Shiseido Company, Limited (SSDOY) CEO Masahiko Uotani on Q2 2022 Results – Earnings Call Transcript

… skin beauty company. The transfer of the manufacturing business for Personal Care … a trend of less cosmetic product usage, past … efficacy and functions of cosmetics, science and formulation technologies … PRIOR is performing well. Skincare brand – if sales go …

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Shiseido Company, Limited (OTCPK:SSDOY) Q2 2022 Earnings Conference Call August 10, 2022 2:00 AM ET

Company Participants

Takayuki Yokota – Executive Officer, Chief Financial Officer & Japan Region Chief Financial Officer

Masahiko Uotani – President & Chief Executive Officer

Norio Tadakawa – Chief Executive Officer, Japan Region

Kentaro Fujiwara – Senior Executive Officer, China Region, Chief Executive Officer

Conference Call Participants

Akiko Kuwahara – JPMorgan

Katsuro Hirozumi – Daiwa Securities

Hisae Kawamoto – UBS

Keiko Yamaguchi – Goldman Sachs

Wakako Sato – Mitsubishi UFJ Morgan Stanley

Takayuki Yokota

Now, I would like to present the business results for the first half of fiscal year 2022, and the full year outlook. To begin please refer to page 3. This is the summary of first half of 2022. There are five key points that, I would like to cover with you today. The net sales, excluding business transfer impacts and exchange rates was minus 1% year-on-year. Americas and Travel Retail continued strong, and EMEA keeps its strong momentum excluding shipment suspension to Russia.

On the other hand, China was affected by lockdowns and Japan was affected by slow market recovery, especially in the mid-price range. At the same time, the Skin Beauty brand sales ratio continued high performance at 75%, thanks to the portfolio reorganization, which is very much on track to achieve the 80% target in 2023.

The overall e-commerce ratio was 31% as a result of online business performing strong, with promotions such as China’s 6.18 shopping event. The growth rate of EC sales was minus 2%, but this was primarily due to the retail normalization since COVID measures relaxed in Americas and EMEA shifting from off – online to offline with social economic activities reopening and resuming.

The core operating profit was ¥17.5 billion, a minus ¥5.5 billion year-on-year due to transfer of Personal Care business. However, the company reduced fixed costs from structural reforms and pushed forward the company-wide agile cost management. The company also is showing strong transformation to become a skin beauty company.

The transfer of the manufacturing business for Personal Care products will happen in Q1 of 2023 for Kuki factory, and second half of 2023 for Vietnam factory as announced on August 1. The professional business was transferred on July 1.

Next is page 4, the P&L executive summary. As mentioned earlier, the core operating profit was ¥17.5 billion. IFRS operating profit was ¥17 billion. This is an improvement of ¥38.2 billion versus previous year because in 2021, the company booked impairment loss on Dolce & Gabbana trademark rights, structural reform cost, and withdrawal from hyaluronic acid business as non-recurring items.

The profit before tax for the quarter is ¥25.6 billion, due to FX gain from yen depreciation and also share of profit investment accounted for using equity method. As a result, the profit attributable to owners of parent was ¥16.2 billion, an improvement of ¥44.4 billion year-on-year.

Next is page 5, net sales by brand. Japan and China that accounts for about 50% of the overall like-for-like net sales, performed lower than last year, being impacted by the market environment. As a result, brands such as Shiseido IPSA and ELIXIR were heavily impacted.

On the other hand, Clé de Peau Beauté performed relatively strong even being impacted by the China lockdowns, and contributed to the numbers in other regions such as Japan. NARS realized strong growth in all regions expanding its share. Fragrance such as narciso rodriguez also continued to perform well.

Now Drunk Elephant was minus 10% year-on-year. We are accelerating the rollout to new markets, but the main reason for the struggle is the performance in the Americas. We will aim to achieve strong growth for the full year by enhancing the digital media approach for higher brand recognition, as well as focus on its strength in skin care innovation. From June, we have started a new digital media strategy with retailers in the Americas, and we are already seeing momentum recovery for the brand. Next is page 6, the net sales year-on-year. Americas and Travel Retail continues to grow covering the lower performance in China and Japan versus last year.

Next is page 7, on the Japan business. The local market performed flat in Q1 year-on-year then experienced low recovery in Q2 after the quasi-state of emergency was lifted, resulting in a slight increase versus last year for the first half total.

However, due to the price hikes across a wide range of industry products, the household spending has been under pressure, causing the market growth to center around low-price range segments that department stores grew versus last year which was under state of emergency but is still low compared to 2019. Under such situation the local sales was positive mid-single digit in sales, in consumer purchase basis and momentum is definitely improving from Q1. —

One of Shiseido’s strength the Prestige brands had strong growth especially with the increased consumer touch-up activities at the store expanding its brand loyal user base. Also as for ELIXIR the core brand in the mid-price range continues to struggle.

However, we are seeing the momentum improvement through stronger promotions, highlighting impact and efficacy of the products such as the wrinkle cream. Also HAKU well known for its brightening beauty serum launched Beauty Supplements a step to our holistic beauty approach initiative. E-commerce continues to grow primarily with our retailer EC channel expanding our share.

Next is page 8, China business. The overall market was heavily impacted through the resurgence of COVID and lockdowns in both online and off-line. Under such environment our off-line channel traffic slowed significantly resulting in our consumer purchase to be a negative low-teen percentage.

E-commerce also slowed down due to logistics slowdown from lockdowns. But in the 6.18 promotion in Tmall we captured growth that exceeded market growth especially NARS achieved a significant growth of over 60% versus last year.

As consumers purchase channels diversify we are strategically expanding to other platforms outside of Tmall. We have added five brands and started sales in TikTok in Q2.

