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

In the previous Q3 business results presentation on November 10, we have explained about the downward revision of core operating profit to JPY 35 billion from the initial plan of JPY 60 billion. With this big revision we as management understand the big impact it had to the stock price and the trust of the stakeholders. We take this seriously, and as a company are committed to turn around the business quickly and execute with solid action. In result, the core operating profit for 2023 performed above the forecast of JPY 35 billion to JPY 39.8 billion. As we exceed the forecast, it is also a continuous challenge for us to improve on the accuracy of our forecast and the use of focus. On the other hand, for 2023, we were able to add some profit as a result of business management agility, although the business environment continued to drastically change in China and travel retail. Even though the profit amount of JPY 35 billion is far from satisfactory, we feel that we were able to achieve some fruit as a result of pursuing profit expansion. This slide summarizes the key points that are updated from the last business result presentation. Japan local captured solid recovery. The consumer purchase is accelerating its growth every quarter. Although the market is driven by low price range, the company's focus of mid- to high price range grew strongly and expanding the market share for the full year. The share declined in Q1 but along with the powerful innovative product launches in Q2 and onwards, that trend turned to positive growth in share every quarter. From a profitability perspective, we achieved positive numbers for the full year, achieving a strong growth of positive 17%, a drastic profit increase of JPY 9.2 billion. Next, China is steadily moving forward to a recovery trend since the treated water impact. For Double 11, we were significantly hit with a decline more than the market as expected. However, in December, the prestige category market had positive growth, and we are starting to see a recovery to land flattish to previous year on an overall business basis. With the strategic allocation of marketing investments in the small makeup category with NARS and Clé de Peau Beauté, which has less negative impact compared to lotion and emulsion we were able to expand market share. So even in such environment, we are realizing strong growth in focused areas. Next is Travel Retail. Inventory adjustment is on solid track with South Korea completed at the end of 2023. Hainan Island is expected to be completed by end of Q1, as previously explained. Next is Americas, EMEA and Asia Pacific. In these brands such as NARS, Drunk Elephant and narciso rodriguez, the localized Valley development showed solid result, realizing a double-digit growth for the full year in all 3 regions. Globally, we pursued thorough cost management more than ever, adapting to market situation whilst continuing to invest in growth areas. Next is Page 4, the P&L executive summary. Core operating profit was JPY 39.8 billion, a minus JPY 11.5 billion. The first half captured significant profit growth, but the decline in sales in the second half resulted in the full year core OP to decline year-on-year. Operating profit was JPY 28.1 billion of minus JPY 18.4 billion. The profit attributable to owners of parent is JPY 21.7 billion, a minus JPY 12.5 billion year-on-year. EBITDA was JPY 91.8 billion, a decline by JPY 10.6 billion year-on-year. EBITDA margin was 9.4%. Next is Page 5, the performance by brand. The slowdown of China and Travel Retail in the second half impacted the overall business. Shiseido and ELIXIR had double-digit growth in Japan, but resulted in negative growth globally. As for Clé de Peau Beauté, even though the sales ratio is high in China and Travel Retail, because of the strong presence of the prestige brand and its brand power, the brand sustained its positive growth. Brands such as NARS, Drunk Elephant and narciso rodriguez had very strong growth, driving the overall business. NARS grew to be the third brand in our company to exceed net sales of JPY 100 billion following Shiseido and Clé de Peau Beauté. IPSA had a big decline in sales. There was the impact from the treated water, but we do realize there are brand challenges as well. So we will turn around the brand with initiatives such as creating new hero products going forward. Next is Page 6, the net sales year-on-year. For the full year, the overall company had positive growth from strong growth in Japan, EMEA and Asia, although China and Travel Retail experienced negative growth. As a result, the net sales remained largely in line with our previous forecast disclosed in November. In Q4, refraining from Japanese products after the treated water release impacted China and Travel Retail as well as the inventory adjustments continued in Travel Retail for South Korea and Hainan Island, resulting in negative sales in these regions. We were able to partially offset in other regions, but net sales resulted in minus 6% overall for the quarter, a bigger minus range compared to Q3. Next is Slide 7 about the Japan business. The market is solidly recovering. First, for the local market, the low price range continues to drive the growth and mid-price range growth rate expanded further in Q4 remaining on recovery track. In such environment, we continue to concentrate our marketing investment to our focused area in core brands in mid- to high price range to expand the loyal users, allowing the company to expand share overall for the full year. Local consumer purchase accelerated its growth rate quarter-to-quarter, realizing high single-digit growth for the year. Now in January, the local consumer purchase is accelerating further to mid-teen percentage, kicking off 2024 with a good start for high growth for the year. By brand, Shiseido grew significantly in Q4 by over 30% and also for the full year by high teen percentage, mainly due to great performances of new products such as renewal launch of Ultimune in Japan and the Essence Skin Glow Foundation, a newly formulated foundation mix with beauty serum. Clé de Peau Beauté also continued its double-digit growth in the mid-teen percentage significantly exceeding the market performance. ELIXIR had a growth of low teen percentage for the year, expanding its share and driving the market contributed by the continued high performance of the renewed wrinkle cream in September and the newly launched Total V Firming Cream, the fruit of state-of-the-art technology for firm and tone skin. Inbound was a growth of high 20%. There is recovery with increase in tourists, but the treated water release continued to impact Q4, resulting in performance lower than expected. Next is Page 8, the China business. As we expected in November, Q4 was a tough market environment with the consumer pullback due to treated water release on certain market situation as well as decline in bulk purchases. However, the sales decline