Shiseido Co., Ltd. (TSE: TYO:4911) reported a challenging third quarter in 2024, with consolidated net sales dropping 8% due to difficulties in travel retail and the Chinese market. Despite this, the company saw strong performance in Japan, with core brand growth and a double-digit increase in sales. The earnings call revealed a revised full-year core operating profit forecast from ¥55 billion to ¥35 billion. The company's new CEO, Kentaro Fujiwara, outlined strategies to enhance operational efficiency and transparency with investors, with plans to discuss detailed strategies at the end of November.
Key Takeaways
- Shiseido's consolidated net sales fell by 8% in Q3 2024, with an operating profit decrease of ¥9.4 billion year-on-year.
- The company revised its full-year core operating profit forecast down to ¥35 billion from ¥55 billion.
- In Japan, sales and core operating income increased significantly, while China saw a 9% revenue drop but a ¥600 million profit increase.
- Shiseido aims to achieve ¥20 billion in cost reductions globally and to revise strategies for sustainable profit growth.
- CEO Kentaro Fujiwara emphasized the importance of operational efficiency and investor dialogue.
Company Outlook
- Shiseido expects to exceed the initial forecast of ¥20 billion in global cost reductions.
- The full-year growth target was revised to a negative 1%, with core operating income expectations at ¥35 billion.
- The company plans to focus on sustainable profit growth and a resilient business structure for 2025 and 2026.
Bearish Highlights
- Declines in travel retail sales and adjustments in unrealized profits contributed to lower Q3 profits.
- High SG&A ratio raised concerns, with the company acknowledging the need for a more efficient cost structure.
Bullish Highlights
- Japan's core operating income increased due to higher sales, improved gross profit margins, and structural reforms.
- In China, strategic marketing and store closures led to a profit increase despite a revenue drop.
Misses
- Brand Shiseido and Drunk Elephant struggled, particularly in travel retail and the Americas.
- Europe experienced lower than expected shipments, although marketing investments continued.
Q&A Highlights
- CEO Fujiwara discussed the importance of controlled promotion activities and hinted at potential growth opportunities in the Americas.
- The company is focusing on educating its personnel on profitability amid workforce reductions.
Shiseido's third-quarter performance reflected a mix of challenges and strategic wins. While the company faced headwinds in travel retail and China, it showed resilience with strong e-commerce performance and core brand growth, particularly in Japan. The CEO's commitment to structural reforms and cost reductions is aimed at navigating through the current market difficulties and ensuring long-term growth. The upcoming detailed plans and strategies will be pivotal in setting the company's direction for the next two years. The market will be looking forward to further announcements at the end of November, which are expected to provide more clarity on Shiseido's path forward.
InvestingPro Insights
Shiseido's recent financial performance aligns with several key metrics and insights from InvestingPro. The company's market capitalization stands at $7.74 billion, reflecting its position as a prominent player in the Personal Care Products industry. This status is further supported by an InvestingPro Tip highlighting Shiseido's impressive gross profit margins, which are currently at 76.26% for the last twelve months as of Q3 2024.
The challenging market conditions reported in Shiseido's Q3 results are mirrored in InvestingPro data, which shows a revenue decline of 5.22% over the last twelve months. This decline is even more pronounced in the most recent quarter, with a 6.14% drop. These figures align with the company's reported 8% fall in consolidated net sales and the subsequent downward revision of its full-year forecast.
InvestingPro Tips also indicate that Shiseido's stock has performed poorly over the last month and six months, with total returns of -22.83% and -33.52% respectively. This stock performance likely reflects investor concerns about the company's current challenges, particularly in travel retail and the Chinese market.
Despite these headwinds, Shiseido has maintained its dividend payments for 33 consecutive years, as noted by another InvestingPro Tip. This long-standing commitment to shareholder returns may provide some reassurance to investors during this period of operational difficulties.
It's worth noting that InvestingPro offers 10 additional tips for Shiseido, providing a more comprehensive analysis for investors seeking deeper insights into the company's financial health and market position.