Next is page 9, other business regions. In Americas, growth continued in all categories even accelerating its growth capturing the momentum from market recovery. NARS expanded its share and improved its ranking in the first half significantly. Clé de Peau Beauté also achieved strong growth with new products such as the serum.

EMEA performed solid excluding the impact of suspended shipments to Russia, EC sales in Q1 was impacted by rebound from last year’s lockdowns and stay-at-home policies in countries like the U.K. However, Q2 flat year-on-year planning at negative growth versus last year for the first half total.

Travel Retail in Asia was impacted by China’s lockdown, therefore the consumer purchase in Q2 was minus versus last year. But Americas and EMEA are capturing solid recovery. Also the external sales are strong in anticipation of recovery.

There has been news that there will be partial lockdowns in Hainan Island again recently, so it’s hard to know what will happen. But we believe that once the lockdowns are resolved, this market will pick up its strong momentum again.

Asia Pacific is experiencing delayed recovery in some markets such as Taiwan, but we saw strong growth, driven by South Korea and Southeast Asia. We are continuing to expand EC platforms, as we are achieving continued growth in EC sales led by the Prestige.

Next Page 10 on COGS ratio. Despite an increase in the COGS ratio due to the negative impact from MSA, Manufacturing Service Agreement, associated with business transfers the like-for-like COGS ratio excluding this impact in the first half of 24.8%, an improvement of 1.2 point year-on-year. The improvement is mainly attributable to favorable product mix from business transfers and lower inventory write-off, despite a rise in the COGS ratio as a result of Fukuoka Kurume factory higher raw material cost among other factors.

Next Page 11 on the cost structure for the first half. Marketing investments decreased by 4.1 points year-on-year due to impact from business transfers and agile cost management in line with sales. And a series of transformations including the restructuring of the regional portfolio resulted in a decline in personnel expenses mainly in Americas and EMEA and other SG&A by 0.2 points and 0.7 points respectively.

On the other hand, we have strategically made DX investments and investment into brand development, R&D in that strengthening brand value to build a foundation for medium to long-term growth.

Next Page 12, on the operating – core operating profit. Core operating profit declined in Japan and China, mainly due to the impact from the Personal Care business transfer and lower margins from decrease in sales. But in Americas and EMEA, core operating profit increased significantly and those regions turned to profit, mainly thanks to improvement in commercial based profitability and a decrease in fixed cost due to organizational and structural reform.

As for Travel Retail, core operating profit increased substantially and the operating profit margin improved, thanks to an increase in margins on the higher sales. In other, there was a major decline in core operating profit, mainly due to lower shipments from headquarter to China, due to decline in sales as well as investment in new factories and DX.

Next Page 13 on cash flow management. Free cash flow was ¥56 billion, due to continuous investment for future growth such as capital expenditures Fukuoka Kurume factory and the investment into IT and DX, as well as an income tax paid associated with the Personal Care business transfer in the previous year. However, we are maintaining stable cash positions

Inventories increased ¥17 billion from the end of December last year but that’s due to the impact from FX and an increase of seasonal products, inventories mainly in Americas for the event season in the second half of the year. And DSI was 185 days, maintaining a level below 200 days.

Next Page 14, on our current assumptions on market recovery in 2022. As for the local Japan market at the beginning of this fiscal year in February, we assume the market to recover in the second half of the year. But due to the delay in the market recovery in the first quarter and recent resurgence of COVID-19 cases, we think its difficult for the local market to recover back to the 2019 level by the end of 2022. Although, we forecast the market to gradually improve in second half.

As regards, the inbound market, we changed our assumption that it would be on a recovery trend from the fourth quarter of this year. In China, we assumed the market recovery to be moderate after the lifting of lockdowns. In EMEA, while we continue suspension of shipment to Russia this year, for other markets, the initial assumptions remain unchanged. For Asia Pacific, America and Travel Retail, the initial assumptions have not been changed.

Next Page 15, shows an increase and decrease factors for difference between core operating profit announced at the first quarter earnings announcement and revised core operating profit announced this time. JPY 34.5 billion decrease in gross profit from lower sales is due to decline in sales, mainly in Japan and China, suspension of shipment to Russia, deterioration of the COGS from a surge in raw material cost, which are somewhat offset by weaker yen.

Next, as for marketing investment and brand development R&D costs, JPY 10 billion of strategic marketing investment that we had factored in at the beginning of this fiscal year will be suspended in response to a downward trend of the market environment and we aim at reducing the cost through agile cost management. In addition, a decreasing gross profit is partially offset by a reduction of personnel expenses and other SG&A and core operating profit comes in at JPY 50 billion.

From there, we have also factored in a total of JPY 10 billion of additional strategic investment to achieve growth over medium term. As a result, we are forecasting JPY 40 billion for the full year, a decrease of JPY 22 billion.

Finally, page 16 on the full year forecast. Sales are forecasted to be JPY 1.070 trillion, down JPY 5 billion from the previous quarter announced in May, due to the impact from sales decline in Japan, China and Russia, which is partially offset by positive FX impact, mainly from weaker yen.

Like for like basis, excluding the impact of FX and business transfers, we are forecasting an year-on-year increase of 5%, Core operating profit as just explained is forecast to be JPY 40 billion. JPY 11 billion declined in nonrecurrent items reflect, about JPY 14 billion impairment, associated with the transfer of the manufacturing business for personal care products, announced recently. As a result, core operating profit is forecast to be JPY 33.8 billion, down JPY 33 billion. Profit attributable to owner or parent is JPY 25.5 billion, down JPY 18.5 billion from the previous forecast, mainly due to the impact from lower tax expense.

That’s it from me. And now, I will hand over to Mr. Uotani.