range stayed within the forecast, and we see that we have hit bottom heading to a recovery trend. As for the market, the off-line grew in Q4, but the online experienced the big minus, resulting in a negative overall. Our consumer purchase was minus high teen percent for Q4 and minus low single-digit percent for the full year. Online was heavily affected after the treated water release, resulting in minus mid-20% for Q4. Off-line was also a minus of mid-single digit. By brand, the signature Japanese brand, Shiseido faced a tough result of over minus 30% in Q4. However, Clé de Peau Beauté in the high prestige did well landing flattish to last year. The company struggled more than the market in the Double 11 campaign, but Clé de Peau Beauté and NARS captured strong growth and actually increased its ranking. In TikTok, we expanded our brands realizing the growth of over 3x of that versus last year. Although there are headwinds to Japanese brands at the moment, we were able to make good decisions on investments to invest in what works under such environment to protect our profitability. And we also captured wins in areas where we should win. Next, Page 9, we'll look at Travel Retail. The market continued to see adjustments in distribution inventories due to tightening regulations as well as reluctance to buy Japanese products following the release of treated water. Customers purchases in fourth quarter were in the high minus 10% range globally and in the low minus 20% range for all of Asia, excluding Japan. The chart to the right shows the percentage of customers who purchase Japanese products in the fourth quarter of the previous year, for Hainan Island and Korea and respectively. And with a solid line, as you can see from the difference between the solid line and the dotted line, shipment sales were lower than customer purchases in the fourth quarter as well and the reduction of distribution inventory is progressing and schedule towards completion of the optimized process. Next Page 10, the Americas, Europe and Asia Pacific achieved double-digit growth for the year primarily driven by the growth of global brands such as Drunk Elephant, NARS and narciso rodriguez. Going forward, we will continue to strengthen our investments for sustainable growth and expand our market share. Next, cost ratio in Page 11. In the fourth quarter, the real cost of sales ratio worsened by about 2 points from the previous year due to an increase in allowance for write-offs of unevenly distributed inventories mainly as a result of lower sales in China and Travel Retail sales. However, due to the cost improvement and the logistics cost improvement, it is down to about 1 point difference. Next, Page 12, core operating income by reporting segment. And although Japan did not reach the initial plan due to a downturn in inbound sales, the marginal gain from higher sales led to a significant increase in profit and the segment returned to profitability for the full year. China posted a marginal gain in the first half due to higher sales. And in the second half, despite lower sales, cost management contributed to a significant increase in profit. In the Americas, profit increased due to a marginal gain from higher sales despite some offsetting factors such as the impact of business transfers resulting in a profit margin of approximately 10%. Travel Retail posted a significant decrease in the profit due to a large marginal gain from lower sales. Others and adjustments, the net income decreased by approximately JPY 17 billion due to various factors as described above. The major impact was marginal decrease due to the decline in internal sales into China and Travel Retail. Page 13 shows our assumptions for 2024. As we have explained, the market environment bottomed out in 2023, and we aim to achieve a steady growth and recovery in 2023 through high-quality growth strategies and cost structure reforms. We expect 11% overall growth in Japan, mid-single-digit growth locally and growth in both online and offline market, but we also expect continued polarization of consumption. We will transform our business model, optimize SKUs and promote selection and concentration. As a result, the sales of local brands in Japan will decline due to streamlining while we aim for strong growth in core brands. Inbound sales are expected to exceed 60% with continued growth due to the increase in travelers and the impact of treated water release will continue through the first quarter and ease from the second quarter onwards. China is growing at 5%. Market growth is expected to stabilize and grow in the low single digits due to a shift in consumer purchasing behavior towards essentialism with an emphasis on efficacy. The impact of treated water is expected to continue through the first quarter and ease from second quarter onward. We aim for above-market growth and [ our shelves ] through increased investment in growth areas. Travel Retail will grow by 7%. We will return to a travel-centric business model and continue to maintain appropriate levels of distribution inventory. In South Korea, inventory adjustments have been completed and thereafter, we expect that market to grow and mobilize in line with the pace of traveler recovery. In Hainan Island, inventory adjustment is expected to run its course in the first quarter of 2024. We will work to maximize sales by offering attractive products and marketing to travelers. Growth is expected to be 10% in Americas and 13% in Europe. In both regions, we expect the market to grow steadily in the mid-single digits, but we aim to grow our sales above the market. Asia Pacific is expected to grow 13% with mature markets such as Taiwan and South Korea continuing to experience stable growth, driven by economic growth in Southeast Asia. We assume that growth in Southeast Asia will outpace market growth due to accelerated growth in the region. Page 14, it is the outlook for 2024. We are assuming sales of JPY 1 trillion and real year-on-year growth rate of 8%. The sales assumptions are the same as reported earlier. Core operating income will increase by JPY 15.2 billion to JPY 55 billion, and we will bottom out in 2023 and make a strong recovery. We will continue to make investments to strengthen our brand value for sustainable and stable growth and will steadily implement strategic investments such as focus. We will also steadily promote measures to increase gross profit, which will be discussed later by Mr. Fujiwara later to improve profitability. Net income is JPY 22 billion. We plan to record JPY 30 billion in non-recurring items mainly for structural reform expenses, including organizational reform, productivity improvement and rationalization stores and offices. As a result, net income in 2024 will remain at about the same level as the previous year, but we will proceed with the structural reforms without delay in order to provide profitability in the following fiscal years and beyond. Now I would like to invite Mr. Fujiwara for his presentation.

