Shiseido Co Ltd Ord

Thank you very much for waiting, everyone. Thank you very much for joining us in the business results briefing of Shiseido of the December period 2023. And before we start the briefing session, there are some housekeeping announcements. And so we may mention the outlook for the future based on the current assumption, and this is associated risks and uncertainties. So please remember that the actual result may be different from the outlook currently. Let me introduce the Mr. Kentaro Fujiwara, COO, and Mr. Takayuki Yokota, CFO. I am Hiro Fuji. I will be the moderator for today from IR department. And today, we will cover the outline of business results as well as the midterm business strategy, followed by Q&A. We plan to end the session by 7 p.m. Japan time. And the briefing footage will be available afterwards in recorded form at a later date. Now, we would like to invite Mr. Yokota to brief on the results of 2023 and outlook of 2024.

In the previous Q3 business result presentation on November 10th, we have explained about the downward revision of core operating profit to 35 billion yen from the initial plan of 60 billion yen. With this big revision, we as management understand the big impact it had to the stock price and the trust of the stakeholders. We take this seriously and as a company are committed to turn around the business quickly and execute with solid action. In result, the core operating profit for 2023 performed above the forecast of 35 billion yen to 39.8 billion yen. As we exceed the forecast, it is also a continuous challenge for us to improve on the accuracy of our forecast and the use of focus. On the other hand, for 2023, we were able to add some profit as a result of business management agility, although the business environment continued to drastically change in China and travel retail. Even though the profit amount of 35 billion yen is far from satisfactory, we feel that we were able to achieve some fruit as a result of pursuing profit expansion. This slide summarizes the key points that are updated from the last business result presentation. Japan Local captured solid recovery. The consumer purchase is accelerating its growth every quarter. Although the market is driven by low price range, the company's focus of mid to high price range grew strongly and expanding the market share for the full year. The share declined in Q1, but along with the powerful innovative product launches in Q2 and onwards, the trend turned to positive growth in share every quarter. From a profitability perspective, we achieved positive numbers for the full year, achieving a strong growth of positive 17%, a drastic profit increase of 9.2 billion yen. next china is steadily moving forward to a recovery trend since the treated water impact for double 11 we were significantly hit with a decline more than the market as expected however in december the prestige category market had positive growth previous year on an overall business basis With the strategic allocation of marketing investments, in the small makeup category with NARS and Clé de Peau Beauté, which has less negative impact compared to lotion and emulsion, we were able to expand market share. So even in such environment, we are realizing strong growth in focused areas. Next is travel retail. Inventory adjustment is on solid track, with South Korea completed at the end of 2023. Hainan Island is expected to be completed by end of Q1, as previously explained. Next is Americas, EMEA and Asia-Pacific. In these brands, such as NARS, Drunk Elephant and Narciso Rodriguez, the localized valley development showed solid result, realizing a double-digit growth for the full year in all three regions. Globally, we pursued thorough cost management more than ever, adapting to market situation whilst continuing to invest in growth areas. Next is page 4, the P&L executive summary. Core operating profit was 39.8 billion yen, a minus 11.5 billion yen. The first half captured significant profit growth, but the decline in sales in the second half resulted in the full-year core OP to decline year-on-year. Operating profit was 28.1 billion yen, a minus 18.4 billion yen. The profit attributable to owners apparent is 21.7 billion yen, a minus 12.5 billion yen year-on-year. EBDA was 91.8 billion yen, a decline by 10.6 billion yen year-on-year. EBDA margin was 9.4%. Next is page 5, the performance by brand. The slowdown of China in travel retail in the second half impacted the overall business. Shiseido