Full transcript - Shiseido Company Ltd (SSDOY) Q3 2024:
Ayako Hirofuji: From here, I would like to explain the third quarter performance for 2024. First please take a look at summary on Page 3. After the summer, travel retail and China faced further challenges. The third quarter was a quarter focused on achieving profit by thoroughly improving efficiency and scrutinizing costs. The good news is Japan. The results of the reforms implemented so far are clearly reflected in the significant increase in profits, which has become a key driver supporting the overall company's profitability. Consolidated net sales on a like-for-like basis, excluding the impact of foreign exchange and all business transfers, declined by 8% in the three months from July to September and by 3% on a cumulative basis for the third quarter. In Japan, the core brands continue to perform well with the launch of new products in the third quarter, driving strong growth. Despite a slowdown in inbound sales, the overall business in Japan continued to show double digit growth on a cumulative basis. In EMEA, sales declined in the third quarter due to shipping delays and other timing issues, but on a cumulative basis, sales showed an increase. On the other hand, in travel retail and China, the decline in Chinese consumer demand, which became evident in the first half of the year, accelerated further in the third quarter, resulting in a greater than expected decrease in sales. In the Americas, net sales continued to decline in the third quarter. The production shortfall caused by IT system implementation issues in the second quarter, which had led to a significant sales decline, has been largely resolved. However, there has been a delay in recovering from the loss of consumer purchases due to the supply reduction earlier in the year. Core operating profit for the third quarter on a cumulative basis was ¥27.4 billion, a decrease of ¥9.4 billion compared to last year. The significant impact of declining sales in the high margin travel retail segment was a major factor. However, the Japan business has steadily improved in terms of profitability and productivity, realizing significant increase in profit. In the light of the performance being more challenging than expected in travel retail, China, and the Americas, as well as a more difficult outlook for the fourth quarter than what was expected in August, we are revising our full-year forecast for the core operating profit from ¥55 billion to ¥35 billion. The year-end dividend forecast will remain unchanged at this time, however, we will closely monitor the situation and review as needed. Next (LON:NXT) on Page 4, here is the executive summary of the P&L. On the left, we show the figures for the three months from July to September, and on the right, the year-to-date for the nine months. First Q3 year-to-date, the actual net sales and core operating profit are explained as earlier. Operating profit is ¥2.2 billion, a decrease of ¥23.6 billion versus last year. In addition to the decline in core operating profit, the ¥25.2 billion of non-recurring items had a significant impact. In the first half of the year, we incurred structural reform costs related to Japan's early retirement program and organizational optimization and store closures in China. On top of that, we had ¥3.2 billion in costs in Q3, primarily related to the termination of leases for directly operated stores and offices. For non-recurring expenses, we had originally forecasted ¥30 billion for the full year, and there's been no significant difference from that estimate. The quarterly profit attributable to the owners of the parent company was ¥800 million, a decrease of ¥19.8 billion compared to the previous year. Next, core operating profit for the period from July to September was ¥8.1 billion, with a profit margin of 3.8%. Despite a decrease in actual sales of 8% year-on-year, we maintained the same level of profit margin as in the first half of the year. This result reflects the efforts across the company of prioritization of investments and thoroughly managing costs. While the profit margin is not at a level we are fully satisfied with, we will continue working toward establishing a high profitability structure going forward. Next is Page 5, the net sales by brand. ELIXIR accelerated its growth significantly from a 5% increase in the first half to an 18% increase in the third quarter, resulting in a 9% growth for the nine months. The launch of the Youth Accelerator Serum, the serum, in Japan in September had a strong cumulative shipments reaching 520,000 units just 10 days at performance, particularly in EMEA and the Americas. On the other hand, other key brands saw a decline due to the impact of reduced sales in travel retail, China, and the Americas. Brand Shiseido experienced a 7% decrease globally, primarily due to the declined sales in travel retail and China. Clé de Peau Beauté continued to grow in Japan and China, supported by a strong base of loyal users, but was significantly impacted by the drop in consumption in travel retail, resulting in a 2% decline globally. Drunk Elephant faced a substantial drop in shipments in Americas and also saw negative growth in EMEA in Q3, turning negative globally. We recognize that revitalizing Brand Shiseido in China and recovering consumer purchases of Drunk Elephant in the Americas are our urgent priorities, and we are committed to making every effort to address these challenges and drive recovery. Next on page 6, we have the year-on-year net sales by region. On a cumulative basis, Japan, EMEA, and Asia Pacific saw an increase in sales, while China, travel retail, and the Americas experienced a decline. In Japan, shipments increased by 5% in the third quarter, showing a slight slowdown compared to previous growth rates. However, consumer purchases have remained strong. Since May of last year, following the full post-COVID reopening, we have maintained growth momentum despite higher year-on-year comps. This is a reassuring sign that our strategy of selection and concentration, along with innovations driven by our technical capabilities, is working effectively. Next, EMEA, which had maintained strong growth through the first half of the year, saw a temporary decline in the third quarter due to the impact of delayed shipments of holiday and the high