Unicharm : Summary of Q&A

Unicharm Corporation

Q3 Financial Results Briefing for the Fiscal Year Ending December 2022

November 7, 2022

Question & Answer

[Q]: For the gross margin on page 14 of this slide, regarding this raw material related, if it is only 3Q, it is about JPY9.7 billion, and it will be JPY8.9 billion in 4Q. For the product composition in 3Q, for example, it is about JPY1.7 billion after subtracting, and this will be about JPY11 billion. The quantity, etc., for 3Q only is JPY15.5 billion, but this one, on the contrary, is JPY18 billion. For the difference between 3Q and 4Q that your company expects, could you please explain what the actual contribution is and what is expected in 4Q?

[A]: Raw materials have been moving at a pace of less than JPY10 billion every quarter and every three months, so the period from October to December is also subject to foreign exchange factors, but I think it is about the same. In the area of product mix, regarding positive and negative factors, especially changes in product mix, the composition of the baby care, which has a relatively low profit margin, has decreased, while other areas have increased. The reduction in the baby care is also a cost-increasing factor, though, so it offsets both. In Japan, since July, we have been implementing value-pass through and launching new products, including baby care products in particular, so 4Q will see an increase in areas that were not fully realized in 3Q. For countries other than Japan, we are gradually passing through the value of the products while monitoring the situation, so this portion of the cost is increasing.

[Q]: For example, if we look at the mix alone, there was only about JPY1.7 billion in 2Q, but if we look at page 14, we can see that this figure will expand to about JPY11 billion, which is a figure that does not seem so out of place for your company, since it is simply the result of all the work done since September or so. Is that correct?

[A]: That's right. The effect will be gradual and will not occur all at once.

[Q]: Also, in the area of volume, 3Q shows a fairly large increase of about JPY15.5 billion, but I think this is JPY10.8 billion, so could you please explain this and tell me how it comes in and out?

[A]: The volume for 3Q is JPY15.4 billion, and the product mix is JPY3.8 billion, but the product mix has been done partly as mentioned earlier. In general, 3Q is about JPY1 billion, and within that product mix, JPY1 billion or JPY2 billion is about the value pass-through, and this JPY15.4 billion is where China's top line seems to be recovering. The exchange rate is also pushing up the market a little bit, and there is Asia, so some of that is

coming out. Other SoutFheast Asian countries also extend the top line well. Also, there are some parts of India that are growing nicely and well.

[Q]: Why the slowdown for the volume in 4Q?

[A]: Rather than a slowdown in 4Q, the JPY11 billion, such as for the product mix, etc., is a so-called pass- through. The timing is a little different in each country, but the effects will be felt in each country. If the balance here were to be upset, the quantity point would stretch a bit. I would imagine a slight dip in the product mix and an increase in volume.

[Q]: I would like to ask the difference between 2Q and 3Q. The impact of high raw material prices had just increased by JPY3 billion due to the exchange rate. Why profit increased in 3Q alone, and what is the biggest difference between 2Q and 3Q?

[A]: The biggest difference between 2Q and 3Q is the lockdown in China. The biggest factor was that we were unable to sell enough, and in 3Q, the inventory adjustment of baby products is still continuing. Feminine care has grown sufficiently in this 3Q, and the fact that it is in a state where it can carry things is a major factor. If feminine care moves, it will be profitable, and I think that is a major factor.

[Q]: There has been a topic in the industry so far that inventories are tightening in North America, but has that occurred for your company? What do you think about the sustainability of the top line?

[A]: Fortunately, in North America, we were able to detect such a situation in advance and raised the standard inventory value for larger orders, so there is no reason now that products are not being delivered.

[Q]: In terms of sustainability in 4Q, do you think that you will be able to continue this trend of profit growth?

[A]: There are some areas where value pass-through has not yet fully progressed or penetrated, and some new products are being launched, so I think the baby care and other products will be a little more profitable. We expect a similar situation to continue in the other segments.

[Q]: I would like to ask you about the feminine business. I don't think you were able to do well due to the lockdown in 2Q. So, I wonder if there is a term gap in shipments, what the current situation is, and if consumption is also weak. Could you please tell us what the actual situation in the feminine is for the period from July to September and also the outlook for 4Q, with market share and other factors involved?

[A]: The feminine segment is strong to begin with, so the market share itself has not moved significantly, remaining at just under 20%. I think all manufacturers are in the same situation. In the case of the feminine segment, I think the percentage of e-commerce purchases is about 20% or less. The big difference with the baby is that in the baby care department, the EC ratio was very high, but here we are seeing inventory adjustments in those platformers and transactions are flowing to other platforms. There is a trend toward O2O and such, and the baby is a bit slow, but the feminine has a solid store front, so we are not being dragged down by that and are returning to the original growth curve.

