Shiseido Co Ltd

TSE:4911

Earnings Call Transcript 2022-Q1

[Takayuki Yokota, executive]

I would now like to explain about the business performance for the first 3 months of fiscal 2022. Please refer to Page 3. As already announced, we have adopted the IFRS, International Financial Reporting Standards, from the first 3 months of fiscal 2022. The following explanations are based on financial numbers on IFRS basis.

As for the major impacts due to the transition from JGAAP to IFRS, please refer to supplemental data 1-1 to 1-5. Also, please be noted that for our business management KPI, we are using core operating profit, which is the IFRS operating profit minus nonrecurring items.

Please have a look at Page 4. This is a summary for Q1 of 2022. And there are 5 key points I would like to cover today. Net sales was minus 1% versus last year on like-for-like basis, which deducts the impact from the business transfers. Overseas businesses, excluding Japan, performed flat year-on-year. Americas, EMEA, Travel Retail continued its good momentum, offsetting the slow market recovery in Japan and slow China markets due to the zero-COVID strategy and expansion of COVID cases. The sales ratio of skin beauty brands grew to 75%. The restructuring of the business portfolio contributed to this, allowing the company to be on good track to meet the target of 80% in 2023.

We are also making good progress on DX acceleration. The sales growth of EC is moderate at plus 3% versus last year, but this is due to the offline consumer traffic recovering in those areas such as EMEA and Americas that were under lockdown the year before. The e-commerce sales ratio was 29%.

The core operating profit was JPY 4.4 billion due to the reduction of fixed costs from structural reform in EMEA and Americas and other factors such as agile cost management. The company is on solid track for all other transformations.

As for the Personal Care business, the remaining Asia Pacific region transfer is underway through Q1 to Q2, and currently, all countries and regions, aside from Vietnam have been transferred. The Professional business is on track for the transfer plan on July 1.

Also, we have fully rolled out FOCUS in the Asia Pacific region in March and the start of operations for Fukuoka Kurume factory is to start in May, all progressing the company to the solid foundation building. of -- for growth trajectory again in 2022.

Next is the P&L summary on Page 5. Operating profit was JPY 4.4 billion. Last year, we had booked the impairment loss on Dolce & Gabbana trademark rights to nonrecurring items. Therefore, the profit is plus JPY 10.9 billion year-on-year. The profit before tax for the quarter was JPY 8.2 billion due to the bookings of currency exchange gain from yen depreciation and equity method investment gain. As a result, the profit attributable to owners of parent for the quarter was plus JPY 15.5 billion from last year at JPY 4.4 billion.

Next is Page 6 on net sales by brand. As the Japan and China sales that cover over 50% of the sales underperformed than that of last year, brands such as Shiseido, IPSA, ELIXIR, ANESSA were heavily impacted. On the other hand, Clé de Peau Beauté and NARS were positive 10% and positive 35%, respectively, realizing double-digit growth. Especially for NARS, the new product with skin care function, light reflecting foundation has been selling very well globally, accelerating its growth.

Also, the Fragrance category experienced big growth too, led by narciso rodriguez. Now Drunk Elephant looks like it is underperforming with minus 32% year-on-year, but this is the impact from the advanced shipment last year in which we have to do in the Americas due to the transfer of warehouses. Therefore, this brand is expected to have strong growth for the full year.

Page 7 shows you the new product launches for Q1. We proactively executed new launches and renewals centering around the FOCUS category of Prestige skin beauty brands. Even in the harsh market environment, the company will continue to grow sustainably from mid- to long term by providing attractive products and brand experiences.

Next is Page 8, the net sales year-on-year. The solid growth of Americas, EMEA and Travel Retail contributed to the global growth offsetting the decline of Japan and China.

Next is Page 9, the Japan business. The local market for Q1 landed flat year-on-year. Last year was state of emergency, this year was the quasi-state of emergency, increasing the people to go out more as restrictions eased, but the cosmetics purchase rate did not recover. In terms of price points, the low-priced brands had mid-single-digit growth and mid- to high-priced brands shrink by low-single digit. There was no market recovery in the mid- to high-price brands, which is our focus.

Under such environment, our local sales grew by low-single digit on consumer purchase basis, and the market share grew in our FOCUS category of mid- to high-priced brands. Especially, the Prestige brand had strong performance in our core brands, SHISEIDO and Clé de Peau Beauté, boosted by the enhanced OMO initiatives, synergizing our stores and digital. Also, the skin beauty items such as MAQuillAGE New Liquid Foundation and ANESSA Day Serum, providing the first-in-world sun dual care technology contributed to the market share expansion by capturing the needs of consumers. On the other hand, ELIXIR, our core mid-price brand continues to struggle.

The daytime moisturizer that was renewed this year performed well, contributing to loyal user growth, but the dip in lotions and cream sales pulled back the overall sales from recovery. E-commerce continued to grow and expand market share centering around our business partners, EC.