Now I would like to update you on the midterm strategy, SHIFT 2025 and Beyond. In this midterm strategy, we will focus to enhance execution and deliver results while adapting to the change in market environment. In the midterm strategy, there is no change to the core strategy of continuous growth and improvement in profitability. However, we have refined the target to adapt to the market environment change. First, the core operating profit in 2023 landed at JPY 39.8 billion from the original plan of JPY 60 billion. We take this result seriously and have started a review of the business structure of the whole company for structural reform. We will follow through with the structural reform leading the year 2023 as bottom and committed to turn around the business. The core operating profit target for 2024 is JPY 55 billion. By executing the structural reform, we will aim to achieve core operating profit margin of 9% in 2025, a year behind the original schedule. By completing the structural reform, we will continue to target the core OP margin of 15%. We will complete the business transformation with achievement of continuous profit growth and structural reform as core components. In detail, global cost reduction of over JPY 40 billion, complete Japan structural reform and acceleration of growth, achieve high-quality growth in China and Travel Retail, accelerate growth in high-performing Americas and EMEA as well as Asia Pacific, and further acceleration of core brand growth momentum, expansion of gross profit. We will execute these items by 2025 to build a resilient business structure. In terms of global cost reduction measures, we will pursue over JPY 40 billion of cost reduction in 2 years, as you see in this page. Japan will target JPY 25 billion of cost reduction. On top of the JPY 10 billion in China and Travel Retail, adapting to market environment changes, we will also execute a cost reduction of JPY 5 billion in other regions to enhance the profit structure. These measures have already started to take place from end of last year, and the core action plans will aim to be completed in the first half of 2024, so that we can capture the full impact in 2025. Next is about the reform in Japan. To realize a sustainable growth in the Japan market, we will aim to create new market capturing the diversified needs from the change in consumers' values. In detail, we will concentrate the investments to global and Asian brands that are achieving high growth since 2023. Through the selection and concentration, we will further enhance the sales platform by expanding the loyal user base and to aim for 70% of sales from these brands. For Japan local brands, we will sharpen the targets and marketing initiatives while capturing the changes of Japanese consumers. Also, we will focus on hero SKUs to enhance growth and profitability. We will also continue innovative marketing for new market creation, creation of new category utilizing the skincare technology and expansion of new business portfolios such as the inner beauty category. For the channel strategy, we will convert to a business model where growth will further contribute to profit. We will accelerate initiatives in EC where the growth opportunity and profit rates are both high. We will create seamless consumer experience by reinforcing OMO strategy with our EC business partners. As for our owned.com, we will be renewing the website to improve consumer experience. We will also expand brands in EC sites. Department store will seek for further profit improvement by growth with loyal user base expansion in prestige brands. As for drugstores, we will shift more to self-selection model. And for cosmetic specialty stores and GMS, we will achieve productivity improvement by optimizing the area-based investments. We will shift to consumer-centric activities concentrating the investment to consumer touch point strategy from channel-based market operation. Next, China and Travel Retail markets are shifting from rapid growth to steady growth. By price range, high prestige has high growth, continuing its competitive landscape in prestige and premium including price competition. Expansion in middle-class consumers with growth of regional cities and diversifying channels, expansion of Chinese local brands, the market is becoming more diverse and more complex. As for Travel Retail, we predict increase in more tourists, but we see a rising trend of travel retail EC purchased by Chinese consumers. Market change continues to be predicted in China, but it continues to be an important market for our company. Therefore, we will continue to aim for high quality, sustainable growth with steady profit creation. We will focus on the high prestige brands and product line targeting affluent consumer base, aiming for a low teen percentage of growth. Also, we will accelerate the growth of NARS, originally an American brand to a growth of high-teen percentage. And we will be pushing forward Drunk Elephant in China for further acceleration in growth. We will execute targeted marketing for local consumers, including marketing asset creation with diversified digital platform and expansion into new retailers. We will also accelerate expansion into local cities to steadily capture the growth opportunities across China. For Travel Retail, we will shift to more travel-centric approach to realize high-quality growth. In order to execute these growth strategies, we will convert our business structure. First of all, we will have -- we will be less reliant on large-scale events, enhance the loyal user base and convert to more data-driven marketing. At the same time, aim to stabilize the market by suppressing price promotion and tightening the control and expand our official route to market. Along with these strategy changes, we will also streamline the organization structure for productivity improvement. Also, we will drive synergy through an integrated approach for China and Travel Retail to aim for a stronger brand equity and optimize investment for Chinese consumers. The Travel Retail region CEO will report to China region CEO to optimize cross-regional integrated marketing and investment activities. Also by integrating, we aim to reinforce strategic investments for key retailers for an optimized cross-regional operation. As you can see, China and Travel Retail will continue to be reinforced as important markets. At the same time, we will accelerate the growth in Americas, EMEA and Asia Pacific for attaining the optimal geographical portfolio. In terms of brands, we will continue to strengthen investment into our core brands. In 2023, we achieved high growth, not just through our innovative new product launches but also through new communication creation of existing products like we did with SHISEIDO MEN. We have prepared more new innovative product launches for 2024, and we will aim for high growth and loyal user base expansion through innovation. This year, we are also working on initiatives focusing on gross profit growth. Not only will we focus on the top line growth, but we will elevate on price strategy, optimize brand, product channel mix and the whole company will work together to maximize the gross profit by more than just reducing COGS. Now I would like to hand over to the CFO, Yokota-San, to talk to you about the financial targets based on these strategies.

