Shiseido Co Ltd Ord

Investors and analysts, thank you for taking the time to participate in the 2024 Q2 results presentation for Shiseido. The disclaimer for today is shown on the screen. Now, the video and script of today's presentation is planned to be uploaded on the company website. Now, I would like to introduce to you the participants. President and CEO, Kentaro Fujiwara. CFO, Ayako Hirofuji. And I will be the moderator of today's presentation. My name is Oshima from the IR Division. Today we will present to you about the 2024 first half results from the CFO, Hiro Fujii-san, and we will be presenting to you the mid- to long-term strategy from the COO, Mr. Fujiwara, and open up for Q&A session afterwards. During the Q&A session, we will have the CEO of the China region, Mr. Umitsu, to participate to reply to any questions. necessary in his area. We plan to finish at 6.40 p.m. today. Now, Hirofuji-san, please.

Now, I would like to explain the results for the first half of 2024. Please take a look at page 3. First, the first half of 2024 results. The consolidated net sales for like for like were down 4% in three months from April to June and down 1% in the first half. excluding the impact of foreign exchange and business transfers. Local sales in Japan continue to grow strongly, led by core brands, thanks to the successful implementation of selective and focused investments. Similarly, in EMEA, strategic investment in focused areas have helped maintain strong growth in both skincare and fragrances. On the other hand, in travel retail in China, weakening Chinese consumer sentiment and changes in purchasing behavior, which was seen as risks in the first quarter, became apparent, posting a deeper than expected negative result. In the Americas, sales decreased due to lower shipping volumes due to a temporary production decline. Co-operating profit was 19.3 billion yen, a decrease of 8.8 billion yen year-over-year due to the significant impact of lower profit from travel retail, although the decrease was partially offset by a positive impact of fixed cost reduction through structural reforms as well as year-over-year sales growth in Japan, EMEA, and Asia Pacific. The four-year focus remained unchanged. We will take additional company-wide measures to address the weakness in travel retail in China and continue to aim to achieve 55 billion yen in core operating profit. Details of these measures are explained in the next page. First half result were below expectation for both sales and profit in Chinese market due to uncertainty over employment and future drives consumer sentiment for less spending and more saving. This has resulted in a change in purchasing behavior and weakening consumer sentiment leading to a significant slowdown in travel retail in China. Particularly as travel retail has high profitability, the decline in sales has also led to a significant drop in profits deteriorating the so-called regional mix to push down overall profits. However, this volatility in the Chinese market is not a new phenomenon. In order to protect current profits amid this volatility, we will further strengthen measures based on right understanding of market realities and also promptly formulate and take additional medium to long-term initiatives to improve profitability and address essential issues. The current negative impact on profit in travel retail will be compensated by maximizing the strong local sales in Japan and Europe, capturing demand from inbound tourists to Japan, and company-wide efforts to improve profitability and so on, so as to achieve a four-year forecast. Now page 5, PL summary. Like-for-like net sales and core operating profit are as explained earlier. Operating profit was minus 2.7 billion yen, a 16.4 billion yen decrease from the previous year. In addition to the decrease in core operating profit, non-recurring items were as large as 22 billion yen. The breakdown of non-recurring items of 22 billion yen includes restructuring costs of 20.1 billion yen, such as early retirement incentive plan in Japan. The main items of 1.9 billion yen in the second quarter includes restructuring costs related to organizational optimization and store closures in China. Four-year non-recurring items planned at the beginning of the year is 30 billion yen, and there is no significant deviation from this forecast. Profit attributable to owners of the parent decreased 11.7 billion yen to 0.0 billion yen from the previous year. In the first quarter, the company was in the red and profit decreased due to provision of the early retirement incentive plan, but in the second quarter, it turned to be in the black and increased profits. In terms of cash generation capability, EBITDA margin was 8.9%. Next on page six shows the first half sales results by brand. For our fragrance brands led by Narciso Rodriguez and Drunk Elephant continue to perform well, especially in EMEA. On the other hand, other core brands saw either lower sales or only single-digit growth due to weakness in travel retail, China and Americas. On the other hand, other major brands saw either Shiseido was also down 6% globally due to lower sales in China. On the other hand, Clé de Peau Beauté, like Shiseido, has a large exposure to China, but the strength of the high prestige and luxury markets sustained, posting an increase in consolidated sales while maintaining positive growth in China. NAR suffered from a decline in travel retail Asia and a shipment cutback in Americas. Especially in this year, performance