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

Hello, everyone. I am Okabe, the Shiseido Chief Brand Innovation Officer. Until last year, I was involved in the Shiseido (sic) as Head of brand. And from January this year, I have been in charge of R&D to bring out my utmost effort to generate innovation. Today, I would like to introduce our R&D strategy, which is based on the overall Shiseido strategy, and share some examples of innovation. First, allow me to explain about our business strategy. Currently, the corporate business focuses on long-term and social goals, making sustainability a key focus for the reason the companies should exist and advancement of technology such as digitalization has become more and more important. At the same time, the values of consumers are changing with increasing interest on health and presymptomatic state. In the cosmetic industry, skincare and sun care, which is focused on functionality is important for us to make sure that there are science supporting the efficacy. And we also forecast that inner beauty market will expand the approach, eating habits and sleep, using beauty devices and esthetic medicine, which approach to the inner side of beauty. Furthermore, we also believe that advancement of digital technology will expand along with e-commerce and data analytics-based marketing, and approach against each preference of consumers will become essential. For Shiseido, innovation in this area is a must have. Based on this external environment, we have laid out our midterm business plan. We have also developed WIN 2023 as our 3-year business plan. Shiseido is aiming to become the world's #1 company in the area of skin beauty by 2030. During the 3 years, from 2021 to 2023, we will establish a foundation to execute drastic reform. And we will transform our business to be profit-focused from conventional growth focus from revenue expansion. 2021 will be the year of transformation preparation for the next stage. And 2022 will be our 150th anniversary, and we have set this year as the year to go back to growth trajectory, further accelerating DX and growth of global brands. And for the final year, in 2023, is defined to be the year of complete recovery. And skin beauty company -- as a skin beauty company, we will target JPY 1 trillion of net sales and 15% OP margin. During these 3 years, we will continue to aggressively invest in brands, innovation, supply chain, DX and talent. The corporate mission of Shiseido is Beauty Innovations for a Better World. Through the power of beauty, we aim to realize a sustainable world. Skin beauty will be the heart of our business. We will stand hand-in-hand with 200 million people around the world. And our 2030 goal is to provide many opportunities for people to feel happiness. As we work to realize this, we will operate beauty wellness business based on oriental ideas to achieve this goal. And furthermore, for our future beyond this, we will set a concept called Personal Beauty Wellness Company. This concept is a fuse of skin beauty and inner beauty. Through the lives of our consumers, we hope to become partners to help realize healthy beauty unique to each and every customer and consumer. As I have just explained, R&D in Shiseido is instrumental and is also a core function within the company. Until last year, I was in charge of Shiseido and CPB brands. And I've been looking at this R&D department as an external person. And what I felt was that the Shiseido R&D has even higher capabilities. They should be able to provide more value-added products and service for consumers. And at that time, I was asked by the company to become the representative of R&D. I was obviously very surprised because I wasn't sure whether I can lead R&D with a marketing background. And I also wondered whether I can be of any support for the R&D team. I thought hard. But looking at the recent changes, the rapid changes of the environment and looking into the diversified needs of consumers, had gotten me to think that if I can apply all of this into R&D initiatives through my experience from marketing, I may be able to make some contribution. We are to apply the wonderful R&D activities to brands and products, and deliver that to the consumers. And we want this GIC to continue to provide innovation to the world. And I am putting my utmost effort and making sure that this maintains to happen. The first thing that I started doing after this appointment was to figure out what the strength was for a Shiseido R&D. How are we different from our competitors? I wanted to provide a guidance of this and also make sure that we had a common language amongst the researchers, so that the entire R&D team can look and face towards the same direction. And I decided to learn from our history. The history of Shiseido R&D goes back to 1916 from a test room. Through our over 100 years of history, we have set safe and secure as our top priority and tenaciously pursued ways of maintaining healthy and youthful skin as well as figuring out what beauty care is. All products and services are rooted to our areas of strength, dermatology. That's the first point; and number two, material science to realize new function and usability. And lastly, sensorial emotional science that fulfills mental satisfaction through textures and fragrance. Anti-aging, whitening or brightening are new categories that Shiseido R&D has generated and delivered to the market. Shiseido R&D has been creating these categories and markets. In order to further accelerate these innovations, we have been increasing our investment from 2015. And in our midterm business plan, VISION 2020 until FY '20, we have been able to make a significant contribution. Going forward, to support future growth, R&D area will be an area that will be able to gain 3% of R&D expenditure -- a 3% of sales for R&D research. And this with the backbone of our R&D activities. As I mentioned in the beginning, the overall strategy is in line with the R&D strategy. Skincare category will become reinforced. This will be a very strong foundation for our business, and this is where the core is. And furthermore, we will go into inner beauty categories, including ingestibles. These 2 categories will be supported by innovation, which is divided into 7 areas. So I have divided innovation into 7 buckets. The researchers need to know why they are doing a specific research. Is this research really going to contribute to business or brand? And are we being able to do this research to support consumers? We wanted to make sure that all of these are visible, and that's why I have applied 7 buckets under innovation. This would be the pursuit of eternal skin, and it also would be a game changer. It will be an attempt to new categories. We do have a couple of variations. The most important thing that supports this is to reinforce basic research and development. We want to go back to the basics. And innovation is to continue in the [ mid, ] long-term perspective, and R&D strategy is the backbone in realizing that. So in light of what we have learned from this history and what we are currently working on, we have extensively thought about what are the strengths of Shiseido's R&D? What are the differences from other companies. I interviewed not only current researchers but also former employees, sales and marketing staff and beauty consultants. The result was a unique concept called DYNAMIC HARMONY. The unique approach of Shiseido R&D, it's something that cannot be defined by a single value. It skillfully integrates seemingly conflicting values to create DYNAMIC HARMONY. The fusion of East and West, fundamental cure and symptomatic treatment, Chinese medicine and treatment, mind and body, visible and invisible, these are unique concepts that only Shiseido can offer. This idea of creating new value through the integration of technology and knowledge and the utilization of diverse human resources is the unchanging DNA that has been passed down to Shiseido researchers since the company was founded. Now please watch the video about DYNAMIC HARMONY. [Presentation]

