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

Thank you very much. I will now explain our 2025 half year results. Please take a look at Page 3, the first half results and full year outlook. Our current top priority is to steadily implement our action plan and build a business structure that generates stable profit. There are 3 key highlights I would like to explain. First is the result of our structural reform. Continued from Q1, in Japan, in China & Travel Retail, the fixed cost reduction efforts we have been working on since last year is clearly reflected in the first half figure, improving profitability and maintaining profit margins despite the declining net sales. As there were a few media coverage, in Americas, under the new leadership structure, we accelerated personnel and organizational rationalization in July. As a result, we will accumulate the benefits of our annual structural reform across the company. The second is strengthening financial discipline. Given the challenging market environment, we conducted further cost review across the company. And despite the decline in net sales, our company core operating profit for the first half exceeded in our plan. In addition to our cost reductions in P&L, we also focus on the cash balance sheet, reviewed our capital investment and steadily implemented our asset-light strategy, including relocating and reducing offices to improve ROIC. Third, regarding our full year outlook. While we anticipate certain risks to net sales, our commitment to achieving core operating profit of JPY 36.5 billion remains unchanged, and we will achieve this through accelerating structural reforms and cost management. Since our disclosure in May, we have received many questions from investors regarding impairment risks. Given the declining profitability of our Americas business, we determined there are the indications of impairment and conduct the impairment test. As a result, we did not record any impairment loss for this quarter. However, given the underperformance of Drunk Elephant to date and uncertainty, including interest rate outlook, we recognize that the risk of impairment losses on our Americas business is greater than ever. For details, please refer to Page 17 of [indiscernible] report. Now Page 4, the executive summary. Net sales for the first half were JPY 469.8 billion, with the underlying growth rate of minus 6%, primarily due to weakness in China & Travel Retail and Drunk Elephant. Compared to the plan, the result was slightly below our initial forecast of a low single-digit decline due to poor performance of Drunk Elephant and others. Core operating profit was JPY 23.4 billion, an increase of JPY 4.1 billion year-over-year, exceeding our expectations. We are pleased to report that we have already achieved over 60% of our full year guidance of JPY 36.5 billion. We view this as evidence that structural reforms and strengthening the financial disciplines are beginning to bear fruit. But we are by no means optimistic as the upside in the first half includes expenses carried over on the second half and uncertainty and risk factor remains. Nonrecurring items totaled JPY 5.3 billion of the JPY 23 billion in full year 2025 plan, we recorded JPY 3 billion in expenses related to structural reforms in Americas in Q2. As a result, interim profit was JPY 9.5 billion. While this was -- this has already exceeded our 6 billion net profit forecast for 2025 announced in February, we have not revised our earnings forecast as the majority of nonrecurring items are expected to occur in the second half. Free cash flow was JPY 17.5 billion, turning positive from a negative figure in Q1 due to factors such as higher profit before tax and others. Next, Page 5, core operating profit. First, the cost of goods sold ratio improved 1.5 (sic) [ 1.6 ] percentage points from last year to 22.6%, driven by better mix of brands and SKUs. Marketing investment decreased JPY 2.7 billion from last year. Meanwhile, its share of net sales increased 1.7 points to 28.8%. This was primarily due to increased marketing investments associated with new product launches