Milbon Co., Ltd. (4919) Earnings Call Transcript & Summary

Allow me to start today's presentation covering the financial results for the second quarter of fiscal year 2025. First are the consolidated financial results. The key highlights of the financial results for the first half of fiscal year 2025 are as shown here. Despite a decline in the first quarter, net sales across the whole of the first half returned to slightly positive growth, but profit declined. The overseas business remained generally strong, while domestic sales fell short of the plan. On a per region basis, in the domestic salon market, although beauty-related consumer spending has recently weakened, sales of our hair care products have remained resilient. On the other hand, hair coloring products showed signs of recovery in the second quarter compared to the first. However, results still fell short of the plan. Performance remained generally strong across overseas countries on a local currency basis, although results in South Korea were negatively impacted by a stronger yen. Conversely, the U.S. business achieved significant growth. Operating income declined due to inventory losses, foreign exchange effects and higher SG&A expenses. It also fell short of the plan, mainly because of the domestic sales underperformance and reduced gross profit caused by inventory losses. In light of these results, we have revised our full year earnings forecast downward. We will be going over the details of this revision later on. Regarding shareholder returns, in line with our progressive dividend policy, we will be upholding our commitment to avoiding dividend cuts. Consequently, we'll be distributing an interim dividend of JPY 40 per share as originally planned. Additionally, to enhance capital efficiency and strengthen shareholder returns, we have resolved to repurchase up to JPY 2 billion of our own shares. The consolidated statement of earnings is as shown here. In addition to the factors I mentioned just now, we were forced to record a valuation loss of approximately JPY 760 million on investment securities, which contributed to a significant decline in net profit. This waterfall chart shows the factors behind year-on-year changes in consolidated operating income. Net sales returned to slightly positive growth in the first half, but operating profit declined due to lower gross profit resulting from inventory losses and foreign exchange effects as well as higher SG&A expenses. Profitability improvements from price increases on domestic hair care products are expected to begin in the second half. We also incurred expenses related to Expo 2025. This waterfall chart shows the factors behind the difference versus the target. The sales underperformance versus the plan was the single most impactful factor, and another negative factor was a decrease in gross profit margin. Although we implemented additional measures to reduce SG&A expenses, they were not sufficient to fully offset this impact, leading to the first half results shown here. I would now like to discuss the financial results by region and the revision of the full year earnings forecast. This table shows the net sales and operating income results by region. Domestic sales increased, but operating income declined due to lower gross profit and higher SG&A expenses. Overseas, particularly in South Korea, results were negatively impacted by yen appreciation, although local currency sales were more or less in line with the plan. Specifically, actual net sales, ignoring foreign exchange fluctuations, grew by 5.5% in South Korea versus a year-on-year decrease of 3.2% on a yen-denominated basis. Similarly, net sales in China also grew by 3.6% on an RMB-denominated basis, but decreased by 1.5% when taking into account ForEx effects. Next are the financial results by region, starting with Japan. In summary, while sales returned to slightly positive growth, we faced a challenging profit environment in this region. Looking at each product category, hair care products posted a rather strong performance with the category of hair coloring products posting negative year-on-year sales growth. Specifically, sales of hair coloring products decreased by 1.8% in the second quarter and 4.7% for the cumulative period corresponding to the first half of the fiscal year. In other words, this sales decrease was more pronounced in the first quarter, meaning we are on a gradual recovery track. While we have been able to lower SG&A expenses, we weren't able to avert a year-on-year decrease in operating income in the first and second quarters. Next are the financial results in South Korea. This market faced temporary negative factors such as political instability in the first quarter, but these issues have, for the most part, been resolved. While results were affected by yen appreciation and won depreciation, performance in local currency terms has progressed in line with the plan. Looking at the product categories, our operations in South Korea posted very strong results across the board in the second quarter. Specifically, sales increased by 14.2% in the category of hair care and 6.2% in hair coloring. Hair coloring had actually seen a sales decrease in the first quarter, but reversed this trend in the second quarter and now continues on an upward trend. Our South Korean subsidiary has posted a strong performance out of Milbon's various overseas subsidiaries with an operating margin of over 20%. Next are our operations in China. Despite the