Kao profits hit by raw material costs

By Simon Pitman

- Last updated on GMT

Japanese global personal care provider Kao has reported a fall in
profits as rising raw material prices send costs rocketing.

The company said that in the nine month period ending 31 December profits fell by 7 percent, from ¥57.72bn ($546m) in the same period of 2006, to ¥53.70bn. The company said that the fall was mainly attributable to rises in the cost of petrochemical-based ingredients - an increase that mirrors the rising cost of oil prices worldwide - combined with further hikes for natural oils and fats. Profits dipped because the company had not passed on the cost increases to consumers, given the competitive state of the consumer market, both in Japan and worldwide. This is expected to become a familiar tale for the global personal care companies in 2008, with industry experts suggesting that pricing pressures are likely to continue to impact profits as cost pressures grow. In recent weeks several leading ingredients players, including Rohm and Haas, have announced price ingredients on fine chemicals and personal care ingredients due to rises in raw material costs and freight costs. Reviewing its last quarterly results, the world's largest consumer goods player, Procter & Gamble, also said that further price increases in overall costs were likely to impact its profits in 2008. Despite the downturn in profits, Kao reported that sales during the nine month period had been robust, rising 7.3 percent to reach ¥1.0 trillion, a figure that was boosted by brisk demand for personal care and household products and further boosted by the consolidation of Kanebo Cosmetics, which the company bought in 2006. The company bought up an 86 percent share in Kanebo cosmetics through the Japanese government agency in IRCJ, and the remaining 14 percent from parent company Kanebo Company, after the business went into receivership. Breaking the results down on a geographical basis, the company's consumer products business performed best in the Asia and Oceania region, where sales increased by 20.5 percent to reach ¥63.7bn, whereas sales in Europe and the US grew by 4.3 percent to reach ¥112.6bn. Sales in the mainstay Japan market increased by 5.7 percent to reach ¥823.3bn. Likewise sales in the beauty care business, which accounts for the majority of the consumer product sales worldwide, grew by 7.8 percent to reach ¥464.8bn. Looking ahead to the full year results, the company said that the continuing cost pressures had created 'uncertainty' and that it would be looking to expand sales and improve cost efficiencies in an effort to counteract the impact. This focus would be likely to help it achieve its previous full year forecasts, with 2007 sales estimated to rise by 6.3 percent to ¥1.31 trillion and net profits up 6.4 percent to ¥66bn.

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