in EMEA. And personnel expenses decreased JPY 15 billion from last year, improving its share of net sales by 1.2 points. This primarily reflects the results of restructuring efforts in Japan, China and Travel Retail. The effects of personnel reductions in the Americas are expected to be realized from Q3 onwards. Other SG&A decreased by JPY 5.9 billion, driven by a decrease in depreciation expenses and rigorous cost management and others. Next, Page 6 shows net sales by region. The sales decline steadily narrowed from minus 9% in the first quarter to minus 3%. While this did not meet our main focus of flat sales growth in Q2, all regions are on recovery trend. We are expanding our market share in areas such as fragrances in Japan, Asia Pacific and Europe. Next, Page 7 shows the sales trend by brand. Q-on-Q performances vary from brand to brand. We will carefully evaluate each brand from a strategic perspective to strengthen and expand our core brands and challenges will be properly identified and addressed. A positive sign across all brands is that the growth accelerated or revenue declines narrowed from Q1 to Q2, indicating a steady improvement. Clé de Peau Beauté, NARS and ELIXIR are performing well and driving growth across the company. Fragrance is capitalizing on market strength, improving in Q2 and accelerating growth in the second half. ANESSA revenues declined primarily due to Travel & Retail and inbound tourism to Japan, but this was in line with our strategy and generally anticipated in the plan. Drunk Elephant and brand Shiseido in China & Travel Retail are seeing a narrowing of their declines, but still in the process of recovering. Therefore, we will closely monitor their future improvements. Now Page 8 talks about by region. The figures on the upper left table and the text for first half net sales and core operating profit show 6-month basis, while Q2 market and Q2 customer purchases show the most recent 3-month figures to indicate changes in momentum. Japan achieved a significant increase in profit despite the decrease in revenue, demonstrating continued progress in structural profitability improvements. On the other hand, what stands out as a trend is a slowdown in inbound demand. Local market in the second quarter continued modest growth. Consumer purchases grew low single-digit percent. Core brands drove growth and share expansion is continuing. Shiseido's new ULTIMUNE is continuing to drive momentum. E-commerce sales are maintaining growth at high teen percent with loyal user purchases driving growth on our online website. On the other hand, the inbound market growing with an increase in number of visitors to Japan began to slow down in May, particularly in the department store channel and inbound consumer purchases turned negative in Q2. We analyze that incentives to purchase in Japan declined because of factors such as the narrowing price gap between Japan and overseas markets caused by the strong yen, extension of the 618 shopping season and intensified low price competition in China. Despite the sales decline, core operating profit increased JPY 13.2 billion, thanks to structural reforms, such as reduction in personnel expenses due to early retirement and improved efficiency of marketing investments. First half margin was 13.3% and Q1 was higher at 15% due to rush demand before the price hike. We believe low teen percent level is our normalized level, averaging out such one-off factors. Slide 9 is China & Travel Retail. It was slightly ahead of sales target. If we focus on Q2 only, growth turned positive Y-o-Y in China. China's prestige market growth rate accelerated from Q1 to Q2 and market share expanded in Q2. In addition, 618 e-commerce sales saw fierce price competition among platformers and price-driven purchasing behavior remained strong. But even excluding the impact of the extended sales period, sales increased marginally Y-o-Y. We outperformed the market driven by high prestige brands. Offline market faced ongoing challenges. Clé de Peau Beauté and NARS maintained strong momentum overall, including offline channels. With online consumption