Now for the financial targets. As the year 2024 is midway of the structural reform, we have yet to achieve full recovery, but we will aim for a ROIC of 9% and ROE of 11% by 2025. For free cash flow, although the profit declined compared to the target previously mentioned for 2025, we will secure the JPY 100 billion, as mentioned before, through actions such as capital efficiency improvement in sales of idle assets. As for one of the key metrics in our company, the days, sales and inventory, DSI, we have newly set as 200 days, considering the current situation in the recovery of market environment in the future. For a sound financial position, we keep the previous target and sustain the policy of A rating. Now the acquisition process of Dr. Dennis Gross has completed according to schedule, however, it will not impact the target achievement of capital efficiency and sound financial position. In order to improve ROIC, which is our most important capital efficiency indicator, we have set the 3 key drivers, sales growth, core operating margin and free cash flow. We will improve each of these areas through the actions through [ shown below ]. I will now explain the progress of the FOCUS 1.0 project, a globally integrated ERP system. In 2023, we completed the implementation of FOCUS in China, Travel Retail and Wave 1 in Japan and about 60% of our global sales are already being handled by FOCUS. Implementation in all regions is scheduled to complete in 2024, contributing to further profitability, productivity and capital efficiency improvements. That is all from me.

Now let's start with an overview of our initiatives for 2030. So far, I have explained our initiative for the 2 years of 2024 and '25, and the core operating margin that we are aiming for in 2025 which is 9%. However, I do not believe that 9% is sufficient for -- sufficient profit margin that can be reinvested for sustainable growth. It is also not a level that satisfies Shiseido's goal of becoming a global company. The target of 15% core operating margin is not just a number. It is the profitability required for a global company that we believe that our efforts to achieve the target are the source of the competitiveness of our business. How can we achieve this goal as quickly as possible despite major changes in the market environment? We will tackle this issue by mobilizing the wisdom and execution capabilities of the entire company. At the present stage, we're aiming to achieve the 15% target in 2028 or 2029. Compared to the 15% target we have set for '27 at the time of our announcement last February. As I've explained, the major changes in the business environment has slowed down in sales in China and Travel Retail, which have been a large part of our business that had high profitability had a large negative impact on consolidated operating income. In order to recover from this, we are currently pushing the 3 pillars described here and we'll further accelerate them in the future. The first is to maximize and accelerate growth in existing business. Japan's population is expected to decline and high market growth is difficult to predict. As a top company in this market, we will expand our market share create new business areas and maximize sales. Although the Chinese travel retail market is unstable, it is the world's largest skin care market with a population of JPY 1.4 billion. We will use our accumulated experience and data identify growth areas and win in this huge market. In the Americas, Europe and Asia Pacific, we aim to sustain to further accelerate high growth achieved in 2023, and we will achieve growth opportunities in all regions to maximize sales. In parallel to these growth efforts, we aim to generate revenues that exceed growth by advancing mechanism to maximize gross profit, including strategic improvements in brand mix and pricing. As a result, we expect growth in existing business to exceed 5% in 2026 and beyond. Second, we will complete over JPY 40 billion in cost structure reforms by 2025. And through this process, we will incorporate measures to constantly improve productivity into our business management. In order to continue to refine our competitive and strong corporate structure, we will continue to optimize cost on a constant basis beyond 2025. Third, to expand into new areas, we will create new beauty categories within the cosmetic business by capturing Shiseido's world class technologies and diversifying consumer values and also aim to expand into areas outside the cosmetics business by utilizing M&As and collaborations with other companies. Through this effort, Shiseido aims to achieve a 15% core operating margin in the travel retail market in China, even though the market environment is deviating significantly from the initial plan with a delay of 1 to 2 years, namely from 2028 to '29. To achieve these growth targets, our business portfolio will be strengthened and expanded in core areas with skin care as core of a business portfolio by 2030. In this core skin care area, we will strengthen such as the derma and medical, where our portfolio is thin. We'll also leverage our skin care technologies and expertise to create new beauty categories by integrating them with other categories. Furthermore, we aim to develop into a new lifestyle value proposition that transcends the cosmetics domain. In the derma area, we announced the acquisition of Dr. Dennis Gross Skin Care, derma brand from United States. This acquisition will expand our prestige skin care portfolio in the U.S. region, and we will leverage our existing business base to achieve growth and increase profits. Next, preparations are already underway to expand the skin care technology. Specifically, we will leverage IFSCC Award winning technology to create a new anti-aging category, the Second market. Second skin is expanding its domain from exclusive use for the eye area to make up. Skin care foundation with a function of beauty essence et cetera, we aim to achieve an overwhelming and high profitability by leveraging our proprietary technologies to create new categories in the market. On February 1, we launched new business, Shiseido Beauty Wellness marking our entry into the inner beauty market. We aim to create a new market by fusing beauty and wellness through our life science data and joint development with TSUMURA and Kagome, Japan's leading companies in each field. We will continue to take on the challenge of creating new market in these areas, including collaborations with new partners. We will strengthen our structure to realize this growth. First, innovation creation of the core of our existing business growth has been continuously strengthened since the past. And last year, we produced the first IFSCC winners from our innovation centers in Europe. Going forward, we are strengthening our structure and capacity to create innovations, not only originating in Japan, but also in other regions, as our R&D in each region deepens its understanding of local consumers and creates innovations that originate in the region. In addition to strengthen our growth core brands in our core markets, we will establish brand holder satellite offices in Americas and China. We will not only localize brand communication, but also promote sustainable growth in our core markets as satellite offices for product development. To create new markets, we have established M&A teams in Japan, China and the Americas. We will accelerate our entry into new markets and vacant areas. Meanwhile, we have introduced the beauty innovation contest system to create new businesses by maximizing the creativity of our employees globally. Last year, approximately 2,000 ideas were collected from all over the world, and we are proceeding to materialize 3 of the new ideas. As a new initiative, we also plan to establish a mechanism for value creation through co-creation with customers. We will utilize this mechanism to realize our vision of 2030, which is to become a personal beauty wellness company. Therefore, our 3 areas of investment will remain unchanged for medium- to long-term growth, brand, innovation and human capital. We placed sustainability at the center of our management strategy and promote the creation social value and resolution of social and environmental issues through our core businesses. These activities and disclosure efforts have led to improvements in external ESG evaluation, including a AA rating from MSCI last year and being named A-list company for forests in addition to climate change by CDP in February of this year. We will continue our efforts to be a sustainable company that is needed by society. With regards to governance, as already announced, we plan to transition to a company with 3 statutory committees after the General Shareholders' Meeting in March of this year, which we will clearly separate the functions of business execution and supervision and enhance the effectiveness of our strategies. Finally, we will complete the business transformation by 2025 and build a structure that can sustainably generate earnings after which we will continue to grow our existing businesses and take on the challenges of discovering and creating new beauty values to realize beauty innovations for the better world. We aim to realize a better world through the power of beauty. That is all for me.

Thank you very much. Now we would like to go into the Q&A session as we hope to take as many questions as possible, we would like to kindly ask to limit one question per person. [Operator Instructions]. Now If you have any questions, please raise your hands. So men from over there. We'll take the first question.

