs. As for the Beauty Care business the company said that despite premium market conditions being flat, sales of brands such as Impress, Evita, est and Kate performed well. Meanwhile, in premium skin care the Bioré brand benfited from a number of new product launches, including U Body Cleanser and the makeup remover, Melting Liquid. Sales of premium products were also boosted by aggressive expansion in China, where the drive centered on department stores and high-end drug stores, while sales of the Bioré brand were said to be particularly strong in Singapore and Taiwan. Looking ahead to the full financial year, which ends in March 2008, the company is forecasting tough times as interest rates and material costs look set to continue rising. Again the company pointed out that raw material prices are likely to impact results, with a particular reference to petrochemical-related products, but it is also forecasting that sales growth should remain strong, given that the global economy remains stable. All of this considered the company believes that full-year sales should increase by 6.3 per cent to reach a total of ¥1,310bn, while net income is expected to decrease 6.4 per cent to ¥66bn, impacted by rising costs and interest rates on credit facilities.

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