becoming the norm, Clé de Peau Beauté is promoting customer visits by creating regions to visit, such as opening a new spa on the upper floors of major department stores and providing the best customer experience possible. We believe that investing in experiences to build equity as a luxury brand is helping us stand out from the competition. Although Shiseido grew markedly in 618, it continued to suffer in offline channels. Travel Retail continued to face challenges in the Asian market, and the Japanese market also slowed down and consumer purchases fell to the negative low 20% level. Despite sales decline and worsening business mix, we maintained high profitability with core operating profit of JPY 38.8 billion, profit margin of 22.1% via structural reform such as fixed cost reduction and cost management. Slide 10 is about Americas. Americas market maintained Y-o-Y growth, but fell short of expectations in Q2. Consumer purchases were negative high single percent and Drunk Elephant struggled with results far below our initial expectation. Core operating profit dropped JPY 3.3 billion due to sales decline. Shiseido benefited from new product launches with new ULTIMUNE and mineral sun care -- sunscreens already launched in Japan, fueling growth. We are accelerating structural reforms actions for a swift turnaround of Americas. CEO, Fujiwara, will give further details about this, along with our recognition of challenges of Drunk Elephant. Slide 11 is on Asia Pacific and EMEA. In Asia Pacific, market contraction is continuing, notably in Taiwan and South Korea and sales declined, but overall market share expanded mainly in main markets. Core operating profit decreased by JPY 1 billion due to sales decline and others. Next is EMEA. Q2 market maintained moderate growth, but the pace of growth decelerated. Q2 consumer purchases turned positive after negative growth in Q1. Drunk Elephant continued to struggle, but fragrances remained buoyant with Zadig & Voltaire fueling high growth at low 20%, outperforming the market by far, expanding its share. Core operating profit declined JPY 4.6 billion on increased marketing investments and lower gross profit. Both Asia Pacific and EMEA are expected to secure profits on a full year basis. Acceleration of sales and profitability improvements are expected in the second half. Slide 12 is on 2025 core operating profit forecast. We are expecting some downside risks to achieving sales target, but we will continue with management efforts to achieve 2025 core operating profit forecast of JPY 36.5 billion. From next slide onwards, I will explain the major assumptions and initiatives. Slide 13 shows downside risks and opportunities. In Japan, sluggish inbound sales in Asia Pacific, Americas and EMEA, market deceleration and continuing lackluster performance of Drunk Elephant are considered major risk factors. On the other hand, China & Travel Retail are trending better than expected as of now, which we see as an opportunity, especially in China, although second half of last year was a low hurdle, actual shipment on a preliminary basis in July performed well with double-digit growth. We will continue to maximize opportunities. Slide 14 on tariff impact. As a result of reviewing assumptions reflecting changes in the situation, tariff impact for 2025 full year is expected to shrink to around JPY 3 billion as of now compared to the JPY 7 billion a year at maximum, which we announced the last time. We will aim to maximize the impact -- minimize the impact by executing mitigation actions as described. Slide 15 is on progress on global cost structure transformation. In the first half of 2025, we realized JPY 13.5 billion cost reduction benefits on track with the plan. On a full year basis, we will accelerate structural reforms in Americas ahead of schedule as a result, accelerating personnel expenses reduction and therefore, raised cost reduction target from JPY 20 billion to JPY 25 billion. Furthermore, we will increase 2-year reduction targets for 2025 and 2026 from JPY 45 billion to JPY 50 billion to improve profitability. This concludes my presentation.