Next is Page 10, the China business. As for the market, the e-commerce continued to grow, but the traffic in offline channels slowed down due to the zero-COVID strategy and lockdown in March. Under such environment, the company continued its strong growth in EC of low 20%. Yet the traffic decline in offline impacted the performance, landing the overall consumer purchase to be minus low-single digit. The temporary business impact from the COVID situation is unavoidable, and we believe that the China market, especially with the Prestige category, will continue to grow in mid- to long term.

We are continuing to execute our plans for sustainable growth as explained on February 9, and we see the impact from it in Q1 already. For example, the Shiseido Future Solution captured big growth of positive 37% with enhancements to promote trade-up. Also, we are accelerating platform coverage in order to capture the diversification of consumers' purchase channels. For example, in January, we started the sales of Shiseido in JD.com, capturing strong growth on Women's Day. ANESSA also recorded #1 sales in sun care in TikTok Women's Day promotion.

Next is Page 11, other business regions. In the Americas, all categories, including makeup, grew, capturing market recovery and realized solid growth. NARS grew over 40% year-on-year, expanding its market share substantially. Clé de Peau Beauté is utilizing local ambassadors in North America, enhancing promotions capturing local needs and grew over 40% year-on-year, contributing to growth of our FOCUS skin beauty category.

EMEA also captured solid growth of the market, turning positive versus 2019, especially narciso rodriguez, a fragrance brand, expanded sales in all countries of EMEA. E-commerce sales turned negative year-on-year due to a reactionary fall from lockdowns and other restrictions in European countries last year. And thus, we believe this is positive, reflecting the normalization of the market. Travel Retail continued to be driven by Hainan Island, realizing growth for exceeding that of 2019. Prestige brands were especially strong, growing over 20% in all brands.

In Asia Pacific, market recovery was slow in Taiwan and others. Against such a backdrop, we continuously expanded rollout on major EC platforms, which became a driver of significant growth, mainly for Prestige.

Next is Page 12, on COGS ratio. Although COGS ratio increased due to manufacturing service agreement for business transfers, but excluding this, Q1 COGS ratio on a like-for-like basis was 23.8%, an improvement of 3 points year-on-year. In addition to the product mix improvement due to business transfers, COGS ratio continued to recover with lower inventory write-offs.

Next is Page 13, the cost structure. For marketing investment, we had higher media costs for the 150th anniversary. On the other hand, with agile cost management, in line with sales and lower costs, thanks to business transfers, we were able to reduce cost by 1 point. Furthermore, mainly in EMEA through a series of structural reforms, including rebuilding business portfolio, reducing the number of unprofitable stores and others, we were able to reduce personnel cost expenses by 0.6 points. On the other hand, to build the foundation for mid- to long-term growth, we continued our DX-related investments, which increased the brand development and R&D cost ratio and expense ratio by 1.5 points and 0.1 points, respectively.

Next is Page 14 on core operating profit. Operating profit declined in Japan and China. In addition to lower margins coming from lower sales at both businesses, profit was impacted by transfer of Personal Care business in Japan and enhanced marketing investments in China. On the other hand, in Americas and EMEA, operating profit improved significantly, thanks to higher commercial base profitability and decrease in fixed cost due to organizational and structural reforms turning both businesses profitable. In Travel Retail, OP margin improved, thanks to higher margins coming from sales growth. In Others, there is a larger decrease in profits as this segment includes new factories and DX-related investments. We are continuing to make investments to make sure we continue to grow in the future.

Next is Page 15 on cash management. Other than the income taxes paid associated with Personal Care business transfer, we continue to make investments for future growth, such as capital investments in new Fukuoka Kurume factory, IT and DX Investments and others, resulting in negative cash flow of JPY 44 billion, but we are maintaining a stable cash position. Inventories increased by approximately JPY 5 billion since December last year, as we have secured more safety inventories, mainly for raw materials against the backdrop of supply chain disruptions.

Next is Page 16, showing market changes and Shiseido's response. As is described here, changes we had not assumed at the time of the announcement of the forecast in February 2022 are occurring and uncertainties over economic environment is increasing. Amidst various risks, we are steadily executing our major strategies such as focusing on skin beauty, DX and others in WIN 2023 and beyond. At the same time, we are collectively taking measures to respond to changes in the environment to maximize the benefits of structural transformation and are advancing with the initiatives to increase profitability.

Today, we have Mr. Tadakawa and Mr. Fujiwara, who are responsible for Japan and China businesses, respectively, to explain the future initiatives and the current situation. First, we'd like to start with Mr. Tadakawa, Japan business. Mr. Tadakawa, please?

[Norio Tadakawa, executive]

First of all, I would like to share with you the market assumptions before going into the future plans. As Yokota-san has briefly mentioned earlier, the life with masks and rise in prices, we do observe that the wallet share of cosmetics has gone down. By lifting the quasi-state of emergency, the opportunity to go out, especially for leisure and dining with friends, are increasing. What this means is that in terms of overall consumer sentiments and consumption, consumption is recovering, but the spending is focused on leisure activities and for communication purposes. This is what we think the current situation is.