year-on-year comps from last year's initial shipments of new products. In China, in travel retail, Chinese consumer spending declined even further compared to the first half of the year, resulting in a larger than expected negative growth. For the Americas, we had originally expected a recovery in the second half of the year. However, after the decline in the second quarter, sales also fell short of expectations in the third quarter, resulting in a significant drop in revenue. This is Page 7 about Japan. In the third quarter, local market continued to maintain growth. Despite higher year-on-year comps, the positive trend from the first half of the year was sustained. As for inbound sales, while the number of inbound tourists to Japan continues to rise, there has been a declining trend in cosmetic purchases, and the pace of growth has slowed down. Amidst this, our Japan business continued to lead overall growth with strong performance, achieving a robust growth rate in the low teen percentage for core brands. The increase in market share in the mid to high price segment contributed to this expansion, and overall we saw an increase in market share. Both Shiseido, Clé de Peau Beauté, and ELIXIR have steadily been growing their user base, and all three brands have expanded their share in local market. Following the success of Shiseido's Foundation Serum, ELIXIR's Youth Accelerator Serum has also gained significant market share in the serum category, recording a major hit. E-commerce sales have also continued to show steady growth, expanding at a pace of high 20%, outperforming the overall business as we continue to expand the range of brands available online. As for inbound sales, the Q3 results were below expectations, however, we will cover this shortfall with increase to sales from the strong performance of our local business. This is Page 8, China and travel retail. First, regarding the Chinese market, consumer spending continues to decline due to increased saving tendencies and a more cautious approach to spending, driven by uncertainties about the economic outlook. This situation has become even more challenging compared to the first half of the year. Our business in China continued to experience negative growth. By channel, e-commerce showed a solid performance, with a growth rate in the low 20% range in the third quarter, benefiting from the relatively low comps last year following the release of treated water from Fukushima, which led to reduced purchases of Japanese products. However, offline sales saw a significant decline. From a brand perspective, Brand Shiseido, in particular, despite last year's significant decline, experienced further decline in sales. To rebuild the brand value, we will accelerate our efforts for selection and concentration investment strategy on key products. Next, regarding travel retail, the decline in spending by Chinese travelers has been more significant than expected and the situation has become increasingly challenging. While we have already implemented inventory adjustments, we will continue to rigorously manage inventory levels and to ensure control so that we do not have excessive shipments. We will also maintain our strategy of focusing on traveler-centric business and intentionally reducing non-tourist sales. While the current situation remains difficult with prolonged profit declines across the company, we are committed to improving the health of the business and ensuring stable mid-to-long-term growth. Despite the challenges, travel retail and Japan has continued to grow, driven by a recovery in the number of store visitors. In EMEA and the Americas, high growth rates have continued, particularly in the fragrance segment. Next, Page 9, we will look at the Americas. As of August, we have reported that the decline in sales since the second quarter was a temporary phenomenon caused by a decrease in production and we would aim to achieve the high rate of growth in the second half of the year as production and inventory returned to appropriate levels. Unfortunately, however, the result fell far short of our expectations and sales also declined in the third quarter. We were aware that consumers were turning away from the products due to the lack of stock in stores caused by the supply shortage in the first half of the year, so we made additional investments in marketing measures for our select, focused brands in order to recover from this. As a result, NARS turned to positive in the third quarter, but Drunk Elephant was slow to recover and the negative margin widened. In addition, there was a trend among consumers to trade down in the oppressive skin care market and Shiseido also lost market share, resulting in a decline in our shipment sales. We are currently discussing the ideal brand, price range, channel and management approach for our overall business in the Americas. Next page 10, the European market continued to grow in all categories. Those sales in the third quarter were affected by the partial delay in shipments to the fourth quarter, but in the fourth quarter, we launched an advanced cream from the vital perfection line and the cream from the bio-performance line in September and October, respectively for Shiseido. By making solid investments in marketing for the media, we are planning to achieve growth in the high-teens in real terms. Although this is preliminary data, shipments in October are progressing as planned. In Asia-Pacific, the slowdown in the Taiwanese market accounting for a large proportion of our sales had an impact, but this was covered by growth in other major countries and regions, and as Shiseido and Clé de Peau Beauté continued to grow. Next on page 11, we will look at core operating income by segment. In Japan, we saw a significant increase in income due to not only higher sales but also an improvement in the gross profit margin due to a better product mix and price increase as well as the effects of structural reform. There was also a one-off increase in income due to the deferral of some expenses, but we are continuing to make steady progress towards our target of over ¥20 billion in annual income. As I explained earlier, inbound tourism is weaker than expected, and though sales are currently about half the size of the peak in 2019, we are still generating a profit, and we believe that we are steadily