Shiseido Co Ltd Ord

Thank you very much for joining us and we're grateful that investors and analysts have joined to the third quarter results briefing for 2023 of Shiseido. And there are a few housekeeping announcements before we start the briefing sessions and we may mention the outlook for the future based on the information that are currently available. This is associated with the risks and the uncertainty, so please be reminded of this so the actual result may be different from the actual result. Now, I would like to introduce Mr. Kentaro Fujiwara, the COO, and Mr. Takayuki Yokota, CFO. And I am Hiro Fuji from IR department, and I'll be the moderator for today. And today, we would like to explain the outlook on the third quarter results and important business agenda. After that, we would like to have a Q&A session. We plan to finish the whole program at 18.30, 6.30 in the afternoon. And this briefing session will be available on our website after it's ending. Now, I would like to call upon Mr. Yokota to explain the 2023 third quarter results, January to September, and 2023 outlook. Now, I would like to present the Q3 2023 results. To begin, please see page three. First, here's the summary of Q3 2023 financial results. In the real terms, excluding the impact of foreign exchange and divestitures, net sales increased 5% year-on-year on the third quarter year-to-date, and turned negative 2% in the three months from July to September. Local sales in Japan continued to recover steadily in the mid-to-high-end price range, mainly due to the strengthening of new product development. sales in the Americas and Europe also remain strong, especially for global brands. On the other hand, in travel, retail, Korea and Highland Island, inventory adjustments in the distribution channel due to tightening regulations continued, resulting in low shipment levels. In addition, after release of treated water in late August, consumers were reluctant to buy Japanese products which affected China travel retail and Japan inbound. The e-commerce ratio was 32% and e-commerce sales turned negative in the third quarter due to the suspension of live streaming in China after the release of the treated water. Core operating income was 36.8 billion yen. Although profit declined in the third quarter due to marginal Decrease in profit resulting from lower sales. A large increase in profit in the first half led to a ¥0.6 billion increase in the cumulative profit. In addition, the decision was made to integrate two plants in Osaka and an impairment loss of ¥6 billion associated with this decision was recorded in the Z quarter. We also issued a revised earnings forecast release today. In particular, we have revised our forecast in light of the impact of refraining from buying Japanese products after the release of treated water in China and travel retail. I will explain the details at the end of my part. And the third quarter, so next page four is a PL summary. Core operating income increased 0.6 billion yen year-on-year to 36.8 billion yen. Operating income was 25.8 billion yen, a decrease of 9.8 billion yen. In addition to non-recurring items related to transfer of the cookie plant in the first half and impairment loss associated with the decision, To integrate the two Osaka plants and a gain on sales on a fixed asset such as offices were recorded in the third quarter. Profit attributable to owners of the parent declined 8.5 billion yen year-on-year to 20.6 billion yen. EBITDA increased to 0.6 billion yen year-on-year to 75.1 billion with an EBITDA margin of 10.4%. Next, page five are the results by brand. The slowdown in China and the travel retail in the third quarter impacted the overall performance, but we saw the significant increase in self-credible booty, now drunk elephant, and the fragrance brand now so Rodriguez grew strongly and contributed to overall performance. Credible booty maintained a high cumulative growth rate, mainly in Japan, China, and Europe, thanks to strong growth in the first half the growth was driven by success of measures to strengthen the brand such as innovative new products and efficiency efficacy claims as well as the strong performance of the prestige market nars continued to perform well thanks to the addition of new products this year in addition to light reflecting foundation which was continued to perform well Since its launch last year, Drunk Elephant also continued its strong growth momentum. On the other hand, the Asian brand Elixir posted negative growth due to the impact of treated water in China and travel retail, while negative growth in travel retail offsetting the growth of Alessa in Japan. Ipsa, which continues to be negatively impacted in China and tribal retail, and we are working to nurture new hero products. Fragrances continue to perform well, especially the new All of Me product from Nalsiso Rodriguez, which drove growth. Next, page six. are our sales trends. In the third quarter, overall global sales were down 2% in real terms year over year due to lower sales in China and troubled retail. After the first release of treated water in late August, China and travel retail were impacted by a reluctance to buy Japanese products. In addition, travel retailers continue to adjust distribution inventories due to tightening regulations in Hainan Island and South Korea. Next, page seven is our Japan business. The market is definitely improving. First, in the local market, the structure continues to be driven overall by growth in the low price segment. The mid-price segment was flat year over year through the second quarter, but slightly improved in the third quarter, and it is on a recovery track. Under these circumstances, we will continue to concentrate marketing investment in our core brands in the mid- to high-end price ranges, which is our focus area, to steadily expand the number of loyal customers, significantly increasing the market share in the third quarter. Local customer purchase are growing steadily every quarter and we saw the high single-digit growth in cumulative Q3. By Brent, Shiseido and Kledipo Bote continue to double-digit growth in the low 10% and mid 10% respectively, significantly outperforming the market growth. The effect of strengthening product appeal through innovation and a timely launch of the new products in response to the recovery in demand also contributed to these results. Despite the hurdles posed by last year's renewal of its lotion and make-a-lotion, Elixir achieved a strong growth in the third quarter in the low 10% range and expanded its market share. In addition, Anessa captured the expansion of of opportunities to go out and is firmly expanding its share in the sun care market, which is shifting toward lower priced products. Inbound growth was in the upper 20% range, with high growth in July and August, but slowed in the second half of the August after release of the treated water, especially in September, resulting in results significantly lower than our initial expectations. In the fourth quarter, we continue to see strong new products offerings, which will accelerate local sales growth.