We do believe that after this phase, the cosmetics market will start to gradually recover too, but on assumption that the market size will not recover to the pre-COVID level in both local and inbound. It is the Japan market mission or importance to heighten the profitability. And there are 2 main pillars to transform the business structure in the Japan market. First, is the cost structure transformation. Given the current situation of the Japan business, with high fixed cost ratio, we need to continuously realize profitability improvements that do not depend on sales growth.

In the call in February, we did speak about our plan to improve profitability by about 3%, that does not depend on sales for 2022. This 3% does not rely on sales, so we are currently working on it to meet the target. On top of reducing labor cost, SG&A and COGS, we need to take actions to things such as shifting marketing investment to digital and improving ROI by strengthening the CRM. Every year, these must be continued to realize profitability improvements by 3% on average per year, not relying on sales and watch carefully over the market situation, so that if there is a case in which the market will experience a big decline, we can accelerate the cost structure reform as needed.

We will create a structure where the high profitability can be achieved with incremental sales gain by expanding our net sales. And this growth expansion will not just be about the market situation, but by selecting brands with high profitability and SKU with high profitability, and also thoroughly enhancing on our mid- to high-priced brands to thoroughly strengthen the skin beauty area.

In terms of strengthening these areas, we will continue to heighten the consumer satisfaction through CRM and providing customized experience and value to our consumers to create more fans and loyal users of our brands to secure stable sales. As a result, the ROI will heighten too. Also, we will continue to provide significant products through R&D and elevate our brand equity with significant brand power through our accelerated digital area with D&A diagnosis and Personal Beauty plan, innovative solutions which work at Shiseido's advantage.

In these ways, we will continue our structural transformation in both profitability and growth with our business partners so that we can realize the cost structure that can keep our SG&A in low 60% in the midterm. And so that with this we can transfer to a business structure that can secure sustainable and stable profitability in Japan.

Next is about China from Fujiwara-san.

[Kentaro Fujiwara, executive]

This is Fujiwara from China. And first, looking at the outlook for the midterm Chinese market, we believe that the China market will continue to grow over the medium term. However, for growth, we expect the growth to slow down. We also believe the contents of growth is coming to a turning point, with changes in the value of consumers. We will thus overhaul our operation, aiming for sustainable profit growth.

Operations will be shifting more towards digital. And as were offline, in order to enhance productivity per store, we will proceed with closure of unprofitable stores and optimize personnel allocation. Furthermore, to enhance cost effectiveness, we will localize sample production and by leveraging the scale merit to procure centrally, we will build a structure that will enable us to respond to changes in the market with speed at low cost.

With such efforts, we will generate capital for additional investments. At the same time, to win the competition in the maturing market, we will overhaul our operation to enhance our brand value. To break away from the currently intensifying price competition, we will shift our marketing investment from mainly promotions now to brand value proposition. We will also enhance our communication to convey the value of our products specifically, its effects and efficacies in order to break away from price competition.

Furthermore, in order to address the diversifying needs and channels, we will localize value creation locally. By having China lead the production development, product development and communication creation, we are aiming to respond to changes in the market by promptly addressing the needs and adopt strategic approach by channel. We want to be proactive in capturing opportunities with diversified channels. Consumer behaviors within digital cannot be captured only on a single platform anymore. We are, therefore, going to complete the rollout based on the characteristics of each of the platforms within this year. As for offline stores, we are going to advance them from a place to sell to a place to offer novel brand experience and best build channels to generate synergies with digital.

While we shift our operations, as I explained, we will clarify the positioning of our brands in each market. With diversified need of consumers, we believe the market segments will become more fragmented by making clear the segments each brand can build their foundations, respectively. And by flexing investments there, we believe it will be possible to realize efficient investments and sustainable growth. Thank you. And that's all from me.

[Takayuki Yokota, executive]

The next, Page 19 is about the full year outlook. In line with voluntary adoption of IFRS from Q1 of 2022, we are restoring the fiscal '22 forecast announced in February and announced a new forecast based on IFRS. Substantially, there are no changes than the accounting standard.

Last of all, even with rapidly changing environment, in order to aim for a medium-term sustainable growth, ESG is essential, which is what I will be explaining now. First is about diversity and inclusion. Based on PEOPLE FIRST principle, various initiatives we have taken, including work style reforms, improving easiness to work and others were appreciated, leading us to be awarded 100 Best Companies Where Women Actively Take Part in 2022, a ranking by Nikkei Woman and Nikkei Group's Nikkei Womenomics project. We will not be content with the status quo and we'll continue to further promote diversity and inclusion.

