Shiseido Co Ltd Ord

investors, analysts, thank you very much for your attendance to Shiseido Company Limited 2025 second quarter earnings briefing. So today's disclaimer is shown on the screen. So today's session will be organized on audio only. Video and scripts will be posted on our website later. So today, the presenters will be Kentaroji Ujiwara, our president and CEO, and Ayako Hirofuji, CFO. Myself, IR department, Oshima, very pleased to meet you. I'm today's MC. And there will be presentation from Hirofuji and Fujiwara, and then there will be Q&A session. The time end will be around 5.45. Now, hand over to you, Hirofuji-san. Thank you very much. I will now explain our 2025 half-year results. Please take a look at page 3, the first half result and four-year outlook. Our current top priority is to steadily implement our action plan and build a business structure that generates stable profit. There are three key highlights I would like to explain. First is the result of our structure reform. Continued from Q1, in Japan, in China travel retail, the fixed cost reduction effort we have been working on since last year is clearly reflected in the first half figure, improving profitability and maintaining profit margins despite declining net sales. As there was a few media coverage in Americas under the new leadership structure, we accelerated personnel and organizational rationalization in July. As a result, we will accumulate the benefits of our annual structural reform across the company. Second is the strengthening financial discipline. Given the challenging market environment, we conducted further cost review across the company and despite the decline in net sales, our company core operating profit for the first half exceeded in our plan. In addition to our cost reductions in PL, we also focused on the cash balance sheet, reviewed capital investment and steadily implemented our asset light strategy including relocating and reducing offices to improve ROIC. Third, regarding our full-year outlook, while we anticipate certain risks to net sales, our commitment to achieving co-operating profit of 36.5 billion yen remains unchanged and we will achieve this through accelerating structural reforms and cost management. Since our disclosure in May, we have received many questions from investors regarding impairment risk. Given the declining profitability of America's business, we determined there are the indications of impairment and conducted impairment tests. As a result, we did not record any impairment loss for this quarter. However, given the underperformance of Drunk Elephant to date and uncertainty, including interest rate outlook, we recognize that the risk of impairment losses on our America's business is greater than ever. For details, please refer to Page 17 of Tangshin Report. Now page 4, the executive summary. Net sales for the first half were 469.8 billion yen, with the underlying growth rate of minus 6%, primarily due to a weakness in China travel retail and Drunk Elephant. Compared to the plan, the result was slightly below our initial forecast of our low single-digit decline due to poor performance of Drunk Elephant and others. Core operating profit was 23.4 billion yen, an increase of 4.1 billion yen year over year, exceeding our expectations. We are pleased to report that we have already achieved over 60% of our full year guidance of 36.5 billion yen. We view this as evidence that our structural reforms and strengthening the financial disciplines are beginning to bear fruit, but we are by no means optimistic as the upside in the first half includes expenses carried over on the second half and as a risk factor remains. Non-recurring items totaled 5.3 billion yen of the 23 billion yen in full year 2025 plan. We recorded 3 billion yen in expenses related to structural reforms in America in Q2. As a result, interim profit was 5.5 billion yen. While this has already exceeded our 6 billion yen net profit forecast for 2025 announced in February, we have not revised our earnings forecast as the majority of non-recurring items are expected to occur in the second half. Free cash flow was 17.5 billion yen, turning positive from a negative figure in Q1 due to factors such as higher profit before tax and others. Next, page 5, core operating profit. First, the cost of goods sold ratio improved 1.5 percentage point from last year to 22.6%, driven by better mix of brands and SKUs. Marketing investments decreased 2.7 billion yen from last year. Meanwhile, its share of net sales increased 1.7 points to 28.8%. This was primarily due to increased marketing investments associated with new product launches in EMEAs. And personnel expenses decreased 15 billion yen from last year, improving its share of net sales by 1.2 points. This primarily reflects the results of restructuring efforts in Japan, China, and travel retail. The effects of personnel reductions in the Americas are expected to be realized from Q3 onwards. Other SG&A decreased by 5.9 billion yen driven by a decrease in depreciation expenses and rigorous cost management and others. Next, page 6 shows net sales by region. The sales decline steadily narrowed from minus 9% in the first quarter to minus 3%. While this did not meet our main focus of flat sales growth in Q2, all regions are on recovery trend. We are expanding our market share in areas such as fragrances in Japan, Asia, Pacific, and Europe. Next, page 7. shows a sales trend by brand. Q and Q performances vary from brand to brand. We will carefully evaluate each brand from a strategic perspective to strengthen and expand our core brands and challenges will be properly identified and addressed. A positive sign across all brands is that the growth accelerated or revenue declines narrowed from Q1 to Q2, indicating a steady improvement. Clé de Topo, Botte, Nars and Elixir are performing well and driving growth across the company. Fragrance is capitalizing on market strength, improving in Q2 and accelerating growth in the second half. Unnecessary revenues declined primarily due to travel retail and inbound tourism to Japan, but this was in line with our strategy and generally anticipated in the plan. Drunk elephant and brown shiseido in China and travel retail are seeing a narrowing of their declines, but still in the process of recovering. Therefore, we will closely monitor their future improvements. Now, page 8 talks about the buy region. The figures on the upper left table and the text for the first half net sales and core operating profits show six-month basis, while Q2 market and Q2 customer purchases show the most recent three-month figures to indicate changes in momentum. Japan achieved a significant increase in profit despite the decrease in revenue, demonstrating continued progress in structural profitability improvements. On the other hand, what stands out as a trend is a slowdown in the inbound demand.

