Shiseido Co Ltd Ord

I would like to present the 2023 first half results. First, please refer to page 3. This shows the key headlines for the first half of 2023. This quarter marked good performance continued from the first quarter. The like-for-like net sales, excluding the impact from FX in all business transfers, was an increase of 9% year-on-year. Japan steadily recovered in mid-to-high price range with strong new product launches capturing the market recovery. China grew both in online and offline channels as well as Americas and EMEA, remaining strong, driving the overall growth. On the other hand, travel retail sales decreased due to retailers' inventory adjustments associated with market normalization of focusing the business model to travelers and also delay in recovery with Chinese travelers. By brand, the global brands Shiseido, Clé de Peau Beauté, NARS, and Drunk Elephant experienced outstanding performances contributing to the overall growth. E-commerce sales ratio was 34%. The 618 promotion in China realized growth above the market in all platforms, contributing to the growth of Global EC. Also, the great performance of Drunk Elephant with high e-commerce ratio drove the growth. Core operating profit was 28 billion yen, an increase of 10.5 billion yen or positive 60% year-on-year. Factors such as the sales increase through enhanced investments to brands and innovation, cost management and FX impact from yen depreciation contributed to the increase in profit. For the first half performance, both net sales and core operating profit exceeded the initial forecast. Also, the transfer of Kukki factory was completed on April 1st. Next is page 4 of the P&L summary. Core operating profit was 28 billion yen, an increase of 10.5 billion yen year-on-year. Operating profit was 13.6 billion yen, a decrease of 3.3 billion yen. This was due to the loss associated with the Kuki factory transfer in non-recurrent items. The profit attributable to owners of parent for the quarter was 11.8 billion yen, minus 4.5 billion yen versus last year. EBDA was 53.2 billion yen, an increase of 10.2 billion yen. The EBDA margin was 10.8%. Next is page 5, performance by brand. Global brands Shiseido, Kletopo Bote, NARS and Drunk Elephant contributed significantly to the overall growth. Shiseido and Kletopo Bote grew in all regions except for travel retail. The strong growth was driven by new innovative products and brand enhancement initiatives such as effects and efficacy appeal, capturing the strong performing trend of the prestige market. NARS continues to grow its sales with the light-reflecting foundation, the global hit product launched last year, along with the new launches this year, capturing outstanding performance. Drunk Elephant is continuing its strong growth momentum as well. On the other hand, the Asian brands Elixir and Anessa perform flat year-on-year. Elixir continues its double-digit growth in Japan, but is a minus in China in travel retail. Anessa grew in both Japan and China, however, was offset by the minus in travel retail. For Elixir, the renewed lotion, an emulsion in Japan last September, is planned to be launched in China in August, too, aiming for recovery. In terms of other brands, Ipsa experienced negative growth, especially in China and travel retail. However, we are strengthening initiatives to create new hero products. The fragrance business continues to perform strong. Next is page 6, the trend of net sales. The second quarter captured double-digit growth in net sales on like-for-like basis with positive 10%. The negative in travel retail was offset by growth in all the other regions. The big change here is that China turning to a high growth of 20% in Q2 from the minus it experienced in Q1. Next is page 7 about the Japan business. First, the market situation is steadily improving. In terms of the local market, the low and high price range drove the market growth, showing continued recovery with low single-digit growth. On the other hand, mid-price range stayed flat year-on-year. When you compare the overall local market to 2019, it has continued double-digit decline since COVID-19, but the minus has shrunk to a single digit in Q2. Slowly but surely, the market is steadily recovering. The inbound market recovered further from Q1, realizing higher growth rates in Q2 month to month. To recover fully to the 2019 level will still take time, but we are observing the recovery in number of Chinese tourists to Japan each month. In such environment, the Japan business for Q2 steadily grew the number of