sluggish market recovery, our salon support activities, an area of strength, were well received, resulting in net sales and operating income exceeding the plan. Our operations in China delivered strong results across the board in the second quarter, with the categories of hair care and hair coloring growing sales at a rapid clip and making a strong reliable contribution to overall Milbon results. This business has been able to generate a positive operating income, and we have plans to invest in marketing expenses in the third and fourth quarters to stimulate demand. So we expect to realize results more or less in line with the forecast. Next are the financial results in the United States. Here, amid a challenging salon market, sales grew strongly, driven by the high reputation of our products and collaboration with distributors. Hair care and hair coloring products delivered tremendous growth in the second quarter and made a strong reliable contribution to overall Milbon results. That said, we did incur upfront investment costs associated with marketing expenses and the hiring of personnel, and we're starting to feel the impact of the new tariffs. Ultimately, these factors converged to create a year-on-year decrease in operating profit. We believe the significant sales growth is a very positive development for this business. I would now like to discuss the revision of the full year earnings forecast. Given that it is becoming increasingly unlikely we will be able to meet our sales targets in Japan, and based on our first half results and the current market environment, we have revised the full year earnings forecast downward, incorporating all currently foreseeable risks. We have outlined a list of additional foreseeable risks here in the table, things like inventory losses through the first half, ForEx fluctuations as well as other factors that are difficult to measure and assess the impact of with any meaningful degree of precision and predictability. This revised forecast, therefore, assumes a baseline of uncertainty and factors of this kind. Going over the main highlights, we are now guiding for a gross profit margin of 63%, JPY 5.3 billion in operating income and an operating income margin of 10.1%. Circling back to what I said earlier, we recorded a valuation loss on investment securities, which means a significant reduction in expected profit attributable to owners of parent. This waterfall chart shows the breakdown of the revised domestic sales forecast. We were initially targeting JPY 40.85 billion in sales, but have since then revised this target down to JPY 38.9 billion. Sales of hair care products decreased by around JPY 400 million on a year-on-year basis in the first half, and we expect a smaller decline of JPY 243 million in the second half. On the other hand, sales of cosmetics decreased by around JPY 150 million in the first half, and we expect an even larger decrease in the second half. It should, however, be noted that this expected decrease is simply the result of a management decision to focus our activities in the product domains of hair care and hair coloring. Sales of hair coloring products decreased in the first half, but we expect a slightly smaller decrease in the second half. This next waterfall chart shows the breakdown of the factors behind the adjustment to consolidated operating income. A very significant factor here is a decrease in gross profit due to lower sales. And another factor is a decrease in gross profit margin. Going forward, we will continue efforts to reduce SG&A expenses. For the first time in the company's history, Milbon will be executing a share repurchase operation within the scope of its shareholder returns policy. As I stated earlier, in line with our progressive dividend policy and commitment to never lowering the dividend payout, the interim dividend was set at JPY 40 per share as planned, and the year-end forecast of JPY 48 per share remains unchanged. Additionally, a share repurchase of up to JPY 2 billion was resolved to improve capital efficiency and enhance shareholder returns. Previously, our initiatives to return value to shareholders consisted exclusively of the distribution of dividends. But this year, we have decided to couple the dividend with a share repurchase plan, bringing the total returns amount to 161%. As we wrote here, Milbon's shareholder return policy isn't limited to the distribution of dividends, as we are committed to further enhancing returns to shareholders through things like flexible share repurchases. We have also issued revisions to Milbon's capital allocation policy. As you'll remember, we shared with stakeholders Milbon's capital allocation policy during the 2024 full fiscal year results presentation. You'll find several significant changes outlined in the magenta box in the bottom right. Basically, we have moved up by 1 year the share repurchase plan that was originally planned for fiscal year 2027, as we will consider the flexible execution of a share repurchase operation next fiscal year as well. In other words, we are bringing share repurchases into the scope of the ongoing medium term management plan. The rationale for this change is as follows. While the expansion of Yumegaoka factory is still under consideration, our approach to this type of investment has shifted as we now favor financing these types of projects through the intelligent use of debt rather than primarily with Milbon's own funds. This frees up capital, which we plan to proactively return to shareholders in the form of dividends and share repurchases. This concludes my presentation. I would now like to give the floor to President Sakashita for a discussion of the Milbon Group's progress in fiscal year 2025. Thank you for your time today.