Next, page 8, I will explain our China business. In the third quarter, the market grew only slightly and slowed down partially due to the release of the treated water. Our customer purchases slowed down significantly to minus low teen in the third quarter, and year-to-date growth was in the low single digit. Following the release of the treated water, we curbed overall marketing activities and managed costs such as suspending live streaming by KOL and cancelling promotions of new products and e-commerce sales. especially in the third quarter, were down in the high 20% range, which was significantly lower than last year. Under these circumstances, Brent Cicero struggled to post a sales decline of low 20%, even with the launch of the new audio mean, but the high-prestige Clé de Beaubauté grew in low teens, and NARS also performed well, posting low single-digit sales growth. Now, slide 9. The market continued to adjust distribution inventories in response to tightening regulations, as well as consumer pullback on buying Japanese products after the release of treated water. The company's third quarter customer purchases were minus low teen globally and minus high teen in Asia, excluding Japan. The chart on the right shows year-over-year comparison for Hainan Islands and South Korea, respectively, using the solid line for customer purchases and the dotted line for external sales. As you see from the difference between the solid line and dotted line, external sales were lower than customer purchases, meaning inventory level continued to be optimized. Slide 10. The Americas, Europe, and Asia Pacific continue a strong double-digit growth. In both Europe and the Americas, market growth continued in all categories, while brands Anars and Drunk Elephant enjoyed continued momentum. In Europe, Shiseido and Narciso Rodriguez also showed robust growth. In Asia Pacific, markets continue to grow in all major regions and our company also continued to realize good results expanding our overall market share. Next is the cost ratio on page 11. The year-to-date cost-to-sales ratio compared with the same period of the previous year steadily improved by approximately 2 percentage points due to productivity improvements resulting from the shift to in-house production and the alleviation of rising logistic costs. In the third quarter, we recorded an impairment loss of 6 billion yen due to the decision to integrate two factories in Osaka that we expect to improve productivity improvement. by ¥3 to ¥4 billion per year after the integration in 2026. Next, on page 12, I will explain core operating profits by reportable segment. In Japan, OP improvement benefited from the higher growth profit driven by the sales growth. Although the cumulative total did not reach the black slightly, it turned to profitability in the third quarter. In China, increase in sales in the first half of the year was a factor in the improvement. But in the third quarter, flexible cost management contributed to the increase in the profit despite the decline in sales. In the travel retail business, profit declined sharply due to the significant impact of a lower gross profit caused by lower sales. Lastly, on page 13, I would like to explain the outlook for the current fiscal year. Given the significant change in the market environment, we will make a revision on the full year of the forecast this time. One of the changes since August is the impact on the consumer pullback on Japanese products after the release of the treated water. This is a factor that we did not anticipate in the initial plan and that will result in a significant decrease in sales. In addition, the impact of inventory reset in travel retail distribution was already largely factors in our August in multiple billion yen level, but we anticipated the impact becomes even greater. On top of that, the recent week 11 trends shows the changes in China's consumer purchases behavior, such as a decline in bulk purchase due to uncertainty about the future. In light of these developments, we have revised our forecast for retail growth from 11% to 2%. Although the decline of gross profit due to sales decline will be partially offset by flexible cost management and the positive impact of yen depreciation. Core operating profit is now estimated to be 35 billion yen, down 25 billion yen. Net income attributable to owners of the parent is estimated to decrease by 10 billion yen to 18 billion yen. In addition to the impact of changes in the market environment, this includes the gain in sales of profit mix assets.