Masahiko Uotani

Hello everybody. This is Uotani speaking. I would like to speak to you about how we plan to overcome the prolonged challenge we face and to realize growth in the mid to long term for the future. As you know, we face this unprecedented COVID-19 crisis in the spring of 2020. And since then, we immediately share the Build Back Better vision company-wide and created the Win 2023 and beyond strategy with a sense of urgency. Through these actions, we have protected our company and pushed forward thorough reforms to enhance our profitable base as a company.

To allow the company to focus on skin beauty, we executed all business structural reforms as planned and also achieved profitability improvement for EMEA and Americas a big challenge we have had for some time. The company is also moving forward with individual business transformation targets. And despite the harsh business and financial environment, we have continued to invest in DX and new factories as planned in order to strengthen the foundation of the company for further growth.

Through the continued structural reform efforts, we generated cash and reduced debt to establish a strong financial basis. Through these company efforts of structural reforms with Win 2023 plans, we have forecasted acceleration of sales and profit generation targets at the beginning of the year. However, the business environment has become increasingly difficult compared to the previous assumption as a result of delay in Japan market recovery and slowdown of the China market growth due to lockdowns.

But especially, when I speak with overseas investors, I often get the question of why is the Japanese market recovery delayed? And why don’t the Japanese people take their masks off? Now given the uniqueness of the Japan market, how do we recover profitability in Japan under this COVID lifestyles?

And as for China, how do we overcome the impact from the lockdowns and handle the overheated promotion competition, including price promotion and secure profitability? These are the big business challenges we face right now. Therefore, I will have both of the region, since I get many questions about Japan and China, I will have both of the regions CEOs Tadakawa-san and Fujiwara-san to update you about the action plans for the second half as well as for the mid to longer term.

Now, I would like to hand over to the Japan Region, CEO Tadakawa-san to present.

Norio Tadakawa

I would like to talk to you about the market trend and changes in consumer behavior. First of all, we currently stand on the viewpoint that the challenging market environment will continue with no immediate recovery of local inbound markets. However, we aim to expand our share by adapting quickly to the changes in consumer behavior, and maximizing that as an opportunity.

Especially in the Japan market, as Uotani-san has mentioned earlier, the intent to wear masks continue to stay very high. And as a result, more people are conscious of the visual gap when wearing the mask and not wearing the mask. From this mask gap perspective, we consider it to be a market opportunity in which we can maximize through proposing the optimal skin care, makeup, and products.

Also, for the senior market, there used to be a trend of less cosmetic product usage, past the age of 65. But as we are seeing more active seniors, we know that the senior demands will increase. So we will enhance our proposals to the senior market, including further R&D efforts. Capturing the changes in consumer behaviors, we have reacted very quickly and we’ll have many products and action plans that will be executed from the second half.

First is innovation. For the ELIXIR renewal planned on September 21, we will be introducing with much confidence, a collagen related product that collectively captures the best technology that Shiseido can provide. We are already starting collaborative work, with our business partners, where we have full committed support of the partner’s management to staff to make this brand renewal a big success.

We will have special counters in our business partners nationwide, and the biggest media deployment in the recent years. Please do look forward to this amazing product and brand renewal.

On October 1 brand Shiseido will launch a product called Skin Filler. This is a product with innovative technology that just by applying to the skin the small hyaluronic acid will be delivered thoroughly inside the skin allowing the skin to regain its suppleness and firmness in the morning. This will especially target consumers that are concerned about their laugh lines under their masks.

Furthermore for senior consumers, pre-order will launch a product advancing the corsets technology to resolve skin sagginess. With these innovative technology we will introduce products to address skin concerns to realize share expansion.

Next is the acceleration in DX. We will introduce an app called Beauty Tea on September 1. This will centralize membership cards to one ID, which this industry was not able to realize. The record of the skin diagnostic and shopping in multiple channels will be consolidated to one data to allow for more tailored counseling and services as well as better membership benefits.

As the consumer diversification continues, CRM integrating digital and offline becomes even more important. We will be working on creating this strong consumer data platform to be the front-runner in our industry.

Also, in order to provide personalized beauty and wellness to each individual consumers, we will provide as part of our value services like Beauty DNA program which both Shiseido’s strong diagnostic technology. We want to be pioneers in the industry so that we can evolve personalization for the future before our competitors to ultimately heighten consumer satisfaction.

At the same time, we will continue on-site experiences that stimulate consumer demands. As shown on the left bottom of the slide, we held our 150th anniversary special events in seven cities in July. It was a hands-on experience with skin diagnosis and makeup booths.

Every day the event was filled with consumer smiles and happiness and it was proof to us that people are wanting these face-to-face events on this disclosed COVID environment. We are confident that there is strong consumer demands. Therefore in the second half of the year we will expand our consumer touch points proactively both in offline and online.

Along with these growth action plans, we are also working on the structural reforms. As for the returns of old products due to new product launches, we have broken old traditions and promote using up in-store inventory to reduce inventory write-offs to try to limit business impact. We also completed office reorganization to have the office locations in July focusing on productivity improvements.

As part of the domestic structural reform, we will take action to reorganize manufacturing sites. The transfer of Kuki factory and Vietnam factory as announced on August 1 will happen in consideration of benefit for both parties Shiseido and Fine Today. For Shiseido it is part of the concentration to core business and an effort to also concentrate to evolve prestige and premium categories in manufacturing technologies.

From a business perspective, it will lead to a reduction in fixed cost and fixed assets and improvement on COGS by concluding OEM. Of course, this is a deal to secure benefits for the future growth of both Kuki and Vietnam factories. But in the mid-term we believe that this will provide positive impact to the Shiseido business.

Now I would like to update three key points on our mid-term action plan. First is enhancement of brand value and innovation. The key point here is that to meet diverse and changing consumer values and demands, we will strengthen our brand portfolio and innovation. With the basic strategy, we will take detailed action based on these pillars mentioned on this slide.

