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

Good afternoon, everyone. My name is Shinichiro Hyogo, Executive Officer in charge of Corporate Communication and Finance at Milbon. Thank you for joining today's briefing. Whether you are tuning in online or braved the intense summer heat to be here in person, we greatly appreciate it. We know 4:00 p.m. is getting a bit late in the day, especially right before the holiday, so thank you for making the time and for your continued interest in Milbon. Later in the presentation, President Sakashita will provide a detailed breakdown of our overseas operations and other business areas. Therefore, I will keep my segment overview brief and focus primarily on our financial figures. Let's now move on to the key highlights of our financial results for the first half. We achieved a significant increase in profit with net sales growing by 8.3% and operating income by 72.7%. Versus the plan, net sales increased by 2.9%, while operating income was up 39.5%, exceeding our targets. Looking at performance by region. The domestic hair salon market continues to struggle, but sales of our hair care products remained solid. We successfully met our first half domestic plan as solid sales of existing products offset the delayed launch of our new hair coloring product, PRETOWA. Overseas sales performed exceptionally well, showing strong growth of 24.7% on a yen basis and 16.7% on a local currency basis. The United States, in particular, showed strong year-on-year growth of 45.0% on a yen basis, driving our overall overseas performance. Operating income rose year-on-year and exceeded our plan, reflecting increased gross profit from higher sales and lower-than-expected SG&A expenses due to timing differences. As a result, the operating income margin improved significantly from 7.8% to 12.5%. Based on our strong performance in the first half, we are revising our full year earnings forecast upward after factoring in anticipated cost increases for raw materials and supplies due to the situation in the Middle East. For the full year, we project JPY 55,600 million in consolidated net sales, an upward revision of JPY 800 million and JPY 6,550 million in operating income, which is a JPY 250 million increase. Turning to shareholder returns. We declared an interim dividend of JPY 40 as initially planned, and we are maintaining our year-end dividend forecast. Furthermore, just today, the Board approved a treasury share repurchase of up to JPY 1,800 million in order to improve capital efficiency and enhance shareholder returns. Please turn to Page 4. This slide shows the consolidated statement of earnings for the first and second quarters. Looking at the year-on-year changes, net sales, operating income and ordinary income increased by JPY 2,070 million, JPY 1,408 million and JPY 1,646 million, respectively. Versus our plan, net sales outperformed by JPY 753 million, operating income by JPY 947 million, ordinary income by JPY 1,168 million and profit attributable to owners of parent by JPY 759 million. During this first half, ordinary income grew significantly due to the recording of foreign exchange gains under nonoperating income as well as a onetime profit from equity method investments. One specific item to note is an extraordinary loss of JPY 127 million, which represents an impairment loss associated with the studio closure. We had originally factored JPY 100 million into our full year consolidated forecast for this. This slide shows the factors behind the year-on-year changes in consolidated operating income. A key highlight here is the improved gross profit margin alongside the increase in gross profit driven by higher sales. During the same period last year, inventory write-downs and disposal losses on cosmetics weighed down heavily on our margins. This year, a decrease in those write-downs contributed to an improved gross profit margin, which boosted operating income by JPY 339 million. Additional positive factors included a decrease in marketing expenses. Conversely, the increase in personnel expenses was driven by base salary raises, while the increase in logistics expenses was linked to higher sales, primarily overseas. All in all, operating income reached JPY 3,347 million. This slide explains the factors behind the difference versus our targets. Our operating income exceeded the first half plan by JPY 947 million. This outperformance was driven by increased gross profit from higher sales, combined with lower-than-planned marketing and R&D expenses due to timing differences, largely tied to PRETOWA. Page 8 shows our financial results by region, detailing net sales and operating income for both domestic and overseas markets. If you look at the third column from the right, you will see our targets for the second quarter year-to-date with the actual year-to-date figures highlighted on the left. Comparing actuals against our plan, domestic net sales exceeded the target by JPY 121 million and domestic operating income outperformed by JPY 261 million. Overall, overseas net sales exceeded the plan by JPY 631 million and overseas operating income outperformed by JPY 685 million. Looking at the overseas results by region, net sales in the other region fell slightly short of our projections. However, in all other regions, we firmly exceeded our targets for both net sales and operating income. Turning to Japan. Market conditions remained largely unchanged. Against this backdrop, sales of our hair care products remained resilient, increasing by 4.4% year-on-year. In our hair coloring category, the delayed launch of our new product, PRETOWA, which was moved from June to September, resulted in a negative impact of roughly JPY 300 million by the end of June. As a result, hair coloring sales fell slightly short of our