US factories no longer a sore spot for K-beauty's top two ODM makers

Riding the global K-beauty wave, South Korea's two dominant cosmetics ODM makers — Cosmax and Kolmar Korea — are seeing sharply higher earnings expectations for their US subsidiaries. Both companies' American operations had long been chronic money-losers, but the K-beauty boom now appears to be lifting even those troubled units. Cosmax posted its first-ever quarterly profit in the US in the second quarter and is expected to sustain that momentum, while Kolmar Korea's US unit sales are forecast to more than double from a year earlier.

Hana Securities estimates Cosmax's consolidated third-quarter sales at 823.8 billion won ($614 million) and operating profit at 79 billion won — up 41 percent and 85 percent, respectively, from the same period last year. Yuanta Securities Korea projected third-quarter sales of 815 billion won and operating profit of 83 billion won. Hana Securities said it expects Cosmax to beat market expectations, citing a continued rise in indie-brand orders in the domestic cosmetics market and growing contributions from overseas subsidiaries in China and the United States.

The US unit's performance stands out in particular. Hana Securities forecast that Cosmax's US subsidiary would post third-quarter sales roughly 70 percent higher than a year earlier, driven by new orders from local indie brands and repeat orders from existing large clients pushing up production volumes. The US unit recorded its first quarterly operating profit in the second quarter of this year, 13 years after the subsidiary was established.

Kolmar Korea is also expected to report stronger third-quarter results. SK Securities estimated on Oct. 14 that Kolmar Korea's consolidated third-quarter sales would reach 837.4 billion won and operating profit 95.7 billion won — up 22.6 percent and 58.6 percent, respectively, year on year. Kyobo Securities projected sales of around 830 billion won and operating profit of 91.2 billion won, while Yuanta Securities Korea forecast sales of 833.6 billion won and operating profit of 97.7 billion won.

Analysts also see a sharp rebound in Kolmar Korea's US unit sales. SK Securities projected that the subsidiary's third-quarter sales would rise 123 percent from a year earlier, attributing the gain to a low base from a major client's order cuts last year and an increase in orders from new clients.

Both companies' US operations had long struggled. While domestic sales grew rapidly on the back of Korean indie brands expanding overseas, the US factories remained in the red for more than a decade, weighed down by fixed costs and low plant utilization. "There weren't many small indie brands in the US the way there are in Korea," an industry official said. "But as Americans have come to realize that affordable, high-quality cosmetics exist, individual inquiries have been picking up since last year."

Cosmax established its US subsidiary in 2013 and steadily expanded its local production base, but new client acquisition and output growth fell short of expectations, keeping the unit in the red for over a decade. In 2023, the company absorbed US cosmetics manufacturer NuWorld into Cosmax USA to consolidate production facilities and cut costs.

The results of that restructuring are becoming visible this year. Cosmax's US unit posted second-quarter sales of 53.8 billion won, up 79.4 percent from a year earlier, and recorded its first quarterly operating profit since the subsidiary's founding. Revenue growth in the US is now beginning to translate into improved profitability, as it already has in South Korea and China. DB Securities forecast that the US unit's full-year sales would rise 53 percent from last year and operating profit would reach 8 billion won. Meritz Securities also projected that the unit's annual sales would surpass 200 billion won for the first time this year and that it would turn a profit on an annual basis.

Kolmar Korea's US business has similarly suffered from low efficiency. The company brought a second US factory online last year, lifting annual production capacity from about 180 million units to around 300 million. Yet the US plants ran at just 8.8 percent utilization in the first half of this year. According to Kolmar Korea's semiannual report, first-half production capacity at the US facilities stood at about 147.9 million units, but actual output reached only 12.96 million units.

Kolmar Korea's US unit posted an operating loss of 3.7 billion won in the first quarter and a further loss of 1.4 billion won in the second quarter, though the deficit narrowed from the prior quarter. The US business continues to weigh on consolidated earnings, but securities analysts say the scope for improvement is growing as the company secures new clients and order volumes increase.