making progress in reforming our business structure to be able to generate profits locally. In China, despite a 9% decrease in revenue and a negative 9% real growth rate for the third quarter, profits increased by ¥600 million. We are continuing to strengthen our marketing investments in key areas and are minimizing the impact of the decrease in revenue through structural reform such as the closure of unprofitable stores and personal reduction and building PL structure that generates healthy profits. In Europe, while shipments in the third quarter were significantly lower than expected, we continue to invest in marketing to maintain and accelerate customer purchases. So while sales increased and profits decreased in the third quarter, we are aiming to improve profitability along with the recovery in sales in the fourth quarter. In addition, although travel retail is our most profitable segment, the significant decline in sales has led to a fall in profits. This decline in travel retail sales has also had a significant impact in other segments, reducing internal sales and margins. As a result, overall profits for the third quarter fell by ¥9.4 billion. Adjustments were also affected by the change in the elimination of unrealized profits, leading to a decline in profits. Last year, the adjustment for the elimination of unrealized profit had a significant positive effect due to a reduction in inventory in anticipation of a worsening outlook mainly in China and travel retail. This year, the main factor was the decrease in profit as a reaction to that. Next page, on page 12, we look at the global cost reduction and profit improvement measures that we are promoting as part of a global transformation. In the first half year, we generated ¥7 billion in benefits, and in the third quarter, we generated approximately ¥4.5 billion in benefits. When combined with the expected benefits from the fourth quarter, we expect to generate ¥20 billion in benefits for the year, which is ¥5 billion more than our initial forecast. We are accelerating the implementation of structural reforms, mainly in China, focusing on reducing fixed costs, and also in Europe, United States, Asia, and our plan by improving costs and optimizing logistics and the global basis. Next, page 13, I will talk about the progress of the structural reform program in Japan. Mirai Shift NIPPON, 2025 improvements in both profitability and productivity are steadily progressing. First, in terms of profitability, the growth of core brands through selection and concentration, the implementation of strategic price increases, and the improvement of the product mix through the launch of new and high-end products in the mid-price range have all contributed to an increase in the gross profit. We have also been able to create a number of hit products based on technological capabilities, such as the one shown in the photo. Our success is underpinned by a marketing strategy that emphasizes returns, with a focus on concentrating investment in core brands and changing communication for the same products to lead to dramatic sales costs. Furthermore, we are reviewing the optimum way to operate our business and have a close Harajuku [ph] flagship store and our global flagship store in Ginza as well as terminating our office lease. In addition to improving profitability, we're also working to improve cash flow and improve capital efficiency by reducing our balance sheet. Turning to productivity, although we significantly reduced the workforce at the end of September through our early retirement support plan, we have not seen a decline in sales momentum during the transition period, thanks to the improvement in the employee productivity and optimum personnel allocation that we have been working on as part of our structural reform. Personal beauty partners are implementing reforms aimed at increasing sales per person and we are promoting optimum personnel allocation and the activation of activities that make the most of digital and specialist skills in order to maximize our customer contact points. We are also promoting productivity improvements for sales staff by transferring authority and responsibility to the frontline, so that decisions and actions can be made quickly and from the frontline in terms of operation. Next, page 14, we will explain the outlook. As I mentioned at the beginning of this presentation, we have revised our full year outlook in light of the significant changes in the market environment. The main reasons for this are the lower than expected sales in travel retail and China and the delayed recovery in the Americas, which I will explain in more details in the next slide. In light of these factors, we have revised the initial focus of 8% real growth to a negative 1% for the year and positive 6% for the fourth quarter. Although this means that we are moving from a negative 8% in the third quarter to a positive figure, given the low hurdle caused by the impact of treated water in China last year, we are not placing too high a growth rate. And based on the initial response to double 11, e tcetera., we are confident in the accuracy of our focus. We are also revising our focus for the core operating income to ¥35 billion and for profit attributable to the owners of the parent to ¥6 billion. We will maintain the year-end dividend at the current level for now, but we will continue to monitor the situation closely and conduct a thorough review. Finally, on Page 15, we will look at the difference between the previous focus for full-year core operating income. The decrease in marginal income due to lower sales in trouble retail and China and the Americas was partially offset by flexible cost controls and effects of structural reforms. There was an increase in income due to depreciation in Yen, but the impact of the decrease in income in the high margin trouble retail business was significant. The core operating income is expected to be ¥35 billion, a decrease of ¥20 billion. Despite these difficult circumstances, we will steadily work on the issue we currently face in order to ensure that we can steadily increase profits and improve profitability in line with the strong revenue growth in Japan, our home country, and to build a new business foundation that can generate a stable revenue for the entire company. That is all from me.