varies depending on the balance of each brand's sales composition by region. However, our policy of investment in core brands to nurture our brand value remains unchanged. In particular, we will significantly invest in marketing for the Shiseido brand in China and in the Americas, where sales declined sharply in the second quarter, so as to win back the customers and regain our business while controlling the overall investment amount. Next, on page seven, the sales trend. The first half saw double-digit growth in Japan and EMEA, but negative growth overall due to lower sales in travel retail, China and the Americas affected negatively. Japan maintained strong momentum with this growth of 7% in the second quarter. This is a slowdown from 20% in the first quarter, but within our expectation, as there was a rush demand before a price hike in Q1. The plus 7 percent in the second quarter and 13 percent in the first half were encouraging results, despite the pullback after the price increase. Similarly, EMEA maintained a double-digit growth in the first half. despite the pullback in the second quarter due to the advance shipments in the first quarter before the IT system implementation. In China, in travel retail, we had anticipated negative growth in the second quarter even in the original plan due to the high hurdles of the previous year. But the negative growth was deeper than expected due to the changes in Chinese consumer sentiment in the market. In the Americas, no change in the annual sales plan, despite the temporary decline in sales, as we expect, turned around in the second half of the year. Page eight shows Japan business. The local Japan market maintained growth in the second quarter, A downgrade of COVID-19 to Class 5 in May 2023 raised high comparison base in the previous year, and although the growth rate was slower than in the first quarter, we maintained solid trend. In particular, growth in the mid-price segment, our largest market, exceeded overall growth rate. The number of inbound tourists to Japan has already surpassed the pre-COVID-19 level in 2019, while the number of Chinese tourists is still 26% below the level of 2019. Our Japan business continues to see a strong growth in core brands with high teens and hero products plus 30% and above, contributing to overall share expansion. The key core brands Shiseido, Clé de Peau Beauté and Elixir also saw steady growth in the number of loyal customers and increased their local market shares. E-commerce sales also grew at an accelerated pace, exceeding 30% in the second quarter. For inbound, sales growth slowed down in the second quarter. Although the initially projected annual growth rate of 60% year over year is difficult to achieve, we will make up for this by increasing sales in the local business, which is performing well.

Next is page 9 about China and travel retail. For the China market, through all the channels, market maturity is progressing in parallel with the ever more unpredictable economy, resulting in trend for consumers to demand better quality for more reasonable price. As a result, the discount ratio is getting higher than ever, causing the whole market to be in price competition. Even in such environment, our policy not to be dependent on excessive discounting remains, and we will continue to strengthen the sales power based on brand value and not price. As for performance by brand, Clé de Peau Beauté and NARS realized growth of high single digit in the first half. The very high price point category, known as high prestige luxury, continues to perform well. On the other hand, since the treated water impact, especially brand Shiseido is struggling and there is urgency to rebuild the business. In the second half. Travel retail is facing a difficult situation as the Chinese consumer sentiment weakens, like the China market. Also, the travel retail's price appeal is declining due to the exchange rate fluctuation. In the previous business earning call, we have shared with you that the travel retail plans to turn into positive in May, although the month of May alone was positive in actual performance of the company's shipment sales, the numbers turned negative again in June, performing lower than expected. On the other hand, travel retail in Japan recovered its consumer traffic, marking a significant growth as well as the high growth rate in Americas and EMEA, particularly led by fragrance brands. Next is page 10. EMEA market continued to grow in all categories, and our company marked a double-digit growth in the first half, contributed by Brand Shiseido, Narciso Rodriguez, and Drunk Elephant. Along with skincare and fragrance, the strategic investment to the focused areas drove the results. The second half will continue to strengthen investment in focused areas, including the new launch of Issei Miyake. Asia Pacific was impacted by the slowdown of markets in Taiwan and South Korea, but was offset by growth in other main countries and region, such as Thailand, showing solid performance. America's marked negative growth. However, Branch Isedo and Narciso Rodriguez were positive in sales. Currently, both manufacturing and shipments are recovering as we forecast to achieve the initial target on a full year basis. Next is page 11, COGS ratio. The bold line is the reported number in the accounting system. The dotted line is the COGS like-for-like. The one-off factors that were pushing up the bold line for COGS, such as product supply due to business transfers, impairment loss