Kao Corporation FY2026 Q2 Earnings Report

Quick View

Executive Summary

For the six months ended Q2 of the fiscal year ending December 2026, Kao delivered higher revenue and earnings, accompanied by a clear improvement in profit margins, as operating leverage from improved gross margins took effect in addition to revenue growth across all segments. Revenue was ¥8,719.3億 (up +7.8% YoY), while operating income was ¥958.3億 (up +38.5%), bringing the operating margin to 11.0%, an improvement of +2.4pt from 8.6% in the same period of the previous year. Net income attributable to owners of the parent was ¥656.6億 (¥496.3億 in the previous year, YoY +32.3%); throughout this report, this metric is referred to consistently as “net income.” The primary driver of earnings growth was the recovery in the gross margin to 39.8% (+1.3pt YoY), resulting from measures addressing raw material and logistics costs and improvements in pricing and product mix, which more than offset the slight increase in the SG&A ratio to 30.3% (+0.2pt). Progress toward the full-year company forecasts of revenue of ¥1兆8,000億 and operating income of ¥1,900億 was 48.4% and 50.4%, respectively, representing generally standard interim-period progress.

Factors Affecting Earnings

【Revenue】All six segments recorded revenue growth, indicating that top-line expansion was supported by a broad range of businesses. The core GlobalConsumerCare segment, which represented 74.5% of total revenue, grew +7.2%, while Cosmetics and Chemical grew +10.5% and +9.5%, respectively. All segments performed at or above the company-wide growth rate of +7.8%. Improvements in regional and product mix and the penetration of pricing initiatives contributed to revenue growth.

【Profit and Loss】Operating income increased +38.5%, substantially exceeding the revenue growth rate, primarily due to the recovery in the gross margin to 39.8% (+1.3pt YoY). The SG&A ratio rose slightly to 30.3% (+0.2pt), but the improvement in gross margin more than offset this increase, expanding the operating margin to 11.0% (+2.4pt YoY). Profit before tax was ¥973.2億 (+35.6%), while income taxes and other taxes were ¥310.9億 (effective tax rate: 31.9%; previous year: 31.1%). No temporary factors corresponding to extraordinary gains or losses were identified. Accordingly, the current period was characterized by both revenue and earnings growth, with profitability-led improvement as the earnings growth rate exceeded the revenue growth rate.

Segment Analysis

By segment, the core GlobalConsumerCare segment was the largest contributor to company-wide earnings, generating operating income of ¥657.1億 (+20.4% YoY) at an operating margin of 10.1%. HygieneLivingCare maintained the highest margin among all segments at 14.5%, with revenue of ¥2,707.2億 (+5.0%) and operating income of ¥391.7億 (+10.1%). Chemical recorded revenue of ¥2,224.4億 (+9.5%) and operating income of ¥180.7億 (+26.2%), with earnings growth exceeding revenue growth and profitability continuing to improve. Cosmetics was particularly notable: revenue increased to ¥1,309.8億 (+10.5%), while operating income improved by +1,603.6% YoY to ¥57.6億, approaching a level of recovery near a return to profitability; however, its operating margin remained relatively low compared with other segments at 4.4%. HealthBeautyCare, with an operating margin of 8.7%, and BusinessConnected, with an operating margin of 4.4%, also recorded higher revenue and earnings. A key feature of the results was that all segments contributed to earnings growth.

Key Financial Metrics

【Profitability】The operating margin improved to 11.0% from 8.6% in the same period of the previous year, a +2.4pt improvement, while the net profit margin, based on net income attributable to owners of the parent, improved to 7.5% from 6.1%, a +1.4pt improvement. ROE was 5.8%, with the improvement in the net profit margin serving as the primary driver. 【Cash Flow Quality】Operating cash flow (OCF) of ¥552.5億 was only 0.84 times net income of ¥656.6億, as changes in working capital, including inventory accumulation, weighed on OCF. 【Investment Efficiency】The total asset turnover ratio was 0.46x, remaining broadly flat from the previous year. 【Financial Soundness】The equity ratio improved to 59.0% from 56.7%, a +2.3pt improvement. Against EBIT of ¥958.3億, financial expenses were ¥28.7億, indicating a limited interest burden and a conservatively positioned financial base.

Cash Flow Analysis

Operating cash flow was ¥552.5億, up +28.9% YoY. Starting from subtotal cash flow before changes in working capital of ¥895.4億, deductions included an increase in inventories of ¥207.6億, income taxes paid of ¥342.9億, and lease payments of ¥116.8億, resulting in OCF of ¥552.5億. An increase in trade payables of ¥78.3億 provided a partial offset. Investing cash flow was -¥120.3億, primarily reflecting capital expenditures of ¥286.5億, partially offset by proceeds from the sale of property, plant and equipment and other assets. Financing cash flow was -¥486.4億, with dividend payments of ¥348.7億 representing the principal use of funds. As a result, free cash flow (OCF + investing cash flow) was ¥432.2億, covering dividend payments by 1.24 times. Cash and cash equivalents were ¥3,266.6億, remaining broadly flat year on year.