First is to solidify our number one core brands. We will increase brand equity by sharpening the values provided and increase profitability and expand share in each of the market’s number one brands such as ELIXIR, Clé de Peau Beauté and MAQuillAGE.

Next is to enhance brand value or brand equity in growth categories such as pure and derma, senior and skin care, firming fragrance and relaxation for the mind. We will capture high growth in these categories by leveraging the state-of-the-art Shiseido technology to realize these brands’ equity.

We will also collaborate our technology knowledge to create new markets such as inner beauty, holistic and men’s and diagnostic services. Through these actions, we will elevate Shiseido’s group’s presence in Japan as well as expand the market share.

Next is acceleration of one-to-one marketing to further heighten innovation. Like the beauty key that I mentioned earlier, we will share the consumer data — we will share the consumer data with business partners as needed promote centralization of data so that we can further push for effective approach to consumers through CRM to elevate our ROI.

As part of that approach we will fully leverage the diagnostic model based on the research data one of the biggest strengths of Shiseido. We will strengthen the BC counseling to turn the diagnostic model, a true value to our consumers so that we can approach our consumers with comprehensive proposal about wellness. This will allow to create strong engagement with our consumers that far exceeds our competitors.

With growth expansion to create profitability improvement, we will continue cost structure reform at the same time. This will also build a business model not reliant on inbound sales with SGI ratio at low 60 percentage. We will improve the COGS by concentrating on skin beauty and reducing product returns and estimated refund liabilities and inventory write-offs.

Marketing ROI will be improved through digital shift and also through loyal user base approach through CRM. This will allow for investment to new market creation. Personnel expenses will focus on productivity with standardization, consolidation and streamlined organization more efficient recruitment of less numbers of highly skilled professionals. As for the other SG&A, we will continue to push these initiatives to realize low 60%.

That is it for myself. Now I would like to hand over to Mr. Fujiwara to talk about the China business.

Kentaro Fujiwara

So I will explain about the situation in China. Changes are so dramatic in China. With the resurgence of COVID-19 this time, consumer sentiment has changed so much. I will explain what kind of changes impact our business compared against the past.

Firstly regarding macro environment, in the last 10 years, consumption was stimulated by rapid and accelerated digitalization in people’s lives, which supported the GDP growth. It was based on stable employment and increased income and consumers, especially younger people became confident about the future of China and drove consumption. And there was trade up as consumers would like to spend money from the idea of high prices high quality and consumers’ preference for imported products drove rapid expansion of the cosmetic prestige market. And the growth was spurred by a visor e-commerce centered on Tmall as a new channel for consumption. But now even though there are policies to make a shift from investment to consumption for GDP growth, there are no consumption stimulating factors and uncertainty about that future has increased due to higher employment rate, repeated lockdowns.

There are increasing trend among consumers to focus on savings and restrain consumption, because of uncertainty about the future consumers focus on mid to long-term values and well-being. As a result, they put more importance on effects and efficacy of skin care products and started to buy local brands if they are worth the price. Younger people are becoming more selective and also low price oriented.

As a result the cosmetic market has entered a stable growth phase from rapid growth. Offline channel is sluggish and online channel is more diversified. In such an environment, we are seeing the rise of local brands in China, especially skin care brands with an R&D story on the other hand as for import brands growth is clear in the high prestige. The market will shift to a stable growth from rapid growth recorded in the past. But as consumers are focusing on essentiality and the real value, I think, it gives us a great growth opportunity.

We will capture these changes and make a shift in our investment to high prestige lines and brands with an emphasis on categories that focus more on functionalities such as anti-aging, eye care and sun care. By communicating effects and efficacy through diversified digital platforms particularly social channels, we aim at achieving growth.

From the second half of this year, we will shift from growth driven by large-scale promotions to sustainable growth through consumer-oriented brand and product communication. First of all, to make high prestige and high-function products as mid to long-term growth foundation, we will shift the investment from the second half with a view to developing them. We will evolve communication centered on products effects and efficacy and expand online touch points for communication.

We will also provide new brand experience for consumers through deepen understandings about our products and brands and aim at consumers to send out more information about them.

This is an example of a new communication. Brand holder will change content communication for brand values with more focus on effects and technologies. Align brand values and products create content that ensures to give impression of prestige. On the other hand, locally in China together with China Innovation Center various contents are created that are suitable for each platform and are easy to understand by consumers. Furthermore, China Innovation Center will communicate technological information as resource findings that cannot be appealed through at that should help understanding and appreciation of products by consumers and raise expectations for our products.

Our medium to long-term growth is to develop barrier values focusing on inside and skins of people living in Asia, positioning our unique value as Asian beauty expert. We will deal with marketing that makes full use of consumer data and realize sustainable growth. We will clarify the areas of target by brand and make focus investment. We will transform marketing operations as explained earlier, and promotes local product development in China. As offline is forecast to these markets going forward, we will diversify touch points on e-commerce and a much evolving are operations that enable us to make effective investment that matches consumers buying behavior more precisely.

As for new growth areas, we will secure access to new categories by leveraging a new set — newly sets of investment company together with our in housing development, so that we can enter new areas early in China where technologies are evolving. In our response to sustainability, we will expand retail products, change packaging materials by introducing sustainable products in our daily business activities. We aim at making contribution to society and creating values. We will promote cost structure improvement in an effort to securing a certain amount of funds for investment into the market.

We will reduce COGS by shifting to higher price range and introducing refills. We will shift our marketing investments from price-oriented promotions to value communication. We will optimize consumer journey by utilizing data and we will expand local production of small size samples for better efficiency and we will change our marketing investment to achieve sustainable growth. Personal expenses will be optimized for offline bases and stores enhance productivity or beauty consultants by introducing online tools.

