Transcripts
Shiseido Company, Limited (SSDOY) Q1 2023 Earnings Call Transcript
Operator
Now we would like to go into the Q&A session. From JPMorgan – Ms. Kuwahara from JPMorgan.
Akiko Kuwahara
Hello, this is Kuwahara from JPMorgan. Can you hear me?
Takayuki Yokota
Yes, we hear you.
Akiko Kuwahara
So, one question per person, I understand. So, I want to hear about the comparison versus guide look. The Japanese market is recovering well. And EMEA – and it’s all doing good, is overall doing well. And so, compared to the guidance or the outlook, I think overall, you mentioned that we are on track to the outlook. But are there any discrepancies or some gaps between regions? And now for profit, some of the costs will be carried over is what you mentioned. So, how much are some of the costs or expenses being carried over? So, anything related to the profit. So, along with some of the discrepancies you may expect to the outlook and guidance, can you share along with the profit as well?
Takayuki Yokota
On a consolidated basis, like-for-like Q1 is positive 7%. So, I think that’s pretty much in-line with what we had expected. Overall, in-line with what was expected. EMEA, in terms of EMEA, we have the rush to buy before the price increase, so that probably gave us a little bit of a hike or push in sales. And to the 11% on a consolidated basis, it may seem a bit weaker. But originally, China and the in-bound sales in Japan, we are forecasting that we will have a better recovery from Q2 onwards.
So that included, I think, we are on track. For profit, there are some gaps of about ¥4 billion of when the cost will be booked, but excluding that, is what you’re seeing on a year-on-year basis. But that too is within what we have expected. And that will be my answer. Thank you very much. So the gap of when the timing of the booking is 4 billion, that’s going to be carried over to Q2 from Q1. So, 4 billion will be carried over to Q2.
Akiko Kuwahara
Okay. What I’m concerned about is – so what I’m more about is the investments being delayed too, especially for Japan, the mid-price range overall isn’t really coming back. But your company is your company is investing and the talking about innovation and bringing back your brand power. And that is one of the contributors for the profit improvement for the Japan business, and I think that’s the key to making the Japan business. But the investments to those areas are not behind, right?
Takayuki Yokota
That is correct. So we’re not behind on the investments, but there’s other some expenses that will be carried over to the next quarter. And there’s some shipments of the samples as well, but that’s different from the timing that’s actually going to be used. So, we don’t think of that as a problem. So we don’t think of this expense – in terms of the marketing activities, these expenses being carried over to Q2, there’s no impact. It has no impact to the marketing activities.
Operator
We would like to move on to the next question. Hirozumi from Daiwa.
Katsuro Hirozumi
Hirozumi from Daiwa. Can you hear me?
Operator
Yes, we can hear you.
Takayuki Yokota
Thank you. I’m sorry, I haven’t looked into all the materials, but there’s the profit from other segments, quite significant. And there seems to be some adjustments making a lot of changes or the differences, but the profit from other segment seems to be quite significant. So, why is it – what is the background of this large profit from the other segments?
Takayuki Yokota
So, year-on-year, plus 5.3 billion, half of it is ForEx associated with the export. Just so the – this is – but the brand held by the headquarter, sales associated with that is, we make sales from the headquarters and shipment is associated with the margin increase, which is about ¥3 billion. In addition to that, there is the ForEx impact. Also, there’s a ¥3 billion of ForEx impact.
Katsuro Hirozumi
So, I think the brand holder. Is it a brand holder – of the headquarters, is brand holder? So, it [indiscernible] didn’t do so well. As in the case of Page 5, yes. Having said that, but then the shipments of other brands was much more significant. And so, what brand is doing well in terms of the shipments in the other segment, Brand SHISEIDO, CPD were the main brands from the headquarters.
Takayuki Yokota
Okay. So, on the left, Page 5 on the left, on the Brand SHISEIDO and Clé de Peau Beauté, and so these did quite well then.
Katsuro Hirozumi
Yes, I understand now. So, then going forward, how to interpret the other segments. So the Brand Shiseido and Clé de Peau Beauté will do well. And then there’s the ForEx with the yen depreciation. So, how to make an assumption?
Takayuki Yokota
So, I think this is going to shift as planned. So, we have difficulty in accurately assessing how the ForEx will move, but as long as the sales will shift as expected, then I think the result will be as expected, as planned. And some of the shipment may not happen, but then this will be within our assumptions. So the Brand SHISEIDO, the Clé de Peau Beauté have the higher margin. And when they ship more than it drives the profit higher. Yes. So the brand holder related profit will be recognized there in the other segment.
