Shiseido Co Ltd Ord

I would like to present the first quarter results for 2025. First, please refer to page 3, key highlights of the financial results. Amid continued uncertainty in the business environment, our top priorities remain rigorous profit management and steady execution over action plans. Although first quarter net sales fell short of expectations, we secured core operating profit of 8.3 billion yen, an equivalent level with our plan thanks to the effects of the structural reforms and strengthened cost management. While maintaining our full-year forecast, we will continue to closely monitor the impact of tariffs and implement additional measures as necessary. Further details on this will be provided later by Mr. Fujiwara. Net sales declined by 9% versus last year on like-for-like basis. In our February disclosure, we had anticipated a decline in the low single digits for the first half. However, results in the first quarter were affected by high year-over-year comparisons in China and travel retail, as well as the assumption that Drunk Elephant would not see a full recovery. In such circumstances, China, travel retail, and the Americas performed with challenging results as expected. And on top of that, consumer purchases maintained strong, but shipment declined in Japan and EMEA, making the year start with a slight lower start to plan. Healthy sales growth is essential for the sustainability of our company business growth. We will further explain about the sales performance assessment and the future plans shortly. Core operating profit was 8.3 billion yen, a decline year-on-year. However, thanks to the structural reforms, notably in Japan, and strengthened company-wide cost management, results were largely in line with expectations. Regarding the impact of tariffs, we have already begun quantifying the downside risks. In addition to initiatives started last year, such as shifting procurement sources and reviewing production locations, we are also exploring a range of additional measures, including changes to logistic flows and wholesale price adjustments. Next, please have a look at page 4, the P&L Executive Summary. Core operating profit was 8.3 billion yen. Non-recurring items significantly decreased from the previous year when early retirement-related expenses in Japan were recorded and totaled to 1 billion yen this quarter. For the full year, we expect to incur 23 billion yen in expenses primarily related to structural reforms outlined in our action plan. While a large portion of these costs will occur in the first half, the majority will be booked in the second and third quarters, resulting in a back-end loaded cost profile. There is no change to the overall outlook. As a result, both operating profit and net profit for the first quarter significantly improved compared to the previous year returning to profitability. Next, regarding the negative free cash flow of 12.4 billion yen, the main factor was a decrease in operating liabilities due to changes in contractual terms with certain business partners. Please turn to page 5 for our breakdown of net sales by region. As announced in our March 28 release, we have adopted a new segment structure from this quarter combining China and travel retail into a single reporting segment. First, Japan and Europe, which had shown consistent growth until now, recorded declines of 2% and 9% respectively in the first quarter. However, this was due to temporary shipment adjustments and booking timing differences while consumer demand remained strong. We are confident in the recovery of shipments going forward. Sales in the China and travel retail segment declined by 14%, while the Americas saw a 19% decrease primarily due to continued challenges faced by drunk elephants. Next, please refer to page 6, Net Sales by Brand. Both Giseido and Clé de Poboté were impacted by the challenging market environment in China and travel retail. However, excluding these segments, both brands continue to show solid growth. NARS recorded a decline due to the contraction of the prestige markets in the Americas. Elixir continued to perform strongly. Anessa saw a significant decline impacted by rebound from last year's full renewal in Japan, lower-than-expected bulk purchases by inbound travelers, and decreased spending by Chinese tourists in both China and travel retail. We aim to offset this with enhancement over popular brush-type UV protection powder, popular in Japan, along with expanded initiatives targeting inbound tourists. Narciso Rodriguez and Issei Miyake recorded temporary declines due to shipment timing delays in EMEA. However, we expect a return to positive growth from the second quarter onward and a steady growth for the full year. Next, please refer to page 7, details of the core operating profit. First, the cost of sales improved by 2.3 percentage points to 22.4% compared to last year. This improvement was mainly driven by a better brand mix and the rebound impact from reduction in allowance for excess inventory write-offs, which had been recorded last year due to a sharp decline in shipments in the travel retail business. Marketing investments increased by 700 million yen. While we achieved efficiencies in promotional expenses, this increase was also driven by investments aimed at rebuilding Drunk Elephant, an upfront investment for a major new product launch in EMEA this year. Personal expenses decreased by 6 billion yen, a reduction of about 10% compared to the previous year, primarily reflecting the impact of structural reforms in Japan and China. SG&A were reduced by 1.7 billion yen thanks to structural reforms such as reductions in outsourcing costs, as well as the results of agile cost management. So as mentioned, we are steadily building a more resilient structure that allows us to secure profits even in the face of significant revenue declines. Next, we will move on to a breakdown by segment from page 8, and I would like to briefly explain the change in the definition of segment profit. To eliminate the impact of annual changes in internal transaction prices due to transfer pricing policies, we have revised the definition to clearly reflect the true profitability and progress of each segment over time. Details of this change are provided in the supplementary materials, and the 2024 results under the new definition can be found in the release from March 28th. Please refer to that for more information. Regarding sales by region, Japan, China, and travel retail and other regions each account for approximately one-third of the total. In contrast, for core operating profit, Japan, China, and travel retail together generated 24.6 billion yen in profit, while Asia-Pacific, the Americas, and EMEA all reported losses. Additionally, headquarter expenses, which are included in adjustments, contributed to the consolidated total of 8.3 billion yen. China and travel retail, which have always been high-margin businesses, continue to generate significant profits. Japan has also improved its profitability due to impacts from structural reforms, successfully transitioning to a more profitable structure. On the other hand, the Americas require a quick turnaround. For Asia Pacific and EMEA, We are planning double-digit growth in the second half of the year. Since there is seasonability impacts of larger sales in Q4 and bigger profits in the second half, we expect both regions to be profitable for the full year.