As our SG&A expenses will be spent more efficiently by realizing cost reduction through integration of distribution centers, making use of economy of scale from centralized procurement. We have been doing structural reform of Opera China dedicated brand within Shiseido Group, we have been making progress in general restructuring which was started last year and by shifting marketing and e-commerce functions to Shanghai this year, we should have a structure in place to realize growth by the end of the year.

To create new growth categories in the changing Chinese market, we are making proactive effort. In July this year, we launched Sidekick, a brand targeting men in Generation Z. From June, they started selling through Inryu through Cross-border EC ingestible beauty brand developed in China. Furthermore, Shiseido Beauty Innovation Fund launched last year signed an agreement for strategic investment and business partnership with Trautec, a pioneer in aesthetic medical care. So as I have explained, while we promote transformation and structural reform to realize sustainable growth with existing brands, we are also making proactive — we’re working proactively in new growth categories aiming at achieving growth in changing Chinese market.

I will now hand back to — hand over back to Mr. Uotani.

Masahiko Uotani

We talked about our initiatives in Japan and China. And from the companywide perspective, there is no change in our basic strategy centered on our focus on skin beauty brands to make a transition to a highly profitable structure as set forth in 2023.

Reflecting back for the last three years since 2020, we have fought against COVID-19. We had undertaken transformation globally in earnest that require tough decisions and thoroughly reviewed non-core and unprofitable businesses as you know. At the same time to defend and secure profits for every fiscal year, while sales were on declining trend, we implemented agile cost management including marketing cost reductions in line with sales decline.

However, after three years of this situation, further continuation of this approach I think will lead to a downward trend. I strongly feel a sense of crisis. Therefore, I think it’s necessary to stop the trend and transform our management to be offensive by increasing strategic investment, revitalizing the business and organization. After three years of tough times and encouraging beauty consultants at stores and our employees who are working hard under this tough environment and living up to expectations of our shareholders who trust us, I think are my responsibility as a management.

The top priority in our strategy as explained earlier by the two CEOs is to strengthen brand equity, which serves as a basis for our bond with consumers and for continuous purchases of our products by consumers. After experiencing COVID-19, there is a growing awareness among consumers in the world towards health and immunity efficacy and functions of cosmetics, science and formulation technologies to support product development.

As this is an area where Shiseido has strength since we have continued our efforts in basic research, we will proactively communicate such information like benefits and brand equity through advertising and the like as important factors backing credibility of brand equity.

As you have seen earlier collagen science technology, et cetera. There are concerns that price-oriented promotions that have been overheating centered on China will impair brand equity if they are continued for a long time. So we need to shift our investment to strengthen brand equity and shift away from overemphasis on promotions. Of course, things cannot be changed overnight, but we will be strengthening investment into brand equity.

The second important factor, which is our people. People are our biggest assets for Shiseido. I strongly believe that investment into people capital will enhance corporate value and have raised people first as our management philosophy. There is a sense of stagnation in the society and also cooped up feeling among our people due to COVID-19 pandemic as the industry has been impacted quite seriously.

To overcome this situation, strengthening investment into people capital and improving employee engagement are very important strategies.

Digital Academy and online learning, in which more than 10,000 employees around the world participated already, and re-skilling opportunities using Digital Academy will be enhanced through a joint venture with Accenture among others. And also, through a job grade-based HR system, which had been introduced already, we have started individual career development as it’s very important.

To support development of our people by setting their individual career targets, we will expand various programs, including existing training programs and study abroad programs and make proactive investment aimed at developing future leaders for Shiseido. In addition, we are looking into building a global training center in Tokyo for our people around the world can learn together.

While promoting D&I, we will also promote improvement of office environment and work style reform through introduction of hybrid work styles. Furthermore, as for compensation, in line with the Japanese government policies, we have aimed at realizing high compensation based on the level of individual responsibility, efforts and results by introducing the job grade-based HR system.

Although affected slightly by the impact from COVID-19, unfortunately, we will strengthen and enhance this initiative going forward. At the same time, we will take on a challenge to build a model from a perspective that higher investment into people leads to higher corporate performance, which is currently drawing attention among business people, and we will strive to proactively disclose information on that.

As explained earlier, we will make additional investment of ¥10 billion, combining ¥5 billion investment in brands and ¥5 billion investment into people. We will implement that in the second half. And such investment will not be temporary, but rather continuing in next year onwards, we are committed to ensuring medium to long-term growth.

Not to mention, transformation is never ending to build a strong financial base, which enables us to make proactive investment for the future. We will make efforts company-wide review our business in response to changes in the market environment to achieve reduction targets for the COGS and SG&A ratios, aiming at achieving the operating profit margin of 15%.

I will touch on 2023. Japanese economy and Japanese industries, Japanese businesses, I think will be back on a full-scale recovery trend in 2023. Also, in China, we are assuming recovery and steady growth of the cosmetic market, if not the high growth recorded in the past. By overcoming key challenges both in Japan and China, we aim for V-shaped recovery in 2023.

Thank you very much for listening. That’s it on our initiatives going forward. Now, we will open the floor for Q&A. [Operator Instructions] So, please start asking questions.

Question-and-Answer Session


First JPMorgan, Kuwahara-san. [Operator Instructions]

Akiko Kuwahara

Hello, can you hear me?

Takayuki Yokota

Yes, we hear you great. Thank you.

Akiko Kuwahara

This is Kuwahara from JPMorgan. Thank you very much for the great explanation. As Uotani-san mentioned at the end, the ¥10 billion for the strategic investment. And I think how you used that I think the market evaluation may split. But of course looking forward, I do understand that you want to normalize that and I think it may continue that. But the profitability you wanted to heighten by 2023 and I think that was a priority to elevate the profitability.