Next, I would like to talk about our social contribution activities. We strongly hope that safety and peace of the Ukrainian people will be secured as soon as possible, and we'll best support the people suffering under the current environment with our employees all over the world with our utmost efforts. So far, we have undertaken initiatives described here as a part of our support. But this time, we will be hosting a charity concert to offer support to people who have evacuated to Japan from Ukraine. The proceeds from this concert will be donated to support living expenses of the Ukrainian refugees in Japan. We would very much appreciate your warm support. The outline and the details of the concert are on our website news release.

Thank you. This concludes my briefing.

[Unknown Attendee]

Now we would like to go into the Q&A session. If you have a question -- first question, JPMorgan, Kuwahara-san.

[クワハラ, analyst]

This is Kuwahara from JPMorgan. Thank you very much for your briefing. Just to go over a few numbers. So I would like to ask a question to Yokota-san. So you've changed the IFRS divestment impact. The sales, I think I can figure it out once I calculate it, but I want to see the gains and loss through the divestment at IFRS. Last year's Q1 for Personal Care, I think it was about JPY 2 billion, what was announced or disclosed for profit. So JPY 2 billion, is that about right? And on Page 14, you have the core OP per region. So in each of the regions, the Personal Care and makeup brands these divestments, what kind of impact did it have on the core OP? Those are the areas I would like to confirm.

[Takayuki Yokota, executive]

The Q1 actual performance, right?

[クワハラ, analyst]

Yes.

[Takayuki Yokota, executive]

First of all, for Personal Care business transfer impact, overall the OP impact JPY 0.5 billion impact. By region, Japan, JPY 5 billion; China, minus JPY 1 billion; APAC, JPY 500 million.

[クワハラ, analyst]

For Q1, EMEA and America is not fully calculated yet?

[Takayuki Yokota, executive]

No, it is out. The numbers are out.

[クワハラ, analyst]

Is it JPY 2 billion to JPY 3 billion? That's for 2022 full year or Q1?

[Takayuki Yokota, executive]

No, I'm talking about Q1. I think I explained this last time. But -- so for 2022, the restructuring impact is about JPY 7 billion to JPY 8 billion total for EMEA and Americas. So Q1 right now, we are on good progress to have that -- to achieve that for the full year.

[クワハラ, analyst]

Personal Care, full year, I think, mainly for the first half, what is the impact for the full year for Personal Care business?

[Takayuki Yokota, executive]

Sorry, I do not have the numbers right in front of me. Please give me a moment.

[クワハラ, analyst]

Okay. I will be waiting for the number, and I'll pass on the mic to someone else.

[Unknown Attendee]

Next, Jefferies. Miyasako-san, please.

[Mitsuko Miyasako, analyst]

I'm Miyasako from Jefferies. Tadakawa-san, I have a question about Japan business. First, looking at the Japanese market, you mentioned that the forecast for the full year is 10%, but you have a lower forecast. And the Q1 sales, was it on -- in line with the plan? It's 150th anniversary and you have new products from February. And if you have lowered the forecast for the Q1, how are you going to achieve the full year forecast?

[Norio Tadakawa, executive]

Thank you for your question. This is Tadakawa. Looking at the first quarter, as of February, I mentioned that the progress would be low single digit for Japan market. But in the end, the market was flattish in the end. So the share -- so our view is that it's flat. But original plan -- compared to the original plan, that was negative low single digit. And in Q2, the market may recover to high single digits. That's what I mentioned in February. But looking at Q1, I don't believe that we will be able to achieve high single digit in Q2 and Q3, Q4, we do not expect that much recovery.

I think we need to consider such a risk also. And looking at the latest situation, April, it was -- the market growth was low single digit. And during Golden Week season in May, it started to grow to high single digit. So as I mentioned earlier, a little bit -- so the timing is a bit delayed compared to the overall consumption. I think this is the trend we are seeing. And when the sales declines, we would like to operate the business, taking into consideration the risks on the profit when the sales decline.

[Mitsuko Miyasako, analyst]

So if that's the case, Q1, so just that the market view was not accurate. So if that was correct, then you were able to achieve the market?

[Norio Tadakawa, executive]

In the end, this time also basic care and cosmetics is focusing its bias more towards low-priced products, because income level of the consumers have made a decline because they were not able to work and also the bread and butter prices have increased. So looking at the market, low-priced products are growing, but mid-priced products and above are not growing. And as you already know, in Shiseido, we are strong mid- to high-priced products.

So at the timing when the mid-priced products and above will recover, we will be able to see growth. But if you shift very much to low product -- low-priced product, it will sacrifice profitability. So we would like to create a structure where we will be able to grow profitability and grow sales.

[Mitsuko Miyasako, analyst]

But you would like to somehow control profits. Even if sales does not grow so much?

[Kentaro Fujiwara, executive]

Well, as a company management, I think it's very important. So I don't want to create a story, where because sales was not -- did not grow, we could not grow profits. I would like to avoid such a situation.

To the previous question, Yokota-san has something to add.