Then I would like to talk about the action plan 2025 to 2026. So I will cover the important topics of that on Page 17, further future initiatives for key brands. For key brands, we are working to strengthen brand equity, not only to generate sales, but also to ensure long-term sustainable growth. At the launch of the brand's hero product, Ultimune 4.0 brand Shiseido engaged a global campaign aggressively across all regions, making investment at an unprecedented level to acquire new customers. The campaign keywords Freedom From Age and Slow Aging helped to deepen customers' understanding of the products' benefits and create new markets globally. In Japan, Ultimune sales nearly doubled and the brand as a whole achieved double-digit growth, maintaining its momentum in the second half. Additionally, the new Shiseido Men Ultimune, which incorporates the full breadth of 100 years of research into men's skin was launched on July 21 with new promotions aiming to accelerate growth in the second half. Clé de Peau Beauté launched renewed versions of its Key Radiance Care emulsions and cream in Japan on July 21. Initial sales have been extremely strong, setting a stage for subsequent global launches. Additionally, on July 25, Nicole Kidman became the new global brand ambassador. Through this, we aim to further strengthen our positioning as a luxury beauty brand, accelerating growth in Europe and the U.S. and expand our scale globally. For NARS, in the third quarter, we will relaunch the brand's iconic multiple lines and create buzz through limited editions and new colors tailored to each region. In addition, we will continue to strengthen our loyal customer base and accelerate sales through a lineup of technologically advanced and topical products, including brands and items that are too numerous to introduce here. Now Page 18. Drunk Elephant continues to suffer from a challenging situation with falling the second quarter results far short of expectations. In light of this, headquarters and local offices work together to conduct a fair and transparent brand review and identified new issues to achieve a turnaround. There are 3 major challenges. First, the brand lacked targeting based on a clear understanding of customers. Two years ago, we achieved significant sales growth, thanks to social media buzz around our hero product. Since then, however, the brand's positioning has become unclear and our customer base has weakened as our original target customers have drifted away from the brand. Regarding brand value, our once innovative cleaning formula has now become commonplace in the U.S. market. Our current communications do not adequately highlight the uniqueness and value proposition of our brand over competitors, making it insufficient to attract new customers. Furthermore, our products lack groundbreaking innovation, causing us to lose market presence and competitive advantage. Therefore, we have postponed the strengthening of our clinical and high-performance skin care communications and review of our sales floor layout, which we explained last time. And this year, we will first clean up our market inventory, reduce uncertain uneven inventory, build in-store engagement and redefine our value creation foundation. This will lead to successful brand reset campaign from next year onwards. Now next Page 19, we will discuss the efforts to achieve profitability in Americas business by 2026. As previously announced, under the new management structure with Alberto as CEO, our Americas business has swiftly implemented a turnaround plan, completed key restructuring actions and is now moving to phase of continuous investment. By streamlining and simplifying our organization, we have departed from silos and clarified accountability between functions. This will enable us to streamline our operations and optimally reallocate our resources even with a limited workforce, improving the flexibility and agility of the entire organization. As a result, we believe that we will have created an environment for even stronger innovation, enabling us to achieve sustainable growth and strengthened competitiveness. Cost reduction benefits of the structural reform are expected to be approximately JPY 15 billion per annum from mainly Q3 to Q2 of next year. We expect the half of the impact to be JPY 7.5 billion this year and the remaining half JPY 7.5 billion in next fiscal year. As for the breakdown, JPY 7.5 billion, which is half of the impact will be from workforce reduction and the remainder will be expense reductions such as downsizing office spaces and optimizing procurement. For office space downsizing, we are planning to post structural reform costs north of JPY 4 billion in Q3. Americas loss exceeded JPY 10 billion in 2024, but we are steadily making progress to returning to profitability in 2026. Next, please move on to Slide 20. In the first half -- second half of this year, we were planning to implement FOCUS ERP in Japan and global headquarters, and we have been able to go live in July and global implementation was completed. With this, standardization and integration of system data was completed globally, and we achieved 80% standardization within Focus system globally. By launching Global One IT team, we will integrate IT environments that tend to be fragmented by region and enable quick and flexible responses to global business needs. With this, we will increase agility and promote employees' productivity improvements. From here on, we will be transitioning to value realization phase on a full-fledged basis. Real-time visibility into accounting and supply chain data enables rapid global response to issues and opportunities, leading to faster and more accurate decision-making. It also contributes to improving inventory turnover and reducing inventory imbalances by maintaining appropriate inventory levels, thereby contributing to improved ROIC. As we will be able to capture each region's situation using common metrics, it will make it easier for us to share best practices. At this moment, the system has not been applicable to some of the regions, but we aim to maximize return on investments with headquarter support. Slide 21 is Action Plan 2025 to 2026 assessments and future direction. So far, we have been communicating that we need to complete all actions within this year in order to deliver full benefits in 2026. We have been focusing on speed. As of today, we believe the progress is on track. There are some measures that have not been announced, but we plan to thoroughly implement them during the remainder of this year. As has been mentioned until today, completion of the action plan is merely a starting point. As a strong winning player in the global competitive environment that continues to generate solid returns. We must continue to evolve further. It is not enough to just take action based on the plan. There are more challenges that we need to tackle and more room for us to evolve. In order to bridge the gap between the ideal state and the current, we are currently working on a medium-term management plan, which we plan to announce by the end of this year. The themes will be achieve sustainable profitable growth, optimize cost structure and reinvest for the next growth strategies. By clarifying the issues that need to be addressed, we aim to accelerate action and achieve profitability that exceeds capital cost at an early stage. This concludes my presentation.