and Elixir had double-digit growth in Japan, but resulted in negative growth globally. As for Kledopo Bote, even though the sales ratio is high in China in travel retail, because of the strong presence as a prestige brand and its brand power, the brand sustained its positive growth. Brands such as NARS, Drunk Elephant and Narciso Rodriguez had very strong growth, driving the overall business. NARS grew to be the third brand in our company to exceed net sales of 100 billion yen following Shiseido and Kledopo Bote. Ipsa had a big decline in sales. There was the impact from the treated water, but we do realize there are brand challenges as well, so we will turn around the brand with initiatives such as creating new hero products going forward. Next is page 6, the net sales year-on-year. For the full year, the overall company had positive growth from strong growth in Japan, EMEA and Asia, although China and travel retail experienced negative growth. As a result, the net sales remain largely in line with our previous forecast disclosed in November. In Q4, refraining from Japanese products after the treated water release impacted China and travel retail, as well as the inventory adjustments continued in travel retail for South Korea and Hainan Island, resulting in negative sales in these regions. We were able to partially offset in other regions, but net sales resulted in minus 6% overall for the quarter, a bigger minus range compared to Q3. next is slide 7 about the japan business the market is solidly recovering first for the local market the low price range continues to drive the growth and mid price range growth rate expanded further in q4 remaining on recovery track In such environment, we continue to concentrate our marketing investment to our focused area and core brands in mid to high price range to expand the loyal users, allowing the company to expand share overall for the full year. Local consumer purchase accelerated its growth rate quarter to quarter, realizing high single-digit growth for the year. Now in January, the local consumer purchase is accelerating further to mid-teen percentage, kicking off 2024 with a good start for high growth for the year. By brand, Shiseido grew significantly in Q4 by over 30 percent and also for the full year by a high teen percentage, mainly due to great performances of new products such as renewal launch of Altimmune in Japan and the Essence Skin Glow Foundation, a newly formulated foundation mixed with beauty serum. Clé de Peau Beauté also continued its double-digit growth in the mid-teen percentage, significantly exceeding the market performance. Elixir had a growth of low teen percentage for the year, expanding its share and driving the market, contributed by the continued high performance of the renewed wrinkle cream in September, and the newly launched Total V Firming Cream, the fruit of state-of-the-art technology for firm and toned skin. Inbound was a growth of high 20%. There is recovery with increase in tourists, but the treated water release continued to impact Q4, resulting in performance lower than expected. Next is page 8, the China business. As we expected in November, Q4 was a tough market environment, with the consumer pullback due to treated water release, uncertain market situation, as well as decline in bulk purchases. However, the sales decline range stayed within the forecast and we see that we have hit bottom, heading to a recovery trend. As for the market, the offline grew in Q4, but the online experienced a big minus, resulting in a negative overall. Our consumer purchase was minus high team percent for Q4 and minus low single-digit percent for the full year. Online was heavily affected after the treated water release, resulting in minus mid-20% for Q4. Offline was also a minus of mid-single digit. By brand, the signature Japanese brand Shiseido faced a tough result of over minus 30% in Q4. However, Clé de Peau Beauté in the high prestige did well, landing flat as still last year. The company struggled more than the market in the Double Eleven campaign, but Klero Pobote and NARS captured strong growth and actually increased its ranking. In TikTok, we expanded our brands, realizing a growth of over three times of that versus last year. Although there are headwinds to Japanese brands at the moment, we were able to make good decisions on investments to invest in what works under such environment to protect our profitability. and we also captured wins in areas where we should win.

