Shiseido Co Ltd Ord

I would like to present to you the financial results for the first quarter of 2023. Please refer to page 3. This is the key headlines for Q1 of 2023, and as you can see, we started the year off with good performance. Like-for-like sales, excluding FX and business transfer impacts, was up by 7% year-on-year. Sales declined in China due to infection re-expansion in January and in travel retail due to the retailer inventory adjustments primarily in South Korea. However, we are on track with the guidance. On the other hand, Japan realized solid recovery led by strong performing high price range sales and with the enhanced new product launches that capture the recovering market demands. The market had faced difficult situations from the COVID impact for some time, but we are finally accelerating the growth momentum. Americas and India continue to perform strong from last year, contributing to the overall growth. By brand, our global brand Shiseido, Kletopo Bote, Drunk Elephant and NARS capture strong growth, leading the overall performance. E-commerce sales ratio was 34%. Although there was market stagnation for the Women's Day promotion in China, the EC sales value globally is growing year on year. Drunk Elephant, the brand with high e-commerce ratio, performed well, contributing to drive the overall EC sales. Core operating profit was an increase of 8.2 billion yen, primarily contributing to higher gross profit from increased sales and agile cost management, as well as FX impact from yen depreciation. The company started off the year on track to the annual guidance of 60 billion yen in core operating profit. However, as some of the costs such as SG&A will be carried over to Q2, the Q1 cost was lower than expected. Therefore, the annual guidance will not be changed. In regards to the transformation, we are on solid progress and completed the transfer of Kuki Factory on April 1st. Next is page 4, the P&L Executive Summary. The core operating profit was 12.5 billion yen, an increase of 8.2 billion yen year-on-year. Operating profit was 10.5 billion yen, an increase of 6.1 billion yen year-on-year. There is a 2 billion yen loss in non-recurrent items for the quarter from the impairment losses and structural reform expenses and others related to the cookie factory transfer. Profit before tax for the quarter was 10.3 billion yen, an increase of 2.2 billion yen year-on-year. Profit attributable to owners apparent for the quarter was 8.7 billion yen, an increase of 4.3 billion yen year-on-year. EBDA was 24.9 billion yen, an increase of 7.8 billion yen versus last year. EBDA margin was 10.4%. Next is page 5, the results by brand. Global Brands, Shiseido, Clé de Poboté, NARS, and Drunk Elephant significantly contributed to the overall sales growth. Shiseido and Queropo Bote captured solid sales in EMEA and Japan and also achieved double-digit growth in China. The brand's strategies, appealing the effects and efficacies of the brand and products, were successful. Along with a robust, high-prestige market, these brands captured outstanding growth. Last year, NARS grew significantly with their new product, Light Reflecting Foundation, creating a high hurdle for the year, but the brand continues to perform strongly. As for Drunk Elephant, the brand experienced negative performance last year compared to the previous year, but this quarter achieved outstanding growth, which is more than double than last year. Consumer purchase had been showing very strong growth momentum from second half of last year, and for this year, the shipment is also accelerating its growth. On the other hand, the brands Elixir, Anessa, and Ipsa that cover a big sales portion in China and travel retail faced difficult situations. A fragrance business continues to perform strong. Next is page 6, the net sales trend. The like-for-like net sales for the quarter was plus 7%. The decline in China in travel retail was covered by the steady recovery in Japan and the significant growth in Americas, EMEA, and Asia Pacific. China has been experiencing a continued decline, but the minus range that was 10% last year has shrank to 3% for this quarter. With January hitting bottom, it has been showing a recovering trend since February. Now if you could take a look at the second column from the right, the total net sales was equivalent to 2019. The good news is Asia Pacific and EMEA that was underperforming against 2019 as of last year turned into positive. However, even though Japan is on its recovering trend, it is still over minus 30% versus 2019, so we will continue to work on its growth acceleration from Q2 and onwards. Next is page 7 on Japan business. First