Shiseido Company, Limited (4911) Earnings Call Transcript & Summary

[Audio Gap] I will explain the business results for the third quarter and the full year outlook of the fiscal year 2021. Please turn to Page 3. I will start by going over the key headlines for the first 9 months of the year. There are 6 key messages that I would like to deliver today. Due to the intermittent state of emergency improved from January, the Japan region experienced weak momentum. The business in China was affected by closure of some stores as a result of torrential rain as well as resurgence of COVID-19. Amidst such challenging business environment, the company was able to achieve solid growth at Shiseido Group, leveraging our strong global footprint, driven mainly by America, EMEA and Travel Retail. Operating profit was JPY 26.3 billion, up JPY 17.3 billion year-on-year. The company stepped up investments in line with market recovery, while solidifying the foundation for profit through ongoing cost management, and gradually bearing fruit from the structure reform. Global transformation is on track. In the third quarter, the company made announcement about the transfer of Prestige makeup brands in August with a view to closing the deal in early December. Progress has been made with digital transformation, which is one of the key strategies of WIN 2023 and with e-commerce growing more than 20%, driving growth globally. Shiseido Interactive Beauty, a joint venture established with Accenture in July and focused implementation are also on track. Free cash flow was JPY 132.1 billion as cash inflows from Personal Care business transfer and inventory reductions outweighed growth investments into factories and digital transformation. These were the key highlights. I will provide detailed explanations about the full year outlook later, reflecting the market environment of each region. From the previous forecast, net sales are revised down by 2%, while the operating profit is revised up by 19% due to strengthening the earnings foundation. As a result, net profit, excluding the impact of the structural reform is revised upward by JPY 11 billion. Next, please refer to Page 4 for the executive summary of the P&L. Like-for-like basis, net sales increased 13% year-on-year, up to JPY 745.4 billion, excluding the impact from the transfer of Personal Care business in the third quarter. Excluding Japan, which faces delay in market recovery, like-for-like sales were up 22%, driven by the growth of overseas businesses. E-commerce continued to grow mainly in Prestige growing more than 20% globally with the sales ratio at 30%. Also skin beauty brands, the company's strategic investment area, grew by double digit, driving the overall growth. The skin care sales ratio was 63% globally, an increase of 11% year-on-year. Operating profit was JPY 26.3 billion, up 195% year-on-year, which was mainly attributable to higher sales as well as ongoing cost management. Extraordinary profit and loss was positive JPY 32.7 billion. Transformation impact was JPY 35.3 billion. While recording JPY 86.2 billion proceeds as extraordinary profit from Personal Care business transfer, impairment loss of JPY 7.3 billion on goodwill was booked associated with the transfer of makeup brands. Please refer to supplemental data 10 for details. As a result, net profit attributable to owners of parent was JPY 36.8 billion. Next, please turn to Page 5. This page shows the trend of year-on-year net sales. While the third quarter sales in Japan, China and Asia Pacific slowed down from the second quarter, due to the impact from COVID-19 variance. The company achieved growth globally driven continuously by Hainan in Travel Retail in addition to strong recovery in EMEA and Americas. Next is the performance by brand. Globally, strong momentum continued in skin beauty brands such as Shiseido and Clé de Peau Beauté. EMEA and Americas captured recovery in demand in makeup and fragrance, realizing strong recovery of brands in those categories. On the other hand, ELIXIR recorded negative growth amid the tough market environment with more than 70% of sales generated in Japan, although double-digit growth was marked in China and travel retail. Next, Page 7 is about Japan region. Mr. Tadakawa will explain the results as well as the future initiatives.