Next, we would like to invite Mr. Kentaro Fujiwara, President, COO, to present on the important business agenda. Now, I would like to talk about the important business agenda.

So in mid-term management strategy plan, we aim to achieve stable growth by shifting to a highly profitable structure through proactive investment and structural reforms. To achieve this goal, the top priorities are to build earning space by bringing back growth in Japan and to win in China. The outline of the reform in Japan was explained in the August earnings briefing, so today I would like to share the progress to date. Regarding reforms in Japan, we are working to change the overall business structure of profitable businesses in order to achieve sustainable growth. Based on a core operating loss of 13 billion yen in 2022, we aim to generate core operating profit of 50 billion yen in 2025 by generating 38 billion yen in growth profit increase resulting from the sales growth and 25 billion yen through profit boosting initiatives and efficient The sales have made already progress until the third quarter of 2023, thanks to the recovery from the COVID pandemic, the launch of epoch-making new products, and successful marketing initiatives investments. Toward 2025, overall local sales are projected to grow in the low single digits compared to 2023. This will be achieved by concentrating on selecting brands while focusing on the global Asia brands. where we aim for strong growth in the high single-digit growth rate, same as this year. On the other hand, we expect to decline sales of the exclusive brands in Japan as a result of optimization, including SKU reduction. As a result, sales in 2025 are expected to achieve the same level as in 2019. In the meantime, inbound sales recovery is expected to be minus mid-20% level in 2025 compared to 2019 due to a decrease in per capita purchase amount and the shift in purchase locations by Chinese tourists despite the positive aspects of steady recovery in the number of visitors to Japan. Next, as measures to improve profitability by 25 billion yen, KOK's improvements of 5 billion yen include SKU optimization, brand mix improvement, strategic price increases, reduction in product returns. Another 10 billion yen will achieve marketing and other expenses, including streamlining of samples and promotional items, logistics operations, and streamlining of IT systems. And the also 10 billion yen will be realized organizational productivity improvement and optimization of human resources allocations. All of these profit boosting and cost efficiency initiatives will be implemented by the end of 2024. And the company aims to transform itself to a highly profitable structure from the beginning of 2025.

Next, I will explain our view on Chinese market environment. First, we assume that the impact of reluctance to buy Japanese products after the release of the treated water will normalize by first quarter 2024. We will continue to closely monitor changes in the market environment, take our prompt action. Next, regarding the purchasing behavior of Chinese consumers and the market slowdown, we believe that consumers need will become more essentialist, with an emphasis on efficacy, and that consumption will become more polarized. In terms of purchasing behavior, we believe that discounts will become the norm, bulk purchase will decline, the ratio of sales at big events will decrease, and the market will shift towards a more mature market. In the meantime, we expect to see growth opportunities in the regional cities below the Tier 3 level as the middle class expands and the trade-up and domestic international travel recovers. As for the tightening of the regulations and inventory adjustments in the travel retail sector, inventory levels in South Korea are expected to be appropriate by the end of 2023 as a result of the efforts made since the beginning of the year. In Hainan Island, inventory adjustment has progressed and is expected to be appropriate by the end of first quarter 2024. Travel retail business is expected to normalize to a traveler-centered market in the future. China and the environment surrounding it will continue to change, but the Chinese market with its overwhelming size will remain strategically important. What is important is that in light of these market changes, we will strive to achieve stable growth by transforming our business structure to one that can generate higher profits than ever, even in the midst of change. In addition, the travel retail channel has become a normalized channel of purchasing opportunities for Chinese consumers. We will further evolve our integrated approach to China and travel retail. The framework of the structural reform of the China business will include portfolio and marketing reforms to achieve growth in the face of change. We will identify growth areas and promote selection and concentration. Specifically, we will select brands, products, channels and SKUs to achieve growth and efficiency, and we will continue to reduce the composition ratio of large-scale events, which we have been doing until now in order to strengthen sales during normal times due to changes in the market. In terms of growth opportunities, we will strengthen our investments in high prestige and high functionality and effectiveness. and accelerate our expansion into third tier and lower tier regional cities. At the same time, we will strategically raise prices, regularize unauthorized sales, and strengthen management in order to generate stable and high profits. In the operation system, we will reduce the ratio of fixed costs to sales by optimizing the storefront structure and organization, and strictly controlling personal costs while reducing costs by localizing samples and outsourcing operations in-house. By implementing these structural reforms, we will quickly transform a profit structure while continuing to invest in marketing that leverages consumer data, strengthen our brand power, and implement locally driven innovations to realize sustainable business growth in this huge market. Thank you very much for your attention.

