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

I will explain the business results explanation for the fiscal year 2021. Please turn to Page 3. I will start by explaining key headlines for the fiscal year 2021. FY 2021 results far exceeded the plan announced in November last year. Net sales were up 12% like-for-like, excluding the impact from business transfers. Operating profit more than doubled year-on-year at JPY 41.6 billion. Net profit was JPY 42.4 billion, up by JPY 54.1 billion from the previous year. There are 6 key messages that I would like to deliver today. Skin beauty brands, which the company is enhancing investment as one of the important strategies under WIN 2023, realized 10% sales growth. And the sales ratio of skin care products increased up to 64% of total sales. Digital transformation is on track. With the shift to digital in each region, e-commerce sales ratio was 34%. As a growth driver, e-commerce sales increased more than 20%, coming very close to the 35% target set for 2023. By region, leveraging our strong global footprint, growth was driven by Americas and EMEA, which offset declines in Japan where challenges continued. Excluding Japan, sales grew 19% like-for-like with our solid global business portfolio, one of our strengths, yielding positive effects. As for the operating profit, there were substantial contributions from improved product mix associated with strategic investment into skin beauty brands as well as business transfers, agile cost management in line with market changes and also from solidifying the foundation for profit through fixed cost reductions. Free cash flow was positive JPY 186.6 billion, as cash inflows from Personal Care business transfer and inventory reductions outweighed growth investments into factories and digital transformation. In WIN 2023, under the slogan of trust and empowerment, 2021 was positioned as a year for doing the groundwork. And global transformation with over JPY 200 billion in scale was driven in each region. Without deferring difficult decisions, the transformation plan was executed in the short term, preparing well for the business to be back on the growth track in 2022 onwards. Next, please turn to Page 4 for the executive summary of the P&L. On a like-for-like basis, net sales increased 12% year-on-year, up to JPY 1.0352 trillion, excluding the impact from the transfer of Personal Care business in the third quarter; and the impact from 3 brands, bareMinerals, BUXOM and Laura Mercier, whose transfer was completed in December. Operating profit was JPY 41.6 billion, up 178% year-on-year, which was mainly attributable to higher sales as well as agile cost management in line with market changes. Extraordinary profit and loss was positive JPY 28.4 billion. Structural reform expenses were JPY 29.9 billion. Please refer to Page 18 and supplemental data 10 for details. As a result, net profit attributable to owners of parent was JPY 42.4 billion. EBITDA was up 142%, achieving a double-digit EBITDA margin at 16.7%. Next, please turn to Page 5 for performance of major brands. SHISEIDO and Clé de Peau Beauté grew substantially by 15% and 21%, respectively, with sales recovering to 2019 level, driving overall growth globally. In SHISEIDO, core lines, including Ultimune and Vital Perfection, grew, particularly in China, Americas and EMEA. Sales of Clé de Peau Beauté increased in all the regions, expanding market shares in China and Americas. IPSA already exceeded the 2019 level, maintaining the top share in prestige for consumers in their 20s and expanding the market share with solid performance under COVID-19 pandemic. Drunk Elephant was rolled out in markets, including Japan, South Korea and Travel Retail and the Middle East. And in Americas, distribution started at Ulta, and the number of counters is increasing. As regards ANESSA, year-round initiatives have been successful, achieving recovery in a challenging Japan market and recorded growth in China through cross-border marketing. Please refer to Page 6. In response to diversifying consumer needs, we accelerated rollouts in new growth categories. In 2021, sustainability-focused brand BAUM and THE GINZA, the "highest price range brand" in the group, were launched in China. And EFFECTIM, which is an Asian care brand fusing skin care and beauty devices, was launched in Japan and China. In 2022, we will continue to consider enhancing various brands and categories sequentially. Next, Page 7 shows our results on digital transformation. Prestige e-commerce sales grew almost 20% year-on-year, helped by new website launches. We have continued our efforts on CRM as well as data platform. In 2021, over 200 live streaming shows were held globally, enhancing engagement with consumers. We have also undertaken new initiatives such as promotions in a virtual space in addition to offering online counseling. The total number of students enrolled in internal digital academy exceeded 10,000. Advanced marketing programs were launched globally, and workshops for executive officers were conducted. As such, development of digital workforce is steadily underway. Next, Page 8 shows year-on-year sales trends. In addition to strong growth throughout the year in Americas and EMEA, Travel Retail sales continued to be driven by Hainan, contributing to global growth. Asia Pacific and Travel Retail turned to growth exceeding 2019 level in Q4. And Americas was above 2019 level for the full year. Please turn to Page 9 for Japan region. The state of emergency was lifted at the end of September in Japan, but traffic remained slow in October-to-December period. And the local market was pretty much flat year-on-year. Due to prolonged impact from COVID-19, cosmetic purchase rate among consumers decreased, while the prestige market saw recovery trends. Amid such business environment, we steadily captured market recovery opportunities. And SHISEIDO Ultimune, which was renewed in 2021, recorded strong performance. Clé de Peau Beauté achieved increase in the number of regular users in skin care. And prestige brands overall turned to positive growth. Furthermore, while consumers continue to wear masks, with agile development in line with new consumer needs such as base makeup which prevents color transfer to masks and tone-up primer, MAQuillAGE increased the market share and gained #1 share throughout the year. E-commerce maintained double-digit growth, driven mainly by retailer EC, and expanded the market share. Initiatives for 2022 will be explained later by Mr. Tadakawa, CEO of the Japan region. Moving on to Page 10, on China, looking at the market first. The scale of Singles' Day event increased, but the market faced the impact from continuous online discount promotions as well as slow traffic in the off-line channel due to partial retail closures with the spread of new variants. In such a business environment, our Singles' Day total sales grew by 1.4x from the previous year. In prestige, rankings went up for SHISEIDO, Clé de Peau Beauté and NARS, with prestige sales growing 1.5x, substantially outperforming the market growth. Initiatives for 2022 will be explained later by Mr. Fujiwara, CEO of the China region, who is joining us today remotely from China. Next is Page 11, the other business regions. In the Americas, all categories, including makeup, bounced back with market recovery, capturing a double-digit growth continued from Q3. Growth in NARS was especially significant, already