Kentaro Fujiwara: In the earnings announcement in August, I mentioned that a briefing session would be held at the end of November. Today, I would like to take this opportunity to touch on how we view the coming two years, 2025 and 2026. Since 2023, we have been advancing our midterm business strategy, Shift 2025 and beyond. This slide here outlines the objectives we have aimed under the Shift 2025 and beyond strategy, which was announced in February of this year. Aiming for sustained profit growth and the building of a resilient business structure, we have been working on these initiatives with the full commitment of the entire company. As for global cost reduction, as Hirofuji-san already mentioned, we are already seeing results for 2024, exceeding the initial target of ¥15 billion. We will continue to make steady progress to achieve the target of over ¥25 billion planned for 2025. Regarding the reforms aimed to improve profitability in Japan, we have been driving the initiatives last year and we are steadily seeing improvements in both profitability and productivity. However, in order to achieve the target of ¥50 billion in core operating profit next year, Japan, the largest and most important mother market, must aim for even higher levels of earnings potential. On the other hand, while we have been aiming for high quality growth in China and travel retail within the framework of stable growth, the market has experienced negative growth and the outlook for the future is not optimistic. Given the significant impact of the situation, we believe a strategic review is necessary. As a result of the review of the strategies in China and travel retail, while the Americas, EMEA and Asia Pacific have been achieving growth, there is a need for greater focus on improving profitability moving forward. Regarding the growth momentum of our core brands, given the market environment changes, we believe that a review and strengthening of our approach is necessary. In response to the significant changes in the market, the company, as one team, will face the reality with strong sense of urgency to complete the transformation we initially set out to achieve, which is to build a more resilient organization and profit structure that is thus dependent on market conditions globally. In order to achieve this, the strategic direction for the years 2025 and 2026 will focus on formulating a business plan that does not rely on excessive growth, establishing a profitable revenue structure even under challenging market conditions, and instead of blaming the market environment, concentrating on controllable factors and thoroughly executing countermeasures ourselves. The key difference from the past is that we are starting with the mindset of letting go of excessive growth expectations and optimistic assumptions and instead building a profitable structure even under challenging market conditions. The must-win battles for our company are the six listed here and we will prioritize these efforts for 2025 to 2026. These are all initiatives that we can execute to achieve results through our own efforts and decisions. By carrying them out with strong determination, we aim to build a foundation for growth. Next, on page 19, of the six must-win battles, the top priority is to reduce costs. In addition to the more than ¥40 billion over the two years 2024 and 2025, we have also accumulated measures at the ¥25 billion level. We will expand these key areas to the entire global company and we will implement cost structure reforms and cost reductions without exceptions throughout the company. Please turn to page 20. First, we will accelerate structural reforms over the two years from 2025 to 2026 and we will improve profitability through further structural reforms and we will rebuild the foundations to ensure that we can escape from the current critical situation and achieve sustainable growth thereafter. On page 19, we mentioned cost reduction as part of establishing a highly profitable structure, but of course we must not fall into a state of shrinking equilibrium by focusing solely on cost reduction. In order to realize our goal of becoming a personal beauty wellness company, we will promote the establishment of the strong brand structure in order to nurture global brands in the prestige skin beauty domain, which is our core domain. Regarding advancing business management, in addition to fundamentally strengthening financial governance, we would like to build a new global operational structure that can create value with the aim of improving operation efficiency and strengthening organizational capabilities through greater collaboration between regional businesses and the global headquarters on the global scale. So I would like to explain these details at the end of November. The key to moving forward with this is our action guideline act and deliver. We will pursue a commitment to taking action ourselves and delivering results. Naturally, I am prepared to take the lead in this. To be honest, the next two years will not be easy, but I am confident that we will be able to overcome this and become stronger. We need to be prepared for the next two years to be critical period. As I explained at the press conference when I was appointed COO, my motto is not leaving any issues for the next generation. I will stick to my original intention. I will do what I say I will do. From January and onwards, I would like to continue to actively engage in dialogue with investors as CEO. I would like to receive feedback and review what needs to be reviewed and work to improve corporate value. As a new CEO, I will work to transform the company into one that can generate solid returns.
Operator: Thank you very much. Now we would like to go into the Q&A session. From JPMorgan Securities Kuwahara-san.
Akiko Kuwahara: Hi, this is Kuwahara from JPMorgan Securities. Thank you for your presentation. Can you hear my voice? So it's one question proportion. I think for the numbers for the business performance I think it's there, but I think since we have the management here, I would like to ask questions regarding the post-structural reform. If you want us to wait until the end of November to hear the details, that is fine, but I want to hear a little bit about. For example, looking at global companies, for example, L'Oreal, your SG&As tends to be high, and I feel like that tends to be a heavy weight on you. That's about 10% plus in terms of profitability or pushing back the profitability. So your company, where you should be aiming for this SG&A ratio? How do you see what is the appropriate level of SG&A? It doesn't have to be a midterm. It could be in the mid to longer term. To what level do you want to reduce the SG&A and by 2026 to achieve this ¥25 billion? So kind to your ideal position by 2026, how much do you think you can achieve by then? It could be more of a qualitative comment as well.
Kentaro Fujiwara: Okay, thank you. Then I would like to reply to your question. As for the detailed numbers, I do apologize. I cannot disclose or mention at the moment today, but as for our thinking in regards to your question, growth and cost structure, we try to look at it separately. So growth, we look at it at a more harsh perspective, and while at the same time, what can we do to improve our profitability? What do we need to improve to improve our profitability? And that is how we look at all of our initiatives. Up to this point, as Hirofuji-san has explained earlier, we have done the cost structure reform in multiple aspects. And this year too, we have the ¥15 billion of target, and we will be exceeding this ¥15 billion target, and next year ¥25 billion in target. So for these numbers or the targets, what we needed, the cost structure reform was Japan and also China and travel retail, which struggle with the market decline. But to aim this ¥25 billion, which is another level, that has to be something that is done across the company, approaching on every aspect of the company. As for the target, which we aim as a company, as for that, if you can hold on till the end of November, I would like to touch upon it maybe end of November.
Akiko Kuwahara: Thank you very much. So as you aim for a global beauty company, so that target or objective does not change. And so for that, the cost and the profit structure, you're aiming for somewhere that is to the level of other global competitors in the beauty industry. Is that quite the correct understanding?