How was it? It included not only the uniqueness of the technologies, but also the benefit to our consumers. So I hope you can get the picture. The 5 approaches that I shared today are our assets that have been accumulated by our predecessors. There is no end to the DYNAMIC HARMONY. We will create the sixth and seventh DYNAMIC HARMONY or tenth DYNAMIC HARMONY as the DNA of all researchers and pass them on to our future researchers. Furthermore, based on our DYNAMIC HARMONY philosophy, we are actively working to partner with the outside world. Today, we are pleased to announce that Professor Masaru Tomita of Keio University; and Neuroscientist, Dr. Nobuko Nakano, have agreed to serve as advisers to Shiseido GIC. Dr. Tomita will open the Tomita Laboratory within GIC to promote research on conventional futuristic innovations. Dr. Nobuko Nakano, a Neuroscientist, will further refine psychology research, which is one of Shiseido's strengths, and take initiative to share information on consumer innovation driven by psychology. We will also further strengthen our open innovation with research institutions and start-ups. We have open innovation program, fibona, and joint research with the CBRC in the U.S. that has been going on for more than 30 years. We will strengthen joint research with domestic and overseas research institutions. For example, from this month, in a space research project sponsored by the Russian Academy of Sciences and NASA, we will verify the stress assessment method developed by Shiseido. It is the power of people that drives innovation and change. In line with our people-first philosophy, our corporate value will be enhanced when people from diverse background demonstrate their individual strengths. And also, we support the activities of external female researchers and also female researchers in Shiseido, and we have conducted this grant for 14 times so far. So Shiseido R&D is a place where diverse talents are actively working. Today, based on the DYNAMIC HARMONY philosophy, we would like to introduce to you the 3 innovations that would create the beauty of the future. From a global perspective, there is a focus on the sustainability. So that's the first technology. Second is the new creation of anti-sagging market. And thirdly, the second skin technology. So from here -- so Shiseido researchers will never stop challenging and evolving to create innovations, will share their technology with passion. Okay, researchers, please give a good presentation.