Local market in the second quarter continued modest growth. Consumer purchases grew low single-digit percent. Core brands drove growth and share expansion is continuing. Shiseido's new Altamune is continuing to drive momentum. E-commerce sales are maintaining growth at high teen percent. with loyal user purchases driving growth on our online website. On the other hand, the inbound market growing with an increase in number of visitors to Japan began to slow down in May, particularly in the department store channel and inbound consumer purchases turned negative in Q2. We analyzed that incentives to purchase in Japan declined because of factors such as the narrowing price gap between Japan and overseas markets caused by the strong yen, extension of the 6-1-8 shopping season and intensified low price competition in China. Despite the sales decline, core operating profit increased 13.2 billion yen thanks to structural reforms such as reduction in personal expenses due to early retirement and improved efficiency of marketing investments. First half margin was 13.3% and Q1 was higher at 15% due to rush demand before the price hike. We believe low 10% level is our normalized level averaging out such one-off factors. Slide 9 is China and travel retail. It was slightly ahead of sales target. If we focus on Q2 only, growth turned positive YOY in China. China's prestige market growth rate accelerated from Q1 to Q2 and market share expanded in Q2. In addition, 618 e-commerce sales saw fierce price competition among platformers and Price-driven purchasing behavior remained strong, but even excluding the impact of the extended sales period, sales increased marginally. Why or why? We outperformed the market, driven by high-prestige brands. Offline market faced ongoing challenges. Credit Po, Botte and NARS maintained strong momentum overall, including offline channels. With online consumption becoming the norm, Kleropo Botte is promoting customer visits by creating reasons to visit, such as opening a new spa on the upper floors of major department stores and providing the best customer experience possible. We believe that investing in experiences to build equity as a luxury brand is helping us stand out from the competition. Although Shiseido grew markedly in 618, it continued to suffer in offline channels. Travel retail continued to face challenges in the Asian market, and the Japanese market also slowed down and consumer purchases fell to the negative low 20% level. Despite sales decline and worsening business mix, We maintained high profitability with core operating profit of 38.8 billion yen, profit margin of 22.1% via structural reform such as fixed cost reduction and cost management. Slide 10 is about Americas. Americas market maintained YOY growth but fell short of expectations in Q2. Consumer purchases were negative high single percent and drank elephants struggled with results far below our initial expectation. Core operating profit dropped 3.3 billion yen due to sales decline. Shiseido benefited from new product launches with new Ultimune and Mineral Sun Care sunscreens already launched in Japan, fueling growth. We are accelerating structural reforms actions for a swift turnaround of Americas. CEO Fujiwara will give further details about this along with our recognition of challenges of Drunk Elephant. Slide 11 is on Asia-Pacific and EMEA. In Asia-Pacific, market contraction is continuing, notably in Taiwan and South Korea, and sales declined, but overall market share expanded, mainly in main markets. Core operating profit decreased by 1 billion yen due to sales decline and others. Next is EMEA. Q2 market maintained moderate growth, but the pace of growth decelerated. Q2 consumer purchases turned positive after negative growth in Q1. Drunk elephant continued to struggle, but fragrances remained buoyant with Zadig and Voltaire, fueling high growth at low 20%, outperforming the market by far, expanding its share. Core operating profit declined 4.6 billion yen on increased marketing investments and lower gross profit. Both Asia Pacific and EMEA are expected to secure profits on a full-year basis. Acceleration of sales and profitability improvements are expected in the second half. Slide 12 is on 2025 core operating profit forecast. We are expecting some downside risks to achieving sales target, but we will continue with management efforts to achieve 2025 core operating profit forecast of 36.5 billion yen. From next slide onwards, I will explain the major assumptions and initiatives. Slide 13 shows downside risks and opportunities. In Japan, sluggish inbound sales. In Asia Pacific, Americas in EMEA, market deceleration and continuing lackluster performance of drunk elephant are considered major risk factors. On the other hand, China and travel retail are trending better than expected as of now. which we see as an opportunity. Especially in China, although second half of last year was a low hurdle, actual shipment on a preliminary basis in July performed well with double-digit growth. We will continue to maximize