Kentaro Fujiwara: Yes, we do need that profit structure. Otherwise our business -- our business is also something that proactively creates new value. So yes, we do need a certain level of profit. Otherwise we can't challenge new things or make investments. So yes, looking at the global peers, the global competitors, we want to make sure to bring it to the level of the profitability of these global players.
Akiko Kuwahara: Okay. Thank you very much.
Operator: Next from CLSA Securities, Oliver. So please ask you a question.
Oliver Matthew: Hello. Thank you for your presentation. I have two questions or maybe just one question. Actually, let's -- you mentioned travel retail and the China outlook is a little bit difficult. But could you comment a bit more on when you think you could see revenue growth again for those two markets is my question. And just to follow up to the previous question, could you be clear when you say you need to be at the right level of profitability? What is the kind of acceptable level for a cosmetics company for operating profit margin you consider? Thank you.
Kentaro Fujiwara: Okay. So thank you very much for the questions. And currently for the China Clé de Peau Beauté and ANESSA still growing. However, to our main brand, the brand Shiseido is a little bit suffering. So therefore we really talk to and to recover to the brand of Shiseido growth. This is our first priority. And the second question is that for the target of the profit abilities. So today it's too early to say to the committed to the target.
Oliver Matthew: Okay. So just on travel retail, when do you think you might see some growth again?
Kentaro Fujiwara: You mean for the travel retail growth?
Oliver Matthew: Yes. Revenue growth. Yes.
Kentaro Fujiwara: Revenue growth. Okay. So the currently for the travel retail situations, so number of the tourists is increasing. However, the conversions from the tourists to shopper has drop a lot. And also for the purchase price per person per tourist is also dropped. So therefore, first, we seriously take into account all such situations. And in addition, we also carefully manage to the tourist sales and the non-tourist sales. So non-tourist sales is sometimes is disrupted to our brands. So therefore, from now on, within the two years, we really manage to the non-tourist sales in order to keep it to the make it for the healthy sales. That's a target for the next three, two years.
Oliver Matthew: Okay. Thank you.
Operator: Next, Morgan Stanley (NYSE:MS) MUFG Securities, Sato-san.
Wakako Sato: Hi, this is Sato. Can you hear me?
Kentaro Fujiwara: Yes.
Wakako Sato: So you mentioned about the strengthening of the finance governance and I've been looking at the news flow and there's something I've been wondering about. In regards to M&A, not more in the recent performance, but I just want to ask about M&A for your company. I was questioning the fine today's sales, but 20% of shares in June was sold with ¥12.8 billion, and so that would be about ¥64 billion to ¥65 billion. So the sales is sales, but looking at the cash flow and the value assessment, the deal negotiation, I don't feel like the deal negotiation was done right. And I thought the sales price was okay, but looking at the cash and the goodwill, at the time, Bloomberg was saying it could be about ¥150 billion. So in detail, what you've done in the past couple years, I feel like the M&A's had not been too -- was not necessarily with integrity to the shareholders. And I understand that the cosmetics and I feel that the cosmetics brand is growing, but I question this. So as a management, how do you look back on that, reflect back on it, or have gotten learnings from it so that that could be utilized for your governance, so that it could be placed in your next plans and strategic plans? And so I do want this financial governance to be strengthened. What I have just mentioned is there's a misunderstanding or if there's any direction of M&A, or if there's a thinking around M&A, direction as a strategy as a company, please let us know what you're viewing?
Kentaro Fujiwara: For the financial governance, I do not have anything that I can talk to you about in detail at the moment, unfortunately. However as you have mentioned -- what you have mentioned to us, cash flow, or more the cash centric financial governance is something that I myself have been wanting to focus on. So in that sense, looking back at the past M&As, what went well, what did not go well, that is not something that I would like to comment on at the moment. However I am certain that whatever M&A's were done in the past, it was done appropriately with the appropriate strategy of the company at the time. But with that in mind, with your comments, we would like to take that back to see what we can do to strengthen our financial governance.
Wakako Sato: Thank you very much. I would like to get some comments around that in your next mid to long-term strategy announcement. Thank you.
Operator: Next, Yamanaka-san from SMBC Nikko Securities.
Shima Yamanaka: I'm very sorry. My name is Yamanaka from Nikko. I have a quick question on the reduction of fixed costs and also reevaluation of the source of profit. And next year and the year after, so in the next two years, as America is going to be important as a growth factor. So I wonder that there may be some factors that may affect that effort. For instance, in China, if the pricing is not working well for certain brands, perhaps you understand that there is a movement to rebuild the brand. In particular, you mentioned the rebuilding of the branch Shiseido is very important. So are there going to be needs to make an investment for growth?
