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.