Milbon Co Ltd

TSE:4919

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[村井 正浩, executive]

First, allow me to start with an overview of the consolidated financial results for the second quarter of fiscal year 2024. We will be starting with today's message. Realized results surpassed the initial plan as Milbon recorded an increase in both sales and profits. Within this, domestic hair care products in our South Korean business drove particularly strong performances, and we have made good progress toward achieving the consolidated full year targets for 2024.

Next, while our operations had been significantly impacted by soaring raw material prices, these negative pressures have started to let up a bit as gross profit margin shows a recovery trend from the first to the second quarter. Additionally, expense deferrals, coupled with the aforementioned favorable sales results made for an operating income performance significantly exceeding the plan.

Domestic sales and profits increased. Here, hair care products like Aujua drove growth, while our hair coloring products are regrettably slightly behind schedule in terms of the full year targets. Overseas, sales and profits exceeded the plan. We posted very strong results in South Korea and the U.S., well, as I'm sure you are aware, we faced some headwinds in China as market conditions continue to deteriorate in the country. Still, this weakness in China was offset by a very strong performance in the aforementioned 2 markets.

Lastly, we believe we are on track to meet the full year forecasts, which remain unchanged. Regarding the consolidated statement of earnings, the results are as listed here. Circling back to what I said earlier, gross profit margin improved significantly from the first to the second quarter. So efforts on this front bore fruit. Additionally, some SG&A remains to be spent. So these factors allowed us to significantly exceed our profit forecasts.

The waterfall chart on Page 5 breaks down year-on-year changes in consolidated operating income. As you can see, an increase in gross profit due to higher sales was the single most significant factor in this operating income growth. These are year-on-year figures, and we hired more people and raised employee pay, which led to an overall increase in personnel expenses. We recorded an increase in various other expenses as well, but were nevertheless able to grow operating income on a year-on-year basis.

Next is an analysis of consolidated operating income versus the plan. Here too, the contribution of higher sales to an increase in gross profit was the single most important factor. Additionally, the decrease in gross profit margin has abated significantly and now only has a limited negative impact on operating income results. As I mentioned earlier, we have been able to keep expenses under control, and the positive effect of these efforts is shown here under the items of cost containment and deferral of marketing expenses.

In terms of these deferrals, these will be used throughout the rest of fiscal year 2024. And as it stands, we don't expect to use the amount saved through cost containment.

I would now like to go over net sales and operating income results by region, both in Japan and overseas. We recorded strong results in Japan, where net sales grew by 6.9% on a year-on-year basis. Net sales also grew by 11.4% overseas as well, but this was in great part the result of a weaker yen. So actual net sales growth, excluding foreign currency effects, stood at 2.8%.

On a country-by-country basis, we experienced some headwinds in China, where we saw a year-on-year net sales contraction in real terms on a local currency basis, but this decline was nevertheless offset by our results in South Korea and the United States.

Here are the financial results for Japan. Hair Care products delivered a very strong performance, growing sales by 9% on a year-on-year basis. Additionally, and while the scale of this business is still rather small, cosmetics posted very strong results and delivered significant growth. Conversely, while sales of hair coloring products did grow, they did so only slightly.

I would now like to give you a status update of our operations in Japan. According to the key themes we outlined at the start of the year, we have made great progress regarding Milbon ID with a growing number of salons and sales. Next, our initial plan for fiscal year 2024 is reaching a store footprint of 100 of our smart salons, but our priority here is ensuring that each smart salon is successful. In light of this, we are starting to see great results as President Sakashita will be discussing in his presentation.

Lastly, we seek to promote high value-added hair coloring products. As you can see from the little cloudy weather icon here, we are yet to see material results on this front. Next is South Korea, where we have seen strong results. Hair Care products performed very well here, and products for perms saw significant growth, although admittedly, this is still a small category in absolute terms. Hair coloring products represent a large portion of sales and growth for this product category had stagnated a bit over the past number of years. However, growth has picked up again a bit in the second quarter with a sales increase of 4.6% in the second quarter and 2.9% as of the end of the first half.

We similarly posted a strong profit performance. Milbon was anticipating a significant increase in expenses related to the hiring of additional personnel, et cetera. However, we haven't been able to hire as many people as we had originally anticipated. So ultimately, operating income grew on a year-on-year basis. That said, we will continue hiring more people. So we expect these expenses to be recorded later in the future.