recovering to the 2019 level performance globally. In the Americas too the brand grew over 40% versus Q4 of last year and grew significantly on an annual basis at over 60%, expanding its share for the year. The company will continue to position NARS as core brand of the prestige makeup category and execute various efforts for its continuous growth. Similar to the Americas, EMEA also captured solid growth along with market recovery, expanding its share in all categories for the year. Asia Pacific had continued restrictions, especially around Southeast Asia. However, within such environment, we expanded our presence in the core EC platforms in all regions, realizing great growth in e-commerce sales. Travel Retail continues to have slow recovery in Japan, but Hainan drove the growth in Q4 to exceed 2019 year-on-year. On top of the increase in counters in Hainan, the growth of EC had significant contribution to the overall growth. Next is Page 12, on the COGS ratio trend. Although we did experience COGS ratio increase due to the manufacturing service agreement for the business transfers, the like-for-like COGS ratio for Q4 was 23.1%, a continued improvement, thanks to favorable product mix from concentration on skin beauty brands and lower inventory write-offs. Next is Page 13, the costs structure. SG&A declined by 3.6 points when excluding impacts from COVID-19-related extraordinary loss. We proactively strengthened marketing investments, eyeing market recovery; and on top of the sales recovery, reduced fixed costs with structural reform. As a result, both personnel costs and other SG&A reduced by 1.8 points and 1.4 points, respectively. Next is Page 14, the operating profit versus outlook. Even though China and Japan experienced decline in operating profit due to slowdown in sales, we achieved effective cost management in line with market changes amidst new COVID variant impacts by improving product mix with expansion of skin beauty brands like Clé de Peau Beauté as well as managing SG&A and marketing investments. As a result, even in this unpredictable environment, by quickly adapting to market changes throughout the company, we achieved an operating profit of JPY 41.6 billion, an increase of JPY 9.6 billion from the November announcement; furthermore, exceeding the initial plan of JPY 35 billion announced last February. Next is Page 15, operating profit by reportable segment. Both in Americas and EMEA, operating profit improved by over JPY 25 billion together, thanks to higher commercial base profitability and decrease in fixed costs due to organizational and structural reforms. Travel Retail marked significant growth in operating profit and margin improvement from higher gross margins accompanying sales growth and effective marketing investments. China has a decline in operating profit by JPY 17.2 billion. However, excluding the impact of Personal Care business transfer and transfer pricing impacts, OP actually grew on like-for-like basis. On the other hand, Japan experienced an OP decline by JPY 100 million. Excluding impacts of Personal Care business transfer and COVID-19-related reclassification of extraordinary loss, rebound from inventory write-off expansion and transfer price impacts, the operating profit decline was bigger on a like-for-like basis. This came from strategically increased marketing investments in anticipation of market recovery compared to the very tight cost management last year. Now I would like to go a little more in detail for Americas and EMEA. Please refer to Page 16. Both Americas and EMEA marked significant operating profit improvement, thanks to commercial business growth, profitability improvements and lower fixed costs from organization optimization and structural reforms. Americas and EMEA contribute to more than 90% of the OP increase of JPY 26.6 billion, contributing significantly to the overall group's profitability improvements. As for the Americas, on top of the higher sales capturing market recovery, we reduced the fixed costs from closing negative-performing stores and executing organization structural reforms, which resulted in a double-digit margin in the commercial business. The brand holder costs seem to have increased compared to last year, but this mainly came from proactive investments for global rollout of Drunk Elephant and transfer price impacts. We expect 40% of these brand holder costs to be reduced from 2022 onwards, along with the business transfer of makeup brands. EMEA marked a double-digit margin, thanks to profit increase from skin beauty focus and favorable mix as well as commercial-based margins improvements with efficient cost management from organization optimization. Also due to lower Dolce & Gabbana trademark amortization, the P&L improved significantly, achieving positive number for the full year. Next is Page 17, cash management. As investments in new Fukuoka Kurume plant and future growth such as IT and DX are made, there are incoming cash from Personal Care business transfer and inventory reduction primarily in Japan. This resulted in a positive free cash flow of JPY 186.6 billion. Even excluding the incoming cash from business transfer related items, we generated over JPY 30 billion of free cash flow, meaning that we have become stronger in cash-generating power. As for the DSI, one of our KPIs, we brought it down to 218 days from 269 days as of end of 2020. Through the company's activities to reduce inventory, we have made solid progress to the "less than 200 days" target for 2023. Furthermore, the generated cash was used to reduce interest-bearing debt, allowing us to improve the company's financial position. As a result, net debt-to-equity ratio was 0.03, providing us with a strong financial position. Next is Page 18, to update you on the structural reform, the business transformation which we had committed to and executed by each region in a short period of time. And I would like to explain about the Professional business transfer that was announced today. The Professional business, which has its establishments in Japan and Asia, has a strong foothold in both professional and consumer hair categories. We have decided to transfer to a global company, Henkel, in which we will continue to support the business as a shareholder. The transfer price for the deal is JPY 12.3 billion. The impact for 2022 performance on JGAAP basis is expected to be an extraordinary profit of JPY 10 billion. By executing these structural reforms, we have improved the sales mix by growing the sales ratio of skin beauty brands with lower COGS ratio as well as reduced about 30% of SKUs and brought efficiencies to inventory and plant operation, which allows us to predict 2 to 3 points of improvement on COGS ratio for 2022 and onwards. Also, along with the transfer of employees with the business transfers, the number of employees have gone down by over 10% compared to 2020. As explained in WIN 2023, we have achieved the business structural reforms to improve profitability to build a firm platform for regrowth in 2022 and onwards. Lastly, Page 19 is the progress of 2023 financial targets to achieve capital efficiency as announced last February. To achieve our 2023 target, along with the structural reforms executed in 2021, we are committed to rebuilding the platform for lean financial basis and stable cash generation. That is it from myself. Thank you. And I would like to hand it over to Mr. Uotani for the plan of 2022.