Thank you very much. Now we would like to open the floor for Q&A. So those who are joining in Japanese language, please use the raise hands button at the bottom of the Zoom screen. When your name is called and the pop up will be appeared, you will press the button of the attend as a panelist and then have your camera on and then state your name and affiliation and have your questions so it will take a few minutes for preparation and if those joining us in English so the chat functions and please send your questions to the chat functions We would like to have your understanding to limit your questions of one at a time. If there is any availability, we will appoint you for the second time. So please start the open floor for the questions. So please raise your hands. First of all, JP Morgan, Kohara-san, please. So I'm going to switch the settings. So please have your microphone on and the camera on. speaking from JP Morgan. Thank you very much for taking my question. Sorry, take a while for unmute me. So thank you very much for your explanation. And I would like to limit my question only one. especially Japanese business. So the current situation, overall, you reduced the OP guidance this fiscal year. But what was the situation in Japan against your original outlook? So whether the Japan business is now expected to grow or it is not favorable as you expected originally, that is why you have to revise downward. And by the end of this fiscal year, are you able to recover the situation and also the core OP 50 billion yen to achieve and that you share the breakdown already. But in terms of the treated water impact exists and also the probability of the inbound business achievement, how likely is it achievable and including impact of the treated water? What is your viewpoint on that? So thank you for that. The first Japanese situation, the local CP excluding inbound consumer purchase, better than our original expectation, but growing quite well. On the other hand, inbound, as you pointed out, the impact on the treated water was there compared to the third quarter. Yes, the current situation is slightly lower than our original expectation. Having said that, the growth of the Japanese market and the growth opportunity going forward We are seeing that the Japanese business contribution is witnessed. So even the company is now shifting from a lot of marketing investment and then try to generate profit. It's not the case anymore. So overall, the structural reform that we are undertaking, that will be implemented throughout next year. And of course, We should be complacent and overall costs should be reduced and need to take some actions to that. Otherwise, the profit generated from the increase of the sales that will not be realized unless we have a cost reduction. That is why we have 20 versus the 33%. 30 billion yen. That was the number that we are showing this time. And then we have been preparing for that. And partially there was some good results already. But for those no structure reform, that structure reform will be ending by the end of 2024. And then after 2025, we would like to realize the profit generation. That is our plan. Thank you very much. In that case, so this year, the Japan business deficit or losses still remain in the third quarter, but the fourth quarter that will be turned around and put into profitability or break even. So this will be the baseline or starting point. Is my understanding right? And also the profit boosting of 25 billion yen will be realized. around 2025 in my understanding, but how it will be realized? You say that partially that structural reform is yielding like a third or a fourth at least that will be generated in 2024. Well, for this year's landing point, yes, it will be turned into breakeven. Yes. that will be the starting point for 25 or 50 billion yen to be achieved. So that 25 billion yen of the cost reduction efforts and how it will be realized. Yes, internally we are making these simulations. Yes, partially that will be realized in 2020 for almost, but of course that means that we will generate better than this year's profits. But part of the structural reform, we need some investment to undertake such structural reform. So for China, sorry, Japan business and partially China, we are trying to accelerating the structural reform So that requires 20 plus billion yen or so, structural reform costs would be necessary. Okay, thank you very much.