plan. However, hair care sales exceeded our targets, allowing us to successfully meet our overall domestic plan for the first half. Ultimately, hair coloring sales came in nearly flat, and we are very pleased to have held our ground despite the PRETOWA delay. Turning to South Korea. After a somewhat soft start to our sales activities in the first quarter, we mounted a strong recovery in the second quarter. By strengthening our sales activities, we successfully met the net sales plan and by strictly controlling SG&A expenses, we exceeded our operating income target. Moving on to China. The market environment remains sluggish. Despite this, our educational activities and proposals aimed at improving hair salon management are increasingly resonating with distributors and salons. Consequently, both hair coloring and hair care products grew with both net sales and operating income exceeding the planned forecasts. Let's now turn to our operations in the United States. In the first quarter, we saw a significant impact from a distributor switch by a competing brand, KEVIN.MURPHY. While this raised some concerns about our second quarter sales due to sell-in and sell-through dynamics, our second quarter results ultimately came in broadly in line with our plan. As a result, we maintained high year-on-year growth, and profitability continued to improve. Our local team reports that distributor sell-through continues to progress steadily, leaving us fully confident in our growth trajectory for the U.S. Let's now take a look at our operations in the EU. Alongside expanding sales of our new hair care products, we are making solid progress in acquiring new salon accounts. High growth has continued, driven primarily by our direct sales in Germany and supported by our color ambassador initiative. Our operating income here appears to be improving, but we still consider the overall scale to be quite small Additionally, as we will naturally continue making growth investments to expand sales, we do not expect to turn an operating profit in the immediate future. We are revising our full year earnings forecast upward, raising net sales by JPY 800 million, operating income by JPY 250 million and ordinary income by JPY 560 million. We updated this forecast to reflect our first quarter performance in the U.S., the delayed launch of PRETOWA and the impact of rising raw material and packaging costs. In the first quarter, we reaffirmed our commitment to our operating income target of JPY 6,300 million. However, based on current performance trends, we have made a modest upward revision. Moving forward, our stance remains unchanged from last year. Our entire organization is fully focused on delivering on these published targets. Looking at the factors behind this revision, we have incorporated a JPY 500 million negative impact from the situation in the Middle East as well as an increase in personnel expenses, which includes higher bonuses. Despite these headwinds, we have revised our operating income forecast upward by JPY 250 million from JPY 6,300 million to JPY 6,550 million. Next is a breakdown by region. Here, I will briefly explain how we formulated these full year figures. Looking at net sales, we essentially rolled our first half outperformance directly into the full year forecast. For operating income, however, we are factoring in the aforementioned Middle East impact as well as delayed promotional expenses for PRETOWA in Japan. As a result, looking solely at the second half, we have actually revised our figures downward. I would like to draw your attention to one specific point regarding the United States. Looking at the revised plan for the U.S.A. on the right, with our first half operating income at JPY 274 million and our revised full year target at JPY 360 million, it might appear at first glance as though we are lowering second half guidance. On paper, this does look like a downward revision, but it is actually the result of a prior year accounting adjustment. Specifically, a JPY 99 million overstatement in last year's second quarter SG&A was later reclassified as a nonoperating loss in the third quarter. This accounting shift artificially skews our year-on-year baseline, making it look like a profit decline. However, once you adjust for that JPY 99 million, we are actually expecting top and bottom line growth in the second half. Let's turn to the Middle East. This slide covers the impact of the Middle East situation on our financial results, serving as an update to the slide we presented in the first quarter. I know the geopolitical situation has been a point of concern, but I want to assure you that our procurement and product supply remain undisrupted. With a stable supply structure now secured, we are on track to launch our new hair coloring product, PRETOWA, on September 10. Next, let's look at inventory. As of the end of June 2026, our inventory levels have increased by roughly JPY 1,500 to JPY 1,600 million year-on-year. Please note that this is a deliberate inventory buildup, driven by our preparations for the PRETOWA launch and our proactive measures to mitigate supply chain risks in the Middle East. This brings me to my final slide, covering shareholder returns, dividends and the acquisition of treasury shares. At today's Board of Directors meeting, we declared an interim dividend of JPY 40 and maintained our year-end dividend forecast of JPY 48. Additionally, to improve capital efficiency and enhance shareholder returns, we resolved to repurchase up to JPY 1,800 million in treasury shares. Under our policy of not holding surplus cash, we determined that we could free up JPY 1,800 million for this purpose. Thank you for your time today. And as always, we appreciate your continued support of our corporate activities. This concludes my presentation.