loyal users, significantly expanding the share as a result of concentrating innovation and marketing investments to the focus categories of core brands in mid to high price range. The low price range continues to lose share, but the significant market share expansion in our core competitive area, the mid to high price range, drove the growth in overall share. The consumer purchase for Q2 grew by low teen percentage overall. The local was positive high single digit and inbound grew more than 30%. For the local performance by brand, Cleto Pobote was in the mid-teen percentage, Shiseido was in the low-teen percent, both continuing to grow far exceeding the market trend. Product enhancements through innovation and the timely launch of point makeup capturing the recovering demands contributed to the growth. For Elixir, the brand renewed its brightening line this February. It continued renewal since last September. This quarter, the brand experienced a growth of low teen percentage, capturing strong growth with share expansion. Furthermore, Anessa captured the demands and opportunities to go out more, accelerating its growth, even though the sun care market is experiencing a shift to low price range trend. Also in the first half, many of the brand's innovation was highly acknowledged by consumers and beauty journalists, receiving numerous beauty awards. Next is page 8, the China business. In terms of the China market, there was significant recovery as a rebound from the lockdown last year in offline channel. The e-commerce also experienced strong growth. The growth rate in last year's W11 and this year's International Women's Day was stagnating, but the 6-18 promotion accelerated its growth, which was over 20% in all core platforms. Shiseido's consumer purchase also marked strong growth of low 20% in Q2. The offline channel captured a growth of high 20% for the quarter, driven by the enhanced storefront experience as part of the continued brand equity enhancement for growth. In the e-commerce channel, we continue to avoid price-dependent promotions, yet was able to capture growth that outperformed the market and expanding share in all core platforms. By price range, the high price range, especially the high prestige, continues to perform strong in Q2. Cleto Pobote grew over 40% and Shiseido grew by a high 20%. There is no change in planned strategy for the second half of the year. We will enhance investments in the offline channel in line with the recovery of consumer traffic. Along with that, we will continue to suppress price-oriented promotions and execute appropriate resource allocation for sustainable and profitable growth.

Next is page nine. Travel retail was weak, but strong growth continued in Europe and the Americas and Asia. In both Europe and Americas, market growth in all categories continued, and we did well. Drunk Elephant, NARS, and Shiseido led overall growth. The travel retail business remained sluggish due to the continued adjustment to distribution inventories in response to the return of traveler-centric business model and the slow recovery of Chinese tourists in South Korea, as well as tightening regulations in Hainan Island. We were also affected by these factors, resulting in negative growth for the company as a whole. We also saw a recovery in Taiwan and Asia-Pacific, which had negative growth in the first quarter on a shipment basis and maintained double-digit growth overall due to strong growth in NARS and Drunk Elephant Vibrand. Next, page 10, is the cost-to-sales ratio. The cost-to-sales ratio for the second quarter was 25.2%. This was an improvement of about 4 percentage points from 29.4% in the first quarter. This is mainly due to the impairment loss and the transfer of the cookie plant in the first quarter and the fact that the cookie plant will no longer be supplying personal care products in the second quarter. In addition, year-on-year growth in the first half was steady, up about two points, due to a favorable turnaround in the product mix following the business transfer, improved productivity resulting from the shift to in-house production, and easing of soaring distribution costs. Next page, 11, so core operating income by segment. Japan improved due to an increase in marginal gain on higher sales. China also improved significantly due to marginal gain on higher sales. It returned to profitability. America has improved due to increase in marginal gain on higher sales. Europe reported a decrease in profit mainly due to the impact on brand transfer despite the marginal gain