Thank you very much. Now we would like to move to Q&A session. Now I would like to open the floor for questions. Now I would like to ask Kuwahara-san from JPMorgan.

I'm Kuwahara from JPMorgan. So the first half and second half, there were some changes. So I would like to double check the numbers. So the first half, so the core operating profit was better than the original expectations. What was the increase? And then which -- what was the phasing out of the cost? And then the rest, how much was the contribution from your effort? And my second question is that for the full year, it's shown on Page 12, but the cost management against risks, you have to take many rigorous measures, otherwise, you are not able to achieve this figure on Page 12. But the cost management is the one that you were explaining at the beginning of the year. For example, last year, from the third quarter, like an emergency plan that you suggested some bonuses and so forth. Is that the right understanding that like a similar way of the cost management? Or in that case, whether the impact will also be reflecting in 2026?

Well, thank you for your question. So your first question is that JPY 36.5 billion for the first -- I guess the full year. And then originally, achievement for the first half was 40%. Therefore, from that perspective, this was the uplift of JPY 8 billion or so compared to that 40% to the full year basis. Well, the market conditions is very uncertain, but still we begun and then try to make the cost management rigorously. And also, we made a thorough review and then we made the -- some assessment on the expenses and some phase out of the cost, the size of that is JPY 5 billion or so. So that was the -- some phased out from the first half to the second half in terms of the cost implementation. So my point is that the marketing investment for the future growth, we continue to invest. And so that investment will be fully utilized and also affecting for the future growth. And then for the JPY 13 billion of the core operating profit is expected in the second half. So against the sales plan and the full year outlook, is in line with the last year. So the net sales plan is a little short of JPY 30 billion, of which that will be realized JPY 20 billion or so in the second half. And there are some interest gap and also continued cost reduction effort, and we maintain our outlook for the full year guidance. In terms of the cost control, we had the GTC-led additional measures like JPY 5 billion that was added. That is one of the reasons to absorb this figure. In terms of the full year guidance, you raised questions about the second half. Actually, last year, we introduced the reduction on the bonuses and so forth in the third quarter last year that has to be offsetting this year.

Understood. In that sense, for this fiscal year, cost reduction is mainly led by GTC and the payroll is returned in this fiscal year that will be returned in -- as you expected at the beginning of the year. Is that correct?

Yes, you're right. So in terms of the third quarter, the payroll ratio was also returned compared to the last year's payroll adjustment. So negative impact in the second or the third quarter onwards in terms of the payroll.

Next, Morgan Stanley -- MUFG Securities. Sato-san, please.

This is Sato from Morgan Stanley. So this is a continuation from Kuwahara-san's question. Based on your explanation, second quarter sales, you have already incorporated JPY 25 billion of downside.

Yes, that's right.

And if that's the case, then roughly 5% or so is the number. So original plan was plus 10% in the second half, but then it changed to plus 5%. Is that right?

Yes, that's right.

Especially where -- so I understand China is recovering, but which region, where specifically are you worried about now? And Japan, inbound is changing and domestic demand is expected to be high originally based on your original plan. But where are the risks of sales specifically? Can you tell me specifically? So I believe it may be Americas and Japan, but could you share?

Okay. Understood. So it might be a repetition. Full year sales, it was around 4% growth year-on-year. That was the original assumption. But now we believe that there is a risk that it will remain flattish. And the major reasons would be, first, Japan inbound sales from the end of first half, we are seeing downward performance compared to our expectation. So we were expecting 10% -- mid-10% growth in the beginning of the year, but we are -- have changed that to slight decrease or flattish. There is such a possibility. And the second reason, as you mentioned, in Americas, Drunk Elephant recovery compared to the original assumption expectation, we believe that there will be a delay in recovery and the performance will remain sluggish. But there is upside factors as well, China & Travel Retail in the second half. So of course, there's a low base in last year but low hurdle. And there is an opportunity of sales increase, and we will make efforts to maximize that. We would like to implement various measures to realize this, especially for the second half. As Mr. Fujiwara explained earlier, core brand, we have plans of introduction of new major products. And we'd like to make use of these launch opportunities maximally -- at maximum.

And JPY 5 billion, so this cost that was postponed, so where is this -- which region is it? Which area?

So it's dispersed, to be honest, naturally. So depending on the region's mix, Japan China & Travel Retail, so it was postponed from these shifting costs from these areas. So it's like Japan & China Travel Retail.

So not Japan, but China & Travel Retail has high cost shift.

Yes, in terms of the 2 regions, these 2 regions, China & Travel Retail are higher.

So next is Miyazaki-san of Goldman Sachs.

Miyazaki from Goldman Sachs. So the -- I couldn't hear well for the answer of the first question. So let me confirm. In terms of the profit, core operating profit, what was the uplift from the beginning of the year? 40% of the full year was your original expectation, but compared to this 40% expectations in the first half actual performance, the gap was the uplift. Is that correct? In this fiscal year, there was a structural reform of the Americas region. It's now realizing and contributing JPY 5 billion uplift. And then so JPY 25 billion of the cost management. So do you have any good feel on the achievement? And the JPY 50 billion was on. So what was the reason behind for that? Why there was an uplift?