So, this ¥10 billion investment, what is the impact or what is the return? What should we look at? What should we check? So, looking at 2023 the V-shaped recovery how much can you support that with the €10 billion or the COGS reduction or the SG&A reduction? How would this ¥10 billion contribute to it? Maybe you can’t directly connect these items altogether, but if you can dig a little bit further into that that would be very helpful. Thank you.

Masahiko Uotani

So, as a result of this investment — as a result, it will directly go up like this it roughly won’t go up like that it’s hard to say. It’s about brand equity. So, it’s not things that you will see as a result in the next day. Of course if we do something like a price promotion, of course, we can go up — increase the net sales. But we want to leave that and we want to transform from just being price competitive. So, we need a more mid to longer term vision when I talk about these investments.

When I talk about brand equity, there’s the functional equity and then there’s more the emotional equity. But there’s also the functional equity or value which is very much highlighted and focused on.

The current consumers’ values and the changes in behaviors, we want to capture that, understand that and make actions to it. And I think we will see the results of that in the second half already. And looking forward to 2023 like you have mentioned, we want that to be kind of the basis to kick off the momentum for 2023.

And through PDCA, of course, if there’s value in the next year’s business plan in the marketing fees, we could put more weight on that and that could give us some clues as to if we can put more money into these marketing activities.

So, to your question, how do we look at the results? Of course, by — this will allow us to grow the top line and what we call the consumer purchase, the purchase by the consumers. That has to grow at the stores and EC but — so that has to be solid as a pre-assumption.

And the other, is the other main areas the skin care brand Prestige and premium. As Tadakawa-san has mentioned earlier, ELIXIR will have a big renewal with a lot of science-backed technology. And we’re already preparing a big launch, and we feel a lot of potential around this. So this unfortunately in the past three years, when we look at the marketing expenses, we’ve been cutting the marketing expenses including advertising for ELIXIR.

We said, well the sales isn’t growing, we need to cut marketing cost. But now with the September onwards, we wanted to make a dramatic shift to really enhance this brand ELIXIR. So where there is a good marketing initiative and a reason to make investments, that’s where we want to put the money in, because that’s where the synergy of the investment will happen as a result. And that will be selected and concentrated to the high profitable brands and that will lead to a reduction of COGS.

By what percentage is individual. So for each of the items, by line — by line, it’s hard for me to explain. Like you said, there’s things that we cannot fully just directly calculate. But when we look at the priority of the profitability, and the brand, and initiatives that we — the priority of the initiatives that we have, that’s how we are looking at for ¥5 billion for this year. And we feel that one-off investment isn’t going to work. And that’s why next year in the midterm plan, we want to continue this investment and enhance.

The brand equity the brand has to grow. Otherwise we can’t have loyal users. And that, in the end we’ll not grow our net sales. In the past, we’ve had the same story and I think I’ve talked about it before, but it has to be a very virtuous cycle. Right now, I would say that it’s kind of on a shrinking cycle, if we don’t take action now. And so we want to convert that to a virtuous positive cycle and that is the biggest intent of this investment. Thank you very much.

Akiko Kuwahara

Sorry, if I could just add a — PMD would that PMD be an issue. Especially with Shiseido and department store brands, the beauty consultants are there to fully explain to the consumers I’m not worried. But for ELIXIR, because when you talk about innovation for ELIXIR and how do you have someone fully explain, at the drug stores for example that sells ELIXIR, about the efficacy and impact of the products. So how are you going to approach that?

Norio Tadakawa

Then maybe, I’ll talk about that. Right now for — of course for PMD we have — we will be talking about our product and maximize, what we can within the PMD Act and some of the regulations. We just have to be very easy to understand to the consumers. As Uotani-san has mentioned earlier, when we invest on a brand that investment in the end, how would that — how much would that lift our consumer purchase? We look at the ROI. Now, do we see the results in this year or will we see it in the full year? Of course, we will design the ROI appropriately.

But the brand share is, where the results will start to show. Brand equity, we do look at many of the qualitative aspects in index as well. So for ELIXIR, we want to enhance on the science part. And by bringing out the science of ELIXIR, we want the consumers to feel the efficacy and scientific efficacy of ELIXIR, we will continue to research that. Are they feeling it? Are they seeing the efficacy?

And what we’ve worked on as ELIXIR new products, we want to make sure that consumers are understanding it and feeling it. So we want to look at the ROI after that. So what do we focus on? Well the brand equity, including those elements that I have mentioned I think that’s the most important part see that our investment has worked and our solution has worked.

Our — in our company, for example, the ELIXIR brand, we do actually have many beauty consultants in drugstores. So yes it’s not like a prestige counseling like department store counters, but we do have beauty consultants at drug stores too to be able to explain to the consumers to try to match the optimal product to the consumer. So we have that system even in drugstores as well.

Akiko Kuwahara

Great. Thank you very much.


Next question is from Hirozumi-san of Daiwa Securities. Please turn on your video and microphone. When your face is shown on the screen, please start.

Katsuro Hirozumi

Can you see me? This is Hirozumi from Daiwa.

Norio Tadakawa

We can see you now.

Katsuro Hirozumi

One question all right? OP for the first half and the second quarter OP, I think we’re good. I didn’t look at the consensus, but I think that you generated a reasonably solid OP because of the cost management. Cost management on the full year basis JPY22.5 billion. This agile cost management will be continued. On the other hand, you are making additional investment. So you do cost management on one side and making investment on another. So I’m a bit confused. How do we think about this? Cost management, I think that you are making sure that that won’t impact sales. But where are you — what JPY5 billion and JPY5 billion each for people and brands. Please share your view on these additional investments.

Takayuki Yokota

Yokota-san will be providing answer.

Takayuki Yokota

In terms of the cost management, every quarter we update the forecast in our process. And in each region and headquarter costs are all reviewed to have the bigger picture, so that minimizing impact on sales we are working on to reduce costs. Those are the activities that we are implementing.