due to higher sales. Travel retail reported a decrease in income due to marginal gain from lower sales. Other adjustments, the marginal gain decrease due to lower internal sales was offset by a decrease in elimination of unrealized income due to inventory reductions, net income increase. Next, page 12, we will discuss our initiatives to further accelerate growth in the second half of the year in our Japan business. We expect the market will recover steadily in the second half of this year, and all of our strong mainstay brands in the mid- and high-end price range And we will aggressively strengthen products and marketing through innovation in all of our mainstay brands. In particular, we focus on the Clé de Peau, Beauté, Shiseido, and Elexil, which performed well in the first half of the fiscal year. We will continue to strengthen their product lineups, including the launch of new products that you have already seen on the website. And in particular, we will, with the Elixir, finally, we are able to get on the growth trajectory. In September, we launched a wrinkle cream, which was the overwhelming number one share of the market. And in fall, we will launch our new product, Elixir. And we will have a limited edition to commemorate the 40th anniversary. We expect that the selection and the concentration of brands and product lines will improve profitability and that all of our innovative products in the second half of the year will be in the high price range. Next, page 13, I will explain initiatives in China in the second half of this year. Global trends in Chinese consumption, particularly in China and travel retail, are changing dynamically and it is of utmost importance to respond with a sense of speed. In the prestige market in China, we're working to accelerate growth and expand our presence in Chinese market. And we lost our market share in the first quarter but made a significant turnaround in the second quarter and succeeded in increasing our market share in the first half of the year as a whole. The key is the success of strategic investment allocation with an eye on growth areas and accurate understanding of consumer trends. and agility. In the market, the strength of high prestige and efficiency functional products continues to be strong. In the second half of this year, we will continue to win in this growth area and aim to expand our market share through communication and pushes our strengths of advanced technology. From the perspective of marketing ROI, efficient and effective use of promotional events is also a key point. While a policy Moving away from excessive discounting remains unchanged. We recognize that 618 and the W11 are shopping festivals that customers look forward to. We will continue to strengthen our CRM, which has already yielded positive results by effectively utilizing events to fit customers. EFFICIENTLY ACQUIRE NEW CUSTOMERS AND THEN FOLLOWING UP WITH THEIR PERSONALIZED COMMUNICATION TO ENCOURAGE REPEAT PURCHASES AND ESTABLISH CUSTOMERS AS LAWYER SHOPPERS. IN THE SECOND HALF OF THE FISCAL YEAR, WE WILL CONTINUE MARKETING TO HIGH-PERFORMANCE, HIGH-EFFECTIVENESS CATEGORIES AND MAINSTAY BRANDS AS SHOWN IN THE SLIDE. AND WE WILL ALSO STRENGTHEN MARKETING ACTIVITIES IN THE PREMIUM SKIN CARE BRANDS, ELEXIR, AND to return growth. And I will end my presentation on page 14 with the evaluation of the first half of the year and the current market environment. In the first half, we achieved a solid local growth in Japan through brand investment, innovation, and gained market share in a high-end price range, which is our focus area. In China, brands have have been strong, and we increased in the market share while promoting investments in brand and value communication from price-oriented promotions. As for the global brands, such as Shiseido, Klebupo, Boote, Niles, and Drunk Elephant achieved high growth rates. As a result, both sales and core operating income exceeded initial expectations in the first half of the year, but the recovery of Chinese travellers increased. and in the retail business in Korea in the second half of the year was not as strong as initially expected. So we – however, we are – leaving the four-year forecast unchanged in view of downside risks in the second half, such as the delayed recovery in Chinese tourists in Korea and also the Chinese consumers as a whole. We will further strengthen our cross-border strategy, which we have been implementing to date, and offset the downside risk in travel retail by accelerating growth in China. This is all from me. Thank you.