Good afternoon, everyone. My name is Hidenori Sakashita, President and CEO of Milbon Co., Ltd. Today, I will be walking you through the Milbon Group's progress for fiscal 2026. First, let's take a look back at our first half business performance. In the domestic market, our hair care category is performing well. Sales of our premium Aujua and Global Milbon brands remained solid. Our distributors also aggressively drove sales of our new products, specifically Suwae for frizzy hair launched in February and the Nigelle styling spray launched in March. Together, this drove strong overall performance. Turning to hair coloring. Our Villa Lodola gray color products continued to perform well. Within fashion color, we did face the delayed launch of our new product, PRETOWA. However, the strong momentum of Villa Lodola Color successfully offset this impact, bringing overall hair color sales back to roughly flat. PRETOWA was originally scheduled to launch on June 10, and I had hoped to share its initial sales trends with you today. Instead, we have pushed the launch back to September 10. The key takeaway I want to emphasize for the domestic market is this. Despite delaying a highly anticipated product like PRETOWA, we successfully achieved our overall domestic sales plan for the period between January and June 2026. Turning to our overseas markets. Starting with South Korea, both sales and profits are tracking well. In China, despite a sluggish market environment, we are generating solid organic growth. In the U.S., the temporary sales surge driven by a competing brand's distributor switch has largely run its course, but distributor sell-through to salons continues to progress steadily, allowing us to significantly exceed our overall targets. Next is the EU, where we have launched high-quality hair coloring education through ambassador contracts with renowned colorists. These educational activities, which bring together a wide range of local stylists are now fully underway. These initiatives have contributed to continued strong growth in both hair care and hair coloring across the region. Circling back to what we touched on earlier. We maintained our interim dividend at JPY 40 as planned. We also announced the execution of share buybacks up to a maximum of JPY 1,800 million to improve capital efficiency. That concludes my brief review of the first half. Now I would like to review the strategic direction we announced last year, along with the challenges we currently face. As you can see, this slide outlines our framework across Japan, Asia and the U.S. and Europe. Let's begin with the domestic market and how we plan to achieve stable growth across our 3 main categories. In hair care, Aujua and Global Milbon remain our core pillars, and we aim to drive further growth by launching products tailored to specific needs. In hair coloring, the market is increasingly polarized between low-cost and high value-added products. We face challenges in product positioning here, and we will promote premiumization to address them. Finally, in cosmetics, rather than broad expansion, we will streamline our product lineup and pursue sales with a clear focus on profitability. With that context in mind, let's look at the domestic market environment. Looking at the historical trend of the beauty spending coefficient on the chart, the metric naturally fluctuates from quarter-to-quarter, yet we are currently seeing a slight downward trend from flat. Because rising prices are driving greater cost consciousness, adapting to shifting consumer behavior is an urgent priority, making it essential to enhance service menus, pricing structures and the product purchasing environment strictly from the customer's perspective. In this environment, our core strategy this year centers on the small mass market, which is all about matching specific consumer needs with the specialized strengths of individual stylists. To actively target this segment, we are rolling out a series of new product launches, including our highly anticipated PRETOWA hair color and premium new offerings from our Aujua line. We're also introducing take-home products to address specific concerns such as frizzy hair for younger demographics, along with a spray designed to recreate trendy glossy finishes. And we will round out the second half by launching Milbon's first-ever styling series for men. Turning to the first half. PRETOWA hasn't launched yet, so let me start with Aujua. We launched a new Aujua series called Miragery, and sales have been strong, driven mainly by take-home products such as shampoos and treatments. As a result, the Aujua brand achieved solid overall revenue growth. We also launched 2 new products targeting highly specific markets. In February, we launched Suwae, a hair care brand addressing concerns such as frizzy hair, along with needs like hair quality improvement. In March, we followed with Nigelle, a styling spray built around a specific trend. Young stylists describe the look as a filter-like gloss, the kind of finish you see in AI-generated hair style images. And this spray lets them reproduce it on real hair. Both products read the small mass market accurately, which created strong matching between stylists and customers, and both became major drivers of our net sales growth. Let me turn to the hair coloring market. As I touched on earlier, this market is increasingly polarized between low-priced and high value-added products, and it divides broadly into 2 segments: gray color and fashion color. In gray color, we have positioned Villa Lodola color on the high value-added side, and it continues to perform very well. Where we're falling short is fashion color. Our high value-added lineup there is weak, and that has been holding back the category as a whole. I had hoped to bring you good news on fashion color today. Specifically, we had planned to launch PRETOWA in June, but the situation in the Middle East led us to push that launch to September 10. Even so through concerted efforts across the company, we successfully narrowed the decline in the first half. While fashion color was still