Next is China, where we are facing severe headwinds. Salons that previously did well aren't necessarily doing well now. So there is a need to shift our attention and criteria here. Milbon is currently carrying out a number of initiatives we believe will allow us to overcome this challenging climate to deliver growth. That said, it takes time for these efforts to pay off. So at this stage, we haven't yet seen much of the expected benefits.

Next are our operations in the United States, where we have delivered significant growth. Hair Care products, in particular, drove growth and hair coloring products have started showing an increase. As you can see from the vertical bar graph on Page 13, which showcases quarterly net sales results, we are seeing very favorable results. Conversely, we registered a rather large operating income loss in the second quarter.

Milbon's debut at one of the largest beauty trade shows in the U.S. marked a significant expense item, but our current top priority in the U.S. market is growth. So our efforts are more geared toward growth than toward profit generation. This concludes my presentation.

As I would now like to yield the floor to President Sakashita, who will be giving you a progress update vis-a-vis the fiscal year 2024 targets.

[坂下 秀憲, executive]

Good afternoon, everyone. Allow me to update you on Milbon's progress versus its fiscal year 2024 targets. First is an overview of consolidated net sales. As Mr. Murai went over earlier, Milbon recorded JPY 24.526 billion in consolidated net sales, a year-on-year increase of 8.0% and an overperformance of 2.3% versus the forecast. Our operations in Japan account for approximately 75% of net sales, which corresponds to JPY 18.367 billion and a year-on-year increase of 6.9%.

Within our business in Japan, hair care products account for the bulk of sales, and this product category has shown strong growth. While sales of hair coloring products were flat, and were having trouble meeting the forecast target for this product category, cosmetics, which come under the category of others, posted a strong sales performance, growing year-on-year in the Japanese market.

Our operations overseas account for the remaining approximately 25% of sales, which correspond to JPY 6.159 billion and a year-on-year increase of 11.4%. Both hair care and hair coloring products delivered a strong performance in overseas markets, with hair care products, in particular, showing sales growth. We will be going over a more detailed breakdown by country in a moment. Allow me to give you an overview of the current market environment in Japan. The time line runs from left to right in the 3 categories on the vertical axis deal with the hair salon market, the market for hair coloring and hair care products. The rightmost section corresponds to market conditions as of the end of June 2024, with the overall market holding steady.

A factor affecting this is the fact that a high sustained percentage of customers visiting salons receive hair coloring procedures within in-salon menus. In fact, over the past 10, 15 years, these people expressed as a percentage of all salon goers has risen steadily over time and is now approaching 50%. Naturally, there is still room to raise this number even further, but we believe this growth will follow a more gradual curve going forward.

Other factors are an anticipated long-term decline in population and in the workforce, which translate into a shrinking customer pool. In light of this dynamic, we believe we will see a steeper difficulty curve in terms of growth driven by hair coloring products. Conversely, the hair care market radiates strength, and we believe there is further potential for growth in in-salon product sales since after all, only about 15% of salon visitors make purchases. A large number and percentage of customers don't purchase hair care products at salons. So we want to make it easier for customers to try exclusive salon products, offering the opportunity for customers to find the right fit for their hair type allows us to expect sustained growth over the long term.

It was against this backdrop that in the first half of the fiscal year, net sales from our operations in Japan grew by 6.9% year-on-year as did operating income, which grew by 5.1%. Our operating income margin stands at 13.8%, down 0.2 percentage points from the comparable period last fiscal year. While this is a decrease, we are seeing an improvement starting at the gross profit level.

Looking at a breakdown per category, net sales of hair coloring products maintained a consistent level and were more or less flat, having grown by 0.1%. Despite accounting for over 60% of the total, hair care products nevertheless delivered significant growth of 9.0% driving overall net sales.

Within cosmetics, we have released our new product lineup of eyebrow mascara solutions, starting with the release of IM. The concept behind this lineup is giving consumers the ability to change the color of their eyebrows to match changes to their hair color, and this idea has been a great success. This lineup solves the issues with hair coloring and has, therefore, seen strong growth nationwide in the Japanese market.