Good afternoon, everyone. My name is Hidenori Sakashita, President and CEO of Milbon Company Limited. Thank you for taking the time off your busy schedules to view today's financial results presentation. Allow me to use this opportunity to give you a status update on the progress made by the Milbon Group in fiscal year 2025. First is our strategic direction and current challenges. To become the world's #1 professional hair care manufacturer, we're building stable growth in Japan, where Milbon already holds the largest share in this market. And we already hold this distinction in several other countries in Asia as well. Milbon has operations in East and Southeast Asia, and we will continue working to secure the top spot in each country we have a presence in. Our strategy here hinges upon the South Korean market, which tends to be a trendsetter for the whole of Asia. While we're still only the second largest player by market share in South Korea, we will be executing a strategy we hope will eventually catapult us to the full position in this market. Securing the #1 spot in South Korea and Japan has positive implications for our standing in the Chinese and Taiwanese markets since young stylists in these regions are more likely to share our products and styles through social media. They post in Chinese, meaning this information then reaches young stylists in places like Malaysia, Singapore and Indonesia. In other words, the winning strategy here was to focus our efforts on the South Korean market, which acts as a vector for the spread of trends in the beauty space. Another important market is the U.S. and Europe. One interesting difference between the U.S. and Europe and Asia is the importance people attach to salons as vital infrastructure, allowing them to express themselves through beauty. And this extends even to people in more suburban areas a little bit removed from large urban centers. Because of this, this is an attractive market that offers significant scale and also opportunities for growth for brands that succeed in acquiring a foothold in these regions. That said, this is a pretty competitive market that caters to cultural backgrounds and expectations different from those of Japanese consumers and consumers in other Asian countries. So this is a rather ambitious endeavor for us. In fact, we are already starting to see signs of robust growth resulting from successful efforts to leverage Milbon's strengths and competitive advantages. We continue capturing mind share in these markets. And going forward, we will be ramping up efforts to become profitable in the U.S. and Europe. As Mr. Murai went over earlier, our operations overseas, including in Asia, have delivered strong results on a local currency basis. While there is some level of variance on a per region basis, with some markets exceeding expectations and others falling short of the forecast, we are committed to achieving the overall targets we have set for ourselves in the overseas business for the full fiscal year. Looking at our operations in Japan, headwinds in the hair coloring category, a gap in new product releases in cosmetics and a number of other one-off setbacks ultimately translated into a slight sales decrease in the first quarter. This put us significantly behind our original plan for the first quarter, but the recovery in the second quarter ultimately allowed us to record year-on-year growth for the first half as a whole. Sales of hair care products were solid, driven by good in-salon purchase numbers. And while hair coloring sales were still down year-over-year, the rate of decline has slowed. That said, we still face challenges in overall product positioning across the board and thus, the need to enact structural changes remains. The cosmetics category comprises various different subcategories and a wide range of products. We want to streamline this lineup and focus on products with a high probability of commercial viability, determined through feedback and insights from our salon partners. I will now be discussing the market environment in Japan and then go over each category and outline our policies and strategies going forward. Let us start with the market environment in Japan. The line graph shows the historical trend of the beauty spending coefficient on a quarterly basis. This coefficient is calculated on the basis of household surveys carried out by the Ministry of Internal Affairs and Communications. In simple terms, this coefficient represents the percentage of household spending that goes to hair dressing services. You can see a gradual upward slope during the COVID years lasting through to the end of 2023. You wouldn't be able to deduce this from the graph, but as I'm sure you'll remember, it was very common for people to wear masks during the pandemic. So this dynamic made consumers prioritize spending on hair care. This continued through to the end of 2023, but then the percentage of household spending on hair dressing services started to plateau in 2024, eventually slowing down in the first quarter of 2025 as consumers became more defensive in their spending habits in the wake of soaring food prices. While spending has recovered somewhat from this first quarter baseline, we