of all, in terms of the Japan market, it showed solid recovery every month over Q1. We see that the mask regulation being lifted on March 13th has had its impact on market recovery. For Q1 total, the local market growth was mid-single digit. To highlight, January was low single digit, February and March was high single digit in growth expansion, and April is continuing this high single digit market growth, seeming to prove its momentum improvement. In terms of price range, high and low price ranges drove the market, while mid-price range remained flat year-on-year. On the other hand, inbound market showed recovery trend from increasing travelers from Asia, excluding China, Europe, and the U.S. We will start various initiatives as we eye on the timing of Chinese tourists to visit again, fully preparing ourselves to seize the opportunity when inbound market fully resumes. Japan Business and Q1 realized share acquisition in mid to high price range, which is our core competitive market. We concentrated the investments on innovation and marketing to our core brands, primarily in mid to high price range, which allowed us to expand our loyal users. The growth of consumer purchase was high single digit for the total, mid single digit for local, and high teen percentage for inbound. In terms of local market, which is the core area of business, the brand Cletopo Bote had a growth of mid teen percentage, far exceeding the market growth. This contributed significantly to the profitability improvement as well. Brand Shiseido also expanded the loyal users with the launch of Eudermine Essence Water. This product is the next core item of the brand after Altimmune, realizing a growth of high single-digit. Furthermore, Elixir, which had turned into a growth trend after the renewal of lotion and emulsion last September, it continued its growth in mid-single-digit this quarter with the renewal of the brightening line in February. It received many beauty awards and solidly creating the number one share position in skincare market. One of the important initiatives of the company for the year is strengthening the position in the brightening market across all brands. and we are making good progress to achieve the target. Haku, the number one in brightening market share, had a good start with a new innovation that was launched on March 21st. Followed by that, products such as Clé de Peau Beauté's brightening serum, Elixir's brightening line, are establishing Shiseido's strong presence in the brightening market. So overall, we are capturing follow-up progress in our core area of mid-to-high price range by strengthening loyal user base and share expansion, and we will continue to make this one of the strongest areas of focus. In terms of the low price range, we are actually seeing stronger growth more than expected, so we will strengthen initiatives to accelerate the sales in brands such as Aqua Label and eHuda. Next is page 8, about the China business. After the end of zero COVID policy last December, the number of COVID cases surged again in January, creating a difficult market environment. But February and March turned into a recovering trend. e-commerce underperformed last year's numbers for Q1 and for prestige market overall with the low-performing Women's Day promotion. Shiseido consumer purchase was minus low single digit. This ended being a minus from the sluggish performance of Women's Day and our strategic conversion to not being too reliant on discount promotions. On the other hand, we have some positive news with the offline sales, which have been underperforming year on year due to the COVID impact. Offline sales turned into a positive after six quarters of negative results. The company continues to work on sustainable sales growth through strengthening of brand equity this year as well. So even though the market momentum for the Women's Day was weaker than expected, we evaluate that the overall progress is on track to our strategy. Buy brand, Shiseido and Guadalupo both day trended well, supported by the strong high prestige market and successful marketing activities capturing the recovery in foot traffic. There is no change in strategy for Q2 and onwards, along with the strong investment to offline as traffic recovers. Although there is the 6-18 shopping day online, we will continue to turn away from heavy reliance on extreme promotion and execute appropriate allocation of resource for sustainable and profitable growth. At the moment in April, with the impact from last year's lockdown, we are achieving significant recovery. Hong Kong experienced strong growth along with the recovery of foot traffic from East COVID restrictions.