Good afternoon, everyone. This is Uotani speaking from Shiseido. I will present the plan for 2022. The structural reforms that we committed last year, we implemented everything. And this year is a year for us to transform, to put the business back on a growth trajectory. And Shiseido is marking 150-year anniversary this year. You might have seen this advertisement on newspaper. And 150-year advertisement -- please take a look at the video. [Presentation]

As you have seen, we have a very long history or heritage of 150 years. Beauty is to wish the happiness for people, which is the purpose: beauty innovations for a better world. We have implemented this purpose and have come all the way to here. Business-wise, this is the plan that we have announced August 2020. This is a road map, WIN 2023. And 2021, we already -- we have done the presentation. And 2022, we will accelerate to put the business on growth track, and everything is on track. And we will achieve a full recovery in 2023, with a view to achieving the target numbers you can see on the slide. And we will continue to work on achieving 2030 vision. Brand -- investment into brands and innovation will -- we will continue over a long term to achieve growth of the company over a long-term perspective. I would like to share with you our assumptions for market recoveries. COVID-19 started in 2020 and talking to consulting firms and think tanks and banks globally and getting information from them, what's said back then is that Japan will recover in the second half of 2021. And in the West, the recovery will take place in 2022 or 2023, but what happened was totally opposite. Specialists and experts, for them, it's very difficult to have an outlook. Unfortunately, in Japan, states of emergency continued last year. And we expected a recovery at the beginning of the year, but we see the new variant now. And we expect recovery to take place toward the end of this year or the second half. And also we expect gradual recovery of inbound toward the second half of the year or toward the end of the year. Americas and EMEA, from April last year, the "revenge consumption," so-called "revenge consumption," has been strong. And the business has been steady. Amid such environment, in 2022, the key strategies are listed on the slide: skin beauty. And we will explore M&A opportunities. In EMEA and Americas, we will step up profitability. And Japan, China, we aim for full recovery in second half. China is growing double digit. And China and Travel Retail, we will maintain growth momentum. And accelerate group-wide DX. And we will continue global transformation, as presented. And depending on the environment changes, we will always review our business. And we will also continue long-term initiatives. As for skin beauty, it's not just skin care. Of course, skin care brands Clé de Peau Beauté, SHISEIDO, IPSA, these brands are the main brands. And also, ANESSA for sun care and men's market brand SHISEIDO, we will be rolling out globally. And we also talked about the beauty device business. And in area of clean and sustainable, this area is growing. In December 2019, Drunk Elephant joined the group. And BAUM, which we developed domestically, is valued quite highly among consumers as a sustainability-driven brand using wood as material. And it's our first time to talk about this. We spent 2.5 years and established a sustainability team in Europe to explore development projects. And we will launch this brand called [ ule ] from spring this year using plant ingredients. Makeup. Of course, it's relevant. To make the skin look more beautiful, tone-up element is very important. And also in the foundation, we include ingredients to make the skin look beautiful. At the beginning of this year, we launched in NARS brand a new light-reflecting foundation. Reflective on the skin, that's the positioning of the new product, which is selling quite well. And in the area of total beauty and holistic beauty, reflecting the East concepts, we have -- we're working on inner beauty such as collagen drinks. And INRYU -- a brand called INRYU is sold mainly through cross-border EC, available in March in China. These are supplements making skin more beautiful. Looking at the R&D, Shiseido has the best expertise on skin. So we will use those expertise. And based on this strong business portfolio, we will drive innovation. And 2022 -- the skin beauty brands represented 64% last year, and it will grow to -- up to 75% or close to 80%, which should contribute positively to profitability. And Japan and China, where there are a lot of interest, we have Mr. Tadakawa and Mr. Fujiwara to talk about the details.

This is Tadakawa. Hello. So now I would like to explain about the key points for recovering growth and improving profitability in Japan, so these are the key points that I will be discussing. Now eyeing the market trend, I think what's most important is the recovery in growth along with the recovery of market. And first, of course, that is important for us is to expand loyal users through enhanced brand value and product innovations. We will concentrate on skin beauty category, kicking off a stronger start with prestige and premium brands for the company's 150th year. In terms of the skin care area, we will introduce innovative products in one of the key strong areas of SHISEIDO, brightening. In sun care, we will evolve ANESSA to a skin beauty sun care brand introducing day serum that includes new technology to turn UV ray into light that treats the skin. Also, for base makeup, brand MAQuillAGE will introduce skin beauty foundation that will also reduce pores through continuous usage. And ELIXIR, which we have the biggest share, we will launch the day care revolution with the highest loyal user base on February 21. And we will continue to strengthen through Q2. So in the mid-tier price points, which is very difficult, we will continue to drive market share and continue to expand the market share and contribute to the profitability. So through these innovative products with new technology and by evolving, we will continue to grow and nurture our loyal user base. And that will be a key point for us as we try to grow the Japan market. Along with the brand enhancement is DX and R&D innovation. Especially through digital innovation, we will build a consumer database and thoroughly enhance CRM to heighten the marketing impacts. And at the store front, we will implement a personal beauty plan which will allow us to strengthen the repeat and retention and expanding the loyal user base. Furthermore, as personalization of services, leveraging the Shiseido's research technology, we will evolve to something that is using the consumers' DNA level. We will be providing a DNA counseling to optimal match for taking care of the skin. So evolution of digital and R&D will accelerate the loyal user base. In terms of growth, the last point I would like to mention is strengthening the people and organization. As you know, we launched Shiseido Interactive Beauty to enhance our digital capabilities and recruitment of digital talent. We have welcomed female leaders for the prestige and premium brands, department directors who are both strong in digital and rich experience in brand marketing to accelerate the branding for Shiseido. Also the collaboration with our partner customers, our partner companies, which we have been building from last year, was further strengthened this year to realize growth and recovery establishment of loyal user base. So in terms of the profitability improvements, these are the detailed actions. First, in terms of expanding our sales, we will prioritize higher-profit-contributing categories. As a result, the skin beauty sales ratio will expand to close to 90%. And in terms of selection and concentration, we will focus on these key 11 brands, which will expand to high 70% in sales ratio, so that along with sales expansion, we can realize profitability improvements. The skin beauty will contribute to mid-2% increase in profitability for 2022. And through [ SIB ], we will be analyzing the ROIs. And leveraging the CRM and doing our analysis, we will accelerate the profitability to about low 2% contribution to profit margin for 2022. In terms of COGS reduction efforts such as raw material costs, process fee reduction and such -- and we have reduced such as the distribution costs as well. And those will continue to be made to realize 0.5% of improvement. And also, as part of the structural reform, we will continue to work on organization and office restructuring, reduction of hiring by increasing productivity, to contribute to a little less than 1% of margin improvement. And all of these activities, of course, will impact the performance of 2022 but accelerate the profitability improvements for 2023 and onwards. For 2023, along with expected inbound recovery, we will aim for big profitability recovery and so that we can have this as a standard and as a benchmark to build a stronger cost structure. And I would like to hand on to Mr. Fujiwara for China.