So first, I would like to introduce the UV conversion technology. [Presentation]

Hello, everyone. My name is Miyazawa, and I'm in charge of the research. I have worked with the members representing raw material development, functionality evaluation, formula development and information establishment. Miyazawa myself and my team member [ Takumi Watanabe ], will be presenting together. As our natural environment changes significantly, so does the environment in which our skin is exposed to. Is our capability, our duty limited to protecting our skin against various environmental factors? We have listened to many consumers. And since that their feelings of gratitude toward gifts of nature and their wish not to fight against nature, but to engage with it with a positive attitude and receive its goodness. In line with these sentiments, Shiseido made the decision to begin the development of a premium environmental-coexisting technology in which we harmonize and coexist in a positive manner with various environmental elements such as UV rays, temperature and humidity, and transform them into beauty. As the first initiative, we took on the challenge of coexisting with UV, which we have researched for many years. Until now, UV has been seen as a threat to beauty as it causes damage to the skin. However, the sun's rays are also the source of all of our live on this planet, including ourselves. Could there be a way we can exist together with this light? Maximizing its benefits instead of simply running away from it, we have turned the concept upside down and embarked on the endeavor to develop new technology to turn a portion of skin-damaging UV into something beneficial to the skin. We focused on photosynthesis, which supports life on this planet. As you know, sunlight is turned into energy and photosynthesis, during which light conversion takes place. We looked into the light conversion and discovered that spirulina, one of the oldest photo synthesizers on the planet. We also discovered fluorescent zinc oxide, which is found in minerals and has the property of converting a portion of UV to emit fluorescent light. We will now demonstrate how these 2 components work to convert light, which penetrates into the skin. I will prepare to do the demonstration. So please wait a couple of minutes, please. So Reno-san, please? On the live streaming, I think it may look a little bit blue or green. But when we shine UV on bare skin, you can see how the UV penetrates into the skin. Next, we will apply a prototype containing spirulina extract and fluorescent zinc oxide. And again, we will shine the UV on the skin. And as you can see, the light of the color turns to green. On the side where we did not apply the prototype, there is a difference. It is a blue color. And where we have the prototype, it is in green. As you can see, spirulina extract and fluorescent zinc oxide convert a portion of skin-damaging UV light into a different kind of light. Thank you, Reno-san. So what effect then does this converted light have on the skin? UV causes damage on the skin, promoting the production of skin inflammation factor in the epidermis. The excessive skin inflammation factor causes further damage on the epidermis and dermis. UV also causes damage to the skin's fibroblasts, which produce the collagen and hyaluronic acids necessary for maintaining the skin's firmness and to the epidermal cells, which provide the skin's barrier function. However, as you saw in the demonstration, a portion of UV is converted to a different kind of light by the spirulina extract and fluorescent zinc oxide. We found out that this converted light curbs the production of skin inflammation factor and that UV-damaged dermal and epidermal cells were restored to their original level of activity. The effects observed at the cellular level have also been found to manifest as changes in the skin. As shown earlier, skin cells exposed to UV produce inflammatory factor, which causes photoaging over the long period. And the skin shows inflammation, that is the redness. However, the same UV-exposed light to skin -- when exposed to skin-beautifying light converted from a portion of this UV, shows reduced inflammation and reduced redness, as shown here. Also, what is surprising is that 4 weeks of continued use of the prototype, equipped with skin-beautifying light conversion technology and UV defense technology, resulted not only in the maintenance of healthy skin but also produced perceivable skin radiance in many people. This light converted from a portion of UV was truly a skin-beautifying light. I will now hand over the microphone over to Watanabe.

Now I would like to talk about the sun care technology of the future in which we apply this technology of converting a portion of sunlight into skin-beautifying light. Please watch this video depicting the sun care of the future. [Presentation]

This is sun dual-care technology, which is a completely new sun care technology of the future. We have combined conventional UV protection with the function of utilizing sunlight to beautify the skin. By applying the sun care technology, we are committed to achieving a premium beauty care in which we do not fear the sun, but face it with positivity, harmony, coexistence and change their power into beauty. Thank you very much for your attention. The next presentation is on the new category of sagging skin. [Presentation]

So the presenter of this presentation is a leading scientist of this industry, Mr. Tomonobu Ezure.