I'm Kuwahara from JPMorgan. So in the midterm plan, I'm sorry, I don't have the page with me. But in the midterm, 4%, 6%, 9%, and you said, I'm looking at the page where you said you pushed 1 year back. But if you could just simply share with me the story behind this. What I want to confirm with you is in 2023, the fiscal year that just ended -- so the reason why you -- you went from JPY 35 billion to JPY 39.8 billion. And in 2024, you mean JPY 55 billion of cost reduction and though there is an impact of about JPY 27 billion but the increase is limited to JPY 15.2 billion. Why is that? And in 2025, this 9% that you mentioned for 2025. What you changed was, I think, was it just China in Travel Retail or in 2025, the Japan business? You said that you will achieve the JPY 50 billion, but so does that not change for the Japan business? And you also mentioned that you started doing the structural reform. So are -- you still feel that it's achievable in Japan. So if you can talk about these changes in profit in kind of a storyline that would be very -- in the time line, that would be appreciative.

Okay. For 2025, 9%. How we came up with this 9% for the core OP margin for 2025? First of all, in 2023, the market momentum, considering the market momentum for 2023, China and Travel Retail had originally forecasted rapid growth but we revised it to steady growth. Now Drunk Elephant and NARS and these brands have been very good in Americas and EMEA. So we're rebalancing our regional footprint and we are heightening our focus in these areas, including investments. So 2022 to '25 CAGR and 2023, the base in China had gone down or has been reset. But the CAGR of 8% was the initial forecast, but '22 to '26 is now to 6% -- has now been adjusted to 6%. Along with that, the new sales, the -- and we are reviewing the cost structure. So not just China and Travel Retail, but in other regions, we are looking at an additional JPY 15 billion of cost restructuring. And the JPY 25 billion in Japan has already been included for 2025. So put that together, 2024 and '25, we will aim for JPY 40 billion. Along with that, China and Travel Retail, the sales will go down, but our initial target of profitability, we will keep. China is positive 5 points from 2022. Through structural reform, -- we will keep this target -- we will keep this number. And China is enhancing on the investment and the mix promotion and aiming to accelerate the GP so that we can reduce some of the fixed costs as well. However, our profitability to begin with, has been quite high on average in China and travel retail but has significantly gone down from our original forecast. The region forecast had about 4 points of impact. And we will try to revise that through structural reform by about 1 point or a little over 1 point. So that we can -- so that we aim for 9%, which is 3 points down from the original of 12%. In terms of how the Japan business is proceeding. Of course, we're doing -- in terms of the structural reform, as management, we are committed to turn the business around. And as Yokota-San as mentioned earlier, this JPY 225 billion, that's something that we will continue to pursue. Now the profit that we get from growth -- as explained earlier, from the fourth quarter, the growth strategy that we had planned. We're actually seeing the fruit of it or it's coming -- turning into our results. One, global and Asia core brand focusing on these brands. Through these strategies, these brands have actually been driving our numbers from Q4. That's one thing. Secondly not just the cost, but the growth by innovation, and we can also grow through existing products. And we're seeing impacts of these areas when we look at the overall picture, that's the second point. Next, as we try to convert the business model. In terms of that, of course, we will continue to expand on EC and that's on track. But furthermore, ELIXIR has been growing well in Q4. The market is actually driven by the low price range. But however, ELIXIR, which is the mid-price range, it's growing well and how this brand is growing is not just by new product launches. But actually, in fact, by existing products and the [indiscernible], it's growing. And the price of about JPY 10,000, which is actually a high price point for self-negation, but it's actually selling. The cream we sold for JPY 8,800. 30% to 35% came from the self-drug source. But this cream that we launched more than 50% is actually coming from the drug stores to sell as well. So that gives us some of the optimization of people and giving us some confidence as to how this brand is performing and what we can do in this market as well. So this year, we have many items in plan in the pipeline so that along with the cost improvement, I believe that JPY 50 billion in profit in Japan is achievable.

So 2025, JPY 50 billion, you said it's on track, and that's good. That will stay for Japan. But if that is the case, as for 2024, cost reduction and increase in sales, but it's only going to be about JPY 15 billion profit increase. Is there a cost or investment and changes in region mix? Is that the reason why these numbers are this case in 2024?

Yes, there's also the foreign effects as well. We have JPY 135 to the dollar at the moment. So compared to 2023, we're looking at some negative impact for FX as well and investments and as well as the inner beauty, the new business launch, we have additional investment that we have just spoken about. So with that included, we're looking at JPY 55 billion. And another big point to mention is the allowance for the bonus is also 100% basis. So that's another reason for the number.

Okay. This will be my last question. So the last -- this fiscal year that just ended 2023, it exceeded the actual revision. And you said, yes, the wrinkle cream did well, et cetera, and that's great. But you also mentioned that Japan did not actually match what was expected. So what made you exceed 2023? What made you exceed the forecast disclosed in November?

So what happened in 2023 was EMEA performed higher than expected, top line and bottom line had exceeded our prediction, our forecast. And also in the headquarter, and because of this kind of situation, we had tightened our cost control at the headquarters. Also, China was we looked at the Double 11 campaign. We looked at the situation and said, okay, this is not where we should invest. We will invest to make up, as mentioned in the presentation, so that we can get the highest return on investment. So we reallocate our investment. So in China, the top line was actually as forecasted, but the profit, we were -- China was able to contribute as well. So these are the 3 main factors that allowed us to exceed the forecast.

Any other questions? So then person in Brown.

Sato from Morgan Stanley Securities Firm. So I would like to talk about the unbooked items. So every year, it was '22 is 48, and the '23 is 117, and this year is an increase to 300. And the core operating profit this year is JPY 55 billion. And so the final profit will hardly increase. So basically, it's very difficult to look into the items that are not booked. And when we look at the plan for the cash flow. So there are something that is not cash flow. So basically, although the cash flow will increase, the final income, the profit will not be increased. So such as the impairment and also -- or you can answer in the form of EBITDA but between 2023 and '24. Is it correct to understand that the EBITDA will increase? So that's one thing I want to confirm. And second question, when we look at the core operating profit is not calculatable from the outside. And so there will be an announcement on the final core operating profit. But then I think the -- that should be done also for the final profit. So is it something that the nonrecorded item will also be part of the final results? So if this is to continue, then the final -- we will now see the increase in the final -- the profit. So we will wonder about the EPS as well. So what is the final profit at the end of this fiscal year?