believe this trend remains in place. Let's see how Milbon's hair care products have fared in this market environment. Despite a challenging consumption environment, hair care sales increased by 6.7% year-on-year in the first half in Japan. On the left, we have our flagship brand of Aujua. The category of in-salon treatment care has struggled in the face of a decrease in salon visit frequency by more cost-conscious consumers. Additionally, fewer customers opt for hair bleaching procedures these days. So Aujua's specialty product line for bleached hair too has faced headwinds. Conversely, things have been going well in our e-commerce business, which is independent of the frequency of salon visits. Specifically, our milbon:iD e-commerce service has facilitated steady sales of take-home products. Also within the Aujua brand, we rolled out the new Altiell line in February of this year, and this product line has been very well received. This is a high-end product line, so educational initiatives to explain Altiell's value proposition take time, translating into a delay in adoption by salons. This delay has created a bit of a gap in terms of the adoption of new product releases compared to the same period last fiscal year. Going forward, we want to underscore the opportunity for profitability improvements at salons by guiding customers to more premium offerings at higher price points, thus increasing salon adoption of these products. On the right, we have our professional brand of Elujuda. Here, the new Elujuda Extra Repair launched in April drove overall brand growth and delivered results significantly above plan. Additionally, in May, we raised prices across the brand, which is expected to help improve the gross profit margin in the second half. Next is an overview of the hair coloring market in Japan. Hair coloring product usage is declining, likely due to reduced beauty spending and fewer customers opting for hair bleaching procedures. We are seeing a growing polarization in salon needs for hair coloring, meaning Milbon has been facing headwinds in this market overall since our offerings fall somewhere in the middle of the 2 ends of the pricing spectrum. Allow me to direct your attention to the diagram in the center. The pink circle on the left corresponds to the low-cost end of the market for hair coloring products, while the pink circle on the right represents high-value products with strong uniqueness and consumer brand recognition. The business model for this product class is to generate profits by offering higher value at a premium to regular salon menu prices. Milbon's core hair colorant offerings fall in between these 2 ends of the spectrum. In other words, we haven't been able to fully adequately address market needs. That said, our Villa Lodola Color, brands of organic hair care products, and a number of other products fit the high-value product category on the right. The Villa Lodola brand in particular has shown steady growth. For example, Villa Lodola Color has shown year-on-year growth exceeding 10%, but this strong performance isn't enough to drive the category of hair coloring products as a whole. Our approach to hair coloring in Japan is based on a marketing strategy meeting the 3 requirements listed here. Starting with the apex of the pyramid, we have the development and commercialization of new distinctive products. The idea is to help salons raise color menu prices by offering menus boasting a high degree of differentiation through new functions neither found in our existing hair coloring lineup nor in the products offered by our competitors. The second prong of our approach, the left hand vertex, is enhancing consumer recognition for hair coloring brands. Here, we aim to raise consumer awareness of hair colorants, similar to hair care products, so that we can build a brand that is actively chosen by consumers over our competitors' offerings, even those priced lower. Lastly, the third prong is salon education. Hair colorants are a product category for professional use. So the incorrect handling of these products ends up translating into subpar results. By leveraging our extensive team of educators to provide hands-on training support directly at salons in the domestic market, we provide comprehensive assistance to stylists in providing an unforgettable customer experience. We will be executing this 3-pronged approach to help salons offer higher value-added hair coloring services, thus allowing them to raise in-salon color menu prices and consequently capture higher sales and profits. Circling back to what I said earlier, executing this strategy requires the rollout of new product releases, but we believe we can reap some of the benefits by simply nurturing Milbon's existing hair colorant lineup. We will be executing this strategy over the course of the second half in order to stop declining sales of hair coloring products. Here are some of the ways we intend to stop this downward trend. We have launched additional items under our distinctive and differentiated brands. First, on the left, we have Ordeve Crystal High Bright, released in July, and which is a product that goes beyond the regular distinction between hair coloring and hair coloring for gray hair coverage. We will also be launching a new product line in September under our organic hair care brand of Villa Lodola Color, which continues delivering double-digit growth. By rolling out new higher value-added offerings under these 2 distinctive brands, we