down, the strong momentum of Villa Lodola color offset that weakness, resulting in only a modest decline in overall hair color sales for the half. In September, we will finally introduce PRETOWA to address our weakness in the fashion color space. With this launch, Milbon will firmly establish 2 strong pillars in the premium segment of this polarized market: Villa Lodola color for gray color and PRETOWA for fashion. Looking at the specific targets for PRETOWA, we initially aimed for JPY 1,000 million based on a June launch. Pushing the release to September condenses our sales window from 7 months to 4, prompting us to revise this target to JPY 700 million. However, we actually expect sales to ramp up faster than originally planned, so this new target represents a stronger pace of sales. Given these entirely different time frames, I want to be completely clear that this does not represent a JPY 300 million downgrade to our underlying momentum. We are currently preselling PRETOWA in about 100 salons, and the initial response has been outstanding. Stylists report that the feel, texture and shine are clearly a level above conventional products, empowering these test locations to successfully raise their color menu prices by JPY 2,000 to JPY 3,000. Furthermore, the beige-based shades are proving to be a perfect match for current trends, and consumer feedback has been equally strong. Customers are so satisfied with their first PRETOWA experience that they are specifically requesting it for future visits, including clients who had previously given up on damaged care due to aging hair. Seeing their hair restored has given these customers a new positive outlook. We are witnessing a genuine innovation in salon color consultations, marking the beginning of a new era in hair color that we are very excited for you to see. Turning back to our strategic framework slide. Let's look at the overseas markets. In Asia, our goal remains clear: capture the #1 market share led by South Korea. For the U.S. and Europe, we are taking a targeted approach to build presence and drive profitability. High growth in the U.S. has already prompted an upward revision. Meanwhile, South Korea continues its highly profitable growth trajectory and our ongoing salon management support in China is successfully driving organic expansion. Now let's take a closer look at each of our key markets, starting with a deeper dive into the U.S. market. This chart tracks our sales and operating profit margins from 2014 to the present. Over this period, we executed a major structural shift. We replaced our direct-to-salon model with a distributor network to scale nationwide and also launched Global Milbon to elevate our international competitiveness. This new channel successfully expanded our footprint. Naturally, wholesale pricing initially squeezed our profit margins, but we have since overcome this hurdle. As the network stabilized around 2022, rising sales volume pulled our margins steadily back up. Most recently, we signed brand ambassador contracts as a strategic investment to expand awareness and strengthen our brand. Step by step, we are putting every necessary condition for growth into place. This summarizes our major trajectory from 2014 to the present. Naturally, the move to distributors drove steady top line growth, though the new wholesale pricing initially compressed our margins. However, as we scaled volume through this channel, profitability recovered. I wanted to share this 10-year retrospective to provide the full context behind our current momentum. To explain what is driving this strong sales growth, I want to highlight our competitive advantages. As a product-driven company, our growth is naturally anchored by our flagship hair care brand, Global Milbon. This brand holds 2 distinct competitive edges built directly into its product design. The first, shown on the left, is the highly unique structure of our in-salon menus. As many of you know, professional salon treatments typically rely on 3 or 4 specialized formulas to beautifully restore the hair. Milbon takes this a step further. This particular salon treatment includes a complementary 4-week take-home care kit. By providing 4 weekly single-use treatments, clients can maintain that immediate salon impact at home. This included regimen elevates customer satisfaction and creates a highly differentiated product structure. Looking further to the right side of the slide, you can see how this system builds trust. The stylist's technique combined with Milbon's salon care offerings delivers a beautiful finish. To maintain those results, clients naturally purchase our take-home shampoos and treatments, creating a powerful revenue driver for salons. As I mentioned earlier, this process begins with 3 or 4 specialized formulas. But ultimately, the entire sales and profit growth model is rooted in the professional technique that drives those results. To support that model, our sales teams pour everything into hands-on training. You do not get these results simply by applying the products carelessly since each one has its own method, and Milbon teaches that salon by salon in person. This is our core business model, and it is exactly what makes us hard to compete with. This is our first advantage. The second is the distributor network we have built across North America over the past 10 years. We still have an office and studio in Manhattan, where we continue to sell directly, but everywhere else runs through distributors. The country is vast, so we divided it into territories and built this network region by region. Including Canada, we now work with 9 distributors, which puts our products within reach of salons across North America. Our sales force has grown steadily, too, and more than 300 reps now sell our products. That is showing up in the results. Since 2025, we have ranked #1 in in-store share at our California distributor, Sweis. With TruBeauty Concepts, which covers the East Coast, we have also taken #1 in in-store share as of the first half. Similarly, SSG, interested with Texas and the Midwest has now passed 100 sales reps, making