Up to now, since 2020, since the COVID crisis, and we also sold some businesses in 2021. And at that time, -- so there were some business -- we sold business and some of the cases made profit and such as the personal care. And in 2022, the COVID -- there was a resurgence of COVID in China. And so we saw the personal care production business, and we made a contract with selling that part of the business. And -- and then 2022 it was our impairment. And as for 2023, we actually sold, and there's the loss from the sale. And just through -- and we offset the loss by selling some real estate assets. And we have been involved in the structural reform over a long period of time. So there were a number of items that were not booked. And as far as 2023 is concerned, now the business landscape of the backdrop is changing dramatically. So by 2023, in order to achieve the JPY 150 billion. So structural reform cost at the moment, JPY 27 billion, that is incorporated. That is the current situation. And so you do -- yes, we do have an EBITDA number here. So that means that in next year, well, structural reform may continue for some time in the future. And so our core operating income and IFRS profit is going to match. Well, we are not considering the value to be so high in 2025. And so we would like to make the maximum effort in 2025. Therefore, we will make as much actions as possible in 2024. And so out of the JPY 30 billion, the JPY 27 billion are related to the reform. And so there's -- yes, the business profit and IFRS profit are going to be closer.

Mr. Oba of Citigroup. Please let me know about the pricing strategy. And there's some announcements of the price increase in some brands in Japan and will this happen also overseas? And also, in terms of the long-term overall strategy. The CAGR of 5% is announced for 2026 and beyond. And so could you give us the quantitative breakdown of this number and which region is more than the average and which is the most promising growing region? And how will this contribute to the pricing strategy?

So then let me talk about the growth strategy first. And about 5%, Mr. Yokota will answer. In regards to the price strategy, this will be a global undertaking. As far as Japan is concerned, from 12th of April, we increased the pricing. And so the price -- by change in prices in Japan and the rest of the world will link their pricing strategy to this and this is a plan we have put in place since last year and the price strategy and price increase that we are envisaging. Well, it is difficult to control the price itself, but as much as possible, we would like to minimize the pricing gap. We call it the corridor. So we will minimize the regional differences in pricing so that our products will not go from region to region. So we are working on the pricing harmonization across Shiseido, across company. And we started this initiative last year, and we're continuing on into this year. And as explained, we shall do so, so as to contribute maximizing gross profit.

Now I would like to talk about the more than 5% growth since 2026. According to our assumption now, China and Travel Retail will be the growth in mid-single digit, which is stable growth. And Asia Pacific, the Americas, the EMEA, their growth would be according to the strategy up to 2025 will be high single digit. And beyond the market growth. That's what we will aim for. And for Japan, the low single-digit percentage point growth which is beyond the market growth is our target. So in total, more than 5% or 5% or more growth is something that we are aiming at.

Also, for the Americas, there's Drunk Elephant, NARS and so these 2 brands will have been leading the growth significantly. And the brand Shiseido still has room for growth, we think. And as I explained earlier, so this gigantic -- in order for us to grow in this gigantic U.S. market, we set up the brand satellite office or center so that we will accelerate our activities to fit the U.S. market, the America market. And in fact, it's the e-commerce and also Sephora and Ulta, the new channels that are more promising in terms of growth rather than the department stores. However, the brand Shiseido still has a high proportion of sales from department store. Why we cannot go into Sephora? The merchandising has not been localized fully, so we can be part of Sephora. And take the communication for example, the -- it is different from what will work in U.S. That's why we will leverage the satellite office in the U.S. And also, there are -- is the niche brands that is leading the growth in Sephora. So for instance, in the derma category, we will make the -- we made an acquisition of a company, which we -- in which we have [indiscernible] terms of the portfolio. So we will try to grow in this market segment. And we will also accompany this with the higher profitability of the organization. So with that, we would like to better in the Americas market. And also for the EMEA, half of the markets actually from the fragrance segment and our existing fragrance products are doing very well in Europe. And in addition, it is highly profitable business. So the fragrance business is in the virtual cycle. Now let me talk about the skin care. In France, Spain, Germany, Italy, put together. We became #2 in the skin care. So we are better positioned than Lancome, Estée Lauder. And so we're in the second position in these 4 major markets in Europe. And so we have established a system to make a sufficient profit for reinvestment in Europe. So from next year and onwards, we will have a very powerful fragrance pipeline in Europe. So in Europe, we will certainly strengthen our skin care segment, but with existing products in the fragrance, we would like to make enough profit for further growth. And for Asia Pacific, there are many different countries and regions. So let me focus, first of all, on Thailand which is showing a very robust growth, and the brand portfolio will be expanded so that we can leverage on that for higher growth. And also in India, we will enter into India with a NARS makeup products. We've done so, and it is showing much better sales than we had expected. And we expect that NARS cosmetics in India will be another growth driver. So we would like to take a bold challenge in Asia Pacific regions as well.

Now another question from online from Mitsubishi UFJ Trust Banks. [indiscernible] asked for cost reduction, I understood your view on cost reduction. However, how do you measure the investment impact efficiency of investment? And how do you control and manage? You had an M&A, but in this uncertain market situation, were there points that you had reviewed or revisited through this M&A?

So as for your question, how do we measure the return on investment, I think, is your question. As mentioned earlier, these 3 levers is where we look at the ROIC or want to improve on the ROIC. For example, in terms of brand -- this may overlap with some of the numbers, but e-commerce the customer -- number of customer acquisition or lifetime value, repeat ratio to average ticket -- so globally, we're trying to get the data to improve on the ROI? And how do we leverage the learning for our next actions. And these are things that we are working on. On a globally -- global level, when I'm reviewing with each of the regions, countries and regions, I look at the marketing. What is the marketing cost, and that is what, of course, one of the discussion points and big investments CapEx. This is investment criteria. The payback, NPV, we will look at that to ultimately make the investment decisions. And of course, when we calculate the NPV, there's some work hurdle, right and make our decisions. In terms of the structural reform that we are talking about. JPY 27 billion out of the JPY 30 billion, as for this JPY 27 billion, in order to achieve the JPY 40 billion, you will look at the payback by item that the payback is within 2 years. So we will have a look to make our decisions. That is it for myself.