[Takayuki Yokota, executive]

About Personal Care, the full year impact to about -- the full year impact of Personal Care. Last year, we had transferred July 1. So the first half impact is about JPY 7 billion to JPY 8 billion, will be the full year impact for the first half. So that's JPY 4.5 billion in 1 quarter. And the remaining is JPY 2.5 billion to JPY 3.5 billion in Q2 onwards would be the negative profit impact that we can forecast.

[Unknown Attendee]

Now we'd like to move on to the next question. Now we would like to go into the next question at Mitsubishi UFJ, Sato-san.

[Wakako Sato, analyst]

This is Sato. The operating profit for the full year, so I think you mentioned that it's just a simple change of JGAAP to IFRS. And currently, it's very unstable, uncertain, there's a lot of things happening. And for your company, there's a Russia sales and China lockdown. And the Hainan Island doesn't seem to have much impact, but the sell-out has been stopping from the end of March. So even if that is decent, I believe there will be impact on the inventory.

And also -- so in summary, what is the impact of Russia and lockdown on China? In the current situation that you can share with us or disclose with us, what kind of impact do we have? I do understand that it could be qualitative and Beijing too with some of the OP and some of the China brands, it's -- Beijing is going through lockdown as well. So with these uncertainties around the world, what are you experiencing? And how are you seeing it?

[Unknown Attendee]

We would like to explain the numbers from Yokota first.

[Takayuki Yokota, executive]

The uncertain situation around the world, it's very true to your point, we cannot see -- foresee very accurately what will happen. So we're watching very cautiously. And that is why we have not changed the full year forecast. But with that, so looking at Russia, March 9, we have suspended export from EMEA. And also any of the business activities, including advertisement, so we have also suspended any business activities, including advertisements. So if there are to be impact, it will be Q2 and onwards. So that's just the current situation right now and nothing has changed from that.

For Travel Retail, March travelers to Hainan had dropped in March. But in terms of the sell-in within March, it's not been that impacted. April -- from April, there's been flight cancellations and some of the shipments have been delayed. And of course, there's impact from the lockdowns as well. I'm sure there will be impacts from that. But if that -- those lockdowns open up, I think the consumers behaviors will recover as well, and that's how our retail team is looking at it. It should recover.

In terms of the overall China, for Q1, there's the Shanghai lockdown impact. And I think it was about March 27 or 28 timing that the lockdown happened. So for Q1, we did not get that much impact from the Shanghai lockdown. For Q1, it was more of the continuous regional semi-lockdowns before the Olympic Games. And therefore, the brick-and-mortar channels have been impacted. Offline channels have been impacted, but the EC had not been impacted. That's been the Q1 situation.

But for April, our operation included OER impacted by the lockdown. The distribution center operations have been stopped, and that's been the situation. And for that, that's been listed beginning of May. So I would not say it's not 100% yet, but we have started the operation of these centers. And so the China team is moving to catch up and to recover. That is the current situation.

If there's anything else you would like to add about China from Fujiwara-san.

[Kentaro Fujiwara, executive]

Yes. Just like Yokota has mentioned. One, there's a distribution lockdown. So that happened in April. And after that, we are catching up with different phases. So we're gradually catching up. And there will be other cities that will have lockdown. So for distribution logistics, we are creating multiple backup plans, so that we can ensure that we will not be short of products due to logistic issues or constraints.

On the other hand, offline, given the great uncertainties right now, so channel-wise, we are trying to diversify the channels so that we do not rely on one channel. And offline -- so that even if the offline is uncertain or continues to be uncertain, we want to make sure that the products can be delivered to the consumers directly by backing up with the digital. And that will be what we are working on to recover for Q2 onwards. So we are creating all these backup plans right now, and that is the situation of China.

[Wakako Sato, analyst]

Understood. So I had heard before, even if you order online, it's the logistics is suspended. So even if there is need, it's hard to grow the sales. Is that the correct situation in China?

[Kentaro Fujiwara, executive]

Yes. Yes, in that sense, the logistics is -- if the logistics is fell back, yes, there has been cases where we have had to cancel some of the orders.

[Wakako Sato, analyst]

But if that gets lifted, then the 618 sales, for example, could go up, is that correct? The momentum could pick up if logistics is easing or if the lockdown is easing?

[Kentaro Fujiwara, executive]

Yes, that's what we hope and expect for and that's why we are preparing in various ways.

[Unknown Attendee]

We'd like to move on to the next question, UBS. Kawamoto-san, please.

[Hisae Kawamoto, analyst]

I'm Kawamoto from UBS. I have a question to Fujiwara-san about China. At other companies, they are assuming June, mid-June, the lockdown will be lifted. So they seem to have assumptions for the lockdown lifting. At Shiseido, when would China recover to achieve 16% increase in sales? When should it be lifted for you to be able to make -- achieve it? And would you be able to make it for 618 sales? I think it's front-loading, the activities are starting. On Hainan Island, can you elaborate a bit more on the impact of -- on Hainan Island?