Well, apology for unclear answer, but JPY [ 36.5 ] billion for the full year, JPY 15 billion or so and then of which JPY 8 billion was roughly uplift this first half. That's the result, of which, of course, we are taking on the cost restructuring effort and also some new measures are in place. So there are some uncertainty in the second half. So try to alleviate such risks through such initiatives. And then in terms of the global transformation, JPY 5 billion is now added and mainly coming from the Americas region compared to the original timing, so Americas restructuring effort has now advanced. So that JPY 5 billion is mainly driven from the Americas region, as you say. And the size of the Americas region, the cost structure reform was bigger, quicker and deeper. So that was the result of the additional JPY 5 billion impact and also the JPY 50 billion -- JPY 45 billion original expectation, but now uplifted to JPY 50 billion and so forth. And then that cost reduction effort will also contribute.

So let me double check. JPY 8 billion of the first half uplift, of which JPY 5 billion was the cost phasing, right? So that has to be recognized as a cost in the second half, right?

Well, yes, we phase that cost into the second half. However, so we are now taking some risks of the -- in the second half, so marginal profit and so forth. Therefore, we would like to continue to monitor the expenses in the second half as well.

And I'm Ms. Hirofuji, 2024, 2025 added was JPY 40 billion to -- from JPY 45 billion to JPY 50 billion. There is an increase. But this was -- this is 2 years of 2025 and 2026. So I just wanted to make a correction.

And the next question is CLSA Oliver-san, please.

Could I ask a first question, I know you're still working on the midterm plan, but with the good progress you're making, are we correct to assume that you're still targeting double digit? Your Chair recently suggested you should be targeting more than 10% operating profit margin.

Yes. Thank you very much for your questions. Yes, so we want to be the winner of the global company. So therefore, so the double-digit OP margin is the target for us.

Great. I think you will get there. Second, a bit of a technical question. On the Page 23, you show adjustments. I think these are same as headquarter costs, but they declined a lot from last year, like by JPY 8 billion. Could you explain what the difference is?

Thank you for raising this point, Oliver. This is indeed the adjustment piece would be incorporating the HQ costs. However, there are some technicalities with respect to foreign exchange rates differences. So allow my IR team to be following up separately with you to clarify what exactly is captured in the adjustments as well as the others actually.

Okay. But we should assume they continue a kind of positive downward trend. Is that right?

Yes. Indeed, headquarter cost has been reduced since in this quarter as well through cost reduction measures that we have been implementing, and that is indeed captured in this adjustment section. But in addition to that, there are other foreign exchange savings that is captured here as well. So it is not necessarily entirely from headquarter cost reductions. So I just wanted to clarify that point.

Move on to Hirozumi-san from Daiwa Securities.

My name is Hirozumi of Daiwa Securities. I have very brief 2 questions. So in terms of the net sales for the first half, was the uplift and you explained earlier -- sorry, core operating profit, but I just want to ask the question about the net sales. What was the result of the net sales in the first half? In your earlier explanation, I may misunderstood -- understand that the second half, you anticipate that the net sales in the second half because there is no change in the full year guidance. So what was the achievement in the first half? And then how should I interpret the second half target for the net sales?

Well, we do not incorporate or embed all the sales to be achieved, but there is certain risks of course, but the full year guidance that roughly 4% growth was anticipated. But at the moment, we see that it is in line with the last year's result and then the first half performance was JPY 5 billion or so and then JPY 25 billion in the second half would be achieved. So there is a certain risks of the declining in the net sales.

Okay. So there is a risk, but still there's an opportunity. That is why our full year guidance has not been changed. Is that correct?

You're right. Based on certain risks, we, of course, would like to manage properly to achieve the sales, not just the net sales, we need to have a rigorous cost management measures and need to have a good and conservative view on the sales achievement.

So Page 13, so net sales plan has not been changed, but there is a risk you are making some heads up, right, for the second half achievement. Is that correct?

Yes.