[Q]: I think that the raw materials are also a part of your Company's contractual arrangements. In the current situation, especially in 3Q and 4Q, I don't know if your company is hedging in various ways, as you were asked at the beginning, but even if the yen depreciates, is it correct that there will be no additional increases during the fiscal year? In 1H of next year, considering the gap in naphtha prices, the price of raw materials will be a little higher, but if the current exchange rate continues into next year, will your company continue to raise prices, and although raw material prices are high, will you be able to pass on more value to your customers so that the profit margin on profitability will rise further, or will be maintained at the current level in 1H of next year?

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[A]: Regarding raw materials, we decide the price every half year, but this is not the case for all raw materials. After all, for each country, there are materials that can be procured in that country and materials that cannot be procured locally that must be imported. That is a slightly different situation in each country. Since imported materials are generally denominated in US dollars, there is a risk that the amount may change because of the effect of exchange rates. In the case of our company, the categories are quite separate, and the countries are also separate, so when the yen is weak, the baht is strong, or the yuan is strong, and I think we have been able to offset these factors well. We expect raw material prices to continue to rise in 1H of the next fiscal year, FY2023, and even so, if the value pass-through that we are currently working on in 3Q and 4Q gets on track, we should be able to achieve an increase in both sales and profit.

[Q]: What is the market and consumption environment like in Southeast Asian countries, and regarding sales increases in Indonesia, India, and Vietnam, they look pretty good, but does this include the rebound effect from the coronavirus crisis, for example, or is this organic? I would like to get an idea of what we should think about the momentum of sales growth in major countries in this area for the next fiscal year.

[A]: There is no sense of a backlash from the coronavirus, but the competitive environment and market environment in each country is quite different. In the case of wellness care, we are considering whether we should raise prices and continue to do our best to keep up with the competition or temporarily lose market share, or whether we should lower prices and increase volume. In Indonesia, in particular, although there has been double-digit growth in the baby, Kao and other companies have not followed suit, but since July, other competitors have also raised their prices, and our strategy will be based on tactics and market conditions. Sales in Indonesia in the feminine increased by about 20%, and I hear that there was an impact from the launch of new products in addition to cool napkins.

As for Thailand, the share itself is almost 90% and the number of births is decreasing, so it is difficult to raise the top line in this country. As you may have heard, we are also hearing that the economy line is very much under attack as competition is coming in. Other than that, baby in particular is still in a difficult situation, but pet care and wellness care are also growing steadily in Thailand, although the amount of sales is still small. Kirei care is one such example, but we are now actively working on it because we believe it is a market for the future. Vietnam also experienced an influx of goods from China last year, but after launching new products, I think it can be said that it has returned to its original growth curve. As for Vietnam, wellness, feminine, and baby have the top market share, especially feminine care this time, which was also driven very much by cool and nighttime use.

[Q]: In the first place, the cost of raw materials has risen higher than you expected, and despite the fact that it is considerably higher than initially expected, operating income is within the assumption, and in this 3Q, it is also within the assumption, so I would like you to sort out the reasons for this once again. In addition, regarding value pass-through in the future, but I would like you to tell us how you are responding to this, especially in Japan. Thank you.

[A]: Regarding external and internal factors, especially with regard to external factors, costs related to raw materials, electricity, logistics, and infrastructure have risen significantly. Regarding internal factors, we have not been able to quantitatively tabulate how this has been absorbed, Japan, among others. In the deflationary environment, it had been difficult to raise prices and pass on value to customers, but in April, we started doing so for pet care products, and from the second half of July onward, we started such business negotiations for other SBUs as well. I think the biggest part of the change is that each of us has changed our behavior and ideas a little bit. We are now moving beyond price to work on margins with distributors, which until now have been done within the context of a contract that has been casually decided upon. We are working on a zero-based review of what we should be doing. Also, I think the fact that we are still able to maintain growth in each of our base countries is the biggest cost absorbing factor. We are also working to use our facilities as efficiently as possible, and to increase our fixed asset turnover and sales turnover ratio. I think it is working to reduce

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costs in that area. I believe this is the result of various other daily cost improvement activities. In the case of Japan, we have seen a large increase in profits from feminine care, and I think we have been able to successfully review prices in conjunction with the launch of products and high value-added products.

[Q]: In order to achieve forecasts, in the 4Q, a 40% increase in profit is necessary. I think the hurdle is still a bit high because 4Q is not profitable in the shrinking Asian market, but if the value pass-through you mentioned progresses, will you be able to achieve much in 4Q?

[A]: In the past, 4Q has tended to be severely impacted by W11, with deliveries made in September and October, and sales promotion expenses coming out after the W11 was over. However, this time, there is no such trend, so I think we will be able to make it mainly due to value pass-through.

[END]

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Document Notes

1. This document has been translated by SCRIPTS Asia.

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