Shiseido Co Ltd Ord

Thank you very much. So this is Fujiwara, the CEO and the president of the company. Now, first, let me introduce the key points of Q1 2026 financial results. Day three. In the first quarter, while challenges remain in terms of sales, profit growth exceeded expectations. Core operating profit was 13 billion yen, an increase of 4.8 billion yen year over year. We believe this is a result of the structural reforms implemented over the past few years, functioning effectively even during periods of declining revenue, improvements in fixed cost structure and discipline. The investment decisions have strengthened our so-called management strength or resilience to environmental changes. On the other hand, net sales were 232 billion yen, representing a real growth rate of minus 3%. This year's biggest theme is shifting to a new growth trajectory, and we take this figure very seriously. However, we have clearly identified that factors contributing to the declines in sales by brand and region, and we have already taken some actions, and I would like to cover that later. Previously, optimism about the sales growth and delays in responding to market changes sometimes led to the cost adjustment being delayed. Currently, we are shifting to a system that allows us to grasp the business situation in a timely manner and control it effectively based on priorities. This profit increase is not the result of a short-term reduction in marketing. We believe the essence of this increase lies in our organizational ability to distinguish between necessary investment and costs to be curbed while maintaining investment in marketing and R&D as our focus area. The business environment remains fluid and geopolitical risks are rising. Still, the overall impact of Japan-China tensions is manageable. We anticipate a prolonged slump in inbound demand in Japan, but we plan to compensate for this with accelerated growth in China and travel retail. We have already seen an improvement in momentum, particularly in Hainan Island in Q1, and we will maximize this opportunity. On the other hand, the business risk due to heightened tensions in the Middle East have increased significantly, and we recognize that this is where our fundamental management capabilities will be tested. The key is how we can accelerate our transformation action in response to this uncertainty as we implement the three points of the cost-efficiency measures outlined in our midterm plan as early as possible. Our earnings focus remains unchanged at this point. Among the Middle East impacts, the company can absorb the increased cost for raw materials and logistics. However, if the current situation prolongs and supply constraints, production costs, and stockout risk materializes, we will assess the situation from Q2 onwards and update our earnings forecast as necessary. This is CFO Hiro Fuji. Please see page 4, an overview of Q1. So the details for the Q1 result and the situation of each region. Well, reported net sales increased by 3.7 billion yen. In reality, sales decreased by 3% after excluding FX Impact and others. On the other hand, cooperating profits increased by 4.8 billion yen year over year to 13 billion yen, clearly demonstrating the results of structural reforms and financial discipline. We have achieved increased profits in all categories, operating, pre-tax, and quality profits. Next on page 5, details of co-operating profits. COGS has improved due to improvements in the brand and product mix and a decrease in allocation of excess inventory write-offs. SG&A appears to have increased due to the weak yen, but in reality, the amount has decreased, and the ratio to sales has also declined. The marketing investment ratio has increased due to the strengthening of the brand's value of focus area and upfront investment for new products. Meanwhile, both personnel and other expenses have decreased as a ratio to sales. Despite increased costs due to salary increase, personnel costs have decreased thanks to the effects of structural reforms in America and the optimization of necessary human resources resulting from overall productivity improvements. Other expenses have also decreased because of structural reforms and cost management. Next page 6. Next sales by region. Although the impact of Japan-China tensions remained within expectations, inventory adjustments and others affected, ending up with a lower than expected global figures. While the Americas saw a 5% increase in sales, the impact of Japan-China tensions affected negatively on inbound business in Japan, as well as China and travel retail, and sales in EMEA decreased due to the impact of initial shipments of new products in the previous year. Now, details of each region. First, page 7, Japan business. Due to the slowdown of inbound caused by the sharp decline in Chinese tourists and the impact of shipment restrictions during the transition from old to new products, and that sale started with the 4% decrease, but local business continues to maintain its strength. Local customer purchases of Cifedo, Elixir, and Anessa grew by double digits. Elixir, in particular, is performing exceptionally well with the new brightening lotion and emulsion exceeding 3 million units shipped in just two months since the launch. Cuero Povote is down due to the backlash from the rush before the price increase last year. However, since late April, when the effects of the backlash have subsided, we have seen a partial recovery in momentum, and we would work towards recovery from Q2 onwards. Core OPM is approximately 15%, maintaining profitability even amidst a significant decline in inventory. Productivity improvement through operational efficiency and personal optimization contributes to this. Excluding temporary factors that are focused, brands' performance in Japan is generally strong, and we have secured stable profitability even amid headwinds. We will continue to maintain a strategic direction.