Now, then the next question will be taken from Ms. UFJ Morgan Stanley, a securities firm. Sato-san, please ask your question. sorry um thank you now my name is hello so i would like to ask a question about the travel retail and the travel retail so this time so the south korea um i believe it is going as a macro economy but the highland island in the third quarter and uh the the high 10 percent um so in comparison to global competitors. I believe that the assumption is smaller. And because it is small, the tight situation or tough situation may continue. But other competitors drop by about 30%. So although you are facing the tightness of the regulation, the reduction is only around 10%. And even with the impact of the released water, the decline is only about 10%. So what is the secret? And in the first quarter, so in addition to just regular travelers and as in the case of South Korea, the number of the tourists are up by 40%, but in the Highland Island by summer next year, the business may not turn positive. So how do you see that this negative trend will end by the first quarter next year? What is the difference between the yourself, the Shiseido and Are you talking about the sell-out? Okay, so this is not a case of sell-in. Then, okay, okay, I see now. Well, sell-in, yes, it is quite a significant negative. How much was it? Minus 60%, high 60%, in fact, minus. So this is reflecting the macroeconomy then or macro assumption. Okay, I see that. So that will... continue into the first quarter at around minus 60%. Am I correct? So in regards to the percentage, of course, we have to look into the more details, but this year from the very beginning, so as we've been saying since the beginning of this year, so last year due to the lockdown impact, the sell-in, happened in advance. And for this year, we already lowered the inventory, but the selling-out gap was assumed to be around 30-some percent from the very beginning. But due to the tightened regulations since May, well, the sellout decelerated quite significantly. Therefore, we had to reduce the sellout as well so that the inventory level would be adjusted. So with that, by Q1, the major negative inventory impact may be gone. However, one thing In regards to Hainan Island, travel retail is now growing steadily. And one thing we have to be cautious about is the, and we need to look into further detail about, as Mr. Fujiwara also explained, the decelerated the purchase behavior of the Chinese consumers. And this is something that we need to monitor closely going forward. Okay. So this time, so 60 billion to 35 billion. So I think this mostly comes from travel retail. How much of this reduction comes from travel retail impact? So, well, I kind of rounded up the numbers, so our original assumption of the released water impact is about 20 billion, and also Chinese markets slow down, and also purchase behavior shift impact, cumulatively about 10 billion and regulation tightening and the inventory adjustment, another 10 billion. So altogether about 40 billion, but then there's a good business of other regions and also reduced marketing investment, which is 15 billion. So then we have 35 billion and so the major impact comes from September after the traded water release and also the Q4 impact and we will look at the double 11 outcome and also the market in itself is cooling down and also it is even further down in comparison to what's happening in Japan. So this is still an early lead, but we will continue our monitoring in particular with the double 11. Okay, so at the time of the anti-Japan demonstration, Shiseido recovered quickly, so I hope that we will see it again. Thank you.

Thank you very much. Next question. Morgan Stanley, MUFJ. Miyake-san, please. Change the setup, so have your microphone and the video on, please. Hello, Miyake speaking of Morris Stanley. Thank you very much for taking my questions. So I would like to talk about the China business. At the end of August, at the earnings briefing, you said that the treaty water and that was affecting at the early stage. You couldn't assume the impact on that and offline, not really, but online, no streamlining video of the KOL. So that's the impact. But you say that offline, they are still affected, right? So from September to November, what happened? Also e-commerce impact, the commerce through KOL was suspended. Other than KOL impact, do we have any other elements that drives the decline of e-commerce? And also the marketing spending, you are trying to curb the marketing spending in China. because of the sales goes down dramatically. So you have to put a curve on the market spending. It's natural. But from the original expectation, you want to spend a certain amount of money in line with the competitors. And the handling of the KOL or video is now suspended. And also the China clients or China, the players are trying to increase their market share. There's an opportunity from their perspective. But Having said that, what is the change in China business in the past two months? And how are you going to address the situation? And what is your future plan as well? Thank you. Allow me to answer. September to October, what happened during those two months? So the treated water release began And then retailers and KOLs find it difficult to promote our products. That's the first reaction. In parallel, the consumer mindset or sentiment, we have been monitoring carefully about their mindset as well. For that, it's now settled quite early in our situation in our monitoring. And it was really favorable for us, but that was not supported by the KOL and other retailers behavior. So that was a result in September, October. And that's as a result, our marketing spending went down. So that's the kind of impact overall. And we were not able to have a good promotion in the past two months. But the second release of the treated water, there was the not really big negative impact. And then all the people or consumers were very silent I would say and then that's the now we are running the double 11 promotion and then regardless of the treaty water release especially the overall double 11 promotion and its trend is much lower than our original expectation that is the reality and then on top Our brand is, of course, a made-in-Japan brand or a Japanese brand, so that is affected negatively by the treated water as well. In terms of this treated water release, this impact is temporarily negative impact in our view. And of course, in the past several times, we had experienced, you know, Japan bashing type of approach happen in China. But I assume that around the first quarter, this negative impact this time will be alleviated. And next is the reduction of the purchasing behavior of the consumers in China. We do not anticipate that. We were also anticipating that there should be some stability in the consumer behavior. to be settled. But that timing was a little faster than our original thinking. So we need to take that into our account in taking on our structural reform initiatives next year. And then there's no 1.4 billion people there will not be gone. But there are some growth area and the negative area and there are some ups and downs. And then overall, we see some impact And in terms of the growth potentials should be identified clearly from that differences. And what we are seeing is that the high prestige brands are growing. And in terms of the products, you know, efficacy or real authenticity, those products are well received. Specifically speaking, cream, high price creams are well received. So that is a product that is well received by the market still and also the consumers, young generation. consumers were affected by this economic situation. But the 35 years or older, those are the customers who are not affected by such economic changes. And also the tier three and lower, those are not the affected. So Where do we have the growth opportunities? We need to identify that clearly, and then we need to allocate our efforts and resources in the brand allocations or portfolio. Thank you. Thank you very much. In that case... So... the investment was not at all reduced, but you are trying to concentrate in some of the spending in investment. And then this time, the marketing spending was now reduced. Eventually, that would bring down all the market share reduction, and then you have to spend more money to recover the situation. That happened in the past, but this time it's not the case. And then you are making the focused type of investment. yes temporarily if we spend less marketing spending or sometimes if we spend on the marketing spending uh we were not able to um have a good result um that was a situation in the september so we suspend uh um marketing activities but this time we now understand that this impact was a temporary and then it's not the real the Japan bashing type of approach so okay so the China business profit that you were thinking at the midterm plan there were some risks that sales may go down that is why you wanted to implement that structure reform in China is that what Is that the right understanding? Yes, that your understanding is correct. Thank you very much.