Kentaro Fujiwara: So your question is about the temporarily reducing the investment for assisting growth. In regards to branch Shiseido, there's nothing fundamental that needs to be resolved, such as the two or excessive inventory level in the market. And there's no such situation. What we need to do now is that, for instance, the Double Eleven has started. The price discount and the price promotion in the overall promotion activities will be controlled for the sake of growth. And of course, we need to make some investment for growth. This is not the case of investment for changing the fundamental brand mix or brand structure. And the Chinese market, in any case, will shift dynamically. So in terms of the portfolio, we always need to try to optimize it.
Shima Yamanaka: Thank you for those strategies to restrain the investment for growth in the US, for instance. Are you thinking of it?
Kentaro Fujiwara: The U.S. Drunk Elephant and _ brands are in these markets. But as far as I'm concerned, I believe that there's still room for growth for the branch Shiseido in the Americas and other markets. So we have been selling these through the department stores. But we may be shifting to TEPRA or ALTA (WA:AATP). And that type of the retail related transformation may be necessary.
Shima Yamanaka: So it is not that you do not expect that high cost, but not much growth and profitability. Am I correct to understand it that way?
Kentaro Fujiwara: Yes. So in order to secure the growth, we would like to make an investment. And in order to secure the investment, we would like to succeed in cost reduction in the next two years.
Shima Yamanaka: Understand now. Thank you very much.
Operator: Hirozumi-san from Daiwa Securities.
Katsuro Hirozumi: Hello. Can you hear me? Thank you. One question. Okay. Page 17. Next year's direction. Japan segment was 20 billion in Japan and next year 50 billion. Then that would mean that Japan will be very strong for next year. And the other segments will need a review. Or, you know, if I could say direct, it's going to hold Japan back. So next year, core OP, looking at each of the segments. So is that right? So meaning that next year, Japan will be really driving and the other segments will be kind of being reviewed. Is that the right understanding?
Kentaro Fujiwara: First of all, as for the overall direction, as I have mentioned, Japan will thoroughly implement and complete the structural reform. That does not change. And others, America's EMEA and Asia, growth is one thing. But on top of that, of course, the profitability improvement is something that we do need to work on for next year. And of course, as for the overall numbers, the performance, that is something that we will be sharing with you February of next year.
Katsuro Hirozumi: Okay. So I understand the cost reduction. But how do you see acquiring the sales or capturing the sales? So yes, I get the cost reduction and I get Japan. For example, China, travel, retail, EMEA, America's. How do you view acquiring or raising the sales, growing the sales?
Kentaro Fujiwara: As for that, the details of that, I would like to talk about it at the end of November. But in the main storyline here is that we build a structure that will not be affected by the market environment. And in order to do so, China and travel, retail, we must make sure that we're not leaning too much on China and travel, retail. And so meaning that we do need to focus on growth on America's EMEA. And I think that would be the overall direction of our strategy.
Katsuro Hirozumi: So November 29, is that the kind of things you will be able to mention to us as well?
Kentaro Fujiwara: Yes.
Katsuro Hirozumi: Okay. Then I look forward to November 29. Thank you very much.
Operator: From Mizuho (NYSE:MFG) Securities Securities, Miyasako-san, please ask your question.
Mitsuko Miyasako: Thank you for this opportunity. Global cost structure reform is my question. 2024, other than Japan, China and travel, retail, for the Asia Pacific and the America's EMEA, you are growing. So what are you doing exactly? And also ¥25 billion. Is there a breakdown by region for that?
Ayako Hirofuji: First of all, about the growth of GTC, EMEA and others, there's not one single factor affecting this. This is the buildup and accumulation of many small factors, such as gross margin supply network and also IT cost reduction are also included. And also product mix improvement and also a price increase in some of the products. All of these are constituting this outside of Japan and China. And also in regards to Japan and China as well, brand SKU mix improvement and also the closure of the stores and also the cutting down on head counts in China accelerated more than we had planned. And from our expectation, their cost reduction is accelerated and we are now in good control of the cost. In regards to the 25 billion for next year, as Mr. Fujiwara also said, the details are not to be shared at this point.
Mitsuko Miyasako: But you are close to the final numbers, right, already? And you are close to achieving ¥25 billion.
Ayako Hirofuji: We are having an active discussion on this point, so yes, so certainly we will make a comment at the end of November.
Mitsuko Miyasako: And one last thing, what about the 2025, ¥25 billion.
Ayako Hirofuji: 2025, sorry, I couldn't hear you.
Mitsuko Miyasako: ¥25 billion for 2025 is your assumption?
Ayako Hirofuji: Yes, that's the original plan, so ¥40 billion for 2024 and 2025, yes, we have no change in that plan.
Mitsuko Miyasako: But then there's a ¥5 billion upward revision, so can we expect that? Or is it going to be accumulated in the original plan?
Ayako Hirofuji: So about the next year assumption, we would like to give a separate announcement. So we will make the all-out effort for controlling the cost without exceptions and seek every opportunities for cost reduction. And we are determined to do that.
Mitsuko Miyasako: Thank you.
Operator: Thank you very much. From Jefferies, Kawamoto-san.