And related to this question, in your meetings and your committees, how frequent do you monitor your performance?

On a monthly basis, we have meetings with each of the regions and brands to look at the current situation and how it is proceeding. So we have a review -- monthly review meeting. And on a monthly basis, we look at the cost as well. But we look more for the growth opportunity. So we focus more on the growth opportunities and what is working well. We would enhance on the investment to expand on this growth opportunity. That tends to be the case. Also, kind of going back to what was mentioned earlier. Within our explanation, we keep on talking about high-quality growth. And in terms of this, for example, if you look at China as an example, of course, we will invest as needed. But looking at 2022, large-scale promotion and other unique or specialized sales was over 30%. So this kind of sales contribution, we want to make -- keep it under 30%. So to simply put it, we're not trying to look at short-term sales hike, but we need to make sure we have a sustainable and more of a midterm growth. Where do we grow the sales? Where do we lift the sales for a more sustainable growth, especially in China and Travel Retail? We are monitoring together with the regions to assess the growth situation.

And there was a question regarding M&A.

Well, that's right. As for M&A, of course, if there are any opportunity to M&A, we will be proactive to looking into it. However, of course, there are conditions and criteria to look into it. And one is the skin beauty. Within the skin beauty strategy, does it match with our strategy in highly in regards to skin Beauty. Second point is that brand itself. Is it making profit to be -- that is the brand that is on the market? And third point, if it was a brand that was out in the market, is this brand -- right now, we are not trying to do a strategy where we would launch and roll out the brand globally all at once. We will look at the footprint. So for example, the Dr. Gross that we recently acquired, we will focus on growing in the Americas where the brand has originated. And we will look at that and then seeing how that goes, we will expand to other regions. And also based on our various experiences, the acquired brands does it match into our portfolio, and that would be the only reason we would do our M&A strategy.

We will take another question from online, [ Yamanaka-San ] from SNBC. In regards to South Korea and Hainan Island. So sellout is in general trend of a negative. And so the turnover on the shop front seems to be worsening and selling -- so what -- is there a possibility that the sell out -- even if the sell-out is negative, selling is going to turn to positive?

As I explained earlier, at the end of 2023, Korea Travel Retail inventory will be leveled out or it's going to be normalized. And therefore, the return of the Chinese travelers is rather slow to Korea and also the conversion is not so good in Korea. So for the sell-out to catch up is going to take some more time in Korea in the first or even second -- up to second quarter. And in regards to the Hainan Island, inventory optimization is now underway. And at the end of Q1 this year, it's going to complete. And the recovery of the travelers in Hainan Island, is now higher than the level of 2019. And however, the Chinese consumption has some impact in Hainan Island as well. So with our assumption from Q2, selling is going to turn to positive.

Thank you, and another question from online.

Hirozumi-San from Daiwa Securities. 2024 1st half or Q1 consolidated core operating profit, how do you see the numbers?

Sorry, what's the question? First half?

First half or Q1 consolidated core OP, what do you foresee?

We don't disclose the forecast of the core OP on a quarterly basis. But as mentioned earlier, China, the treated water impact hit bottom in 2023. But up to Q1, they will still have that recovery trajectory. So from Q2, that's when the full recovery would be captured. In Travel Retail too, Q1 is mainly the impact from Hainan Island impacting the sales to be negative or minus. So for the first half, I would say that the sales would be lower than the second half in our outlook. Within that, the profit balance or when we look at the profit balance, 4 to 6. So first half, is about 40% of the JPY 55 billion and the rest of the 60% will come in the second half, and that is how we forecast. On a quarterly basis, there are some kind of time lines in the quarterly basis. But in the best estimate of the halves, the first half and second half, that is what I would say.

Next, Ohana-San from Nomura Securities. The 2025 core OP margin, 9%. And beyond that, with the 15%, how much improvement will there be for gross profit? I understand that there will be a rebate impact or implications. So rather -- so this business originally with a high gross margin level. And so we would -- I would like to hear in more detail about the present activities to reduce the SG&A cost. And so SG&A cost reduction will be the large proportion of the structural reform. So what is linked to the JPY 30 billion, which is known booked nonrecurring item?

So the first question was about the gross profit or how much gross margin is going to improve?

Yes.

So at the moment, our assumption of the gross margin is so as -- so it was 21% with the Shift '21 -- SHIFT 2025. But with the current assumption is 22%. However, 1% out of 20%, it includes the [ recast ] of the accounting. And so the effect of maximizing the gross profit and also productivity improvement activities will drive this 21%. So the -- including the accounting impact of 1 point, we are sure that we can keep at 21%. So -- and also what is linked with this JPY 30 billion of nonrecurring items? The breakdown of the JPY 30 billion is not something I can share with you. But as Mr. Fujiwara also explained earlier, so JPY 40 billion saving coming from the cost of goods sold and also the marketing and samples also SG&A and improving upon the human capital productivity and also SG&A efficiencies. So JPY 27 billion out of JPY 30 billion will derive from the structural reform. So using this, we would like to achieve JPY 40 billion in 2 years.

If there are other questions from the venue, we would like to go for a second round. If there's any questions from the venue in physical attendance. Okay. The person with the scarf.

This is Kuwahara from JPMorgan. So the -- in the late end of December, you had announced the global transformation by 2025, you won't be done in 2025, it will be a continued structural reform and et cetera. So what I would like to ask is what is the ideal fixed cost ratio in the midterm? If you have an ideal cost -- fixed cost ratio, I would like to know. And you mentioned about the SG&A being high, so that you can mention it through SG&A ratio. But in the midterm, to what level do you want this number to drop? Where you, Fujiwara-San or Yokota-San feel is ideal that to what number would you like it to drop so that Shiseido becomes even more competitive? And if you have a specific timing you want to achieve it by, please share that with me as well.