This is Fujiwara speaking. The China market has seen economic stagnation from the second half of last year, and uncertainties are expected to continue in the first half of this year and due to measures against COVID-19 and the growth rate is slowing down. However, over medium term, due to economic policies aimed at achieving healthy growth driven by domestic consumption, we believe the cosmetic market will maintain the growth trend. Growth drivers in the market continues to change and consumers are becoming more mature. Needs are getting more sophisticated and diversified. To secure sustainable growth in that market, we must continue to change. In FY 2022, we will establish a foundation for future growth, while at the same time, we will take on new challenges proactively. Specifically, in 2022, we will strengthen our business portfolio and aim at achieving double-digit sales growth. As for brands, our top priority is to invest into existing brands. With our main brands, we aim at growing sales by establishing new growth areas. Brand SHISEIDO, we'll strengthen SHISEIDO Future Solution LX and capture [ a trend of uptake of ] Clé de Peau Beauté. We will enhance interest in skin care products to increase skin care users, and strengthen Key Radiance Care. ELIXIR, we will strengthen eye care and brightening care categories in addition to daily care products. As for new brands rolled out last year, without pursuing short-term sales growth immoderately, we will target consumers who are receptive to the brand unique propositions and establish an operation model to directly approach them digitally in 2022. As for the consumer touch points, in addition to the main channels like e-commerce centered on Tmall as well as department stores, we will expand both online and off-line channels. We will accelerate the total brand rollout to social commerce, including JD and TikTok and the initiatives that we started from last year. In the off-line channel, in addition to flagship store, we are opening stores at domestic airports to expand touch points with domestic travelers. Please turn to next page. To improve profitability continuously along with growth, we will undertake 3 actions. First, we will develop a data-driven social commerce. We will make a shift from e-commerce, which captures traffic with a huge amount of digital advertisement, to an operation where we can connect with individual consumers. To do that, we established a data platform last year where we can centrally manage consumer data by integrating the data that used to be dispersed. We will use the data to realize more personalized communication. Also, through the tie-up with Tencent announced at the end of last year, we will further leverage WeChat, with a view to doubling sales year-on-year in social commerce. Next, while insights and consumers are changing, there is an increasing consumer desire to select products that fit them. We will incorporate that and sustainability into our marketing, which will gain a significant importance in brand value in the near future. Specifically, our R&D team in China will send out information about efficacy and formula. We will engage in activities to foster a culture of refills, with an aim to enhance brand value, for instance, with the brand BAUM. We will undertake the -- in terms of the cost reduction, for AUPRES, we shifted to online and online sales increased by 5 points. And with offline, we did a structural reform and reduced fixed costs; and margin improved by 1 point. In 2022, we will continue the structural reform to -- and continue streamlining. And the region as a whole, we will take advantage of scale to aggressively promote efficiency in the fixed costs. Specifically, we will further integrate distribution centers, locally manufacture small samples to achieve cost reductions and to enhance our response to market changes. We will also build a centralized procurement function which will be responsible for overhead costs as well. Through these efforts, we aim at decreasing fixed costs ratio by 1 point.