Nice to meet you. My name is Ezure. So cosmetics cannot achieve that, that's impossible. People said that when I started this research. The shape of the face changes dramatically as people age. So the conventional cosmetics were focused on the fine lines on the surface of the skin. But the concern that consumers have is the changing shape of the face as you age. But people said that that's outside of the scope of cosmetics. So the aging face was yet to be defined, and the definition and research methods were uncertain. So I decided to take the inside and outside approach of DYNAMIC HARMONY and progressed with my research. For example, the smile lines. So this is a deep wrinkle. So that was the general knowledge. But is that really true? I asked the same subject to lie down, then the smile line actually disappear. So nasolabial folds or smile lines are different from fixed wrinkles. So what is the nasolabial folds? So let's observe this photo. Then due to gravity, the cheek, it's sagging, and that is the cause of the nasolabial folds. So sagging is the cause of this nasolabial folds. And there are also a variety of changes to the face, and the sagging was the common cause. So that means if we can improve sagging, we can improve all signs of aging of the face. So sagging became the target of our research. So what is sagging? For not really knowing what it was, I started my research with trial and error. So we defined sagging, and we needed to create the evaluation method. And based on that, we clarified how it changes with aging. And also in order to analyze inside of the skin, we developed a method to look inside the skin. In the past, the skin was observed in 2 dimensions using a microscope. You can see the cells here. But it's hard to know in detail. So we developed the digital 3D skin technology, which is the world first technology to analyze skin in 3 dimensions with ultra-high resolution. In this way, it has become possible to analyze skin cells in ultra-high definition, and we have made various discoveries that have changed common sense. In 2014, we discovered anchors. We discovered a structure inside the skin that holds the skin together, and we decided to call it anchor. And by losing the anchor, we found out that the face would be sagging. And in 2016, we discovered the dermal cavitation active due to aging. The deep part of the skin would be hollowed out and would create dermal cavitation. And also in 2018, we discovered a dermal cell network. So this kind of network was discovered, and we call it dermal cell network. And if we lose this network, it leads to the aging and sagging of the skin. And we applied those discoveries to various solutions such as facial exercise, beauty devices and crude drugs. So like this, the target was originally the small lines or wrinkles. But we changed to the sagging, and we came up with various technologies and with multiple discoveries, and that was reflected to our solution. So this is the creation of new world of beauty field for sagging. And in order to establish a dominant presence in the area of sagging, we have presented this technology in the IFSCC. Please watch this video. [Presentation]

So sagging becomes equal to the absolute presence that Shiseido is equal to, sagging a new market. The skin of the face moves always with gravity. So skin is a organ which moves. So if we can understand about this movement, we can find the truth of the sagging, but we didn't have that kind of method. So we have measured the skin deformation and observed the inside of the skin. And using AI, all the information was reproduced, and we created this digital skin. These are not computer graphics. The skin is deformed in various ways such as pushing and stretching. And since the skin is reproduced on the computer, we can freely enter the skin and observe it. This is the inside of the skin. You can see various organs. And you can see the movement of the skin when this is deformed. In addition, the amount of deformation can be displayed in color and measured. We discovered this technology. Because this skin is reproduced on a computer, it can be digitally dissected in this way. We can also extract a specific structure and analyze the deformation in ultra-high resolution, and we can observe a very detailed change. And also furthermore, it is possible to analyze the deformation by its directional vector. We have decided to call this electronic skin that even reproduced this movement 4D-digital skin. So there's a world inside the skin that only we can see. People said that cosmetics cannot achieve or address this issue. But after trial and error, we discovered the truth of sagging one by one and developed technologies and established an absolute presence on a global level. And with -- for the digital skin, and -- latest technologies were developed and beyond. So we continue our research and development. Thank you very much for your attention.