Now we will have Mr. Fujiwara, the president and COO, to present to you about Japan business transformation. Mr. Fujiwara, please. As Mr. Yokota has just explained, the first half of the year has shown good performance. Yet the current market situation continues to show uncertainties. Therefore, in order to increase our certainty to achieve the mid-term business strategy that was announced in February with the target of 12% in 2025 and 15% in 2027, we must further accelerate the speed of strategy and reform execution. In order to achieve the midterm plan, we have proposed these strategies. For the China business, as Mr. Yokota has explained, it is important to respond with agility to quickly changing market and take bold measures to take appropriate action in order to maximize the Chinese consumers' consumption globally. On the other hand, the biggest key to reform is to rebuild earnings base by bringing back growth in Japan. And today, I would like to share with you my determination for the Japan business reform. After I have taken the role as COO, I spent six months in learning and deepening my understanding about the Japan business. Through multiple sessions internally and with business partners, I deepened my understanding of the business structure, looked into the challenges and issues myself, and held further individual sessions for better understanding. This process was very important to understand the core issues and to understand what is really effective and what in fact are the truly necessary actions. Based on this, the prerequisite to keep in mind is that Japan is not a growing market. Therefore, we need to grow by taking share from other players in the market. In order to do so, we need an organizational structure where we can be agile to react quickly to further meet the needs of consumers and with more sensitivity to consumer behaviors. The COVID-19 pandemic impact was, in fact, a good turning point. We did not have inbound sales experiencing negative growth, exposing that we cannot raise profit with our existing business model. As I visited the stores, it was great to be able to confirm that we have many employees that have a sense of urgency to the current situation, have expectations for reform, and with passion for growth. However, the organization in Japan is seeking to respond to the market change whilst continuing to carry on the legacy from the past. Therefore, there is not enough prioritization of strategies, slow in response speed and complex countermeasures. I believe that the Japan business model must start from the needs of the changing market and purchase behaviors of the consumers. And in order to do so, Japan needs to redesign the business model, break away from the existing business practices and internal rules to implement fundamental business model changes. The P&L issues must be addressed as well. As a result of adapting to new market changes, such as digital, while keeping the existing ways and rules, the number of brands, increase in digital cost, and complex operation structure to operate the diverse channels and brands have created inefficiencies and heavy fixed costs. We must face the reality, capture the opportunities to execute the transformation for the future leap forward. The theme of this reform is self-innovation. Looking back at the Shiseido history, the company has developed through innovation through self-questioning and self-denial. As the market is recovering from the COVID pandemic, we must create an organization that can win while strengthening the brands with the consumer and market perspective. I believe that the self-innovation is what creates lasting growth and development. If we do not change now, the existence of Japan business is at risk. That is how strong my sense of urgency is to the current situation. Therefore, myself, the global president and COO, will be the representative director, chairman of Shiseido Japan, effective September 1, 2023. I will lead the transformation myself. I have decided that I have to do this and should do this based on the level of reform needed, the size of challenges, and the necessity of speed. Mr. Tadakawa will continue as President and CEO of Japan, and we will work together as a team. We will continue the fundamental improvement of profit structure with these three pillars of reform in order to achieve the 2025 core operating profit target of 50 billion yen. Now, I would like to explain about the details. First of all, we will transform the business model to a consumer-centric business model. We will review the consumer purchase behavior and resource allocation to convert the business model to a profitable business model. We would like to further strengthen the business model by elevating the brand value and improving profitability. While proceeding with efficiencies through digital, we will secure necessary and enough investments for the brands for sustainable growth and to expand the consumer base by stronger new products. Also, by maximizing brand value and product innovation, we will transfer the high added value to the pricing. This will be the strategy for the prestige business. As for the premium business, we will be focusing on strengthening self-selection purchases. We will do further analysis of consumer purchase behavior to design the consumer decision journey from meeting to purchase with a consistent and strong communication. Through that, we will create an efficient data-driven business model. Shiseido has the rich consumer data and digital capability that can appropriately leverage the information, which should allow us to propose value. As for e-commerce, it is a very high profitable business with high growth opportunity. So we would like to actively invest in e-commerce to grow the EC sales ratio to about 30% level. Also, we want to organize the channel to area perspective. The structure that has continued for 100 years, the historical system cosmetic business model, needs to evolve to match the modern business. To provide product and purchase experience that matches the modern consumers, we need to evolve this historical system cosmetic business model to maximize the value to consumers and our business partners. For the sales organization, we will shift from channel-based model to an area-based model. In each of the areas, people react differently and people travel differently. So in the conventional ways of the channel perspective, the allocation of investment is difficult or we can lose business opportunities. And so if we can reallocate resource and also delegate some of the decision-making to the areas, we can do a better and more fit, appropriate resource allocation to each of the areas. And even more than what we have been doing, we would like to proactively work hand-in-hand with the retailers with strategic partnerships. In order for the retailers and the manufacturers to have a strong partnership, we want to leverage the value creation as partners for new opportunity creation.