Good afternoon, everyone. Long time, no see. I'm Tadakawa, Head of Japan region. I decided to make a presentation today as I thought that you are concerned with our business in Japan. It's already a year since I was appointed as Head of Japan region, and I have been engaged in day-to-day operations such as implementing various measures promptly, identifying challenges that we have faced in Japan, building specific solutions against such challenges, formulating the next year plan and the medium-term to long-term plan and actions as well as making well preparation so that we can ensure to make a jump start once the COVID-19 is brought under control. So I hope you will join me in looking forward to our future development. Now I will explain the third quarter business results of Japan region, our initiative in the fourth quarter as well as strategic issues over the medium term. As you can see in the slide title, the market environment in Japan in the third quarter was quite tough. However, understanding the market turn precisely, it's very important to make a right judgment regarding the investment timing. Therefore, I would like to briefly touch on the market size and its trend. As you can see from the page, on a quarterly basis, there are large fluctuations in the market size indicated in red line, making it difficult to understand the trend. Last year, the first state of emergency was imposed in April and May, pushing down the market substantially. After the lifting of the state of emergency, the market temporarily showed recovery backed by so-called revenge consumption. The market, as a result, has been heavily influenced by substantial fluctuations in demand. It is important to understand the market trend accurately by comparing against a normalized figure after adjusting those fluctuations. In that respect, we are comparing the market against a normalized figure of 2019 after the adjustment of impact from the consumption tax increase. And as you can see, there are no fluctuations in Q1 and Q2. However, in Q3, due to the extended state of emergency, the market shrank by 2% to 3% compared with the first and the second quarters, sampling the consumer sentiment. The state of emergency was lifted in October but the reason why the market doesn't recover as it did in June last year, but by revenge consumption is because of such consumer sentiment. However, the market is on a gradual recovery trend from the end of October. Therefore, in November and December, it is critical for cosmetic companies and business partners such as specialty stores, department stores and drugstores to work as one to promote measures aimed at achieving recovery in demand. Shiseido consumer purchases in the third quarter were down by mid-single-digit percent due to the timing difference of cosmetics stay implemented in June this year as opposed to July in the previous year. By brand, we normally strengthen promotion for HAKU and ANESSA during the season with strong ultraviolet raise. But as we continue here around initiatives for consumers to promote continuous usage so that they feel they fix and benefit throughout the year. The loyal user base has solidly expanded and the brand continued to maintain the peak user base. ANESSA has a challenge that it's regarded more as a seasonal product. However, by promoting day-to-day usage, it should be able to hold a dominant position as safe and secure product, making steady efforts as such on a continuous basis will result in building a stable user base as well as yet the stable earnings foundation. And we were able to see the results from such effort in the third quarter. Amid the prolonged COVID-19, there are many consumers who continue to use base makeup and primer. Although the market is shrinking due to the decrease in usage along with the reduced frequency in going out, this market will pick up for sure, once COVID-19 is brought under control as people will start using more of these products. Beautiful skin is very important for women. In this category, it is very important to meet consumer needs very quickly. As of now, it is far more important that colors don't transfer to masks. Maker responded precisely to such consumer needs and achieve speedy product development and, therefore, gained share significantly. Winning the annual #1 position in this market for the first time is becoming a real possibility. E-commerce continued to achieve double-digit growth. What we are focusing now at Shiseido is DX in collaboration with business partners. We will promote these initiatives in many different ways to maximize the effect while building knowledge at the same time. We established the Shiseido Interactive Beauty in July, and this slide shows the DX acceleration in Japan. Most importantly, we need to provide benefit to our consumers. So in terms of skin diagnosis, we launched an app called Hada Pasha as the base technology, then customized by brand such as HAKU, d program, ELIXIR, to meet the consumer expectations. As a result, we were able to create a personalized experience and solution in which the members of each brand can confirm with data their skin conditions and efficacy achieved from the products. Also we have been developing the makeup and eyebrow simulations prioritizing contents that are needed by the consumers for our daily lives with masks. To match the need of the consumers, we have been adapting quickly to answer these and meet the demands of consumers. And furthermore, we have had a full-fledged start of beauty consultants and omnichannel BCs that can specialize in online communication. Candidates were internally selected, had 3 months of specialized training and have started their services in various platforms from August. On top of the conventional one-on-one online canceling, we have implemented digital seminars using online conference systems to strengthen consumer engagement. In terms of delivery information, we are building knowledge on more impactful and meaningful ways to share the information to our consumers. And we've been successful to improve on the KPIs, such as the number of followers and engagement ratio, both at the same time. Usually, when a number of followers increased, the number of views go up, which means the denominator is higher. Then the numerator, the number of shares and comments and clicks that show the engagement ratio tend to go down. However, in our case, we have been effective in our approach, thus both of these KPIs have increased. This is because we have given continuous trials and errors from a very early stage that we were able to build on our learnings. These efforts are definitely giving us the advantages. Please look forward to further digital initiatives that are consumer-centric next year and onwards. Lastly, I would like to explain about the actions for Q4 and midterm strategic challenges. As I have previously mentioned, what is important now is how we can fulfill the loyal user bases when COVID-19 settles down? The state of emergency has been lifted, but many people still live in anxiety. Within such environment, we need to work together with our business partners to invite consumers to visit the counters. And it is also important to be able to understand the needs of each consumer when they come to the counters for testing and applying products, some people will want it and some will not. So we need to confirm with each consumer what it is they're looking for. In Q4, it is important to thoroughly implement this kind of service together with our partners to take action that is consumer-centric. In order to do this, as mentioned in the middle of this slide, we will develop and engage with an appropriate environment for activities. These are very simple basic things, but to assure there are enough testers, disposable makeup tools and sponges and making sure there are sufficient samples. With the correct environment, we can provide satisfying activities to our consumers that have come back to the counters to really maximize the strength of Shiseido. In terms of brands, we have continued to focus on profitability, concentrating investments into skin care such as ELIXIR, PRIOR, HAKU and BENEFIQUE. At the same time, have started to engage in initiatives to heighten the marketing ROI by doing scientific analysis with a system developed by Shiseido Interactive Beauty team to prioritize media spending to leverage the most effective media strategy. These actions will continue to improve accuracy as data accumulates, contributing even more to the profitability improvement. Of course, at the same time, we will continue to nurture demand with the fun and glamorous power of cosmetics by preparing attractive and long-awaited holiday sets during the season. This year, the number of holiday sets are growing overall as a market. And surprisingly, the sets with lip colors are increasing, too, compared to last year. This means that towards the end of the year, consumers are socializing more, dining and taking off their masks in front of others. These kinds of brand initiatives are completely aligned and linked with the counters and digital initiatives. In terms of collaboration with our business partners, for example, we have created sales basis incentives to the partners' employees as well as services to the consumers that are linked to the ELIXIR commercial. This kind of partnership and collaboration that allows us to act quickly and adapt to change is one of the great outcomes that was achieved by working closely with each of our business partners this year. Lastly, we are not in a place to say that COVID is over yet, so we will continue to expand consumer touch points by integrating online and off-line and to recover the loyal user basis. From online counseling to online seminars, partnering with EC retailers, effective usage of SNS and maximizing our learnings, as mentioned earlier, we will continue to build on the foundation, not just in Q4 but for next year and onwards. If we do not experience another wave of COVID cases, Q4 will be a very important period. These are not actions that take place post COVID, but the actions we take to prepare for post-COVID which will make the difference in the success trajectory when COVID is finally over. Therefore, we will make aggressive marketing and investments in Q4 to build the basis for sales expansion and growth. This is how Japan captures this strategy, so please hope with us that we are not hit with another wave of COVID cases. The Japan business, which had been a source of profit for the Shiseido Group overall was able to recognize the challenges we had in cost structure due to experience in COVID-19. We think it is necessary in the midterm to build a high-profit business model with local sales, not relying on inbound sales. There are several points to that. And as for portfolio, we will further heighten focus on Skin beauty, contribute to gross margin growth by improving productivity in the new plants and distribution centers and to improve the marketing ROI by quickly increasing digital capability by maximizing the function of Shiseido interactive Beauty. Also by deploying focus and continuing operational reform, we will realize the growth of each individuals to heighten the productivity per person. By identifying the challenges that need to be handled, Japan region will contribute to the overall Shiseido group's profitability improvement by capturing steady growth of local-centric consumers to build a sustainable high-profit business model. That's it with me. I will hand it back to Mr. Yokota.