[Unknown Attendee]

So first, Mr. Yokota will be explaining first.

[Takayuki Yokota, executive]

There is a very big impact in April, biggest distribution center was suspended. So distribution center operations, bringing that up to 100%, we're identifying at what time we will be able to do that. And the Chinese team is monitoring the situation. So I would like to refrain from talking about the forecast about this. We are making utmost efforts to cover that -- recover that.

And as for Hainan Island, as I mentioned a little bit earlier, the flights have been canceled, and therefore, we cannot deliver the products. And the travelers are declining. So there as well, I believe the recovery would be pretty quick. That's how Travel Retail looks at it. The retailers need to prepare for the consumers to prepare. So I hear that they have not reduced their intention to purchase.

And Fujiwara-san, anything to add?

[Kentaro Fujiwara, executive]

Yes. So I totally agree to what Mr. Yokota has talked about as the forecast. And various promotions, marketing investments should be able to be made flexibly and we are preparing towards that once the lockdown is lifted. So once the lockdown is lifted in case of China, there will be a rebound in China, and we would like to capture such opportunities. And therefore, we are prepared towards that now.

[Hisae Kawamoto, analyst]

And what's the timing for the lockdown lifting? You don't have any assumption for the timing of the lifting of the lockdown?

[Unknown Attendee]

So Mr. Fujiwara, please?

[Kentaro Fujiwara, executive]

Okay. As for the lockdown, on a daily basis, there is a lot of information, and we need to monitor the situation, and we are preparing. So I would like to repeat the same answer again.

[Unknown Attendee]

Great. [Operator Instructions] So we'd like to move on to the next question. Yamaguchi-san from Goldman Sachs.

[Keiko Yamaguchi, analyst]

This is Yamaguchi from Goldman Sachs Securities. For myself, the sales has been volatile in all regions. And I feel that as a result of that, that is why this is the perfect timing for profitability improvement. But Q1, the market is weak, was probably quite obvious. But I believe that there are certain regions such as Japan and China, where the sales and profit are both dropping. So I'm curious, and I would like to know once again, what kind of actions you are taking and what kind of initiatives you have had in place?

You said Japan's target is gain profitability by 3 points without relying on sales. But however, I don't feel like the company is taking actions to do something like that, looking at the actual performance of Q1. So specifically around Japan and China, could you explain to me what is in the plan?

[Unknown Attendee]

First for the numbers, we would like to have Yokota-san explain to you to touch on the numbers.

[Takayuki Yokota, executive]

First of all, as we had mentioned earlier, in -- for EMEA and Americas, EMEA and Americas, we have had positive of about JPY 2 billion to JPY 3 billion due to the structural reform. So for those regions, we are good on track. For China and Japan, at the February briefing, we mentioned that for Q1, we will have impact from the Omicron COVID cases. So therefore, on a JGAAP basis, we had initially mentioned that the OP would be JPY 80 billion, and we downward revised to JPY 60 billion in February. And to that, as Tadakawa as mentioned earlier as well even to that target, the sales is still a bit short is the current situation. So therefore, we have had fixed promotional numbers, so we wanted to reduce and where we could cut, but it is what it is as of now.

In terms of China, a similar situation has occurred. In result, it's minus 14%. The actual sellout is minus 4%, but the retailers' inventory adjustments have been very careful. And that was short than what we had expected in terms of sales. For China, we have been very flexible and agile and been able to control through marketing expenses. But for the samples, as we aim for the 618 sale, at the timing that at least the headquarters, it hits the China P&L. So even though we aren't actually using it, that's how the P&L is structured. So without that, the numbers would have been better managed than what it looks like right now.

[Keiko Yamaguchi, analyst]

I see. China. Okay. I kind of understand. And I do understand that you're making a lot of efforts in China. But what about Japan? The JPY 3 billion in Personal Care business, even if we think about that, I feel that the decline in profit is big. So I don't see the fruit of all the initiatives we're working on as a company. Is it because all those plans are fixed, so you couldn't adjust, therefore, please look forward to our performance from Q2?

[Norio Tadakawa, executive]

Yes, I would like to answer. This is Tadakawa-san. From last year, Q1, the numbers have deteriorated by JPY 8 billion and JPY 5 billion was due to the business transfer, but the rest of the JPY 3 billion, JPY 1.5 billion is the Personal Care. The back-office cost, cosmetics and Prestige the personal -- the back office that was in Personal Care have been reallocated to other areas. And so the minus is JPY 1.5 billion.

[Keiko Yamaguchi, analyst]

Then what is the JPY 5 billion? And why is that so big?