As for first half China, Japan there were risks in sales for instance lockdowns in China in the second quarter. So for each region, we ask for additional profit generation. So those are our efforts in cost management. And in some cases we cut marketing investment too much that won’t affect sales immediately.

But as Mr. Uotani explained earlier, if you focus on promotion — price-oriented promotions then we won’t be able to make investment enough through brand equity. So this time around, we had the management discussions and we agreed that now is the time to make investment in brand equity, identifying, which brands and activities necessary to make this additional marketing investment.

Katsuro Hirozumi

Question again, brand equity — the marketing investment is for the brand equity, right?

Norio Tadakawa

So let me provide an answer in charge of operations. Cost control and cost management is not only related to marketing investment. It also relates to COGS and logistic costs and returns and inventories and the [indiscernible] of recruiting from various angles we manage cost.

We continue the effort from this fiscal year which we will continue in Q3 and Q4. Marketing investment cost management is that marketing activities are not successful 100%. So the one which is not working we will stop immediately and we will make additional investment into the ones which are more successful. So we will continuously run PDCA cycle to improve profitability. So brand equity, yes, we are making additional investment too.

Katsuro Hirozumi

So through fast PDCA you hope to deliver results, right?

Norio Tadakawa

We can collect various data through digitalization. So if this media works well then we make additional investment into that media. We can make flexible adjustment and decisions. And earlier on the Kuhawara-san question actually I hope that we would like to see results very quickly.

Katsuro Hirozumi

Thank you very much for answering my question.


Thank you very much. The next question UBS, Kawamoto-san. Please wait, while switch the screen. Please wait until your face is shown on the screen.

Hisae Kawamoto

Hello. This is Kawamoto speaking.

Norio Tadakawa

Yes, we can hear you.

Hisae Kawamoto

Thank you. I have a question about China. Thank you very much for the great explanation earlier. But EC platform you want to diversify the EC platform. What’s the ratio of the TikTok sales? And in the mid-term what kind of sales split are you looking at including T-mall et cetera? So what kind of sales ratio are you looking at for each of the EC platforms?

And if — you have AUPRES, which is different from other Japanese manufacturers. AUPRES would be a local brand. And I would think that it’s possible for a local brand like AUPRES to be on the top ranking of China. But compared to prior or Perfect Diary, AUPRES is still lower in ranking as a lower local brand. So can you identify what kind of challenge do you have? And what kind of numbers are you looking at for China?

Norio Tadakawa

So we will have Fujiwara-san answer the question.

Kentaro Fujiwara

First of all, the diversification of EC platform. As for TikTok, there’s two targets, two objectives that we decided to expand into TikTok. One is to capture new traffic or new customer segment. So we wanted to get more traffic. And also to promote purchase through TikTok. As for TikTok purchase the ROI is not yet that high to be honest. So for this year I would probably say single-digit maybe like two percentage — 2%.

On the other hand though T-mall. The overall T-mall traffic generation is lowering or decreasing and that is why we needed to diversify; Ding Dong, WeChat and TikTok. So that’s why we needed to diversify our EC platforms. So in the future the T-mall sales is probably going to go down to about 80% of the overall EC platform sales.

Per year in Perfect Diary and AUPRES what is the difference of AUPRES as a local brand? How do we see — how do I see improvement in Opera? For AUPRES, we’ve had a structural reform in the last two years. The biggest difference is the digitization was very slow in Opera compared to the other competing brands like Perfect Diary. The sales 80% of Opera sales used to be off-line. So EC sales of Opera was only about 20% back in 2019.

For this year, the structural transformation has proceeded well. Therefore, the Opera sales, EC through EC is 40%. And so including the digitization — within offline too, the overall digital EC-related sales is 60%. I would say that the touch point is finally very competitive in the local market by digitization. But furthermore what we need to work on is Opera’s innovation the product innovation. And that is something that we are actually working on right now. And that from next year, I believe that this brand will be a lot more competitive to these other local brands.

And one more thing to add to this, the development in order to push and accelerate the development of Opera brand, within this year the marketing team in Beijing and the e-commerce team in Beijing we will be relocating close to the Shanghai office, so that the region organization can be closer as one team — sorry, R&D team too will be relocating to Shanghai from the Beijing area so that the China region can be stronger as one team to build the foundation for growth. And that is something that we will complete within this year.

Hisae Kawamoto

Thank you very much. One last thing. How do you forecast the margin for China for this fiscal year?

Takayuki Yokota

Maybe I’ll talk about the number. This is on control management basis, but versus target first half, we had the first half COVID impact. So in the second half, hopefully, we can recover. So full year, we’re looking at flat. So as a result the plan is about 5% lower in margin — in operating profit margin. In order to recover the second half, we have marketing — additional marketing investments as mentioned earlier. And that’s part of the reason why for the margin to be lower for the full year.

Hisae Kawamoto

Thank you very much.


Next question is Yamaguchi-san from Goldman Sachs. I will switch the screen and please turn on your microphone and video, when you see your face on the screen, please start.

Keiko Yamaguchi

[Foreign Language] Japan and China. The profit levels what level are you forecasting Japan and China? Mr. Uotani, I would like to confirm the margin levels. I think the COGS will be changed. COGS ratio will change, but next year I get an impression that you will continue strategic investment — if that’s the case OP margin shouldn’t improve that much. There are positive and negative factors. And over the last three years you have been generating ¥40 billion of profit. Next year how much recovery can we expect? And how?

Masahiko Uotani

So reflecting back, FY 2018 and FY 2019, 10% operating profit margin, we achieved and that was the average — weighted average margin. And there are businesses that were overachieving that level of margin or loss-making divisions or regions. Structural reform in the last two years, the underperforming businesses or brands, we have transferred from our portfolio. So then, the margin should improve up to 15% as we have transferred loss-making businesses in line with structural reforms and transformations.