Moving on to Page 10 on China. Due to the spread of COVID-19 variance and bad weather, which caused partial retail closures, offline share slowed down. While online continued the strong momentum, mainly in Prestige recording more than 30% increase despite the third quarter being the sluggish timing for purchases after 6 -- 18 promotions in the second quarter and before W11 and other large-scale online events in the fourth quarter. Next, Page 11, on other regions. In Asia Pacific, the business was affected by store closures, among others, due to continuous restrictions, including lockdowns mainly in Southeast Asia. Amid such environment, e-commerce sales increased substantially upon further rollouts on other major EC platforms in each market. In Travel Retail, although traffic slowed down due to the impact from COVID-19 variance in China, the recovery trend was seen in September. The segment achieved solid growth, mainly driven by e-commerce as well as an increase in the number of counters in Hainan despite continuous pace of recovery in other markets such as Japan. In Americas, all categories achieved year-on-year increase, including makeup with recovery was lagging behind. Drunk Elephant was launched at Ulta in America at the end of September. The number of counter is being increased and global rollout is being enhanced for the brand. However, consumer purchases were down by mid-teen percent because e-commerce sales in America, which represents a large portion of the business was down year-on-year due to reactionally fall against the surge in online sales in the previous year and also because the brand was affected by COVID-19 in Asia. In the fourth quarter, initiatives in America will be enhanced along with the counter expansions and global rollout with -- which will be promoted further such as launch of the brand in South Korea in October. In EMEA, in addition to skin care, we gained share in makeup centered on NARS. E-commerce continued to grow with further rollout on new EC platforms. Next, Page 12 shows the trend of the COGS ratio. The COGS ratio looks to have worsened in the third quarter over the first and second quarters. This is attributable to the increase in COGS ratio due to supply of personal care products, which was started as measures for transition associated with the business transfer. Excluding this impact, COGS ratio would have been 23.5%, continuing to show improvement in the third quarter after hitting the peak in Q3 2020, mainly from lower provisions for inventory write-offs as well as favorable product mix due to Personal Care business transfer. Next, Page 13, on the cost structure. SG&A decreased 4.2 points year-on-year, excluding the impact of reclassification to extraordinary loss related to COVID-19. The company stepped up investments in line with market recovery. While at the same time, realizing reductions in personnel expenses and other SG&A by 2.5 points and 1.7 points, respectively, mainly as a result of sales recovery and fixed cost reductions along with the structural reforms. Next is Page 14, the operating profit by reportable segment. Americas and EMEA, both experienced an operating profit improvement of over JPY 20 billion together due to higher commercial base profitability, lower fixed costs benefiting from organizational and structural reforms. EMEA returned its numbers into positive for the first 9 months of the year. China is minus JPY 18.9 billion in operating profit, but excluding the impact of Personal Care business transfer and transfer pricing OP actually grew on a like-for-like basis. On the other hand, Japan and other segments that have the brand holder functions were impacted positively. Therefore, Japan has an increase of JPY 5.6 billion in operating profit, but excluding impact of Personal Care business transfer, reclassification of extraordinary loss related to COVID-19 in the previous year rebound from inventory write-offs and transfer pricing impact. OP in Japan declined on a like-for-like basis. This is because there has been increase in strategic investment ahead of market recovery compared to the fully suppressed investments last year. Next is Page 15 about cash flow management. Investments for future growth continues to be made, such as the new Kurume plant facility in Japan and IT digital transformation. At the same time, there was incoming cash and inventory reductions from the Personal Care business transfer, resulting in a growth of JPY 132.1 billion in free cash flow. As for one of the KPIs, the day sales of inventory, we reduced it to 236 days from 269 days at the end of 2020, making progress to our target of less than 200 days. Also, through cash that was generated, we strengthened our financial foundation by reducing interest-bearing debt. As a result, net debt-to-equity ratio was 0.14%, a huge improvement to our financial position compared to the net debt-to-equity ratio of 0.36 at the end of 2020. Next is Page 16 about the globally unified platform, FOCUS. FOCUS platform is now live in 3 regions: Americas; Asia Pacific; and EMEA as planned. This slide introduces part of the initiative. We are planning to roll out in Taiwan, Vietnam, Malaysia and Indonesia within the year and will continue to deploy in all regions by end of 2023. Next is Page 17 about market assumptions for October of 2021 and onward. We forecast a gradual consumption recovery with the vaccine penetration, including in Japan. Japan went through intermittent state of emergencies since January of this year, but from the SOE being listed on October 1, along with the COVID cases declining, we assume that the market will start to recover from November. In various regions, including Japan and some categories, it is assumed that it will take more time to recover back to the 2019 market level. In Page 18, I would like to explain about our strategic