Next on page 9, I would like to discuss other regional businesses. In the Americas, the market continued to grow across all categories, and we saw particularly strong sales growth for Drunk Elephant, which more than doubled, as well as for NARS, which continued to perform well. In Europe, too, the market continued to grow in all categories, and we maintained strong momentum, especially for brands such as NARS and Drunk Elephant. In Turbo Retail, while the Korean market was weak, global traffic continued to recover and we achieved strong growth in Europe and in Japan. We will continue to expand and enhance our in-store brand and customer experience to capture the market recovery. In Asia Pacific, markets recovered in all countries and regions except Taiwan in the first quarter. We also continue to achieve strong growth led by NARS and Anessa by strengthening our strategic promotions. Next on page 10 is the cost of goods sold ratio. The COGS for the first quarter was 29.4%, worsened by slightly less than two points from 27.5% in the fourth quarter of 2022. This is due to impairment and restructuring costs associated with the transfer of cookie plant, which were recorded in the current period. The real cost ratio shown by the dotted line was 21.6%, showing a steady improvement in real terms. In the second quarter, the impact of products supplied at the cookie factory will be eliminated, and the cost ratio shown by the solid line will improve by about 4 percentage points from the first quarter. Next, page 11. a square operating profit by reportable segments. Japan saw an increase in profit mainly due to higher margin from higher sales and the promotion of cost-efficiency measures. China increased profit as cost management and other measures offset the margin decrease due to lower sales. Americas and Europe recorded an increase in profit due to an increase in margin increase and higher sales. Results that previously allocated to the brands to be transferred were redeployed to the ongoing businesses to accelerate growth. The increase in profit was achieved despite the absence of large scale of D&G and other products that existed in the previous year. This is a very encouraging result. Travel retail reported a decrease in income due to margin decrease from normal sales. The increase in other businesses was mainly due to the impact of exchange rate fluctuations and cost management in line with the weaker yen, while expenses increased due to strength in DX-related investments. Next, on page 12, we will discuss initiatives in Japan business for the second quarter and beyond. In the second quarter, we will continue our efforts to expand market share in skincare and strengthen activities in base makeup, point makeup, and sun care. We will aim to increase the number of loyal customers and achieve strong sales growth by strategically launching innovative products and strengthening the communication of their values. We regret that we are unable to show you today, but each of our brands will launch groundbreaking innovative products in the second half of the year. We will also strengthen our activities to capture the customer trend of de-masking. Since March 13th, we have seen an increase in demand for skincare products to address skin concerns such as lines and wrinkles around the mouth, as well as an increase in customers seeking base makeup and point makeup, especially lipstick. Seizing this opportunity, the launch of Crédit Pour Beauté cushion foundation in March and Nourish Crime in 24 colors in April have been extremely successful. Branch Isedo also got off to a good start with their launch of 20 colors of Techno Satin gel lip on May 1st. In the mid-price maquillage brand, we are strengthening eye color and mascara products to meet their demand for eye makeup. And in May, we introduced loose poreless powder to the growing market for face powder to capture makeup demand. In the Suncare business, which is entering the period of full-fledged demand, the company aims to expand market share by linking in in-store sales and mass promotions for Anasa. Along with such innovation and aggressive marketing, we will simultaneously improve productivity and infrastructure and cost structure. In terms of cost, we will ensure cost reduction by improving mix, thoroughly reducing uneven distribution and returns, and improving factory productivity by way of increasing the promotion of Skin Beauty brand and core SKUs in particular. The reduction of returns is an important initiative, not only in terms of profitability, but also in terms of environmental friendliness. And we have been accelerating the timing for order suspension prior to renewal and maximizing, minimizing the over-the-counter inventory, which had a certain effect in the first quarter. In addition, we are formally advancing actions to achieve the laws 60% level SG&A expenses. We are working to establish an appropriate personal structure and improve productivity per employee, which has resulted in a significant year-on-year decrease in SG&A expenses in the period under review, mainly due to natural tension. In addition, the office reorganization has been underway and has been proceeded as planned. A number of offices to be reorganized from from 58 to 23 in July. We will continue our efforts and further improve operation efficiency in conjunction with the acceleration of the hybrid works. In addition, we withdraw from convenience stores as part of our selection and the concentration of customer contact points in line with the strategy for sustainable growth. We will provide a more specific roadmap for achieving SG&A ratio in the low 60% range in August or later. Next, on