Now the Americas region, I just want to understand the net sales achievement. So Page 6. So you have the quarter-by-quarter, Americas has a positive 4%, right, plus 4%. And then this is the sell-in, I believe. But the customer purchase in the second quarter was the single digit or high single digit, right? So what is the gap between the 2? for the customer purchase and the sell-out and sell-in.

You're right, there are certain differences in sell-out and sell-in. And especially for the second quarter of Americas region, there is the brand Shiseido mineral sun care products to be launched in the third quarter. That new product launch is coming. So we are very much expected for the good sales, but this was the upfront shipment was recognized. That is the positive figure. And the actual sales for the customer sell-out will be realized in the third quarter onwards.

Understood. Then Page 10, the high single-digit figure. So how would you evaluate that? So yes, Page 10 for Americas. So high single digit that you are expecting, right, for the sellout.

Yes, in terms of the customer purchase, we see the positive trend for the customer purchases. One reason, under the current momentum on the retail sales and e-commerce that we are running, and those 2 will contribute for the second half growth.

So Americas region is very uncertain at the moment for the economic growth. And what is your perspective of the customer behavior in the third quarter onwards?

Well, I believe there is not really big impact on the economic conditions, but beauty trend, quarter 1 to quarter 2, there were some improvements in the customer purchase behavior. So of course, there are certain external factors, but the beauty market is, to some extent, stabilized.

Then your -- the situation for the customer purchases in the third quarter onwards is also in favorable?

Correct.

Next, Mizuho Securities. Miyasako-san, please.

This is Miyasako from Mizuho Securities. There is an upside you mentioned, China & Travel Retail. This is my question. In the first half, until first half, how much upside in sales and also profit? And is it the market that was good? Or is it that your market share is increasing? And also, how do you look at -- how do you view the market in the second half?

China & Travel Retail compared to our expectation, it's not that there was a major uplift. There is a challenging market situation. It's the same for us as well. But Clé de Peau Beauté, NARS, the key brands performed very strongly despite the challenging market, and we have been steadily increasing our market share, and this is something that's very positive for us. And we would like to continue this momentum in the second half as well. We have major events upcoming in the second half, and we would like to maximize the impact. And from second half onwards, especially in Q3, last year, China & Travel Retail was more than 20% negative. So it's a very big dip, and it's starting from a low base. And compared to that, we can -- we believe that we can surely increase.

In Q1, Travel Retail was better than your expectation. And for Q2, Travel Retail & China, both was slightly better than your expectation.

Yes, exactly. The market had recovered slightly. And also in Q2, we have been able to expand our market share. So we have been able to grow steadily. In Travel Retail, the future is intransparent still. And for that part, we are looking conservatively because of that. But when the market recovers, this will be a positive factor for us. And as for China, as Hirofuji-san mentioned earlier, customer trends and consumer trends are recovering slightly little by little. And at the same time, for Double 11 this time, we are forecasting slightly pessimistically. But looking at the first half situation, 618, we were able to mark strong sales. So there might be some upside for Double 11 also.

In China & Travel Retail, so last year, you forecasted slight decline. Does this view change? Have you changed? Or is China & Travel Retail trying to change over mid- to long term?

China and Travel Retail, it's not that we intentionally suspend sales, although we can sell. It's not that we are going to force ourselves to reduce share of products. We would like to -- because it's a big market, we would like to capture market share, but we don't want to have set excessive expectations and set budget. We don't want low-quality growth. We are not going to chase after short-term growth. Rather, we would like to grow over long term in high quality to be able to control China and travel retail market.

And last of all, you mentioned you have increased your market share. Is it in the key brands? Or is it that your share is growing in China overall?

Looking at Q2 only, so we -- our market share fell in Q1. So in Q2, prestige beauty market, we have been able to confirm our growth in market share. So that means share of brand Shiseido has increased also. So brand Shiseido was slow, and that was offset by the strong performance of NARS and Clé de Peau Beauté.

So brand Shiseido, there is no change. So this is something that you can expect in the future.

So to break down, e-commerce, we have been able to capture share, but offline channel, there are stores that are selling well, some are not selling well. So there is a clear difference, and that's challenging. So overall, Brand Shiseido has seen share drop. But online, we have increased share.