hope to help raise the unit price of color menu services at salons. Going forward, we will continue to develop and commercialize hair coloring products following a battle-tested and successful formula. Another important prong of our strategy is enhancing consumer brand recognition. We are conducting a test pilot collaboration with salon reservation platforms. Through this system, customers make a salon reservation paired with the application of Addicthy color, which is our flagship hair colorant offering. Milbon shares pictures on social media of styles consisting of featured color shades applied with Addicthy with the objective of energizing consumers to become aware of this brand to select salon menus making use of Addicthy hair coloring products. We started this initiative in June and started seeing results right away for some products within the Addicthy line with year-on-year growth for the month of July. Naturally, over the course of promoting and advancing this initiative, we will make sure to offer extensive and comprehensive hands-on training to stylists, thus ensuring our 3-pronged hair coloring brand strategy is successful. Next is the category of cosmetic products in Japan. Here, we will be streamlining our lineup and focusing on high potential products. This category faces 2 key issues, namely a broad cosmetics lineup that has led to dispersed sales activities and weak repeat purchases in the makeup category. That said, there are also strengths and opportunities in this category. For example, a positive factor is how we expect repeat sales of our Imprea lotion offering, which is our flagship product in this category. Additionally, salons are perfectly positioned to offer plans coordinating hair and eyebrow color. This type of plan makes sense and is appealing to customers, so salons have responded positively to the concept. In terms of future initiatives within the Imprea brand, we will be concentrating on the lotion category. We released a new lotion offering earlier this year and growth has exceeded our expectations. Then we have our IM makeup brand. Here, our focus will now be on items like eyebrow products that naturally complement hair color. By doing so, we will work to lay out a path forward for cosmetics endorsed by stylists. In summary, we aim to improve sales efficiency by streamlining our lineup. We will also leverage firsthand information and feedback directly from salons into our sales plans, bridging the gap between this and the production plan, thus avoiding the danger of excess inventories and the disposal of stagnant inventories. Next is the overseas business, starting with our operations in South Korea and China. Recovery has been underway since the start of the second quarter in these 2 regions, progressing as planned under favorable conditions in the first half of the ongoing fiscal year. The business in South Korea is making strong progress toward the full fiscal year targets for sales and operating income. Despite the negative impact of yen appreciation, both categories of hair care and hair coloring products delivered growth. The market continues on a consolidation trend around Seoul, and Milbon products are well liked by salons operated in the central areas of the city by a younger demographic of stylists. We expect the categories of hair care and hair coloring products to continue growing. In China, too, sales and profit have exceeded the plan. The overall market recovery in the country remains modest, but strong salon recognition of Milbon's activities continues to support a steady performance on track toward the full fiscal year targets. Specifically, our activities consist of providing advice and unlocking value for stylists involving, for example, the promotion of hair styles through social media and other online platforms, enhancing the value proposition offered to customers visiting salons and helping set price points matching the high level of service. Even against the backdrop of a challenging business environment, our efforts have borne fruit, allowing us to grow sales year-on-year in the Chinese market and really highlighting Milbon's competitive advantage. Next are our operations in the U.S. and Europe. Sales are growing strongly in both markets, especially in hair care, driven by product quality and sales execution. Earlier, I referred to our operations in these markets as a rather ambitious endeavor for us, not only due to the sheer size of these markets, but also due to differences in terms of the cultural backgrounds and even hair types. I believe this is an area of great interest to shareholders who have seen Milbon do well in the Asian market and would now like to know if we can replicate this success and grow in the U.S. and Europe. As in the first quarter, we continued delivering strong growth in the second quarter. We have developed products specifically tailored to local beauty habits and have been able to gain the trust of both stylists and customers in these countries. Milbon products in these 2 regions are sold exclusively through salons, and strict adherence to this strategy has allowed us to further strengthen our cooperative relationship with distributors in the U.S. and Europe. In local currency terms, from January to June, sales grew 30% year-on-year in the U.S. and 88% in the EU. While the absolute sales amount is still small in the EU, the U.S. is a large market rich in opportunities, but also features challenges like fierce competition and issues stemming