Next, page nine, we'll look at travel retail. The market continued to see adjustments in distribution inventories due to tightening regulations as well as reluctance to buy Japanese products following the release of treated water. Customer purchases in fourth quarter were in the high minus 10% range globally and in the low minus 20% range for all of Asia, excluding Japan. The chart to the right shows the percentage of customers who purchased Japanese products in the fourth quarter of the previous year for Hainan Island and Korea, respectively, with a solid line. As you can see from the difference between the solid line and the dotted line, shipment sales were lower than customer purchases in the fourth quarter as well, and the reduction of distribution inventory is progressing in the schedule towards completion of the optimized process. Next, page 10, the Americas, Europe, and Asia-Pacific achieved double-digit growth for the year, primarily driven by the growth of global brands such as Drunk Elephant, NARS, and Narciso Rodriguez. Going forward, we will continue to strengthen our investments for sustainable growth and expand our market share. Next, cost ratio on page 11. In the fourth quarter, the real cost of sales ratio worsened by about two points from the previous year due to an increase in allowances for write-offs of unevenly distributed inventories, mainly as a result of lower sales in China and trouble retail sales. However, due to the cost improvement and the logistics cost improvement, it is down to about one point difference. Next page 12, operating income by reporting segment, and although Japan did not reach the initial plan due to downturn in inbound sales, the marginal gain from higher sales led to a significant increase in profit, and the segment returned to profitability for the full year. China posted a marginal gain in the first half due to higher sales, and in the second half, despite lower sales, cost management contributed to a significant increase in profit. In the Americas, profit increased due to a marginal gain from higher sales despite some offsetting factors such as the impact of business transfers resulting in a profit margin of approximately 10%. Travel retail posted a significant decrease in the profit due to a large marginal gain from lower sales. Others and adjustments. The net income decreased by approximately 17 billion yen due to various factors as described above. A major impact was marginal decrease due to the decline in internal sales into China and travel retail. Page 13 shows our assumptions for 2024. As we have explained, the market environment bottomed out in 2023 and we aim to achieve a steady growth and recovery in 2023 through high-quality growth strategies and cost structure reforms. We expect 11% overall growth in Japan, mid-single-digit growth locally, and growth in both online and offline markets, but we also expect continued polarization of consumption. We will transform our business model, optimize SKUs, and promote selection and concentration. As a result, sales of local brands in Japan will decline due to streamlining, while we aim for strong growth in core brands. Inbound sales are expected to exceed 60% with continued growth due to the increase in travelers, and the impact of trade and water release will continue through the first quarter and ease from the second quarter onwards. China is growing at 5%. Market growth is expected to stabilize and grow in the low single digits due to a shift in consumer purchasing behavior towards essentialism with an emphasis on efficacy. The impact of treated water is expected to continue through the first quarter and ease from second quarter onward. We aim for above-market growth in our sales through increased investment in growth areas. Travel retail will grow by 7%. We will return to a travel-centric business model and continue to maintain appropriate levels of distribution inventory. In South Korea, inventory adjustments have been completed and thereafter we expect that market to grow and mobilize in line with the pace of traveler recovery. In Hainan Island, inventory adjustment is expected to run its course in the first quarter of 2024. We will work to maximize sales by offering attractive products and marketing to travelers. Growth is expected to be 10% in America's and 13% in Europe. In both regions, we expect the market to grow steadily in the mid single digits, but we aim to grow ourselves above the market. Asia-Pacific is expected to grow 13% with mature markets such as Taiwan and South Korea continuing to experience stable growth driven by economic growth in Southeast Asia. We assume that growth in Southeast Asia will outpace market growth due to accelerated growth in the region. On page 14, it is the outlook for 2024. We are assuming sales of 1 trillion yen and a real year-on-year growth rate of 8%. The sales assumptions are the same as reported earlier. Core operating income will increase by 15.2 billion yen to 555 billion yen and we will bottom out in 2023 and make a strong recovery we will continue to make investments to strengthen our brand value for sustainable and stable growth and will steadily implement strategic investments such as focus We will also steadily promote measures to increase gross profit, which will be discussed later by Mr. Fujiwara later, to improve profitability. Net income is ¥22 billion. We plan to record ¥30 billion in non-recurring items, mainly for structural reform expenses, including organizational reform, productivity improvement, and rationalization of stores and offices. As a result, that income in 2024 will remain at about the same level as the previous year, but we will proceed with the structural reforms without delay in order to provide profitability in the following fiscal years and beyond. Now, I would like to invite Mr. Fujiwara for his presentation.