Next, on page 9, we will discuss Japan. In the first quarter, the local market saw its growth pace gradually settle down following the round of reopening measures, showing signs of stabilization. Inbound tourism reached record high levels in terms of visitor numbers, while cosmetics purchases continued to grow at a moderate rate. Despite this, our Japan business maintained strong growth of over a high single-digit percent in customer purchases driven by our core brands and expanded its market share. In particular, New Ultimune from Shiseido, launched in March, features ingredients developed using a proprietary advanced technology and drove growth through communication initiatives focused on anti-aging. E-commerce sales maintained high growth of a high 10%, supported by purchases from loyal users on our newly redesigned online site last year. Inbound sales grew by a high single-digit percentage point. We are focusing on the needs of travelers and prioritizing resources. We are also conducting effective sales activities through digital initiatives such as promotions in collaboration with foreign influencers residing in Japan. As a result, although shipment sales decreased due to temporary adjustments in store inventory, current customer purchasing momentum remains strong, and we are not concerned about the future sales recovery. Regarding the P&L, cooperating profit increased by 5.9 billion yen despite the revenue decrease driven by structural reforms such as reduced personnel expenses by early retirement and improved efficiency of marketing investments resulting in a significant improvement in margin to 15.3%. Next, on page 10, we will discuss China travel retail. Despite the significant revenue decline, we have maintain profitability. First, regarding the market environment, overall consumption in China remained sluggish and price sensitivity continued to rise, while the offline sector continued to face challenges, e-commerce remained positive as consumers continued to prioritize promotions. In the travel retail market, consumptions by Chinese travelers in Asia slowed and Korean retailers accelerated their shift towards a business model centered on travelers. However, we believe these external changes are largely within our expectations. In our business environment, offline sales were challenging overall, but Credible Boutte and NARS saw a slight decline in shipment sales, while customer purchases remained strong in both offline and e-commerce channels. In the women's festival promotions, core brands saw their ranking rise on major platforms, resulting in strong growth that exceeded our plans. On the other hand, Shiseido continued to struggle offline and posted a decline. The travel retail remained strong in Japan, but continued to decline in Asia. Co-operating profit decreased by 2.6 billion yen despite the decline in shipment sales and the deterioration of the mix due to the decrease in the ratio of high-margin travel retail sales. This was achieved through rigorous cost management, including fixed cost reductions and marketing investment efficiency improvements, which have been ongoing since last fiscal year. Going forward, we will further improve integrate the China trouble retail business to create synergies in both sales and costs. Next, on page 11, we will discuss the Americas. Amid growing uncertainty about the U.S. economic outlook, growth in the prestige market has slowed. Consumer sentiment has weakened and trends are below expectations. Due to the impact of this market environment, both shipments and customer purchases have declined by double digits. Dr. Dennis Gross' skincare is growing steadily as planned, primarily through the e-commerce channel, but Drunk Elephant remains a significant challenge. Amid a trend toward heightened consumer price sensitivity, lower price similar products are gaining traction, making it difficult to reacquire customers. Core operating profit decreased due to the reduced revenue and increased marketing investments aimed at revitalizing Drunk Elephant. As previously announced on April 16th, Alberto Noe, who previously served as CEO of the has been appointed a CEO of the Americas region. Under his new leadership structure, we will work together as a company to achieve an early turnaround in the Americas. Next, on page 12, we will discuss Asia-Pacific and Europe. In Asia-Pacific, market growth has slowed in Taiwan and South Korea, resulting in a slight decrease in our shipment sales. However, customer purchases maintain growth of approximately mid-10%. Southeast Asia, centered on Thailand, achieved strong growth, and overall market share has expanded. Corporating profit decreased due to increased labor costs related to inflation and reduced sales. The European market maintained growth, but growth momentum slowed across all categories. Our customer purchases declined by a low single digit percentage due to the poor performance of Drunk Elephant. However, excluding Drunk Elephant, we achieved positive growth and outperformed the market. In addition, fragrance customers were up by a high single-digit percentage, driven by a launch of the new products from Zadig and Voltaire, a focus brand for this year, significantly outperforming the market. decreased by 9% compared to the previous year, primarily due to the impact of the focus system implementation in the previous year and the decline in Drunk Elephant. However, excluding these factors, shipment sales remained positive and other brands maintained steady growth. Core operating profit decreased due to reduced revenue upfront marketing investments related to new product launches. This concludes my presentation.