actions in Q4 anticipating such market recovery. Based on the assumptions earlier, we will make aggressive marketing investments in line with market recovery from COVID-19. For Q4, the investment will increase by JPY 15 billion like-for-like versus last year. As for the Japan business, it is, as Mr. Tadakawa has explained earlier. In China, we have been planning for Double 11 or Singles' Day by preparing Double 11 limited set items more than before, and handed out samples to potential consumers online before the presale to cultivate more demand. As a result, the Double 11 promotions are performing well. In terms of brands, we launched Second Skin on October 1 and also planning to launch a new inner beauty brand, INRYU, next year in January for Japan and March for China. Due to the heightened awareness by consumers in beauty inside and out, Ingestible Beauty market is a category with high expectations for big growth in China. The China Business Innovation and Investment Office that was established in 2019 in Shanghai did an analysis of these consumer insights. And together with the long years of expertise and knowledge of Shiseido to nurture internal physical beauty, we develop the brand INRYU. So as you can see, not just Q4, but in order to capture definite growth for next year and onward, we will make advanced marketing investments which we have to strictly control in the previous year. Next, please have a look at Page 19. This slide shows the breakdown of the 2021 outlook revision made from what was disclosed in the Q1 call. Net sales include impacts from state of emergencies in Japan that continue to Q3, expansion of the new COVID variant in China and unfavorable weather, sales decline in Asia Pacific countries and regions from markdown. On the other hand, it also includes EMEA and Americas that have recovered to 2019 market level from vaccine penetration and sales increase in travel retail as well as FX impacts due to yen depreciation. Operating profit increased by JPY 3.5 billion in existing businesses, including FX impact by executing effective cost management in line with market environment and improving commercial-based profitability by structural reform, making up for the decline in gross margin from decline in net sales. To add to that, the impact from transfer of makeup brands have been added to both net sales and operating profit. Therefore, we are forecasting a net sales of JPY 1.044 trillion, a decline of JPY 23 billion and operating profit of JPY 32 billion, an increase of JPY 5 billion. Next is Page 20. I've mentioned earlier that we will be making aggressive marketing investments in Q4, an increase of JPY 15 billion like-for-like versus previous year. The slide here shows marketing investment comparison for first half and second half of this year. The net sales for the second half is forecasted at positive 9% year-on-year FX-neutral basis. To that, the marketing investment is to increase by 21% on an FX-neutral basis. Japan will strengthen investments in line with market recovery from November and onward to the next fiscal year. On top of strengthening the Singles' Day promotion in China, we will expand investments to maximize the holiday season opportunity in regions such as EMEA and Americas, which we have had to hold back on last year. Next is Page 21 to, once again, update you with the 3 major global transformation. For the transfer and JV of the Personal Care business, we still have partial asset transfers that will be made in 2022, but have completed the transactions in Japan, China and part of Asia Pacific by September. The extraordinary profit recorded in Q3 is JPY 86.2 billion. On an annual basis, the impact is expected to be JPY 86.6 billion. As for Dolce&Gabbana, we are planning the termination date of global license agreement, followed by an agreement in regards to global production and distribution post termination. For the transfer of the makeup brands, minus JPY 7.3 billion for impairment loss on goodwill, resulting from the business transfer, will be recorded in Q3. In Q4, we plan to record minus JPY 2 billion in extraordinary loss for organization optimization post transfer. We plan to close the transfer in beginning of December. Next on to Page 22. This is the summary of outlook for the fiscal year 2021. The net sales and operating profit is as mentioned on Page 19. As seen in the red boxes in the right, Net profit attributable to owners of parent is JPY 30 billion, a decrease of JPY 5.5 billion from the previous outlook. However, on an existing business basis, the net profit is an upward revision of JPY 11 billion when excluding the impacts that were not included in May disclosures, such as the transfer of makeup brands, hyaluronic acid related business impairment loss and onetime structural reform costs, along with the increase in profit improvement of tax-related costs also contributed to the numbers. EBITDA is JPY 155 billion. Free cash flow is forecasted to exceed JPY 100 billion. Now there are no plans on revising the dividend payout due to the change in outlook. Page 23 is the road map for the global transformation. The various transformations are in line with plan such as strengthening investments in growth and rebuilding the business portfolio. We are surely preparing ourselves to go back on the growth track in 2022. Lastly, as we have announced today, the company has decided on the voluntary adoption of IFRS, transitioning from JGAAP, starting in fiscal year 2022 to further enhance global business management by unifying accounting standards across the group and also to improve the international comparability of its financial information in the capital markets. Please refer to supplemental data 11 for the major impact of balance sheet, income statement and cash flow statement by adopting IFRS. That is it for myself. Thank you.