Kawamoto-san from Jefferies.

Kawamoto from Jefferies. Page 19. So the actual probability of the Page 19. So a steady growth -- steady progress toward returning to profitability for Americas, so what is the number of people to reduce the human resource? Or how many office reduction are you expecting? And the other risks in the middle of the chart, what are the other risks? And how much I should be aware of? In terms of the marginal profit, it looks like a contribution of the margin is quite large. So I just want to understand how accurate this in the chart is.

So in terms of the conviction and the probability of this chart, I believe this is quite trustworthy. And then we have already implemented the structural reform in the U.S. And based on that, we now show our plan. In terms of the office cost reduction, the cost base is already implemented. As was explained by the CEO presentation, as a result of such cost reduction, JPY 4 billion or so of the temporary -- the cost reduction is implemented and then roughly 300 or so human resource was reduced. So in terms of the probability of achieving this forecast is quite solid. And other risks include Drunk Elephant, the declining sales as well as the -- for the margin coming from the contribution coming from the Drunk Elephant and also other risks as well. So those potential risks will be offsetting by the other cost reduction measures. That is what we are doing at the moment.

Kuwahara-san, please.

My name is Kuwahara from JPMorgan. I would like to ask for supplemental information explanation. Americas impairment test, you have done the test. And this time, you are not going to post impairment. But I believe that this possibility is increasing. So you will continue to make improvements and efforts, but the risk is increasing. What does it mean? So it's a simple question. Drunk Elephant, is it the delay with Drunk Elephant? Or are you thinking about the market environment? Can you explain about this?

So there is risk of impairment loss, and this is the slowdown of sales recovery coming from Drunk Elephant and discount rate. Interest rate increase, discount rate might increase and also the impact of the tariff, based on that, we are renewing the future cash flow, and we are evaluating cautiously the possibility of impairment loss by brand. We are not doing impairment loss. It's done by region. So the overall cash flow, and we compare that to the carrying amount. And this year, we thought that the risk has been increasing. And therefore, on a quarterly basis, we have been doing the test. And in Q2, the slowdown of sales in Drunk Elephant and others because of such factors, we have disclosed this.

So the progress, you mentioned about the progress. You are looking at the track record, and you have mentioned earlier about sales, there's downside risk, but you did not apply that as a part of the test. As of now, the risk has been incorporated. So including that, it was safe.

So yes, we have put some assumptions, and we have done the impairment test. And in Q3, we will look at the progress of the time and profit sales forecast will be incorporated to do the impairment test. That is what we are assuming.

This will be the last question SMBC Nikko, Yamanaka-san floor is yours.

This is Yamanaka from SMBC Nikko. So for the next year action plan and the core profit how you are evaluating the uplift or double risks? Because originally, in November last year, 2020 -- compared to 2024, the net sales and the core OP margin, it should be -- growth rate would be very hard and the JPY 7 billion or so would be uplifting. That is our expectation. However, for the net sales, there is the downward risks. But still, the cost reduction effort is now better than expected. But still, in case the net sales in the second half would be difficult, then the JPY 70 billion in the second half may be rather difficult or Travel Retail is gradually picking up in the second quarter, then it could be quite a good mix of the sales, even the sales is slightly sluggish, but still JPY 70 billion is achievable. Is that what you're thinking? Which is the correct to understand your feeling?

Well, to be honest, 2026 guidance will be disclosed at the right timing. But we have risks of the net sales reduction and also the cost reduction is having the good progress. So the 7% growth potential or the target, this is unchanged.

So let me add. In terms of net sales, there are some ups and downs. For that, we are evaluating the risks properly, and then we need to solidify our top line growth. And with that stable net sales target, we would like to achieve this 7% the initiatives. So this is the intention of the cost restructuring measures. And even though there are some difficulties in the second half, we would like to achieve this 7% the profits.

Then the OP margin, 7%, you are making sure to achieve that. But in terms of the amount, you'll be disclosing the full year guidance -- full year report. Is that correct?

Yes, you're right.

Now we would like to close the Q&A session now and we also would like to end today's earnings briefing call. So thank you very much for your attendance today despite your busy schedule.

Thank you very much.