Next, please turn to page 8, covering China and travel retail. Net sales declined 1% on a like-for-like basis but exceeded our plan, reflecting strong growth in Hainan and the fact that the impact from Japan-China relations has remained smaller than expected, we have revised our full-year outlook upward and now aim to achieve growth for the full year. In China, we successfully maximized opportunities from key promotions such as International Women's Day and strategically focused on high-functionality and high-value-added products. As a result, mainland China achieved positive growth this quarter. Consumer purchases remain strong for Cuero Pobote and NARS, while Shiseido also continues to grow. In travel retail, although sales declined due to retailer changes in mainland China, Hainan and Hong Kong remain solid. We are successfully capturing demand through marketing activities aligned with shifts in travel destinations. For Anissa, we are currently in an adjustment phase aimed at inventory optimization and market normalization, resulting in a significant sales decline. Increased inflows from unauthorized channels have created price distortions. which we believe will require time and a gradual approach to correct. Rather than prioritizing short-term sales, we are prioritizing the restoration of pricing discipline and the protection of medium- to long-term brand value. At the same time, we will steadily grow our other brands to secure overall business sales. Core operating profit increased despite lower sales, supported by cost management initiatives and other measures. Market conditions are also becoming increasingly complex. While mainland China continues to maintain moderate growth, Hong Kong remains structurally weak. In travel retail as well, momentum differences across regions have become increasingly pronounced. Hainan and Hong Kong have returned to strong growth, while mainland China recorded a big decline due to the temporary impact of retailer changes. Going forward, we will continue to identify growth areas and flexibly allocate resources accordingly. Next, please take a look at Case 9 covering the Americas region. Net sales increased 5%, marking a return to growth after a prolonged period of decline in representing a steady first step toward achieving four-year profitability. NARS and Shiseido were the key drivers of this growth. On the other hand, consumer purchases remained down in the low single digits. However, the pace of decline has narrowed compared with last year, showing signs of improvement. For Drunk Elephant, shipments returned to growth, while consumer purchases continue to decline. That said, the rate of decline has moderated, and branding campaigns are beginning to show encouraging signs. Regarding core operating profit, the structural reforms completed last year are clearly contributing to improved profitability. While sales stabilization remains a work in progress, clear signs of improvement emerged in Q1, and profitability also returned to positive territory. Fujiwara-san will later provide further details regarding our upcoming initiatives. Next, please turn to page 10. In Asia-Pacific, Taiwan, where market contraction had continued, returned to positive growth, and all countries and regions achieved positive growth. Against this backdrop, our consumer purchases grew in the high single digits, and we continue to expand market share. Vibram, Elixir, and NARS, which continue to expand through new store openings, perform strongly. By channel, e-commerce also delivered robust growth, cooperating profit increased by 600 million yen through disciplined cost management. EMEA recorded declines in both sales and profit. In particular, fragrance saw a notable decline in shipments. This was mainly due to a strong initial shipment of major new products in the previous year, as well as reduced shipments to certain Middle Eastern markets. However, consumer purchases continued to maintain strong growth, led by Zadig and Voltaire and Narciso Rodriguez. On the profit, first quarter profit declined due to planned upfront marketing investments aimed at future growth, as well as a slower-than-expected launch of certain new products. We intend to steadily realize the returns from these investments, mainly in the second half, and aim to achieve full-year profit growth. Next, please have a look at page 11 for an update on the progress over global cost reduction and structural reform initiatives. Following the completion of the major actions implemented last year, benefit have already begun to materialize, with 7.5 billion yen in benefit for Q1. While the business environment continues to become increasingly uncertain, we view this as an opportunity to build a stronger management foundation. By focusing on controllable areas that are less affected by external factors, and by thoroughly enforcing cost discipline and advancing structural reforms, we will steadily strengthen our earning power toward achieving the goals of our medium-to-medium management plan. And this will conclude my part. From here, I will review the key initiatives undertaken in the first quarter. Please turn to page 13. This slide breaks down the factors behind the recent sales decline by brand into one-time factors and structural challenges, clearly outlining our countermeasures for each item. We have broadly organized this into three areas. First is the area that is delivering strong results like Elixir. We will concentrate investments in these areas and further accelerate growth. Second is the area affected by temporary factors such as timing difference and rebound from previous year's performance. We will steadily recover this area from Q2 and onwards. Third is the area with structural challenges driven from pricing and distribution such as Anissa. We will prioritize to rectify the structure rather than focusing on short-term sales. In an environment where market changes have become the norm, rather than treating all issues uniformly, we will clearly differentiate priorities between investment and corrective actions according to the nature of each challenge. By concentrating resources on the area where we are succeeding and taking agile action in areas facing challenges, we will increase the overall certainty of growth. Through this approach, we will advance both recovery and structural reform simultaneously, enhancing both solid growth and capital efficiency, from the second quarter onward. Next, America's operations.