Now we will move on to the Q&A session Hirozumi-san from Daiwa Securities.

Can you hear me? I have a question regarding China. Is the business okay? Page 29 I'm referring to. First quarter, the loss was JPY 7.6 billion, which I'm concerned. And the cumulative basis had a profit increase. However, in the third quarter, what was the situation in China? Q4, China sales, I think you're forecasting JPY 90.6 billion. So it's doubling quarter-over-quarter.

Thank you very much for your question. I understand your question was regarding the business in China in the third quarter. The operating profit decline was down JPY 11.3 billion, profit was down. Gross margin was down JPY 3.5 billion. SG&A was up JPY 8 billion. And the Q3, like-for-like was up by 2%. In line with the sales growth, the profit impact was JPY 3.5 billion. But Personal Care business last year was JPY 7 billion. So the gross profit declined by JPY 3.5 billion. SG&A increased JPY 8 billion. 80% of that increase was related to marketing investment. Digital media and exposure on SNS and sample related costs accounted for increasing marketing expense by JPY 5 billion. As for the sample cost, on an accounting basis, it's booked as inventory and recognized as cost. And compared to last year, W11 promotion wasn't -- isn't being enhanced this year. So we are incurring upfront investment. If you look at 3 months basis in China, the profit was down. However, the sample cost is expected to decline by JPY 3 billion. If you look at the second half, the like-for-like sales is up by 13%. Sample cost is forecast to increase in line with the top line growth. And in the fourth quarter, we are forecasting increasing sales and profit with the margin improvement. In Q3, the marketing investment effects for presale of W11, looking at the situation up to today, it seems that we have been outperforming against the market. So pre-W11 activities impact are starting to surface.

Question again. Sales in Q4 are doubling against Q3, is it correct?