it our largest partner, and our in-store share there has risen to #2. In short, our presence is growing in every region. To sum up where we stand in North America, this business model is delivering. Our professional in-salon menus are built to help salons and hair stylists do their best work, and carrying that through to take-home product sales is what drives their revenue and profit growth. The U.S. is, of course, the largest market in the world, and our competitors are expanding through a range of channels, so competition will only get tougher. We intend to grow further without losing our footing on the strengths we have, the trust we have built with distributors and salons, the technology and product capabilities we developed in Japan, and the headcount growth and training of both distributor sales reps and our own field person workforce. I realize that all sounds very positive, but of course, we have challenges, too. We don't have a slide for this today, though growing our hair color business will be a major theme for the U.S. in the next medium-term management plan. We have work to do on the product lineup and on building a proper hair color education structure, and neither will happen quickly. Turning those challenges into strengths is how we aim to keep growing. Next is South Korea, where we hold the #2 position on an estimated share basis. This covers net sales and operating profit margin between 2019 and 2026. The operating profit margin line, the red line, makes the point. We have held consistently high margins throughout. Now allow me to direct your attention to the pie charts on the right. As you can see, in South Korea, hair color accounts for 71% of Milbon's sales. Conversely, the market as a whole looks quite different. Hair care, including styling, is about 40% with hair color and perms each around 30%. This tells us that our room to grow in South Korea is in hair care and perms. Hair color is where we are strongest, and we will keep driving it hard. At the same time, we will fill out the product portfolio to go after the #1 spot. Next is China. Consumers are still spending cautiously, especially at the higher end, but you could call it a shift toward healthier habits. People are not buying what they do not need, and they buy what they do need when they need it. What's more, this change is permanent, and you also hear far less about bulk buying these days. Times have changed. So our job now is to work with salons on management strategies and initiatives that suit the new environment and to grow together with them. Milbon currently ranks fourth in terms of market share in the country and the strategic initiatives we are rolling out in China are generating more interest every year as evidenced by these photos taken at past events. Our strategy centers on delivering high-value salon services. We execute this through hands-on training stylist by stylist. Worldwide, we host educational events designed to turn stylists into highly sought-after top-tier performers. In China, over 300 stylists have registered for these programs, our highest turnout of any country outside Japan. Driven by this momentum, our regional performance is steadily recovering and operating profit margins are trending upward. Our final priority region is the EU. Our strategy here relies on direct sales in Germany and an exclusive single distributor model for other countries. We actively partner with education-driven distributors. Business is already underway in Greece and Norway, and strong inbound interest from other countries will drive our steady expansion across the region. Germany remains our most critical focus, where driven by a highly experienced commission-based sales team, we are seeing strong results across both hair care and color. Lastly, as I mentioned at the beginning, we recently signed an ambassador contract with a young but fast-rising colorist. Through this partnership, premium hair color education is now fully underway. This concludes our regional breakdown, which brings us to today's summary. In the first half, despite the delayed launch of PRETOWA, our performance in Japan exceeded our targets. Driven by equally strong results across our key overseas markets, we have revised our full year forecast upward. We are currently executing on 2 simultaneous fronts: stable growth in Japan and expanding scale and profitability overseas. Lastly, our interim dividend and share buyback plans remain exactly as reported earlier. Here is the revised full year forecast. We have raised our net sales target by JPY 800 million, operating income by JPY 250 million and profit attributable to owners of parent by JPY 300 million. We project an ROE of 9.3%. Looking ahead, Milbon will launch a new medium-term management plan starting next fiscal year. We are still finalizing the exact details. Today, however, I want to outline our high-level direction. The business environment is rapidly evolving. And as we enter our next stage of growth, our primary task in Japan is to make our stable growth even more durable. Moving forward, productivity and profitability will be our defining metrics. Naturally, our own internal productivity is important, but elevating the productivity of salons and stylists is our true priority as their success means Milbon's success as well. Finally, we must tailor our marketing activities to the ongoing diversification of salon business models. As I noted earlier, our overseas strategy centers on 4 key regions: the U.S., the EU, South Korea and China. We intend to rapidly accelerate our growth across these markets. Beyond that, future growth investments will be carefully balanced with shareholder returns. We will allocate cash with a strict focus on capital efficiency, managing the overall business based on ROE and ROIC. To be clear, we are not yet satisfied with our current share price. Our focus in fiscal year 2026 is delivering reliable results that build investor confidence. Building on that momentum, we will launch our new medium-term management plan next year. Thank you to everyone joining us today, both here in the room and online.