We are putting focus on skin care products. And like, as we started, we said 21% for the COGS and that what is not impossible as we focus on skin care 21% is more for sure. And other expenses like SG&A, by implementing structural reform as a result on Shiseido’s P&L, we’re seeing improvement. And we have done simulation, but the actual results are different because of the performance in Japan and China.

If you have the profitability back in 2018 or 2019 then we should be achieving 15% margin. What I’m saying is that TSA impact will weigh next year. And then, businesses in Japan and China, do they go back to fiscal 2018 level? I don’t think so, over a short period of time but what level of OP we can expect will decide everything.

As explained earlier by two CEOs, we will start various initiatives from this fiscal year like brand development and structural reform and how much visibility we can have. From the benefits of these strategies, we’ll decide next year’s performance. So as we say V-shaped recovery, ¥40 billion is not enough. We used to generate ¥100 billion — ¥110 billion or so of OP. So we are targeting similar level to that.

I’d like to refrain from making specific comments, because we are still in the planning phase for next year. But as I said, V-shaped recovery, we would like to make an angle of the recovery as sharp as possible. Depending on the performance of Japan and China, the overall OP margin will be different.

Keiko Yamaguchi

I understand. Margin is very low in China but together with Travel Retail, 9% in the first half. So effects on efficacies, I think, it’s important for you to continue appealing effects on efficacy. But in Japan, this level of sales and loss-making. I wonder why. With the recovery of ELIXIR, do you think Japan business to be profitable? What’s your view?

Masahiko Uotani

Well, as we explained earlier, the market recovery – putting aside market recovery, capturing the consumer needs and increasing market share is really a key. This year in the first half we were below year-on-year with ELIXIR. ELIXIR is under such tough environment. And from September renewal and next year, we will drive innovations on a continuous manner.

ELIXIR used to be higher-margin brands should contribute a lot to Japan overall. Clé de Peau Beauté is performing well and PRIOR is performing well. Skincare brand – if sales go up even further then margin should improve significantly. In terms – what’s the profitability year-on-year with sales increase, it should improve but the profit structure. The profit structure as I mentioned the earnings announcement in May over the next three years – we’re making a transition not to rely on inbound.

In FY 2019 the margin was high teens percent. That level of margin without relying on inbound we’d like to generate just among local consumers. And with that we are changing cost structure. And marketing investment should be 20 – mid-20% level or so to sales. And personnel expenses low 20%, SG&A mid-teens percent.

So high teens percent of operating profit margin. That’s what we are aiming at by – through our cost structure reform and we are developing a growth strategy based on that view. So personnel expenses I think is it a challenge? Not only that, sales volume of each brand now are lower compared to back since. So the gross in sales and also personnel expenses how we can make the personnel expenses leaner those are the things that we need to consider simultaneously. Thank you very much.

Takayuki Yokota

We are past our closing time but we would like to take one last question from Mitsubishi UFJ Morgan Stanley Sato-san. Please wait till we switch the screen.

Wakako Sato

Hi. This is Sato. I want to ask about Travel Retail more in the short term. Travel Retail in the first half too China and Hainan Island – there’s no tourists. I know that’s the situation but 18.3% growth. And looking at Hainan Island ratio, this purchase ratio is going back but the importation is actually going up. So Yes, Hainan Island there’s partial lockdowns. But I believe that there will be some importation – forced importation that will happen. So in the full year forecast I feel like you have a pretty good landing for the full year. But the Travel Retail to be performing well. I guess my question is I’m wondering why was first half so high for Travel Retail? And what would be the key reason for Travel Retail to be so high for second half as well?

Takayuki Yokota

Okay. I would like to explain. As I had explained earlier, the sell-in is — sell-in is higher in looking — looking at the recovery, in the recovery and that was high for the first half. And for the full year forecast, if you look at the full year forecast, you will see, but there’s adjustments made there. And we believe that there will be adjustments made through the sell-in in the first half. So the second half growth, we’re looking at about 10%. And so because we believe that there will be some adjustments in sell-in and sell-out and that’s what we are looking at. And for EMEA and Americas, the recovery is going forward. So our sales portion is a bit low, but we do have hopes for growth in there as well. And that is how we have forecasted for the full year.

Wakako Sato

Understood. So in reality, as for China, do you feel that that’s adequate and appropriate in terms of the China performance?

Takayuki Yokota

I would say that the plan is a bit conservative. But we are hearing that there will be more lockdowns in the beginning of August. So once these lockdowns are resolved or eased, the recovery in June and July was quite fast, when lockdowns were relaxed. So we think that once it’s relaxed, the recovery will be quite fast.

Wakako Sato

Okay. Thank you very much.

Takayuki Yokota

Thank you. With this, we would like to close the Q&A session. Now, to — with the last word, we would like to have one last word from Mr. Uotani.

Masahiko Uotani

Thank you, very much everyone for joining. In a nutshell, we want to make this year to hit the bottom. For the last three years, we faced tough times defending company and defending management. We have taken various actions. But in a sense from here onward, I think, it’s fair to say that we can expect to see a recovery in the society. And that environment, we will be more proactive in investment and we will be implementing various activities to prepare ourselves for the next year, as we have new product launches scheduled.

The most important asset — intangible asset for our business is brand equity, innovation and R&D. So we will continue to put effort in these areas. And for Shiseido to compete in the world, we need our people in Japan and also in the world and give them growth opportunities and incentives and reward them properly and we will strengthen our people capital. And with that level of a strong commitment, we will proceed our business next year onwards. We will hit the bottom this year and we want to make next year a good year. That’s it. Thank you very much everyone.

Takayuki Yokota

Thank you very much. With this, we would like to close this meeting today. Once again everybody thank you very much for your participation.

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