They talked longer than planned, so I am going to skip a few slide. So for DX, digital transformation. As Yokota -- Mr. Yokota has mentioned, EC is growing significantly. And Japan is in the 10%, or the teens. So the Americas and EMEA, EC is high, and as a result of that, that's driving the 34%. So we'll continue to drive that. And beauty tech will continue. And metaverse, we are already doing something like this for NARS. And finally, we have the 3 factories. It took us 3 years to do this, but we've spent our CapEx and -- but we are finally in full productivity. We will complete the Fukuoka Kurume factory in May this year and -- but as a result of that, we have a great structure to increase in the in-house supply capacity, which will allow us to reduce cost. And this Kurume factory, this is the third factory. And this is the state-of-the-art IoT, highly productive line which will be introduced for this Fukuoka Kurume factory. It has new equipments, new technology. So like never seen before, we will be able to be more productive, which will contribute to our cost reduction. In terms of ESG, these environmental activities. So this is something we have been repeatedly saying. And empowering women, the female leaders, the governance, these are all very important philosophy for our Shiseido Company, so we will continue to work on this governance too. As you can see, 54% external directors, and female directors 46%. And we do have 2 new candidates, as shown here, so we will have further strengthened governance coming in place. And for us, our leadership team, we had our structural reforms. And we have been working on it from last year, but we have great team that can execute and drive this. And we are -- I am proud to be able to say this, but here we have 20 members, the diverse global leadership team, the executive officers. And we will continue with this diverse organization. Under this COVID environment, it's been a few years now. And we've continued these structural reforms, so we wanted to really completely switch gears. So from end of last year, we started this project called the [ Phoenix ] project. This is for all employees. We have 40,000 employees. All employees will participate. To become a #1 beauty -- skin beauty company in 2030, what do we need to do? Starting from the business philosophy, to what we should be, the products, organization. We had -- we are getting a lot of proposals and comments from each of the regions in different regions, and we want to really reflect that and build a vision for 2030. And we want to try to come up with what we want to be as a company as a result of this project. Now 2022 business plan. To be very straight with you, it is very difficult to outlook the future, to forecast the future with this given situation, but I want to be very open with you and very direct with you, our best forecasts that we can come up with as of today. So as of October timing, we start thinking about the next year's plan in each of the regions and areas and categories and discuss and consolidate it all together. So the initial plan as of October was net sales of JPY 1,130 billion, OP of JPY 80 billion. [ And I too ] -- JPY 80 billion of OP was the good range to aim for. And so I had thought that this JPY 80 billion would have made sense. But November to December, as you all know, the Omicron expansion in America, in EMEA and in Japan too. Now this COVID situation in January, February. So as of today, right now we have to reflect that into our business environment right now. We can't be responsible or accountable for something that was planned in October, and that is why we are sharing this number with you. And we do have JPY 140 billion worth of transfer business in TSA, so that's also accrued into the sales. So that will continue to decline as these TSA wear off, but in the actual basis, the like-for-like is JPY 960 billion, so it's a 14% growth like-for-like. In terms of the operating profit. As I have mentioned, this COVID being long pandemic. And Japan, the recovery, is it going to be more in the second half? And the situation in China -- reflecting all of these market trends. And looking at the strategy for our market trend is Japan and China, also Americans and EMEA -- if we can see that Japan and Asia will recover like Americas and EMEA, then I think that we should do a strong investment. So I do have that kind of reserve in this. But reflecting all of these together, the net sales of JPY 960 billion on like-for-like basis, the operating profit, I have laid here JPY 60 billion, meaning more than JPY 60 billion, so JPY 60-plus billion. Of course, looking at how things go, we will continue to assess and review in line with the market trends. In terms of the dividend. This has already been announced, but the regular interim dividend is JPY 25. Year-end is JPY 25. Full year is JPY 50, and we will add the commemorative dividend for 150th anniversary of JPY 50. So JPY 25 and JPY 75 will be the dividend per share that -- which we plan to pay out. And the next is a summary page. And the market situation is on the left. There is the plus and the minus. So there's a positive and a negative, of course, but we don't know. Everything is very unpredictable. It's very difficult. There are suppliers, distribution issues. Inflation could slow us down. Inflation slow us down. We don't know. But looking at this at the market, we are trying to do what we can best as of now. And that's written on the right-hand side. The benefits of the structural reforms, we're starting to really see from this year and even bigger for next year onwards. The skin beauty, skin care beauty sales will continue to grow. And due to the favorable product mix, we will improve the COGS. And SKU, as Mr. Yokota has mentioned, close to 30% of reduction have been made in SKUs. We've been more efficient in production and inventory as well. And for fixed costs, in many areas, we have been making continuous efforts to lower the fixed costs, so we're starting to capture the benefits of the structural reforms. And so the marketing, the D2C marketing, will continue to grow, expand, for OMO as well. And we have the factory situation that's all set up to go. So for us, we -- the 2023 and beyond, going forward, we are aiming for growth. And we are pushing our accelerator to even go forward. And that will be my summary. Thank you very much. That will be it from myself.

Now we would like to move on to the Q&A. [Operator Instructions] The questions will be taken in Japanese. [Operator Instructions] JPMorgan, Ms. Kuwahara-san.

This is Kuwahara speaking, from JPMorgan.

Yes, we can hear you. I can't see you, though. And now we can see you.

Kuwahara speaking, from JPMorgan. Congratulations for the 150-year anniversary. We wish you good luck. Down to one question, right? 2022 and 2023 cost structure, the changes that you are expecting, on Page 13. Can you explain more? You plan to achieve 14% top line growth. And even with JPY 10 billion marketing investment, I think the profit growth should be faster. OP margin 5.5% or 6%. What's the SG&A and cost of sales? Looking at the numbers, 2023, 15% margin. How are you achieving these targets? I think that we're all interested in that cost of sales 21% and 64% of SG&A. What's your approach?

I will explain. And firstly, cost of sales. This year, we have seen the mix improvement by 3 points -- we're expecting 3 points improvement. Under WIN 2023, cost of sales ratio improvement target of 2% was set. And against that target, I think that we are on track, but we have remaining TSA impacts, so excluding that, we are on track. Personnel expense ratio or other SG&A, we are also on track and achieving reductions. However, as for marketing investments, we're -- it's -- remains at high level. And against 2023, our approach is that 5.5%. With core business, it's 5.8%, close to 6%. There is still a gap about 9 points, so to fill the gap, we need to see profitability improvement in Japan. That's going to be the major driver. Japan region, in 2021, local market was similar to 2022, amid COVID-19. And we expect to see a recovery and also we expect to see recovery of inbound tourists in 2023. The OP of Japan region used to be JPY 80 billion. So we expect to see a recovery from the Japan region to achieve 15% margin target. Other areas, EMEA and Americas, cost structure improvement has been made. And EMEA turned profitable in 2021, an improvement by 10 points in -- that we have announced in 2019. We're on track in Americas and EMEA.

Just one confirmation. So your challenge is improving return on investment? So next fiscal year, 2023, especially Japan and maybe China, the return on investment will improve. Is that your view?

I think you are referring to marketing ROI. As Tadakawa presented, in 2022, marketing ROI improvement should have a positive impact by 2 points. And as Fujiwara-san explained, in China we will also bring in higher efficiency. China as a whole, compared to this year, 3 points margin improvement is expected in this fiscal year. And 2023, with a higher top line, we should expect to see further improvements.

I will add some comments from my side, 21% of COGS ratio that we have targeted. Through selection and concentration, we should have positive impact. And 64% SG&A or -- there is still a gap, but there are 2 aspects. One is the top line growth. We need to see top line growth. And what we have done is the streamlining and shrinking, but from -- we are seeing market recovery. Japan was down by 30% against 2019, but in EMEA and Europe, if you see recovery, it -- the revenue should top up. And we expect a growth in recovery going forward, including Japan, and 64% or so, JPY 40 billion to JPY 50 billion in value terms. We need to see the top line first. And we have to see the top line growth first, and of course, we have to control costs. So it really comes down to top line growth. And our marketing efforts and the market growth, these are important.

Next, UBS, Kawamoto-san.

Can you hear me all right?

Yes, we can hear you.

I would like to ask Mr. Uotani. This -- the last page, Page 35, JPY 80 billion. OP was planned at JPY 80 billion, but now today you're announcing JPY 60 billion. And so JPY 10 billion, you were mentioning about, I think, that's remaining in Japan and China, so what kind of negative impact were you looking at in Japan and China for this JPY 10 billion? And especially for Americas and EMEA, the top line growth is 10% compared to the last fiscal year that just ended. Why did you bring it down? It looks like it's a slowdown in Americas and EMEA as well. For Americas and EMEA, are there no upside? And looking at -- and you've mentioned that to be assessed and reviewed in line with market trends. That timing for the review, could it be in Q1? What kind of timing are you looking at?