Next question is from SMBC Nikko Securities, Mr. Yamanaka. I'm going to switch your microphone, and so please switch on your camera as well. Thank you. Yamanaka from Nikko Securities. Thank you very much for the briefing. Earlier, in the first question, there was a mention of the 25 billion yen profit improvement for Japan and 20 billion yen of the reform cost is to be budgeted. And so, can you give us more breakdown And in terms of the timing of this, the cost will be the fiscal year 2024. And this will be a reform associated with the cash out. So optimization of human resources is of large quantity. Am I correct to say that? Will there be the optimization of the production site or the brand reorganization? How will the cost will be spent for the structural reform? As much as you can share with us. So this number 20 billion yen is our current assumption of the reform cost. And going forward, we need to look into a further breakdown. and attain more accuracy. But then if 2024 will be the year in which we will, we shall strive to complete the structural reform. So the necessary cost will be incurred. And therefore, in regards to this structural reform, by the end of FY 2024, we will end it so that from 2025, we'll have more a sound and robust management structure so i will not be able to share with you the specific breakdown today okay understand thank you very much next ubs security is kawamoto-san please

Kamata speaking from UBS. Thank you for your explanation. Do you hear me? Yes. Thank you for taking my question. So in this revision, the third quarter, the downwards revision until the third quarter and also the outlook for the fourth quarter, how much have you incorporated this 25 billion yen breakdown of the third quarter and also the fourth quarter outlook? And then why the profit reduction is quite large compared to the reduction of the sales? Are there any other elements? So originally 9% and 12%, that was your original margin target, but what is your perspective? And in the structure reform, you said that personnel control organizational productivity improvement and so forth. I think you would like to implement all those structure reform by the end of 2024. So can you please elaborate on that? Okay, so your question, is that the first half versus the second half, right? First half, you know, 10 billion yen, that was our profit in the core. Our P was improved in the minus 35 billion yen in the second half. So as a result, four year, 25 billion yen minus. That is a four year basis. So, in terms of the mid-term plan targets, what we are seeing now is that there are some impact on a temporary impact and also the structural impact. So there are some differences. So we need to identify temporarily impact and also the structural impacts and especially the China business for the structural ailment. We need we take actions at the early stage so that 2024 we would like to undertake such a structural reform and 2025 will be the year that we will have a further growth. In terms of the organizational productivity things, allow me now to answer to your question. Well, for the second half, you said that that minus 35 billion yen, so what was the breakdown of the third quarter and the fourth quarter? Well, for that, There were some phasing of the expenses. It's too complicated. I appreciate if you take not the quarter basis, but the six-month basis. Okay, understood. But the fourth quarter, if I take a look at your slides, travel, retail, or China business, would go down. So I think that will be the bottom. Is this the right understanding? Because the figure in the fourth quarter is very low. Well, it's not the minimizing or reaching the bottom, but we are seeing the very possible outlook. Based on the possible outlook, we show this figure. Understood. Thank you.