page 13, I will explain our future initiatives in China. In our China business, we will accelerate offline growth and strengthen our responses to the diversification of online platforms with an emphasis on sustainable profitability improvement the brands such as Clé de Peau Beauté, Brand Tecedo, and NARS. In Clé de Peau Beauté, we will capture the momentum of luxury users and the higher prestige market. In addition to continuing to strengthen the Supreme series, our top-end line, we will implement the Height of Radiance campaign, a measure to increase awareness of the brand's unique value of radiance. The campaign aims to attract new users with La Crème, La Fondant, the face of the brand, and we will also work to promote demand by rolling out set boxes to Kansai with a gift-giving season such as Mother's Day and 520, known as the Day of Love in China. As for Brand Shiseido, to rebuild its brand value and prestige image, we will strengthen the brand experience and top-end future solutions, through the offline events focused on the high-function products and launch of the Wrinkle Cream Vital Perfection Wrinkle Relief as one way to expand the appeal on its efficacy and stimulate demand for 618 products. In addition to the light-reflecting foundation, which performed extremely well last year, NARS plans to further strengthen and expand the foundation category to launch a new lip product in May to cultivate new product categories. In addition, we will work to promote demand-launching limited-edition packages to capture the trouble season. We will steadily implement these initiatives to accelerate growth from the second quarter and onwards. My presentation in the first quarter results in future initiatives. Lastly, I would like to introduce the Looking Good corporate message campaign on page 14. Starting with a newspaper ad on April 3rd and a commercial on May 7th, we rolled out the Looking Good corporate message on 8th. The status of our new coronavirus infection was moved to category 5 and we are developing this campaign with the hope that the power of cosmetics and beauty will encourage people all over Japan to have good faces. expressive and unique. We have received many comments from consumers about this message, such as it's heartwarming, very motivating, and it's nice to be able to see faces. In speciality stores, drugstores, GMF, and department stores, the campaign message is being used in conjunction with activities that utilize the power of people, such as skin diagnostics, skin care, and makeup application, and training while addressing the needs of each customer. We will continue to support each customer looking good by meeting their individual needs. In this way, we will accelerate our growth potential by simultaneously expanding our market and market share that will energize the industry as a whole in response to the consumer awareness and inbound demand and will help greatly impacted by COVID.

Now we would like to go into the Q&A session from JP Morgan. Ms. Kuwahara from JP Morgan. Hello, this is Kuwahara from JP Morgan. Can you hear me? Yes, we hear you. Thank you. So one question per person, I understand. So I want to hear about the comparison versus guide look. The Japanese market is recovering well, and EMEA, And it's all doing good. It's overall doing well. And so compared to the guidance or the outlook, I think overall you mentioned that we are on track to the outlook. But are there any discrepancies or some gaps between regions? And now for profit, some of the costs will be carried over is what you mentioned. So how much are some of the costs or expenses being carried over? So anything related to the profit, So along with some of the discrepancies you may expect to the outlook and guidance, can you share along with the profit as well? On the consolidated basis, like Q1, it was positive 7%. So I think that's pretty much in line with what we had expected. Overall, in line with what was expected. EMEA. In terms of EMEA, we had the... rushed to buy before the price increase, so that probably gave us a little bit of a hike or push in sales. And to the yellow 11% on the consolidated basis, it may seem a bit weaker, but originally China and the inbound sales in Japan, we are forecasting that we will have a better recovery from Q2 onwards. So that included, I think we are on track. For profits, There are some gaps of about 4 billion yen of when the cost will be booked. But so excluding that is what you're seeing on your basis. But that too is within what we have expected. And that would be it with my answer. Thank you very much. So the gap of when the timing of the booking is 4 billion, that's going to be carried over to Q2 from Q1. So 4 billion will be carried over to Q2. Okay. What I'm concerned about is So what I'm worried about is the investments being delayed, too, especially for Japan. The mid-price range overall isn't really coming back, but your company is investing and talking about innovation and bringing back your brand power. And that is one of the contributors for the profits. improvement for the japan business and i think that's the key to making the japan business but the investments to those areas are not behind right that is correct so we're not behind on the investment but there's other some expenses that will be carried over to the next quarter and there's some ship shipments of the samples as well but that's different from the timing that's actually going to be used so we don't think of that as a problem so we don't think of this expense In terms of the marketing activities, the expenses being carried over to Q2, there's no impact. It has no impact to the marketing activities.