For Japan and China, we're looking at the slowdown of sales. As a result, the gross margin is going down. The bottom line has an impact of about JPY 10 billion. And the split of that is about half and half between Japan and China. For Americas and EMEA, I do think there is such potential, but as we were creating this plan and as we were looking at this market trend, in the U.S., there were Omicron of 1 million people, and EMEA going crazy with the Omicron, and so on. Belgium had lockdown. And that was kind of the talks with -- early this year. And when we looked at the situation at the time, we felt that we should not expect too high for this year. And so of -- last year's growth, compared to the previous year, the growth was quite high, but if we continue to look and read that we will grow at the same timing or same pace, that will be a bit risky. And that's why we have come up with this business plan today. But looking at the momentum now, momentum right now, in terms of the sales for EMEA and Americas, there could be such. And -- but there will be the sales increase, and that, of course, will contribute to the margin. And so we do have expectation for that at the same time. Now to be assessed and reviewed in line with market trends. What kind of timing? For our management cycle, usually we would review all of this review every month, on a monthly cycle. And so ultimately to make that kind of final decision is a 3 months cycle. So we do -- with the management team do a 3-month cycle of review. Is it going to go upward or downward in terms of the numbers that we have in place? So if we were to be more maybe reasonable in the numbers, maybe I think the assessment and review in line with market trends is probably at the end of first half, but of course, we do these reviews on an every-quarter basis.

Next, Goldman Sachs, Yamaguchi-san.

This is Yamaguchi speaking. I'd like to know assumptions for this year. You need to see the top line growth, you mentioned. From October, Japan and China sales downside risks have been factored in, but Japan 17% like-for-like growth is expected. What's the rationale behind that? And if you fall short in terms of top line, how are you making up in profit? Have you factored in any buffer? In China mainland, 16%; Travel Retail and -- 12%, I think these numbers look reasonable, but profitability is a challenge. You're forecasting 3 percentage points improvement, which is quite encouraging, but I think that -- is it okay to understand that you are able to control -- or not really. Could you also share with us some of your initiatives?

Firstly, 17% for Japan, you -- the assumptions for that. Tadakawa-san, do you have an answer for this, on the market outlook or market assumptions, to start with?

We have factored in some downside. The first quarter, we thought that we -- it won't grow as much as expectations. The market is better off. It grows low single digit; from second quarter, higher single digit. Third and fourth quarters recovered back to pre-COVID level or '19 level. As for inbound, first half this year is in line with 2021; from the second half of the year 2020, down 70% year-on-year. And we think that we -- it will recover by half. So inbound and local combined, lower teens against -- increase against last year. That's the market estimate. And we are forecasting a 17% growth year-on-year. And key for us is mid-price range. Last year, it dipped quite substantially. And that decline -- as I explained earlier, through launches of innovation products, we will strengthen to stimulate demand. And reflecting that, we have come up with that forecast. And as of now, we have to formulate a marketing plan to prepare for the market recovery. We don't want to be too late. As of January, we thought that the first half or the Q1 is going to be challenging, so we have started cost saving. And as what Uotani-san explained, every month, we run PDCA cycle for all the cost items. And if we see new variant, then we will make a response and reduce cost to control cost items, every month. So we will be managing cost items very carefully.

Fujiwara-san, can you also talk about China?

As for China, the costs structure in China. The fixed cost ratio is low. The media spend and costs to approach consumers is quite big, so depending on the market, we will be flexible. We are flexible. And secondly, to improve ROI, as explained, we will leverage data. And data platform is now in place. So we will do a fine-tuning in targeting consumers and with a view to improving conversion. That's a challenge for this year. And finally, as explained earlier in my presentation, China is getting a big scale, so we will take advantage of scale to further reduce the fixed costs and steadily make investment to drive the top line growth. By doing so, we would like to improve profitability or margin.

Investment into digital, you're spending a lot. And live streaming, you're already doing. Are you already doing live streaming? I heard that the costs associated with is quite high.

Well, as for live streaming, the market is changing. Previously, KOLs or top KOLs, we had to pay money, but we have seen changes from last year. And nowadays, cosmetic specialist KOL is used in live streamings. And also we are doing our own live streamings, and ROI is quite high for those, so we are making a shift.

Finally, various costs are increasing. Estée Lauder, I heard that they are increasing prices for their products. How are you responding to cost inflation?

As for cost inflation, as explained earlier, we will take advantage of scale. And rebates and so forth, we will reduce them to respond to inflation and also improve ROI. We will tackle inflation with those measures. Thank you very much.

Cost inflation...

Yamaguchi-san, are you online?

Maybe she has dropped off -- she's still online. Prestige and premium, it's not a scale business. So perm oil and silicones and various raw material prices are increasing, so the -- but the impacts is, relatively speaking, low. In case, we are changing to a different kind of business model. So with the higher scale, we think that we are able to absorb the increase or inflation, but the inflation situation is different, so we have to see market by market. But our intention is to absorb the cost inflation.

Next question, Mitsubishi UFJ Morgan Stanley, Sato-san.

Can you hear me? Great. I have a question for Tadakawa-san on Japan market. So for recovery for the Japan market, you didn't mention about the pre assumption for this year, but I want to hear a little bit more about the future. So looking at the sales, how -- how much profitability improvements can you see without relying too much on the top line sales? For example, you have the factories, so productivity will improve. And you mentioned that 11 brands would cover 70% of the share, so the remaining brands or others, are you thinking of divestiture? Or I mean you might be done with the structural reform, but if it's small, you can sell it like Za. So what do you not -- rely on? And which part do you not rely on in the sales? And in terms of the sales too. This is year 3 of COVID. And what I'm feeling as we head to year 3 of COVID, this new lifestyle -- we're always wearing masks. In fact, people -- especially for Japan, some of the Japanese people are liking to wear masks. They're not forced. They prefer to wear masks. And in China, when Travel Retail sales is growing this much in China -- so if they visit Japan as inbound tourists, will they buy the same amount in Japan? And especially there could have been some inbound demands within the domestic market. That's why we're struggling with this kind of increase, and so I'm thinking all of these things. And also, looking at the Japan sales ratio, department store and specialty stores, I feel like the specialty store sales ratio is improving. And maybe that's good for you, but just looking at Japan as a whole, there's the sales. Which part are you reliant on sales, growing the sales? Which part are you not reliant on the sales in terms of the profitability? And when you say sales and when you speak about the sales, do you really think that that's going to happen with the sales?