[Norio Tadakawa, executive]

We have been exporting including to China. So there's a gap in profit due to the export. And so if we include all that, it's JPY 5 billion. And there is the JPY 1.5 billion of impact from the reallocation of the cost. So -- and the rest of the amount, about JPY 1 billion is the minus gap from the minus is like the sales gap. And Japan is actually deteriorating in COGS, and that's partially due to ELIXIR not performing well. So the brand mix has been deteriorating, including ELIXIR. So there's about JPY 500 million of impact, and that's impacting to about JPY 1.5 billion.

And I spoke about this in February, but in the digital area, we are tightening our -- we are enhancing our investment. And so there are more costs going to that. But with -- by reducing the labor and SG&A, we have kept it flat. Last year's Q4 I think you may remember the performance -- the business performance for Q4. But Q4, it was quite similar in the environment from Q1. Q4 was plus JPY 1 billion in profit. In the sales then was about JPY 3.5 billion higher than that of Q1. In last year's Q4, the final sales did not meet the target. So there were some allowances that were pulled into the profit to make it positive.

So looking at last year's Q4, the actual -- the cost has improved, the overall actual number of performance has improved in Q1. But when we look at the future, will the market come back to where it used to be, we did not want to set our assumptions to that, to pre-COVID level. So we wanted to assume for recovery, but not much back to the pre-COVID level. And therefore, we wanted to suppress where we can in terms of the cost and some of the COGS reduction and SG&A and such so that we can improve our profitability.

So in the future, 60%, we mentioned about the low 60% tile of SG&A and that's our target. And in order to achieve that, what are we going to do every year, and we do have detailed plans to build up to that. But Q1, that was the situation in Q1.

[Keiko Yamaguchi, analyst]

Okay. Understood. I want to just go over some of the numbers. Personal Care business transfer impact overall was JPY 4.5 billion. Is that correct?

[Norio Tadakawa, executive]

Japan is 5 -- Japan is minus JPY 5 billion. China is plus JPY 1 billion. China was negative in Personal Care. So that was offset. And then in Asia, I think it was about JPY 4.5 billion. And that's what goes up to JPY 5 billion.

[Unknown Attendee]

We'd like to move on to the next question, Mitsui Sumitomo Trust Asset Management Company, Koguchi-san, please. Koguchi-san, can you hear me?

[Mitsuru Koguchi, analyst]

Yes. I have a question to Tadakawa-san. You talked about demand forecast in detail earlier. On the other hand, supply side, Fukuoka, Kurume factory will start operation from May. And as of now, the utilization rate of factories in Japan, how are they right now? And what is your outlook for the utilization rate in the future?

[Unknown Attendee]

Okay. Tadakawa-san, please.

[Norio Tadakawa, executive]

Okay. First, Ibaraki and Kurume, so we have 3 new factories and Nasu is operating fully already as originally planned. Ibaraki, probably a 50% utilization rate this year and Kurume factory will start operation from May and in line with the start of the operation, probably in the first year, operation will not be full operation, probably half in the first year. But basically, maybe you remember, there was shortage by 20% before, and that's not happening in Japanese market, at 1% to 2%. Is that -- is shorter stock only for special products.

So in terms of supply, we don't need to worry at all. So we have prepared such a structure. And also one more point, the lead time has been shortened significantly now. Back then, once you place the order, we had to arrange the materials, and it was -- took more than 6 months. But now suppliers' production structure has improved substantially. So compared to back then, probably the lead time has been reduced to half. And we are able to manufacture in a shorter period of time. So in terms of supply, you don't need to worry.

And another positive impact, is that a positive factor is that inventory, we are able to control the inventories. And the depreciation can be reduced, and there are many positive impact, and that's impacting the cost positively. So you don't need to worry. Please do not worry.

[Mitsuru Koguchi, analyst]

So you mentioned that there will be some delay in recovery of demand. But on the contrary, I was worried about the risk of lowering of the utilization rate, do I not need to worry about that?

[Norio Tadakawa, executive]

Well, as for Kurume, we are hiring people looking at the situation of the market. And this is a part where we are able to control. I'm hoping and looking forward to have the factories start to contribute to profit. So I'm on the sales side, so I hope to sell more.

So Mr. Yokota will be supplementing some information.

[Takayuki Yokota, executive]

So our sourcing ratio was 43% or so at last year same time, but in the first quarter, it dropped to 37%. And with Kurume starting to operate, this shift will be improving furthermore. So there is a positive impact that we can expect here as well.

[Mitsuru Koguchi, analyst]

So that will contribute very much to profit, right?

[Takayuki Yokota, executive]

Yes. At Fukuoka, initially, it's a test run. So probably the capacity is only 30%. But in the second year, the utilization rate will increase to 70%. And then towards 2023, it should contribute more and more towards profit contribution.

[Unknown Attendee]

From Daiwa Securities, Hirozumi-san.