Answer is that Q4 in China, in yen based, up 12%. Excluding the impact of Personal Care business transfer, it's up 19%, like-for-like. In 2020 in China, against Q4 2020, up 40% -- it was up 40%. China had already seen recovery from COVID-19. And against last year, excluding the impact of Personal Care business transfer on a like-for-like basis, 20% growth is forecasted, and we believe that this growth rate is quite competitive.

[Operator Instructions] Now Kawamoto-san from UBS.

Can you hear me?

Yes.

Personal Care transfer, the impact of the profit on an annual basis, what will it be? What will be the impact of the profit on an annual basis? You mentioned that in China, Q3 PC gross margin is JPY 7 billion impact. But in the previous material, the profit loss was JPY 6 billion. And so -- and then transfers was JPY 2 billion, so it was a total of JPY 9 billion impact. So the Personal Care business profit impact, how much is it to the country? What is it in a consolidated basis, on an annual basis?

For Q3, in Japan, roughly JPY 2 billion; in China about JPY 4 billion impact.

Do you have the breakdown for other countries or regions?

All the other regions are very minor. For Q4, the minus -- it was a minus in profit last year. So the reverse impact will be about JPY 700 million.

So in Q4, it's a positive JPY 700 million. And so there's no change into what you have disclosed before to what you are talking about right now.

Sure, there's no change.

In the previous question, the gross margin went down by JPY 7 billion. What does that mean?

That's for China, the gross margin for China. So for China -- so this year, Personal Care was -- has been taken up. Last year, we had Personal Care in China. So if you were to compare it next to each other on a P&L basis, the China gross margin has gone down by JPY 7 billion is what I meant in that explanation.

Next, Yamaguchi-san from Goldman Sachs.

This is Yamaguchi speaking. In relation to question number one, I couldn't hear, is my line okay? Can you hear my voice?

Yes, we can.

I have a question regarding China. Mainland China premium -- and premium is flat, but Travel Retail performed strong. And excluding inbound, these 2 channels, what are the consumption among local Chinese consumers looking at July to September, including the sales trend of Travel Retail, excluding the Personal Care. My question is mainly regarding Prestige sales trend.

Can I confirm your question once again?

Are Mainland China and Hainan in trouble, which is under Travel Retail? Total Chinese consumer purchases, how much did it grow globally? P&G is flat. Estée Lauder was growing like 10%. So I get the impression that your sales were weak in China. But including Hainan, what was the actual trend among local consumers?

As of Hainan, on a year-on-year basis, high 50% growth was achieved in Q3.

There is a page regarding the regional performance for 4 regions. The top right, Travel Retail, your Q3 minus low teens, what are you referring to on Page 11, top right, Travel Retail?

I don't understand how do you read these numbers. In earlier pages, Travel Retail was up 24%. This negative -- low teen percent -- negative low teen percent, South Korea and China, Mainland China, recorded negative 10%, so excluding Hainan is it -- sorry -- including Hainan.

The South Korea, Mainland China airport sales were dramatically down, was it?

Yes, that was the case.

So you recorded low -- negative low teen percent. But in earlier pages, you say that a Travel Retail was up 24%. Why are there difference?

We're talking about sell-out numbers. And I think you are referring to sell-in numbers, external sales and consumer purchases.

I have a concern regarding the inventory. Are you seeing shipments for Double 11?

Well, first, what we can say is that in August, traffic in Hainan dropped. As a result, there was an impact -- negative impact in consumer purchases. But September onwards, we are forecasting a continuous decline, but in reality, the buildup was inventory prior to the Chinese New Year, we have seen buying from Chinese retailers. And your question regarding the inventory level centered on Hainan, the Travel Retail is growing dramatically. The inventory turnover is very low. For future growth in demand, it currently -- it's taking time to reserve containers. So as for inventory for Travel Retail, we are trying to see some buildup so that we won't miss any sales opportunities. So to answer to your question, actually, the inventory is, in short, against the growing demand.

Let me confirm again, so sell out in July to September period was up high 50%, correct?

Yes, that's correct. China was flat year-on-year.

Next, JPMorgan, Kuwahara-san.

This is Kuwahara from JPMorgan. Can you hear me all right?

Yes.

For myself, Page 14. I'm looking at Page 14. Japan and China. Japan, it was actually a negative and China was actually growth in profit is what you've mentioned. So -- but if possible, when you look at the 3 months, what would it look like? And when you look at it for the like-for-like basis, what is the actual value again through -- to these items?