Katsuro Hirozumi
Okay, understand. Thank you.
Operator
Thank you. Now, we’ll go into the next question from Morgan Stanley. Morgan Stanley, UFG Securities, Miyake.
Haruka Miyake
Thank you. I have a question around sales of EMEA and Americas. On Page 6, it’s growing 20%, 30% and is performing well. So, I wanted more detail or clarity on that. Drunk Elephant doubled, NARS grew. So, I know these are the drivers, but of this increase in sales, it was this brand, it was the start. If I can have more clarity around that, that would be great? And also, so I understand, is it doing well because the market is doing well? Or are there other reasons? Or is it linked to the storefront sales? So about – some details around that as well. Thank you.
Takayuki Yokota
So your question is about Americas?
Haruka Miyake
Both Americas and EMEA.
Takayuki Yokota
The sales are both 22% and 30% – America, 30%, EMEA, 22%. So, that’s very strong. It looks very strong.
Haruka Miyake
So more of the detail or breakdown of this. EMEA 22% and Americas 30%. So, if you could just maybe from what impacted the numbers significantly, have more clarity. And going forward, how – in order for me to know kind of – or to predict what could happen in the future. If you could give us what were the drivers behind these strong numbers?
Takayuki Yokota
In Americas, the biggest driver was Drunk Elephant. As you may remember, last July to August, we started doing paid media to increase the Drunk Elephant awareness, which had gone up. And along with that, the sell-out. Actual sell-out was growing by about 30%. But the sell-in, there were so retailer inventory, so the sell-in wasn’t catching up to the pace. So therefore, from about December onwards, we used the sell-in started to catch up, too.
So finally, the sell-out and sell-in GAAP has kind of come together and gave us a strong numbers in Q1, which has given us over double performance or sales performance for Drunk Elephant. And another [indiscernible] serum, that was a big hit. Last December alone – I heard that December sales was about the last full year sales. So, it was halo effect. So the man’s protein and other products, there was halo effect from the [indiscernible] and sustaining the Drunk Elephant strong sales.
And to accelerate the strong sales, we are strengthening our investment. And I think these were all the contributors and drivers to the strong sales of Drunk Elephant. For NARS, we have the light reflecting foundation. The reflection foundation, that was successful last year, not just in Americas, but it’s a huge hit globally. And so that high performance of NARS that were sustaining the strong performance as a brand. And so versus last year, it’s over 20% and continuing to grow.
So, these two brands in terms of America, Drunk Elephant and NARS were the strong drivers. And for EMEA, one more. In terms of the market for Americas, the market is experiencing double-digit growth. And for makeup, it’s in the mid-20% growth. So, the growth of the market overall is very strong. And of that, where we’re strong at the core, the skin care, Drunk Elephant, we are capturing the market share. So, I think in Americas, these are the high contributors to our sales.
For EMEA, similarly, the market itself is very strong. It’s experiencing double-digit growth. The strong drivers to the EMEA performance is also the fragrance, and the market itself of fragrance is doing well. And our fragrance is a bit lower in terms of growth rate to the market growth of fragrance, but we do have plans for big launches ahead of us. So, we’re preparing for that. So in the second half, we should be able to make a comeback in the fragrance market as well. But outside of that, Brand SHISEIDO, NARS, Drunk Elephant, similarly are performing well.
As for Brand SHISEIDO last year, we launched the bio performance skin filler, and that’s been a huge hit, so major part of the contributors.
Haruka Miyake
Okay, thank you. So the market is strong and you’re very competitive in that too. Okay. And is the market still growing strong with double-digit growth in April timing?
Takayuki Yokota
We don’t have the exact market data of April, but we do believe that the strong market growth is continuing.
Haruka Miyake
Understood. Okay. So looking at the economy and afterward your balance.
Takayuki Yokota
Well, as for the market outlook and economy, it’s what you hear on the news similar to all of us. In Americas, we will be focusing on what will happen in the second half of the U.S., for example. But that’s for our outlook. If there is a recession, we – think of it to be a mild recession. And to that mild recession, the beauty market is quite resilient. So, we are planning and outlooking ourselves to plan to that kind of outlook.
Haruka Miyake
Thank you very much.