Lastly, Second Skin Technology presentation will be held. [Presentation]

Hello. My name is [ Sekinen ]. I am a member of the Second Skin development team -- Second Skin Technology development team. Since the acquisition of Second Skin in 2018, the multinational members you are looking at have worked together to overcome many hardships. Before I go into the Second Skin Technology, I would like to tell you about a dream that we are trying to achieve using this technology. Our dream is to broaden the potential of skin and its beauty for a world where everyone can live happily. Some people may feel helpless about the effects of UV we have already been exposed to or about skin that has sagged during aging. Others may have sensitive skin that poses difficulties in their daily lives. Finding solutions to such issues has been considered difficult, but we wanted to solve them by broadening the skin's potential with the technology we are developing. As we pursue our research into broadening the skin's potential, we have committed to ourselves not only to achieve compelling efficacy, but also to ensure that we need quality parameters such as user-friendliness, usability and comfort. This is our road map towards achieving the dream of Second Skin Technology. During the 3 years since we acquired Second Skin Technology from Olivo Laboratories, we have listened to over 2,400 consumers worldwide as we focused our development efforts on improving user-friendliness and figuring out how to unleash the skin benefits of Second Skin Technology. Our accomplishments in the first phase has already been reported with our Second Skin Technology. We have successfully developed the function of immediate and physical correction of eyebags while achieving the following natural appearance, compelling efficacy and excellent user-friendliness. People who used our prototype have felt they were able to take an average of 5.6 years off their actual age. This is what we've been able to hear after having people use our prototype. This demonstrates that the Second Skin Technology has enormous potential to change people's impression. While customers' feedback was overwhelmingly positive about the effect of the Second Skin Technology and its user-friendliness, some consumers wished it were a little easier to use or that it involved fewer steps. We will continue to engage earnestly with this kind of feedback and our steadfast efforts to improve usability. Consumers had some additional comments on the effect of the prototype and where it can be used on face and body. Some people asked whether the continued application might rejuvenate the skin itself, while others said they wanted to use it on other parts of the face and body besides eyebags. To achieve such effects, we doubled our development efforts. As a result, we verified that 8 weeks of continued use of a prototype incorporating Second Skin Technology was effective in reducing the size of eyebags and improving the fine lines on them even when the skin was bare without the prototype. It is remarkable that our Second Skin Technology achieved this kind of dramatic success against a skin issue, which conventionally required esthetic medicine. And the concern that many people feel helpless about are the small lines which is mainly caused by sagging of the face. Following our engagement with eyebags, we endeavored to correct the smile lines with our Second Skin Technology. I would like you to take a look at our results. I would like to ask our model to come up on stage. This model applied a prototype with Second Skin Technology to a large area on her side of her face, including the cheek to the right side, to your right. And on your left side, she is not wearing the prototype, just natural makeup. When you compare the before and after, you can see that the powerful skin-reshaping capacity of Second Skin Technology has made smile lines and eyebags disappear with pores less visible. And the skin overall looks glossier. And you can see that the entire face has taken a youthful appearance. Can you turn right, please? This would be the side where the prototype is applied. And the left side would be the side without the prototype. You can see the lines from the mouth, the corner of the mouth, that the line is less obvious. Please turn front, please? And please take another look, please. Thank you very much. Furthermore, you can see the marionette lines. This also shows that there has been improvements on the marionette lines as well. This is a picture of my own mouth line. Even with the marionette line, the Second Skin Technology, which pulls up the sagging skin has made the lines less obvious. Actually, I am also wearing the prototype on my skin today. Can you see the effect of the Second Skin Technology? Compared to the left side, you can see that there is an uplift and less obvious pores. Our endeavors will continue going forward. As I mentioned in the beginning, we have long believed that there is no uncomplicated solution to issues, such as age or UV-induced negative changes to appearance or shape or the day-to-day difficulties sensitive skin can pose to people who have difficulties from a condition. With the Second Skin Technology, we will continue to take on these challenges, endeavoring to impart new functions to the skin to expand the areas of the body we can address and to further improve user-friendliness. And towards the future, we aspire to develop technology, which allows us to change our appearance freely to expand our possibilities endlessly. Please stay tuned for further evolution of Second Skin Technology. Thank you very much.

I hope you enjoyed the presentation. All those 3 technologies that were shared today will continue to evolve. And we will make those technologies into our products and deliver them to you. As I've said in the beginning, the sixth and seventh DYNAMIC HARMONY approaches will be developed, and we will challenge ourselves into the new domain. And Shiseido's R&D research will try to go beyond the limit and border of the beauty, and we will have [ incessant ] challenges under the philosophy of DYNAMIC HARMONY. Thank you very much for your attention.