I think for China, we already explained. So maybe I can omit that China explanation and talk about the Japan market. So the Japan OP for Q3, minus JPY 600 million. Last year's negative was minus JPY 1.8 billion. So we improved by 1.2 million -- JPY 1.2 billion. But last year, we had some of the accounting rules change in terms of the inventory write-off. So about JPY 5.2 billion were written off last year. And the PC, Personal Care business, impact was about JPY 2.5 billion. So last year's Q3 OP was about JPY 1 billion. If we make all the adjustments, it was about JPY 1 billion, the OP in Q3 last year. So if you compare it to that -- compared to last year, it's about minus JPY 1.5 billion. SG&A in Q3, it went down by about JPY 6 billion, but that was mainly impacted. This was mainly due to the PC Personal Care business, transfer. And so looking at the recovery of Q4 and looking at the marketing investments, we've started to increase the investment by about JPY 2 billion. And around the cost reduction, we have done cost reduction by about JPY 2 billion, so that we were able to control the SG&A to the last year's level. But we did have the gross margin decline due to this net sales decline, which brought down the operating profit. So there's a lot of elements mentioned there, but that is how the profit was calculated for Q3 in Japan.

Earlier, you were mentioning about the transfer price. There's the -- China is a separate deal in terms of the -- but for Q3, Japan, does this transfer price impact Japan, Q3?

For Q3, the transfer price, the change in transfer price was not that high in impact. So from that sense, there is not that much impact due to China. One of the main reasons for that is because the Japan -- export from Japan business to China business, majority of it was from the Personal Care business. So the impact of that has been taken away from Q3. And that is why in Q3, we're not getting too much impact from this transfer price.

I see. So this transfer price challenge is -- majority is due to Personal Care -- and majority of it was due to Personal Care business in the past as well, is that right?

Yes. In summary, for the first half, that is the case.

Sato-san from Mitsubishi UFJ Morgan Stanley, please.

Can you hear me okay?

Yes.

I'd like to confirm various numbers, but I'm a fan of Tadakawa-san, so I'd like him to provide an answer. Profitability of Japan, you need to improve profitability in Japan. Thanks for your presentation and other companies, BT consultants early retirement that some other companies have started the offering early retirement program for beauty consultants amid COVID-19 rather than seeing a recovery in inbound, I think so that you're seeing a growth more in Hainan. So recovery trend seems to be different. So I think that you need to close -- to have a close eye on how you're spending money? And are you planning to increase structure reform or employment structure reform in Japan.

Thank you very much, Sato-san. I was waiting for your question. Structural reform. Well, I touched upon structural reform at the end of my presentation. Nothing has been confirmed and approved as yet. So structural reform, I'm planning to do from next year. But in terms of profitability, productivity, sales and profit per staff compared to peers, we are lagging behind. So we need to see -- achieve efficiency. For sure, we will be implementing structural reform to see an improvement in productivity per staff. That's as much as I can say as of now. Okay. I look forward to seeing hearing more from you.

Next, Narikiyo-san from Nomura Securities.

I was actually going to ask the same exact thing as sato-san did, so what should I do? Maybe I can ask about the other segments. Next year and onwards, what is your thought? How do you think of the others, the segment. That's it for myself. So the export to Travel Retail, is that going to be continued to record it in this other. So the profit, how do we look at the profit of this other line in terms of the profit?

In terms of this item, we're creating the annual plan. So we don't have a clear answer at the moment. This has to do with the transfer price impact, too. And we will continue to update every quarter or every year. So please, we will be able to share with you once we have the annual planning.

There's -- a lot of onetime things included in this others right now?

No, that would not be the case.

Okay. I will ask separately on this note.

Ohana-san from Okasan Securities.

I have a question regarding Japan. In the final year of MTP, you are targeting to achieve 20% in the Japan region. Considering the OP margin in 2020, Tadakawa-san explained that the improvement will be made in SG&A, what kind of contributions are you expecting to see to achieve the OP margin of 20%? Can you give me more color?

Looking at this year's results, due to the sales decline, personnel cost has exceeded 30% and expense ratio close to 20%. Because of the decline in the denominator that those costs went up, including personnel costs. [indiscernible] achieved 20% OP margin in Japan, we need to lower the personnel cost down to 20% or 22%; and expense ratio between 13% to 15%; and COGS between 17% to 18%. In terms of the marketing investment, basically, as we are running the brand business, if we lower the marketing investment, we will have a negative [ repercussions ] in the future. So increasing sales and controlling expenses are important to achieve OP margin improvement and to achieve that, we will do structure reform next year and the year after to achieve that target.

In the final year of MTP, you are targeting JPY 350 billion in sales in Japan, with that level of sales, are you confident that you can achieve 20% OP margin. And if you fall short, you might not be able to achieve the target?

Locally, we want to secure revenue between JPY 340 billion to JPY 350 billion. Inbound was as big as JPY 100 billion in 2019. And it's [ fair ] and not to account -- not to depend on JPY 100 billion coming from inbound going forward. So we are forecasting inbound to be about half of 2019 to consider the cost structure.