Next question from Mitsubishi UFJ Trust Bank, Kyogo-san. Yes, please. I'm going to switch to you, over to you.

I'm very sorry.

There's system trouble. Please wait a moment. Kyogo-san, let me give you the opportunity to ask questions next. And now I would like to invite Hirozumi-san from Daiwa Securities to ask questions.

Hello? Can you hear me? Yes, we can hear you.

Can you see me now? Hello? Can you hear me? Okay. Yes, we can hear you. Thank you. Just one question. Page 16 and 17, 18. So, about the likelihood of this evolution. Is this highly likely? So 10 billion yen and marketing and other expenses and other organizational productivity, 10 billion yen. And basically page 16 is something that I'm concerned about. So there's a 38 billion gross profit increase. How likely is it to happen? And also how much is the revenue arriving at this gross profit increase of 38 billion? And also in 2025, target of 50 billion. How confident are you to achieve this target? First of all, about the 25 billion, let me start with the cost. So yes, this is the build-up of all the elements, relevant elements. So this is just a rough breakdown, but in regards to this 25 billion, this is something that's manageable with our own will. And when it comes to cost, as you can see here, it is not simply about the product mix. and SKU reduction, which gives us the more accurate picture of this amount. And next about the revenue or the sales, as you can see, we will divide into the local and inbound. As you can see in the upper box, the local, uh sales we will see the double digit growth this year however from 2023 and after the local um market uh the sales growth will be the uh the high 10 percent the reason is there are some powerful brands and we will keep on our focus on the powerful brands. But other than that, we will optimize some Japanese brands and we are envisaging some reduction in profit. So net, this is going to be the low single digit for local. But the inbound, in comparison to 2019, it is going to recover to mid 20%. So that's what is reflected in this assumption. This is a wish for, it is not a wishful thinking of a high top line, but, and this is so there are the some reduction in the revenue being incorporated for the ones that will go through some reform so i may sound tough but if what can do you think can drive the revenue down in addition to your assumption well it is difficult to answer for the unforeseeable factors now 2023 is coming to an end and And the new product launches forecast for 2024 and 2025 already exist. So we are confident with these new products in 2024 and 2025. Well, only factor may be our assumption on the inbound. And the other thing is the structural reform incorporating the reduction in the revenue, but the reduction in revenue may happen more widely or more significantly than we currently assume. So, of course, we need to keep a close eye on the transition and the decline when you compare the decline in the the revenue at this point and also the future growth of the business we must go through the structural reform so with some sacrifice with the structural reform that is a priority for us to have a better future understood thank you very much Yvonne Mitsubishi UFJ Trust Hyogo-san apology for earlier technical trouble