[Katsuro Hirozumi, analyst]

So the operating profit, JPY 62 billion for the full year. I want to hear from you the accuracy and confidence to achieve the JPY 62 billion. I want to hear from Yokota-san. Page 17 and 18, Tadakawa-san and Fujiwara-san told this presentation, I felt that the 2 of them were more thorough, and the 2 slides were built in a similar way. I feel like that was kind of a precaution for us from the 2 gentlemen that have presented. Is it because we will transform the structure and make sure to generate profit? Is that kind of the commitment we're seeing here? And so the full year of JPY 62 billion in profit, what is the accuracy? How confident are you to achieve this?

[Unknown Attendee]

From Yokota-san.

[Takayuki Yokota, executive]

First of all, I think we have not changed our full year outlook at the moment as of now. There are obviously market uncertainties. And of course, there are upsides too, such as Americas. American market is good. And Travel Retail has been good. And we haven't written this anywhere, but the yen depreciation, too, is actually positive for us. So there are positive factors as well. Yet, there are a lot of uncertainties right now in our environment. So it is hard to say -- make any statement to that.

But looking at these risks and upsides, and Japan and China Q1 was a struggle, if the market recovers the market recovers, then we could do better. But if we just rely and expect the market to recover, we can achieve this JPY 62 billion. And so that is why we are being harsh on ourselves and making an assumption that it will be difficult to do or difficult for the market to recover. And that's why we are doing these other initiatives to make sure that we can -- and on IFRS basis, JPY 62 billion is something that we would like to definitely achieve. And so that's kind of our commitment.

[Katsuro Hirozumi, analyst]

I see the market is difficult, it's a struggle, but you don't want to rely on that. You don't want to depend on that. You want to do something internally to make sure you can achieve it, is that correct?

[Takayuki Yokota, executive]

Yes. The Q1 market environment was difficult. That's something that's a fact for us. And the result of Q1 was not that great for us. So we did assume beforehand the Q1 market was going to be a struggle or that it would be harsh, but it was harsher than that. And moreover, the market and this COVID situation -- and for our company, it's easy for any company to make -- to explain by COVID and the market environment. But as a company, at Shiseido, we don't want to do that. We don't want to rely on that answer. If we don't act now and not rely on the market situation, then we just rely on luck to achieve the JPY 62 billion. So that is why we want to make sure to execute the plans that were presented by Tadakawa-san and Fujiwara-san to make sure we can achieve the JPY 62 billion in our profit for the full year.

[Unknown Attendee]

And it's time, we would accept the last question. Citigroup, Miura-san, please?

[Nobuyoshi Miura, analyst]

This is Miura from Citigroup. I have a question to Fujiwara-san. The risk of down trading, how much of such a risk exists in China now? Also, because it's down-trading, how is the competitive landscape? I would appreciate if you could answer my questions. That's all for me.

[Unknown Attendee]

Okay. Fujiwara-san, please?

[Kentaro Fujiwara, executive]

Down-trading was mentioned. Since last year, looking at the market, the strong growth is high Prestige. high-priced products are growing very well since last year, and therefore, Clé de Peau Beauté, not only that, but also high Prestige line, we are trying to enhance that now. And we would like to be on the -- ride the wave and ride the trend.

Also, there is diversification of market. The values of consumers are diversifying. And in that sense, each brand which customers do they approach, we are focusing on that very much we should invest in those areas. So instead of covering this whole service, where are the consumers buying, who are buying, we need to clarify that to be able to respond to the diversification of the market. So in that sense, this last year, we have introduced a new brand and in skin care, with diversifying needs in the skin care market, we would like to respond to the market.

[Nobuyoshi Miura, analyst]

That gave me a sense of security. And price competition, CEO Uotani mentioned there is the easing of the price competition. How is the situation in April? In May?

[Kentaro Fujiwara, executive]

And as for price competition, the market there is price competition still in the market. And we'd like to break away from that over the mid to long term for us to grow, instead of growing by price promotion that will suppress our profit in the end. So therefore, we'd like to allocate investment more to branding rather than price competition and consumers are not choosing just based on the price. Consumers are willing to pay for value and quality and that's the Chinese market.

So we need to provide good products. So high efficacy products and technological background to guarantee efficacy. And based on that, consumers are choosing and we need to communicate that to the market. So the technology where we have strength, we'd like to communicate that to break away from the price competition, and that's how we are proceeding with our marketing now.

[Nobuyoshi Miura, analyst]

So that means this is my last question. Q1, compared to the market growth, you are behind, and that's because you have withdrawn a bit from the promotion, is that the reason?

[Kentaro Fujiwara, executive]

Yes, that's one of the reasons. And also another is because skin care category is a negative growth category. And our strength of motion and cream -- the market has declined and that's impacted us. So that's temporary, isn't it?

[Nobuyoshi Miura, analyst]

So thank you for answering you gave me a sense of security.

[Unknown Attendee]

And we'd like to close the Q&A session now. And the IR department will be sending you a survey in order to improve our IR activities. We'd like to receive your opinions and ask for your cooperation. And with this, we'd like to close this telephone conference. Thank you very much for your attendance.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]