It is close to our finished time. So along with that, we would also have the last person Miura-san from Citigroup. This will be the last question.

Can you hear me?

Yes, we can hear you.

I wanted to ask about Japan. November and onwards. You've given us the assumption for the November and onwards. So from Tadakawa-san, your perspective. So the short term, it started to recover. And that might be the one step forward. But going forward, what kind of trajectory are you looking at in terms of the market recovery? And next year 2022 or even looking at 2023, what is the assumption to the market? Can you share with us the market image going forward for 2022 and 2023? And with that, how are you going to increase or expand the share? So with what you are capable of doing as a company now, how do you envision yourself growth -- growing in 2022 and '23.

Now first of all, looking at this year's market situation for November and December, the mid-single digit, so maybe about 5% market recovery is what we are assuming. And from end of October, the market is starting to recover. So to that, we are looking at we're looking at a sales increase of the late single digit compared to the previous year. Next year and onward -- first, what we are looking at -- and assumption is I'm talking without rebound. Without the rebound, meaning another wave of COVID, then all this assumption will change, but without another wave of COVID, looking at next year -- next July in terms of local sales, we should be able to recover close to the 2019 level with our hopes included. And as you may know, next year, Shiseido will be celebrating our 150th anniversary. So for next year, we are preparing ourselves for many things next fiscal year -- next year. And at what timing will the market recover or the market recovery accelerates? We are -- we have a lot of preparation that we have done so that we could be ready to join and synergize with the growth when the market picks up products included any of the events and working with our business partners, too. Looking at the Japanese market, including the overall financial markets. we want to, of course, hope for a more exciting and more energized or reenergized Japanese market, not just our company, but to the whole market. So we are cooperating and collaborating with other businesses and other companies so that we can try to boost the Japanese economy. And the local sales, as I have mentioned, we're planning things mainly around July that local sales should recover about that timing. And -- but inbound, I do not think that inbound will be back 100% by next year. So in terms of the inbound, maybe the end or second half of next year compared to 2019, maybe we can recover back to 60% to 70% versus 2019 by end of -- or second half of next year. If we can do that, that's great. But having said that, it doesn't mean that we're not going to take any action. Chinese people or Chinese tourists, we will continue to deliver information content so that the Chinese tourist would want to come to Japan, and we're collaborating and working and discussing with business partners and other companies to try to cultivate that. So we're not waiting for the market recovery. We are -- we also want to be -- we also want to partake in bringing the economy recovery. So working with other companies and working with distribution to stimulate the economy overall. What is most important though is the loyal users of the product and the number of products. During the COVID period, there were a lot of people that stopped coming to the counters or as a result of that, the people have stopped purchasing some products. So I think overall, the number of loyal users have declined due to COVID. But these number of loyal consumers really will make a difference in the market and our sales, so we need to continue to build the loyal users to build the foundation. So rather than going for a onetime boom with events, we are focusing on building our foundation, our base of loyal users. So ANESSA, for example, bringing in Q3 or HAKU, things -- these little steps that we're taking within these brands is because due to seasonality, we are losing some of the consumers. But next year, when the market picks up, it will hit us really hard. So we want to make sure that we rebuild the foundation of loyal users across these brands, and we have the data to verify that now. Before we would -- we didn't really think about -- so we're looking -- we're transferring ourselves to focusing more on the loyal users or the number of lower users to the product rather than looking at just a number of products in the sales of the product itself. So we're looking at the data, and I mentioned about the Shiseido Interactive Beauty, including our business partners and our account partners, we are linking with the POS data and some of the -- many of these consumer data so that we can analyze and find what we need to do and understand what we need to do to continue to build a loyal user base.

I understood very well. So data -- to build on the data because you're #1 company. And just from the P&L, you're going to build the assets because you're saying you're switching over to focusing on the assets. And so is it true that you would be at a more advantageous point than the competitors?

Well, the reason why we launched this SBI is because we want to really fully leverage the database and really structure the database. So data, we cannot secure or collect the data just by ourselves. The ID post data with our accounts, we have to link it together so that we can expand from the data that we have through these post data to accumulate more. So we have been working with many of our business partners or our accounts so that we can link our IDs together to collect and accumulate data. So what is the high ROI action? What is the high profitable action? And we can build that -- construct that together and we can return it back to our account partners. So data analysis area or category, we're investing a lot of time, money and people so that we can leverage it, analyze the data, use the data and return it back to our accounts so that they, too, can benefit from the increase in sales. So if we send out 100 data to -- information to 100 people, do we get replies from 10? So we look at that in a scientific manner. And we have been doing this in many ways. But I would say that we are in an advantaged position because we have been working on this from an early phase.

Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]