I feel like that was a lot of questions.

Yes, I agree, yes. I think it will be a problem if Tadakawa-san said that, "Yes, we won't be following the plan," but...

Well, anyway, Sato-san -- so last year, what we misread the most is the market trend of different price points, meaning that the consumers' behavior -- we thought we would come back. And so the daily products like the face wash, the foundation, the skin care, we saw a lot of transition for the down trade from mid-price point to lower price points. And that has to do with the consumers and maybe just kind of like a big anxiety for the future due to this COVID environment. And when Omicron variant came out, it seems like the consumers' sentiment went down a little bit due to anxiety for the future. And when we think about that, so are we going to compete on the lower price points, the low-price-point category? That's not what we're going to do. We are going to continue to the mid-price point and look for a good cost structure, and that's where we want to compete. And as I mentioned and as we mentioned last year, because this year is the 150th anniversary, we will be, as mentioned earlier, strengthening our products with innovation. And so along with that, there will be a lot of strengthenings that will be done. And the mid-price point category, we need to build a structure where we are driving this mid-price point category. That's how we will allow us to build a stronger cost structure, and that's a big point for us. In order to do so, what can we do on our own? Of course, there's a lot we can do on our own, but the key thing is collaboration with our business partners. And those business partners have to be also focused on mid-price point as well. Otherwise, they won't profit either, so we need to involve these business partners and their employees too to lift and to really focus on the mid-price points. And we will be doing this together. And last year, we did a lot of collaboration with these business partners, drugstores and specialty stores. We have a lot of information shared of the members too. So we want to have these members do -- with digital transformation, do a good CRM. And then as the sales increase, the ROI will improve as well. We want to see the synergy there; and that's a big, important part for us. And the other is, as I have mentioned earlier, 11 brands will cover about 79%. And years ago, when Uotani-san and I communicated, we had about like -- and we talked about 120 brands. And so we've consolidated and really selected many of the brands now. And so as of now, looking at the Japan brand, with SKUs in Japan, it's gone down to about 2,500 SKUs. So compared to what we talked about years ago, we've been more efficient. And -- but as a result of being more efficient, we can see improvement in profitability and COGS ratio as well and also for the processing fees as well. And furthermore, how we work too, the working style is changing too, so we are kind of rearranging the office too. We have offices nationwide, but we are reorganizing our offices too because -- so we can be more productive in our work style as well. And distribution, by having our WDC, the distribution costs or the logistic costs will be much more efficient too. So along with the sales, there are things that will go up, but there are areas which we will not depending -- which we will -- not depending on sales, will be -- as I have mentioned.

So you mentioned -- so where you don't depend on the sales, you said about 2 points in the JP.

For 2022, we're looking at 3 points.

So 2022, regardless of the top line or the sales, you will improve by 3 points in JP.

Yes. So looking at Japan, this year, we're looking at a late single-digit margin. And as an extension of that, there are parts that will be lifted by sales and that will be lifted by productivity. So for 2023, we want to go to late teens or mid- to late teens in terms of the margin improvement. And the biggest thing for 2023 would be, including inbound, that the market has a full recovery for the full year. And if that's the case, of course, there's the profit contribution from the sales. And we will have percentages of the profit improvement, so that's why -- how we want to drive to the late-teens growth.

I do use the day care revolution. I am not sure how much it works, but I will -- I am looking forward to its innovation as well.

Please do purchase the Clé de Peau Beauté as well.

All right.

We're extending time for Q&A and we will accept 2 more questions. Ohana-san from Okasan Securities.

This is Ohana from Okasan Securities. I have a question regarding China. This year -- or from last year, JD and WeChat, those new channels, you started to work, but thinking about profitability in China: The marketing expense, you are expecting an improvement in efficiency in marketing spend, which has been disbursed, so far. With the distribution or disbursement of channels, what do you see the impact on profitability? With the increase in the number of channels, the costs incurred will increase? Or are you moving away from just relying on Tmall and expect improvements in profitability? Can you -- can I have your views?

Fujiwara-san, can you answer -- can you provide an answer to this?

In terms of the diversification of channels, we're responding to consumer journeys. Previously, within Tmall, we were in the ecosystem. And we made a marketing investment and purchases had been made, but now consumers are accessing outside of Tmall. But when they buy, they go to Tmall or Jingdong or social commerce. That's -- those are the consumer journeys. So even outside of Tmall, offline including, we make investment into most appropriate place to drive traffic. So going to new channel, we can create new traffic. With conversion, it's not necessarily the case. So we don't expect diversification to deteriorate -- to see the deterioration on profitability.

So you make investment per channel to capture consumers. So in that manner, I think that the investment is going to increase, from hearing what you have just mentioned.

Well, there is an investment to open a new channel, but we don't expect the margin to deteriorate as a result.

This year, you're expecting 3 points improvement, but like in Japan in 2023 -- how much improvement are you expecting in 2023 in China?

Is this about the market?

No, about the Shiseido's China business, margin expectation in China. This year, you're expecting 3 points improvement. How much more improvement are you expecting to see? Under WIN 2023, you're forecasting 15% or higher, but realistically speaking, are you on track to achieve that target in 2023?

2022, we will improve by 2 or 3 points. In 2023, we will continue to work on improving margin and while expanding scale and reducing the fixed costs. That's the key. In 2023, top line -- depending on the top line, we will see what kind of improvement we can achieve.

This year, you're forecasting much growth in sales...

I'm sorry. We are limiting the number of question down to 1. Next will be the last question, from Citigroup, Miura-san.

This is Miura from Citigroup. Can you hear me?