Operator
Now, we would like to take the next question from SMBC Nikko Securities, Yamanaka please.
Shima Yamanaka
Hello. Yamanaka from SMBC. Earlier in your explanation, the information on the cost, Page 10, I’m looking at. And so, from the second quarter and onwards, did you say that it’s going to improve by 4 points? So, about the cost of goods sold and it’s assumption from next quarter or the next year and onwards. Also, I would like to know – so, you are looking – are you looking at Page 10?
Takayuki Yokota
Yes. The upper line, the solid red line is the cost ratio on our P&L. And the reason why? Well, as you see here, is the cost in the real term is the 21.6% with the remaining business – existing remaining business. And there is a gap between the COGS and COGS LFL. And for this particular quarter, there’s an impact of impairment losses from the Kuki Factory transfer, which is 1.8 points associated with the transfer. This is a onetime phenomenon. So this will be eliminated going forward.
And also in association with the business transfer, there is – from Kuki Factory, there’s a contract manufacturing, as in the case of the normal business, so unlike the normal business, it doesn’t earn as much margin. And therefore, there will be about a 4-point improvement in the cost of goods sold. And going forward, in relation to the business transfer, the main impacts will be eliminated. Therefore, by and by, is – we are going to get closer to the numbers described with the dotted line in a real time, real life. And between now and 2025, we would like to lower this to about 20%. And so a number of actions are taken by different departments.
Shima Yamanaka
Thank you. Then in regards to the second quarter, this [indiscernible] from – deriving from Kuki Factory will be eliminated. Therefore, there will be a 4 points improvement year-on-year. Am I correct in my understanding?
Takayuki Yokota
Well, this is not the case of year-on-year comparison. But the transfer of Kuki Factory will happen in the first of April. And so there may be some costs associated with it, but then the 4 point will be eliminated for the provision and the supply.
Shima Yamanaka
Thank you.
Operator
Going on to the next question from Nomura Securities, Ohana.
Yuji Ohana
Hi. My name is Ohana from Nomura Securities. I have a question regarding Travel Retail. The Travel Retail sales compared to other competitors’ Travel Retail, you performed well. You were competitive. In your materials, you said South Korea did not perform well, but what about Asia? Hainan Island, South Korea, Hong Kong, and Ginza, what kind of plus and minus were there to result in these numbers? And for China, there has been some topics about inventory adjustments. So, what is happening around that? Could you share with us?
Takayuki Yokota
So, your question is about Travel Retail, China. Please wait. South Korea ratio of our company sales, it’s about 40%. You see the portion. But with the South Korea different policy change, there’s been adjustments in inventory. So for Q1 versus last year, it impacted us by 50%. So that is the biggest impact reason – impacted reasons. In China Mainland and rest of Travel Retail Japan and Travel Retail West is covering for this loss. But as a result, though, we could not offset all of it. So therefore, it ended at minus 4%.
For Hainan Island, our sell-out is in the mid-20% in terms of the sell-out sales. If you are aware or if you remember from last year, last year, there was a China lockdown. So, as a result of that, our sell-in went out first. So, we have the advanced sell-in. So, the timing of the planning, Hainan was about 5 points lower than what was expected. So, as a result of that, that was at the timing of the marketing planning. So then this year’s Q1 sellout was mid-20%, then our sell-in was pretty much flat. So, I think that shows us that the restocking had been done pretty – have been quite good for the Q1.
Yuji Ohana
Thank you. So, looking at the Travel Retail China market, the distribution inventory or suppression of inventory. Is that something we should be worried about? Is there something to be concerned about in terms of this inventory control?
Takayuki Yokota
Looking at the current Hainan Island momentum, we only have the data from the air flight travelers. So looking at just the flight, so not excluding ships and others, but by flight January to February, there is about plus 20% in terms of the flight travelers, compared to Q4, which had the lockdown last year, it’s about double. The number of passengers flying. So, I think we’re overall seeing the recovery in traffic to the travel retail areas.
Yuji Ohana
So, Q2 onwards, along with that, you think that you will be recovering along with these foot traffic recovery in travel retail?
Takayuki Yokota
Yes. In terms of Travel Retail, the impact of South Korea was the biggest in Q1 with this inventory adjustment. So South Korea recovery is probably only from about Q3. For Hainan Island, we are doing inventory adjustments. So, rather than sell-out, sell-in will be slightly lower, and we are trying to continue not to optimize, but that’s all been planned.