and structural reform expenses due to factory transfer, are much smaller this year. Therefore, the bold line and dotted line is planned to trend closer together going forward. The COGS like-for-like shown in the dotted line has steadily improved from Q1 to Q2. primarily due to the reduction of inventory imbalance, price hike impact and the mixed improvement from seasonal impacts such as Q2 China sales size from 6-18 promotion, resulting in mixed improvement from increase in high-margin skincare-related sales. Next is page 12, core operating profit by segment. Japan marked significant increase in profit, not just from sales growth but from mixed improvement, higher gross profit and price hike. Japan is steadily making its way to the over 20 billion yen annual target. China's real growth rate for the first half was minus 7%, but the profit remained at minus 600 million yen. As we continue to enforce marketing investment to focused areas, we will minimize profit-loss impact by reduction of fixed costs and structural reform effects to build a sound P&L structure. and travel retail with the highest profit rate experienced significant sales decline causing decline in profit. The sales decline in travel retail significantly impacted intersegment sales, resulting in minus 8.8 billion yen in total core OPM. As for the adjustments, the increase in elimination of unrealized profit drove the minus in profit. This is quite technical, but the main factor for this is the inventory decline range was big in the first half of last year, impacting profit positively, and this year experienced the negative rebound. Next is page 13. I would like to explain about the second half actions to achieve the annual forecast. First, the company's approach to the currently struggling Chinese consumer market does not change in the direction that we will rebuild a structure where we can deliver stable profit, even in a moderately growing environment, and to realize high-quality growth. As for the growth strategy, we will maximize sales by strengthening investment to focused areas with growth, even when the macro situation is weak. Especially brand Shiseido, which has the highest sales ratio in the China business, we will work on the brand by enforcing proactive development and strategic marketing to develop the next hero SKUs. In the second half, we have vital perfection and future solution renewal planned, as well as the launch of Serum Foundation and Skin Glow Foundation that continue to perform well in Japan. Also, we will focus on high-function product category such as Sun Care, Cream, and Serum. And for Drunk Elephant, which we launch in April, we will make efforts to elevate brand recognition as well as promote high-function and high-efficacy campaigns. Furthermore, we will cautiously watch the travel retail market for sustainable growth and to execute well-balanced marketing initiatives so that we do not get spiraled into the vicious cycle of the excessive price competition. In the offline channel, we will focus on pop-up stores in regional cities. In terms of profitability, we have been taking measures such as reducing over 10% headcount in the first half of the year compared to last year, and boldly closing negative performing stores in this fiscal year, contributing to the profit amidst the difficult times. We continue our best efforts for stable and sustainable profit creation. Next is page 14 regarding the activities planned for Japan in the second half of the year. As explained earlier, the first half realized effective sales growth in local and the number of loyal users showed strong growth in core brands. In the second half, we will continue to strengthen investments to core brands to maximize this positive trend. Next for new market creation, the two products in the Serum Foundation category continue to perform well, driven by the communication focused on technology in April. To ensure this does not become a one-time trend, we aim to establish this as a new market and expand its size. The EC sales, as shown in the graph on the bottom right, has been exceeding the growth rate of the Total Japan Local from last year, especially accelerating its growth from Q3 of last year. We are on track of renewing the owned EC site as well as launching Branchiseiro on Amazon and Rakuten. We will continue to focus on expanding the EC sales. As for the inbound sales, we have launched a tourist marketing team in July in order to capture the demands of tourists visiting Japan, which is now far above the size of inbound tourists back in 2019. Capturing travelers as another consumer segment, we aim to drive inbound sales by offering valuable experiences and enhancing brand and product recognition. Last is page 15, about the global cost reduction and profit improvement strategies which we are proceeding as part of the global transformation. We have the annual target of over 15 billion yen this year, and we marked about 7 billion yen in the first half, showcasing the steady progress of the initiative's impacts. We have executed the early retirement support plan in Japan, as already mentioned, organization structure optimization in China, and employee productivity improvement, which are all on track. Because we are in a tough market situation, we will continue to complete any profit improvement activities that can be done with internal efforts to create benefits of over 40 billion yen and further exceeding that to achieve the annual forecast of the year. And that is it with myself. Thank you.