This Q1 marked a planned start towards a goal of achieving the four-year profitability. The left shows a summary of the structural reforms implemented in July of last year. As a result of the comprehensive review of the organization, costs, and procurement, we achieved an annualized cost reduction of 15 billion yen, significantly improving the profit and loss structure of America's operations. Given that basis, we are transitioning to a phase of balancing growth and profitability, focusing on selective investment in key areas and maximizing results. Specifically, looking at combinations of brands and channels, Only a few combinations generate the most of the sales and profits, hence we focus on them. As part of our channel structural transformation, we are accelerating our shift towards e-commerce, primarily through the high-growth Amazon. Going forward, we will concentrate resources on these winning areas to improve the precision and the speed of execution. we will extend our focus on winning area strategy, which demonstrated a successful turnaround from a loss-making structure in EMEA to the Americas. And while promoting cost synergies across EMEA and the Americas, we will ensure full-year profitability. In addition, we are working to improve organizational strength centered on the structure of strengthening sales capabilities. With fixed costs, Now under control, sales expansion directly translates to improved profitability, making the strengthening of sales capabilities the most important driver. Therefore, we intend to secure and securely capture the growth by enhancing the organizational execution capabilities while simultaneously achieving continuous profit improvement. The two brands, NARS and GSAIDO, which accounts for approximately 60% of America's sales, performed well in shipments during Q1, driving growth across the Americas. NARS achieved growth in the high teens. In addition to the strong performance of OTA, Natural Matte Longwear Foundation, the major new product, also contributed to improved sell-out. Shiseido grew across all product lines, achieving high single-digit revenue growth. The expansion of vital perfection at OTA and new products in beneficence contributed to this growth, and the sun care segment, which showed weak momentum last year, has regained its strength. We will continue to use these two brands as pillars of growth, achieving both high-quality growth and improved profitability. Regarding Drunk Elephant, we witnessed certain achievements through our Q1, while also clarified the remaining challenges for renewed growth. Sales have turned positive on shipment basis, and leading indicators such as awareness and engagement of new communications are improving across the brands as a whole. However, customer purchases remain negative, and the performance gap by channel became evident. Specifically, growth in accelerating on Amazon at Ultra, and strong responses are being seen during promotion campaign, while some retailers are facing with the weak conversion rates. Based on our analysis on what works and what doesn't, we are narrowing down the activities we will focus on from the second quarter onwards. First, in channels that are performing well, we will aim to maximize sales by combining key annual promotions with product relaunches. We also plan to enhance buzz with the new product in Q2. For retailers, where challenges remain, we will strengthen measures that directly lead to from the awareness to purchase, such as improving the way products are displayed in stores and online, expanding word-of-mouth marketing, and making product description clearer and simpler in order to improve conversion rates. Going forward, by increasing the precision and speed of execution, we will reliably restore customer purchases and return to a growth trajectory. Next on page 17. As part of optimizing our global production structure, we have decided to close our Hsinchu factory in Taiwan. Production will end in Q1 of 2027, and the factory is scheduled to close in second half of 2027. In terms of financial impact, structural reform costs will amount to approximately 3.5 billion yen for 2026 and 2027 combined, of which approximately 2 billion yen will be recorded in 2026. By the majority of this will be non-cash. Furthermore, we expect an annual reduction in fixed costs of about 1 billion yen after the closure. This decision aims to optimize our global production system in light of demand fluctuations and maximize capital efficiency. By consolidating production at domestic factories, we will strongly promote improvements of utilization rates and investment efficiency. We will pursue company-wide optimization while ensuring our ability to respond to demand fluctuations arising from market changes.