opportunities. Slide 14 on tariff impact. As a result of reviewing assumptions reflecting changes in the situation, Sharif impact for 2025 full year is expected to shrink to around 3 billion yen as of now compared to the 7 billion yen a year at maximum which we announced the last time. We will aim to maximize the impact, minimize the impact by executing mitigation actions as described. Slide 15 is on progress on global cost structure transformation. In the first half of 2025, we realized 13.5 billion yen cost reduction benefits on track with the plan. On a full year basis, we will accelerate structural reforms in Americas ahead of schedule as a result accelerating personal expenses reduction and therefore raised cost reduction target from 20 billion yen to 25 billion yen. Furthermore, we will increase two-year reduction targets for 2025 and 2026 from 45 billion yen to 50 billion yen to improve profitability. This concludes my presentation.

Then I would like to talk about the action plan 2025 to 2026. So I will cover the important topics of that. And page 17, the further future initiatives for key brands. For key brands, we are working to strengthen brand equity, not only to generate sales, but also to ensure long-term sustainable growth. At the launch of the brand's hero product, Ultimune 4.0 branch shadow engaged a global campaign aggressively across all regions, making investment at an unprecedented level to acquire new customers. The campaign keywords, freedom from age and slow aging, helped deepen customers' understanding of the product's benefits and create new markets globally. In Japan, autoimmune sales are nearly doubled, and the brand as a whole achieved double-digit growth, maintaining its momentum in the second half. Additionally, the new Shiseido Men Autoimmune, which incorporates the full breadth of 100 years of research into men's skin, was launched on July 21st, with new promotions aiming to accelerate growth in the second half. Clé de Peau Beauté launched a renewed version of its key Radiance Care lotion, emulsion and cream in Japan on July 21. Initial sales have been extremely strong, setting a stage for subsequent global launches. Additionally, on July 25, Nicole Kidman became the new global brand ambassador. Through this, We aim to further strengthen our positioning as a luxury beauty brand, accelerating growth in Europe and the US, and expand our scale globally. For NARS, in the third quarter, we will relaunch the brand's iconic multiple line and create buzz through limited editions and new colors tailored to each region. In addition, we will continue to strengthen our loyal customer base and accelerate sales through a lineup of technologically advanced and topical products, including brands and items that are too numerous to introduce here. Now, page 18, Drunk Elephant continues to suffer from a challenging situation with falling the second quarter results far short of expectations. In light of this, headquarters and local offices work together to conduct a fair and transparent brand review and identified new issues to achieve a turnaround. There are three major challenges. the brand lacked targeting based on a clear understanding of customers. Two years ago, we achieved a significant sales growth thanks to social media buzz around our hero product. Since then, however, the brand's positioning has become unclear and our customer base has weakened as our original target customers have drifted away from the brand. Regarding brand value, Our once innovative, clean formula has now become commonplace in the US market. Our current communications do not adequately highlight the uniqueness and value proposition of our brand over competitors, making it insufficient to attract new customers. Furthermore, products lack groundbreaking innovation, causing us to lose market presence and competitive advantage. Therefore, we have postponed the strengthening of our clinical and high-performance skincare communications and review of our sales floor layout, which we explained last time. And this year, we will first clean up our market inventory, reduce uneven inventory, build in-store engagement, and redefine our value creation foundation. This will lead to successful brand reset campaign from next year onwards. Now, next page 19, we will discuss the efforts to achieve profitability in America's business by 2026. As previously announced, under the new management structure with Alberto as CEO, America's business has swiftly implemented a turnaround plan, completed key restructuring actions, and is now moving to face continuous investment. By streamlining and simplifying our organization, we have departed from silos and clarified accountability between functions. This will enable us to streamline operations and optimally allocate our resources even with the limited workforce, improving the flexibility and agility of the entire organization. As a result, we believe that we have created an environment for even stronger innovation enabling us to achieve sustainable growth and strengthen competitiveness.