Earnings Quality

The composition of current-period income shows financial income of ¥0.1億, financial expenses of ¥28.7億, and equity-method investment gain of ¥16.3億. The scale of non-operating gains and losses was limited, and the deviation from the recurring earnings structure was small. Meanwhile, other operating income of ¥213.1億 less other operating expenses of ¥87.2億 resulted in a net positive contribution of approximately ¥125.9億. Depending on the details of this item, the level of earnings may fluctuate from the next fiscal year onward, which warrants attention. Total comprehensive income was ¥906.1億, including ¥898.9億 attributable to owners of the parent. The difference of ¥242.3億 from net income of ¥656.6億 was primarily attributable to other comprehensive income, principally foreign currency translation adjustments. From an accrual perspective, OCF remained at 0.84 times net income, with changes in working capital, including inventory accumulation, contributing to the divergence between earnings and cash flow.

Earnings Forecasts and Guidance

The full-year company forecasts are revenue of ¥1兆8,000億 (+6.6% YoY), operating income of ¥1,900億 (+16.2%), and net income attributable to owners of the parent of ¥1,350億 (+12.4%), with forecast EPS of ¥149.21. Progress as of the interim period was 48.4% for revenue, 50.4% for operating income, and 48.6% for net income, broadly in line with standard interim-period progress of 50%. First-half operating earnings growth of +38.5% is substantially ahead of the full-year plan of +16.2%, suggesting that the full-year plan may assume a slowdown in earnings growth during the second half. Although the earnings forecast was revised during the current quarter, there was no revision to the dividend forecast.

Shareholder Returns

The Q2-end dividend was ¥78 per share, an increase of +¥1 from ¥77 in the same period of the previous year. Kao conducted a 2-for-1 stock split effective July 1, 2026. Because the year-end dividend forecast and total annual dividend cannot be simply added to the Q2-end dividend due to the impact of the stock split, the company disclosed a year-end dividend forecast of ¥78.00 and total annual dividends of ¥156.00 on a pre-stock-split basis as reference information. Dividend payments were ¥348.7億 on the statement of cash flows (¥353.5億 in the previous year), representing a level covered by free cash flow of ¥432.2億.

Risk Factors

1. Working Capital Efficiency: Inventories were ¥3,174.7億, up +8.6% from the end of the same period of the previous year, accumulating at a pace slightly above revenue growth of +7.8%. The extent to which inventory levels are corrected could affect operating cash flow generation in the second half.

2. Sustainability of Other Operating Gains and Losses: Other operating income of ¥213.1億 less other operating expenses of ¥87.2億 made a net positive contribution of approximately ¥125.9億 to operating income. Depending on the recurring nature of this item, the level of earnings may vary going forward.

3. Foreign Exchange and Raw Material Cost Fluctuations: Given the high proportion of overseas revenue in the segment mix, foreign currency translation adjustments (+¥225.9億 in the current period) had a significant impact on equity and comprehensive income. Foreign exchange and raw material price fluctuations therefore remain factors requiring close monitoring as sources of earnings volatility.

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Returns

Both the operating margin and net profit margin exceeded the industry median, indicating that profitability was relatively high within the industry.

Growth and Capital Efficiency

Revenue growth was slightly below the industry median, indicating a relatively moderate pace of revenue growth within the industry.

※Source: Compiled by the Company

Key Takeaways from the Results

1. The operating margin improved to 11.0% from 8.6% in the previous year, a +2.4pt improvement. The recovery in gross margin (+1.3pt) and the effects of pricing and product-mix initiatives are evident in the reported figures.

2. The Cosmetics segment improved substantially, with operating income of ¥57.6億 (+1,603.6% YoY), but its operating margin remained low at 4.4% compared with other segments, indicating that its earnings structure is still undergoing improvement.

3. Revenue, operating income, and net income progress rates were all between 48% and 50%, broadly on track with the plan. However, first-half operating earnings growth of +38.5% significantly exceeded the full-year plan of +16.2%, suggesting an assumption that earnings growth will be slower in the second half than in the first half.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade period). It is not a forecast of the market share price or a recommendation to take any specific investment action.

Sensitivity: ¥1,353–¥1,434 at cost of equity ±1%, and ¥1,389–¥1,398 at ω±0.1.

Notes:

• Net assets as of the quarter-end were used; there is a timing difference from the full-year forecast.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not predict or guarantee the future share price)

---

This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting with professionals as necessary.

---End of Report---