Now, I would like to share with you about the following three topics. Tariff impact, path to achieve this year's targets and countermeasures for challenging brands, and the turnaround of the America's business. First, on page 14, the impact of the tariff. Currently, we have 11 manufacturing sites globally. We have five sites in Japan and other manufacturing sites located in areas such as Americas, EMEA, and China. The three brands, NARS, Drunk Elephant, and Dr. Dennis Gross Skin Care, which together account for approximately 15% of global sales, are mainly manufactured in the Americas. Fragrance brands, which account for just under 10%, are mainly produced in EMEA. In China, production is primarily for locally targeted products, while more than half of total sales, including brands such as Shiseido and Clé de Peau Beauté, come from products manufactured in Japan. Sales from the Americas account for just over 10% of total consolidated sales. Within the Americas, approximately 60% of the sales come from the combined brands NARS, Drunk, Elephant, and Dr. Dennis Gross Skin Care, around 30% from Shiseido and Clé de Poboté, and the remaining 10% from fragrances. Although negotiations between countries regarding tariffs are still ongoing and the outlook remains uncertain, We have estimated the potential impact based on what has been announced as of 3.30 p.m. today. The U.S. tariff policies and retaliatory tariffs imposed by countries such as China, Mexico, and Canada using certain assumptions. The assumptions are mentioned at the bottom of this slide. The US tariffs on Chinese imports is 145%. China's tariffs on US imports is 125%. The estimation is based on five main factors. First, the cost of importing raw materials into the US from countries such as China, Mexico, and Canada. Secondly, the cost of importing products such as NARS into China and travel retail markets. Thirdly, the cost of importing NARS and drunk elephant products into countries and regions outside of China and travel retail. Fourthly, the import of Shiseido, Clé de Peau Beauté and fragrance products from Japan and EMEA. Fifth, the risk of restricted imports of U.S. manufactured brands into China and travel retail markets. The estimate does not include indirect impacts such as potential decline in the overall cosmetics market due to the rising tariffs. At this stage, we estimate that the net impact on the core operating profit for 2025, calculated as the direct impact amount offset by the effects of countermeasures already deemed certain, will be up to a maximum of 7 billion yen for the full year, with only a minor impact expected in the second quarter. Among the estimated impact items, item 1 is expected to have the greatest impact, followed by item 2. We have already been working on shifting to local sourcing of raw materials in the U.S. and reviewing production locations, and we expect these measures to offset a certain portion of the impact. Moving forward, we will accelerate these initiatives to further minimize risk. In addition, we will advance the company-wide cost management measures announced last year ahead of schedule. As further countermeasures, we will implement additional actions, such as increasing inventory levels, utilizing preferential tariff schemes, modifying logistics flow, raising wholesale prices, expanding sales initiatives, and further reducing fixed costs to minimize the overall impact. As a company, while we are taking proactive measures to address the most significant risks in order to achieve the 36.5 billion yen target, we recognize that the situation remains fluid and have therefore decided to maintain our current outlook. As all of these actions will be completed within the year, we believe that even if reciprocal tariffs remain in place in 2026, the impact of tariffs on raw materials will be small and achieving a core operating profit margin of 7% is sufficiently achievable. Next is page 15. we are maintaining our four-year outlook for both net sales and profit. With regard to net sales, we will continue to drive initiatives in each region to achieve the targeted positive 4% year-on-year growth on a consolidated basis. While there is some downside risk in the Americas, we expect to offset this at the overall level, taking into account factors such as better-than-expected performance in China and travel retail in the first quarter. In the first quarter, sales declined by 9%, and we expect the second quarter to be roughly flat year-on-year. As such, the first half is planned as a period of sales decline, while we are targeting double-digit sales growth in the second half. Our sales tend to be weighted toward the second half due to seasonal factors such as China's double 11 and the holiday season in Europe and the U.S. In 2023, the treated water issue in the second half, then the slowdown in China and travel retail in the second half last year, along with the decline in sales in the Americas, this disrupted the seasonal pattern of the first and second half to be reversed. This year's initial plan assumes no extreme market fluctuations, and given the rebound from last year, the second-half growth rate inevitably appears higher. By region, Japan, where consumer purchasing is growing in line with plan, and China and travel retail, which are performing better than initially expected, are supporting overall performance. And our global growth is being driven by major new product launches from our core three brands, Shiseido and Kletopo Bote. Meanwhile, accelerating the growth of NARS and recovering drunk elephant are seen as key priorities, and we are focusing our efforts accordingly. In April, on flash report basis, Japan achieved double-digit growth, led by the strong performance of Anessa. In EMEA, fragrances have driven a turnaround to positive growth. With global second quarter sales expected to be flat year-on-year, we are off to a solid start. On the profit side, while we continue working towards achieving our initial sales targets, we recognize the need to prepare for risks such as uncertain market conditions and potential sales shortfalls. To that end, we are thoroughly managing costs, including marketing investments, and implementing additional global cost reduction and structural reform measures through the Global Transformation Committee. The entire company is committed to achieving the 36.5 billion yen target and firmly delivering the committed profit.