from cultural differences. Despite the highly competitive nature of this market, hair stylists and consumers in the U.S. increasingly choose our products as brand awareness of Milbon's products continues to rise. A lot of trends in the U.S. emanate from the West Coast, especially from L.A. And last year, Milbon ranked first in terms of in-store share for the distributor in the state of California, which is headquartered in L.A. Growing our presence and brand awareness in L.A. is synonymous with growing our impact in the U.S. market. Also, and while we're not quite there yet, growing our presence and gravitas in L.A. also has a positive compounding effect in terms of our ability to influence trends in the South Korean and Japanese markets. In other words, we want our initiatives in the various markets we operate in to coalesce into a growth engine driving our global growth strategy. This concludes my overview of Milbon's overseas operations. Next is the outlook for the medium-term management plan. The fiscal year 2026 net sales and operating income targets remain unchanged despite reflecting a gap from the fiscal year 2025 revised target, mainly in terms of net sales from our operations in Japan and due to inventory losses. It's still too early to talk about the net sales and operating income figures for fiscal year 2026. So we'll discuss the numbers once we get there. But looking ahead, we will focus on improving profitability and capital efficiency to achieve our stated ROE target of 11.3%. The first strategy for improving profitability is the launch of premium products. Second is price increases for existing products. Third is a review of SG&A costs. And fourth, efforts to reduce inventory losses through a review of production plans. This year, we incurred one-off costs associated with Expo 2025. So we expect a significant improvement next year on the cost front. To this, we will be adding the additional profits generated through the stable growth of our operations in Japan. Additionally, our strategies for improving capital efficiency are the sustained distribution of stable dividends and the execution of the share repurchase program announced today and with a ceiling of JPY 2 billion to be executed in a flexible manner and taking into account the company's stock price levels. Through the execution of these various strategies, we expect to be able to meet our ROE target of 11.3%. Last is the closing summary divided into 3 key points. The first key point is achieving stable growth in Japan. Here, our core hair care category continues delivering stable growth, and price increases drive profitability. We are driving renewed growth in hair coloring solutions through product differentiation, consumer awareness and education. In cosmetics, we will streamline our lineup to improve sales efficiency. The second key point is our overseas growth strategy. Here, we will prioritize securing the #1 position in South Korea, while also aiming for the #1 spot across all of our markets in Asia as well. In the U.S., we will accelerate our efforts in this market to grow sales while gradually ramping up efforts toward profitability in the U.S. and Europe. There is plenty of room for growth in the EU. We will prioritize our efforts to actively broaden our distribution channels to establish a strong foundation in the region while also cultivating new relationships and sales channels. The third key point is improving capital efficiency and strengthening shareholder returns. We have deployed a share repurchase program to be executed in a flexible manner and taking into account the company's stock price levels. And through this, we seek to share the fruits of Milbon's success with stakeholders. We carried out a number of initiatives against the backdrop of a challenging market environment. Some didn't work out the way we wanted them to, while others resulted in losses. But these setbacks did indeed yield valuable learnings and allowed us to clearly identify the issues that we need to tackle. We will face these key issues head on and do our utmost to make sure we meet and exceed stakeholder expectations. Dialogue with capital market participants allowed us to speed up our efforts in a strategy to improve capital efficiency, namely the share repurchase program we announced today. This initiative shows the commitment of Milbon's management. Headwinds abound, especially in the domestic market, where salon operators and stylists face a challenging business environment, Japan's population decline, fewer people visiting salons, inflationary pressures across the board, et cetera. These are real challenges, but there are early signs of growth. Specifically, the beauty business has the ability to reflect into prices some of the extra value add we create. And even with lower population numbers, we can improve the value proposition of the products we offer. We at Milbon, and this includes not just the management suite but also every single company employee, are committed to creating and offering value at a price point commensurate with the value add we provide, not just helping salons address the management challenges they face, but in doing so, also unlocking further growth for Milbon as well. In closing, stakeholders can expect great things from Milbon as we execute strategies toward the results recovery in Japan and overseas growth. Thank you for taking the time after your busy schedules to view today's presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]