First of all, the ideal is 50% -- 15%. And what we need to cover in some marketing and investment. So that's something that we definitely need to have. So 15% in order to achieve our target 15% gross profit and gross margin. How much can we maximize that? That's something that we'd like to do and improve on the SG&A, as I mentioned earlier. And as one of the milestone will be the OP of 9% is how I feel and that is through the Japan's structural reform and China and Travel Retail. To do a business structural reform matching to the current situation to kind of reset itself at a new start line. From there for the headquarter -- from there on, it won't be a global business structural reform led by the headquarter. I think it will be more of a continuous and sustained structural reform done by each of the regional category. And in terms of price strategy, that is something that we have mentioned earlier, but not only that, for example, organizing or optimizing the SKUs, we have been having these discussions -- one-off discussions separately, but it's been a global SKU rationalization or the SG&A. This is the direction that we have, and this is the way of thinking for SG&A. And I wouldn't say that everything would go as I am mentioning, but in initiatives, as a global agenda, we will have these global agenda as well to achieve the 15%.

So 64% in SG&A ratio is one of the numbers, I think, as a benchmark, if I were to calculate based on what you have mentioned. Now as you look at it by region, from your perspective, what region do you focus on most, for example, Japan, do you have to focus on Japan the most in terms of cost structure?

For -- yes, up until 2025, yes, Japan.

But so then after 2025, it's by region and by each region, they will have to work on different initiatives. Is that right?

Yes, that is correct.

Next, the person sitting next to [ Sato ] from Morgan Stanley.

So based on the 2024 revenue, I have a question about Japan. So this year was a reopening. So there's a growth of the high single digit. And so locally, this year is going to be a mid-single-digit. So that's the domestic demand. And so we are trying to capture the reopening. And think that maybe this is an effect of the price strategy as well as the new products. So can you give us a breakdown on the impact of -- positive impact of the pricing and also the new products such as inner beauty? So are there any elements that we can feel confident about as a driver for growth in the future?

So the product -- new products, so it's not all about the products. When we made the plan for 2024 alongside the strategy, we looked into the growth from the core brands and growth from other areas. And as for core brands, we shall strive for the close to double-digit growth and looking at the tendency from last year, well, there is the -- still the COVID impact, the early part of 2024, but we will work on the business transformation going forward and also we will streamline the SKUs and also we are going to mobilize the investment in a global manner. I mean, the bold manner. So some of the brands are actually set for minus growth, negative growth. So we will basically give a different color to our investment target for where the growth can be expected where we will shrink. And so that's the basis of our plan. And as the inbound is -- accounts for about 60%. And so it's so early, but January and also up to 9th of February -- up to 9th of February, the inbound growth is more than we have expected.

The brands to be discontinued. What -- so the loss is deriving from that? Is it part of the nonrecurring item, such as the dealing with the return of the inventory? So the negative will derive from the nonrecurring -- so is it positioned as a nonrecurring item? Such as the cost for returns?

No, actually, we are not considering to terminate any brands what we need to do and the brands in Japanese market. We will not try to grow in every brand and every SKUs. And for the other core brands, there's cleansing and lotion. And across the brand, we'll try to capture customers, but the -- the other brands, we will focus mostly on the hero SKUs. And so other products may not be -- may no longer be produced or we may not add to the brand portfolio. And so the brand will remain. We will not terminate any brands. In regards to reducing SKUs, we were looking to the right timing of terminating an SKU because there are some existing customers, we will try to notify the customers at an early stage. So that will be ready and the customers will be ready towards the end of the fiscal year so that we will have no returns.

So that cost associated -- costs associated with that activity will be in the core operating profit. It is not booked as a nonrecurring item?

Right. It is not part of the -- so basically, the shift in the revenue will be the -- it will show us the movements in Japanese market.

Okay. We would like to take the last question. Maybe I will ask the question in Japanese. This year's profit guidance from my perspective, I feel like I'm confident that you will be able to achieve what you have in guidance. Let's say, -- if you have a profit of JPY 10 billion to JPY 20 billion, how do you look at the marketing expense? For example, there is FX impact, of course. And China could make a big comeback. So if that is the case, then the marketing expense, would you increase on it? Or would you just control it at the current level? And if there is additional profit you would pay back to those shareholders?

The CFO and I may disagree in this -- the answer to this question. But our business has to grow. I believe our business, our company has to continue to grow. So yes, I believe we should continue to invest. We're not going to invest in a place without strategic ideas and where we have strategy. So I'm not directly answering your question maybe, but if we know we can grow in this area, even if it has slight risk, I would like to make additional investments in that area. But the CFO may disagree with me, and I'm sure there will be discussion with the CFOs and will not -- I may not be approved, but what would you like to say Yokota-San?

On a monthly basis, with each of the regions, we actually have been having discussions on where is the positive momentum. There is positive momentum here. And these kind of discussions have been continued. And we have been having additional agile decisions for investment. And as a result of that, Drunk Elephant has grown and the significant growth came from that agility. And so we can't forget about that profit. But when we know there is growth opportunity, and we know we can go for it, then I, myself very -- like to be flexible on it and feel that we should seize the chance and opportunity if there is a business opportunity. So we look at the momentum. And so including Fujiwara-San and myself, and we will have this discussion with the region to make additional investments, if we can and where necessary.

Okay. With this, we would like to close the Q&A session. Now we would like to have a message a closing message from Mr. Fujiwara, the COO.

Everybody, thank you so much for your participation and attendance. As we have explained in our presentation, we are fully committed to fully execute the business transformation in the next 2 years. Japan, China and Travel Retail and some other regions. There are certain areas of challenge, but that is something that we will definitely commit to as a company to turn around. And at the same time, our business is not going to turn around just through cost restructuring. So we will continue to grow as a business, as a company. So we look forward to -- we will do our best to present you with a happier news and brighter news, and we are fully committed as management. Once again, thank you very much for your attendance and participation.

Thank you. With this, we would like to close the Shiseido's business presentation. After this, we will be sending you a survey of the session from the IR division. We would love to get feedback from you so that we can leverage for -- to enhance and better our session going forward. Once again, thank you very much for... [Statements in English on this transcript were spoken by an interpreter present on the live call.]