Please start your question with the microphone and video on. Hello, Hyogo speaking from Mitsubishi UFJ Trust. Can you hear me? Yes. Thank you for your thorough explanation. I am a fund manager. So my question is about. Earlier you explained Japanese markets, so I understand the structure now, but the current issue you're facing is not from Japan, but it's occurring globally. And then you have to cope with such challenges. And on a consolidated basis, you have to manage your company. And the current macroeconomic outlook was deviate from your expectation, then you have to undertake some structural reform at the early stage, especially for the global arena. If you have any kind of thinking, can you please share? Because the top line cannot be achieved and then the cost reduction impact will be realized in 2025. That means that 2024 would be very, very hard year in my view. So what is the sense of urgency to see such a very poor aspects from the 2024? What is your perspective on that? Well, the global business, I think the same principle will be applied because the Japanese structure reform, what is the... issue is that the sales will not be generating good enough profits and then the top line is increased but still we cannot achieve a good enough margin because of the big cost structure so that is the issue and globally and we are also undertaking the structural reform in China certain level of the profit is generated under the current structure because we already undertook the structural reform. But going forward, we need to have more flexibility and secure our profitability under the Chinese structure. So that is what we need to do. Therefore, we would like to implement another round of the structural reform. And we are also taking the AMEA region like Europe and US. We would like to concentrate in the more focused brands. And as a result, we are seeing a very good result in some of the very strong brands. So and that would reinforce and then also accelerate the company profitability. So that is a really good cycle. And that will lead you to the structural sustainable growth of a business. That is my understanding. And the structural reform, of course, we are focusing on the domestic business, but this time, on a consolidated basis, you have to recognize the downward revision And if the company structure is not leading to the profit generation, then you need to undertake further structural reform. I'm sure you do have many initiatives that you can take going forward if necessary. Indeed, if there is any further reforms necessary, yes, we need to do that. And what happened in China, that negative impact was not really compensated by other businesses. That was a problem. And because of that, the huge market potential in Japan that has to be generating and lead the global business. And if that will be the overall company's structural reform and especially AEMEA region will be riding good situation at the moment. So overall, we would like to take a good balance with the structural reform in Japan. Yes, I expect the impact will be realized at the early stage. And my request is that, as Kawamoto-san said earlier, that your net sales goes down and then the profit would be also further down. So that kind of explanation or stories must be fully explained. Otherwise, you know, marginal profit and then goes down and then the overall sales goes down. You know what you have, even though it is the consolidated earnings report, if you don't have a proper explanation, we find some of the skepticism in the market. So I just want you to explain thoroughly about that.

Thank you. Now it is almost time to close the briefing. So next will be the last question. Ohara-san from Nomura Securities, please. Hello. My name is Ohara from Nomura. Thank you. About the revision of the full year plan, I would like to make a confirmation. And so when we look at the fourth quarter, Japan will see the increase of the profit by 24%. In China, embedded is down by 20%. The travel retail is down in profit by about 50% in the fourth quarter. And in Japan, up to the third quarter, it is the growth of a mid 10%. And so how will it recover to this level in the fourth quarter? And also for China travel retail, there's been explanations. So what will be the right assumption for the fourth quarter in China and travel retail? And also in regards to the operating profit. So this, So deducting the less profit reduction. So am I correct to understand that there's no one-off accounting booking? So let me try to answer. So for Japan, growth, high growth level into the fourth quarter. So the local revenue is, as explained earlier, is going quite well. So every quarter we are seeing a growth in Japanese market. And also in the fourth quarter, there will be large scale innovation being planned. So this will accelerate the growth further. And the local customer purchase is likely to grow. We will push it to grow to the high 10%. And for inbound, to a certain extent, from October onwards, there will be the Chinese Golden Week bringing more travelers. And yes, we did see a dip in September, but it's recovering into October. And if it continues into November and December, inbound is likely to grow into the fourth quarter as well. And so this is the background of our assumption of the growth in Japan market. in the fourth quarter. And in regards to the travel retail, the fourth quarter is significant negative and due to two elements, the South Korea PR and also Hainan Island and partially impact of the traded water release and also the regulation on the inventory causing the inventory adjustment is being prolonged. And for South Korea, the inventory level will be in the realm of two months. And for Hainan Island, as of end of this year, the inventory level, the retail Well, inventory would be around four months worse, and therefore until Q1 next year, the Hainan Island inventory adjustment will continue. That's our assumption. Therefore, the heaviest negative aspect will be the Q4 travel retail as far as we see at the moment. Thank you. Thank you very much. And what about the operating profit? So there's the reduction of the profit and also the cost reduction being . So there's no one-off impact then. Yes, as I said, for the most part with the trade in water release, there's about 20 billion. And Chinese market decline and also the changes in the purchase behavior, it's 10 billion. and tightened regulation causing the inventory adjustment, another 10 billion. And also there's a top up from other regions and plus cost saving and marketing cost reduction. So there's a 35 billion altogether. And so the major one-off costs such as the structural reform, it will not be included in the core operating profit. So this is excluded from the core part. So the third part We explained about the impairment for the integration of the two factories in Osaka. This is also booked separately and also 10 billion yen operating income from the sale of the buildings is also outside of the core operating income. Thank you. I understand now. Thank you very much. Now, with this, we would like to finish Q&A session. With this, we would like to finish the briefing for the third quarter result. Now, the IR department will send you the questionnaire following this program, so please fill in the questionnaire to send it back to us for future improvement of the briefing sessions. Thank you very much once again for joining us out of your very busy schedule. Thank you.