We can't see your face, but we can hear you.

10 minutes later after the session is over, maybe my face will show -- here it is. That's my face. One thing, so 2021, the year -- as of end of 2021, China's -- the brand power in China. From your perspective, did it improve, or did it not improve? Or did it aggravate? Or did it stay flat? So using ROI as a benchmark, could you explain to me? That's it for me.

So you -- the brand equity or the brand value in China. Did that change is the question. How is that? So maybe I can have Fujiwara-san make the comment. And I would like to follow up on it.

Brand equity in China. We are doing our consumer research. And in terms of equity, I do see that it is going up. The awareness, the engagement has actually grown to a quite high level. And one thing to -- as a reference, we use our retention rate. How much of our consumers are coming back? We keep our retention rate. As for that, within the industry, we're at a very high level. So that equals ROI improvement or leading to the improvement of ROI.

And Miura-san, from myself: The main brands have grown in share too. So I think that does speaks -- speak for itself about the brand value, but what we do need to be careful of is, this last year and the last 2 years, the market, China was -- we were -- China was kind of the light to the industry recovery, so all the companies were really focused on China and -- but it ended up being kind of a discount, in the end, with samples, et cetera. And it was said that it may deteriorate the brand value and the ROI may deteriorate, so it was kind of a borderline. Not just us, but all companies too have worked a lot in China to do these promotions, which ended up in this kind of discount. But I think that's kind of flipping a little bit, changing a little bit to fix that. Or -- but when it's competitive, we too need to go into the market and make sure we do not lose this competition. And as a result of that, the Double 11, the singles' sales last year, we grew significantly. But in terms of marketing, to heighten the quality, that's something that we'd like to focus on maybe for this year and onwards. For example, in China, the consumers in China, what do they look for in a brand? That's starting to change. First, it was about awareness. Of course, we need to let the consumers know of our brand, to the people that don't know the brands, and from the admiration to a Japanese product or to overseas product. And then once that penetrates, the brand awareness, then it's the same for any marketing history, but then the knowledge builds. The experience builds. The sophistication level goes up. And if that is the case, then why is this product good? Or what -- is there anything else that is differentiated? And that's how diversity happens in the market. What I'm trying to say is this year what we want to really focus on more in China is -- so what is kind of the contents of the product, the ingredient in the product. That's driving a lot of interests by Chinese consumers. So this kind of prescription. Why is Clé de Peau Beauté scientifically good for the body or the skin? Of course, there's a lot of things I cannot disclose due to pharmaceutical regulations or laws, but these kind of improving the communication quality of these aspects will allow us to capture the needs of the consumers, which will heighten the brand value and equity. So rather than just bringing famous celebrities and making a big buzz about it, it's kind of transforming into more of the quality contents of communication.

As the market -- from us -- or we do see that the Chinese market, the organic margin is quite high. And there are some in the market side that feels differently. But looking at 2021, in actual substantial OP margin, did it go up or did it go down? Or was it status quo? Could you explain a little bit about that?

I will explain myself. For -- the margin in 2021 in China, it's gone down by about 2 points. And there are reasons for that. Q4, the sales in Q4 went down a little bit. And of course, we were forecasting the single days and et cetera and we had the samples and testers. And we had a lot that was shipped out from the headquarters and -- but at the timing that it was shipped out to headquarters, it's calculated, booked into the Chinese account. So that's something that we've been doing with our accounting system. That's not something that is unexpected. We knew that was happening. This point-of-sales material, costs have gone up is one of the reasons for this 2 points decline. And new brand launch investments is also booked into the number. And these are the 2 elements that have aggravated the numbers by 2 points. If we were to exclude that, it's, I would say, breakeven, pretty much breakeven. That's what we're looking at right now. So in that sense, 2022, we -- the new brands will go into year 2, so the ROI would become better and will improve. And the point-of-sales materials, things, items that were shipped early on, that could be used as well. So with all of that put together, we want to improve minimally by 3 points.

Also, Miura-san, I say the similar things every time, but the Chinese market, the China market, it's no longer -- we don't just look at it as just China market, meaning that Travel Retail -- it's the interaction of Travel Retail, so Shiseido compared to other Japanese cosmetics or cosmetic companies, we invest in China. And these people that -- in China come to Travel Retail and shop at our Travel Retail points, especially in Asia. And if you see the numbers in 2021 -- and there's Hainan Island. And even though the travel stopped due to COVID, China is still growing in Travel Retail, including the Hainan islands, as you saw. So for us, we call it cross-border marketing. We invest in China. We grow the users in China. And these travelers will go into Travel Retail and shop there, and that's a very high-profitable business. So we need to put these two together. And then once the inbound tourists come to Japan too, we have to think about that as well. So when we say China market, it's looking at the Chinese consumers as a cross-border marketing. That's how we look -- have to look at China. And last year, we've been focusing on investing more in the cross-border marketing for China. And these strategies and actions, they have to match up together because if we do, hey, this product in China -- and if you go to Travel Retail, there's no product. It needs to all match up. So it needs to be all in sync, and we are working to do that. Especially last year, the brands SHISEIDO and Clé de Peau Beauté, we did a lot of pilots in -- around this area. So that's why in China it will look like their -- the investment will continue to increase, and that will probably look as if we are doing that in China market.

Thank you very much. Now with this, we would like to close the Q&A session. Now to close, we would like to have a word from Mr. Uotani.

[ Hirosami-san ], I apologize for bad connections. Hopefully, we can talk to you again in a small meeting. As I mentioned at the beginning, we have done structural reform; last year, JPY 200 billion worth of structural reform or transformation. We had to make tough decisions. And talking to -- we had to win support from leaders and our employees globally to do what we have done. And now our financial standing is better and business foundation is better and we have the capacity to generate cash. And sometime, we will further accelerate investment to strengthen brands. And then with JPY 10 billion -- or JPY 20 billion sales growth, that should have a very good, positive impact on profit. And we should have an incremental positive effect, leverage effect. So going forward, we will work on driving top line growth and profitability improvement. That's it.

Thank you very much, Mr. Uotani. Thank you very much, everyone, for attending today's briefing session. We will close the earnings briefing session now. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]