Yuji Ohana
Okay. Thank you very much.
Operator
Going to the next question. Miyasako from Jefferies Securities.
Mitsuko Miyasako
Miyasako speaking. So, I would like to ask a question about in-bound and how it is recovering, but 10%-plus, high 10%, and you have a plan for 70%, plus 70%. And the Chinese in-bounds are not recovering so much. And so what is your assumption on the shopping patterns or the behavior?
Takayuki Yokota
So, the Japanese in-bounds – so at the time of planning was to consider that the recovery will happen from second quarter and onwards. And also, when we look at the current situation, we – indeed, we see some recovery in first quarter, but not so much. But as far as the April situation is concerned, there is a clear recovery. There’s a visible recovery. So, however, this is the recovery from in-bounds except Chinese travelers. So, the more robust recovery should happen when the – at the timing of a recovery or restart of the Chinese tourism to Japan.
Mitsuko Miyasako
So when do you think that will happen? What’s your assumption of the timing? And are you going to stay with your original planning or assumption?
Takayuki Yokota
At the moment, we don’t have information on that. So, we are staying with our original plan.
Mitsuko Miyasako
And I believe that the rich Chinese tourists are coming back to a certain extent. And what are their purchase behavior in relation to your products?
Takayuki Yokota
I think you make an assumption based on their assumed consumption behavior, but I think there’s different opinions about whether their purchase will come back or not. And in any case, our plan is to expect 70%-plus year-on-year. So, from the end of Q3 to Q4, our assumption is to see the recovery. So, depending on how things will go, this timing may be delayed or come even earlier than our assumptions.
So, we will keep an eye on this. And so, what we need to be careful about is the Japanese local market recovery, which has been quite stagnant, and we are beginning to see the signs of its recovery, so how to accelerate it is something that we are focusing on at the moment. So for the Japanese local market recovery, there is tendency that recovery is happening sooner than expected. So, we would like to capture the moment.
Mitsuko Miyasako
Thank you. So I would like to go back to the in-bound topic. So, Korea – so the Hainan. And also, do you think that there needs some in-bounds from Korea?
Takayuki Yokota
No, we’re not looking into that much. And so it’s not realistic then. So, there are some complex factors that would have affect the market. And in any case, we would like to increase the local Japanese market or the business. And if that is compounded or the supplemented by the in-bound business that will be great. So that’s sort of the assumption that we are making.
Operator
We’d like to move on to the next question. [Foreign Language] From JPMorgan Asset, [indiscernible]. Can you hear me?
Unidentified Analyst
Yes. Ohana asked a similar question, but about China and Travel Retail. The sell-out, the consumer purchase. Excluding China’s beauty, I feel that you are outperforming the other competitors, not sell-in, but sell-out? And that I think maybe is it – so your high performance, is that because your strategy from last year has been performing well? And along with that, what is your current situation on the market share? And also, for the source of demand, what is your core such as Global SHISEIDO and Clé de Peau Beauté, what is supporting these consumer purchase?
Takayuki Yokota
Sorry, let me confirm the question with you. Sorry, this question is specifically about China?
Unidentified Analyst
China and Travel Retail.
Takayuki Yokota
In terms of China prestige, the market is single – early, the low-single-digit growth. The growth is about mid-single-digit. So, about 5% was from off-line. E-commerce dropped, as a result, ended in low-single-digit for the prestige market. Of that, for our company, so we strategically wanted to lower the ratio of extreme promotion. I want to heighten the improve on the brand equity, and that’s been the strategy. So, the huge promotions.
The expectation to these huge promotions were not very high because of our strategic conversion of how we want to approach these promotions, but to ask for that, we are lower in share to competitors, but that’s because of our strategy. We don’t want the extreme promotion. But offline, we’re recovering of the market, especially, Brand SHISEIDO. We believe that we are capturing the market share, and we are on progress to capturing the market share for Brand SHISEIDO offline. So, I believe that overall, we are doing well. And our doing well to the progress that we want to achieve in terms of the China market. And for Travel Retail, what was your question?
Unidentified Analyst
So, China and Travel Retail. So my image was — when you think about the Chinese people demand, the Chinese people demand overall, I feel like you are capturing the sell-out. So, looking at the global suppliers, excluding, let’s say, the South Korean players. I feel that the other players are not as performing well as Shiseido was in terms of the Chinese audience in terms of sell-out?
Takayuki Yokota
So, you’re talking about Hainan Island or…?