Hisae Kawamoto: Thank you very much. This is Kawamoto from Jefferies. Q3 sales, the situation, I want to confirm something. Page 26, Hirofuji mentioned about the top line, but from what we've been hearing, there's been a lot of talks about the cost control. So what about the sales? How should we view or understand the sales for next year? Because Q3, so I understand that Shiseido Drunk Elephant having a negative performance, but Anessa was minus fragrance. The market is growing, I think. So why is that a minus? So you have many other brands outside of your brand, Shiseido. For example, _ is very seasonal. So what is happening? How will you be working on some of these other brands and areas for next year and onwards?
Ayako Hirofuji: Sorry, I may have missed part of your question, so I hope I can answer your question. Let me confirm later. But first of all, for the nine months, year to date, to plan, the sales is below what is expected. If you were to see it by region, TR has been the biggest category segment, which has been below what has been expected. And that is giving a very big negative impact across the company. And next is China, followed by TR is China. And so therefore, within the brands, within the brands, Brand Shiseido was the biggest decline or negative, but the other brands, for example, Cledepeaubeaute in China, it was actually performing well. And so by region, the brands had different positives and negatives.
Hisae Kawamoto: So to the plan, what is the actual of each of the brands and how was it? It is kind of, was that the kind of the intention of your question? So on page 26, I'm just looking at the overall
Ayako Hirofuji: Kawamoto-san, I apologize. It's a little bit difficult to hear you. Maybe if you can bring the mic closer to you.
Hisae Kawamoto: On page 26, fragrance and Anessa. For example, I think the fragrance, the market is growing. Anessa is also a strong brand. So why are they these two negatives? What's going on?
Ayako Hirofuji: For fragrance, for Q3 on page 26, the minus that you see in fragrance, that's the net that is driven by the negative in EMEA. So Europe in Q3 was a temporary negative, as mentioned in the material of the business performance. But that's due to a time lag. The Q3 sales was pushed forward to Q2 and Q3 was pushed back to Q4. So there's some time lag that impacted the EMEA negative, making the fragrance look negative. And because within EMEA sales, the fragrance cover a lot of the chunk. So that is why the fragrance looks negative for Q3. However, Q4, we do have a boost plan and EMEA as mentioned in the earning call. October numbers looked good. We are seeing good performance for October. So that is something that we are confident to be able to recover. So that is for fragrance. Now, for Anessa, China and travel retail has driven this negative performance of Anessa.
Hisae Kawamoto: Understood. Thank you very much.
Operator: From [indiscernible] Trust Asset Management.
Unidentified Analyst: [indiscernible] speaking. I hope you can hear me. Now, I have a question about the employee engagement and also the risk on the personnel. So you've reduced the headcount, but you're maintaining the revenue level according to your explanation earlier. It may be so in the short term, but when we look at mid to long term, can you maintain that? The motivation of the employees, is it maintained or going forward, how are you going to strengthen the motivation of the employees? Under the difficult circumstances, unless there are exciting things, it may be difficult for employees to be able to enjoy working in the company. So in the future, I fear that there may be some risks of, for instance, some fraud. So what is your thought of Fujiwara? If you can answer some qualitative response, that would be great, or any assumption.
Kentaro Fujiwara: Thank you very much for your question. So one of the things that I'm happy that we've done was to make the solid investment in our core brands, and that reached the customers. And our customers came to the shopfront seeking the products out of the brand, and that was quite encouraging for our employees, and this was highly appreciated by our retail partners as well. So as a company, we will be making, we are making investment into the brands, and that creates the exciting products, and also exciting workplace, and that came, so that turned out to be very successful. So there was 1,500 people who went for the package of early retirement, but even then we increased the top line. And also, in the case of TBP or PB, so where people gather, we will dispatch the beauty consultant, and so this is the strength and also the meaning of the activities of the TBP, and we received very good feedback. And the risks or the evils that we need to overcome is that, having said that, by losing 1,500 people, depending on the location, sometimes we face a shortage of personnel, from what I gather, and there's some level of anxiety for the personnel shortage, and those voices have reached me, so then once again, we would like to revisit our criteria in dispatching people, and we will consult with the retail partners, and to gain their understanding to improve upon the way we sell our products. And lastly, I would like to add that I have been telling the Shiseido team to make profit, and so making profit, the concept of making profit will be educated to all the PBPs, the personnel beauty partners, and so that what needs to be done to be able to be profitable, and we are continuing with our education, and we are receiving excellent feedback from this education activities, and our PBPs are now coming to understanding that what actions will result in higher profitability, and in addition to our cultural reform, we would like to accelerate the changes to the better direction with this education, continued education.
Unidentified Analyst: Thank you very much for this forward-looking topic. I'm looking forward to your announcement at the end of November. Thank you.
Operator: With this, we would like to close the Q&A session. Thank you very much today. With this, we would like to close today's business performance call. Thank you very much for your participation today.
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