Unidentified Analyst
Well, Travel Retail overall.
Takayuki Yokota
What was good was the Travel Retail Japan. Those Chinese tourists are not back yet, but the Travel Retail Japan is growing versus last year, and that’s one of the points to highlight. So, these agents, excluding people from China were the driver to the growth of Japan PR. In PR West, is – has solid growth. How are we against the market? I do not know. We do not know. But the Travel Retail West is doing well too. Then the rest will be – now for Hainan, as mentioned earlier, it’s in the mid-20%. Along with the traffic recovery, I think we are capturing the demand.
So, for Travel Retail, the mix of consumers are different from Japan players, Japanese players. And for travel retail, for Hainan, the traffic is coming back. So we’ll as – we can only capture some of the information for domestic flights. And for January, it’s been increased by 20% to Hainan Island from the domestic flight. So, I think from that, us capturing the mid-20% in growth, I think we’re pretty much in line with the foot traffic recovery.
Unidentified Analyst
Okay. Thank you very much.
Operator
The next question, so I would like to take last – two last questions. [Operator Instructions] From UBS, Kawamoto.
Hisae Kawamoto
My name is Kawamoto. I hope you can hear me?
Takayuki Yokota
Yes, we can hear you.
Hisae Kawamoto
So – and just on the increase of operating income, ¥8.2 billion. I would like to understand it better according to [Hirozumi] [ph]. So half of it comes from ForEx impact. And so from the second quarter, so I think the ForEx impact is going to settle. So, I believe that there may be some shift in the end. So, there will be a higher profit earned in China following the cost management. What did you do exactly? Did you try to reduce the fixed cost? Another question is that ¥600 billion.
Operator
I’m very sorry, but we can only take one question.
Takayuki Yokota
Thank you. So, about the assumption on the increase in the operating profit. So, I believe we’re talking about ForEx. And as you said, the last year, the ForEx since February, March, it started going up. And against the dollars, the yen was very much appreciated. And so, this time, the reflection of that came – will not happen from second quarter onwards, not in the same manner as we saw earlier. And based on the currency assumption that we have, of course, the – if there is a movement in the ForEx and potential, there may be some shift, but – so yes, your assumption is correct at this point in time. And I believe you had a question about China.
Hisae Kawamoto
So, was the increase in the operating income in China, is it due to lower fixed cost? Are you talking about Q1?
Takayuki Yokota
Yes. Certainly, yes. We have worked on the reducing the fixed cost. But the biggest element is the impact of the shift in the booking top numbers.
Hisae Kawamoto
And also in Europe about the last minute purchase before the price increase, was there any increase in the cost or was any impact?
Takayuki Yokota
Well, it is really difficult to cut out which part of the purchase comes from the last-minute purchase. But then, yes, there will certainly be some contribution to the revenue, but it’s not so significant, having said that. And the price increase will – was carried out in our first quarter in EMEA and the U.S.
Hisae Kawamoto
Thank you very much.
Operator
Thank you. Next will be the last question. Mitsubishi UFJ Morgan Stanley, Sato.
Wakako Sato
Hi. This is Sato. I didn’t think I will be called upon. Thank you. Page 20, SG&A. [¥2 billion] [ph]. So you said ¥2 billion will be carried over to Q2. When I look at what’s happening here? So, what from here is carried on why? Can I have the reason? So brand development is going down significantly, for example. So, what’s going up, what’s going down?
Takayuki Yokota
For some of the booking delays is mainly in the marketing cost. Samples, shipping – shipment of samples, for example, that’s a big chunk of it. For brand development expense that’s going down, that is not due to the booking gap or lag. But compared to last year and this time for brand development, last year, we had the Dolce&Gabbana transfer. We had the TSA-related things that were going on before D&G were transferred. So, it’s more of the commission that we have to pay to D&G commission. What we have to pay to D&G. So that was why it looks lower than last year.
Wakako Sato
The ¥4 billion. That’s only in China?
Takayuki Yokota
No, it’s not only in China. It’s other as well, but half is China.
Wakako Sato
Okay. Thank you.
Takayuki Yokota
Thank you very much. With this, we would like to wrap up the Q&A session. We will be sending you a questionnaire survey from the IR department. We would love to get your feedback on this survey so that we can continue to improve our IR activities. With this, we would like to close the phone conference. Thank you very much for your attendance today. Please don’t forget to close your phones. Thank you very much.