Milbon is driving growth through a two-pronged approach, synergizing our strategy focusing on high-end hair care products and a strategy to promote in-salon product sales. Within this strategy, focusing on high-end products, Aujua's new Presedia lineup, which came out this February, has posted strong results and is driving the Aujua brand overall. This is a series of scalp Care products and particularly worthy of note here is the fact that this series boasts the highest price point out of all of Aujua's brand offerings.

Presedia is now available at many salons carrying the Aujua brand, who adopted this product because of its high value proposition and high expectations for Milbon's cutting-edge technology embedded into this lineup. More and more salons recommend Presedia to customers, and these efforts are starting to bear fruit.

On the right, we also have our Elujuda brand, which generates over JPY 4 billion in shipment value. Within this brand, we launched Frizz Fixer in March of this year as a high-end product with a price point of JPY 3,000 per unit for the first time ever for this brand and this product has been very well received. Previously, we had set a price range between JPY 2,600 and JPY 2,800 for Elujuda, with Frizz Fixer now having an MSRP set at JPY 3,000.

This is a highly functional product that helps make Frizzy hair more manageable with continued use. In summary, Aujua's Presedia and Elujuda's Frizz Fixer highlight Milbon's R&D capabilities in the development of high value-added hair care products under a value-based pricing paradigm. That said, we need to continue executing a number of initiatives in terms of our product mix, as this strong performance for hair care products has brought down hair coloring products as a percent of total sales.

This shift in product mix negatively impacted first half gross profit by JPY 91 million. However, over a medium-term time horizon, we expect to be able to offset this deterioration of the product mix by executing measures to maximize profitability for hair care products. In other words, we'll be transforming our operating structure into a business model, allowing us to deliver high gross profit margins, whether hair coloring or hair care products perform well.

Within our pricing strategy to achieve this, we will be carrying out price revisions for existing products. More specifically, starting in the first half of next year, we'll be revising the prices of certain mid-priced hair care products in line with rising manufacturing costs, which shows the first half of next year in order to minimize the disposal of existing product and material inventories since these have the old MSRP on the labels printed on them.

Milbon will continue and further accelerate value-based pricing of high-value products, which includes this price revision of existing products, while simultaneously raising the overall sales composition of new highly profitable products. Through these efforts, we will further increase our ability to generate profits through Milbon's hair care products.

The aforementioned lineup of products with high-end price points has a manufacturing cost margin matching that of our hair coloring products or even lower. This is the case for Aujua's Presedia and Elujuda's Frizz Fixer. To reiterate, Milbon's capabilities in the development of high value-added hair care products, coupled with its value-based pricing have started to bear fruit.

Regarding measures for raw materials, we seek to standardize and reduce the use of packaging materials for part of our lineup of products for professional in-salon treatments. For example, we were able to reduce by close to 50% the amount of resin material used to make the bottle caps used in hair coloring products. And this was achieved by making the cap smaller in a way that doesn't affect the act of opening or closing the bottle. These kinds of small tweaks can lead to cost reductions in the order of several tens of millions of yen. So we will work actively to explore and implement small improvements in a way that isn't detrimental to quality and design.

Lastly, we will leverage collaboration amongst our 3 global factories to procure raw materials for using our products and unlock further economies of scale. Through this, we will carefully and continuously monitor procurement costs.

I would now like to discuss our medium-term Smart Salon strategy to bring Milbon's hair care products to market and expand hair care products. Allow me to start with a progress update on milbon:iD, which is Milbon's e-commerce platform. We continue making good progress toward 1 million users by fiscal year 2026, which we formulated within our medium-term management plan. In fact, we are now on track to reach 1 million users next fiscal year ahead of schedule.

Going forward, in addition to growing the number of users, we will also be executing a series of initiatives to increase the number of active purchasers, that is, the ratio of product purchases to total users. Starting this fall, we will be offering Style Stock as a new service, encouraging purchases by displaying on users milbon:iD My Page, information about products they have tried in salon and recommended products.

We are also seeing strong results for our live commerce efforts through Milbon official channels. In 2023, we moved approximately JPY 50 million in GMV, which we expect to double to approximately JPY 100 million in 2024. We follow up on customers who have received in-salon beauty counseling by offering them product news through our live commerce platform, and these efforts have translated into the aforementioned amounts in GMV, which are accretive to salons results. This is a GMV of JPY 100 million from live commerce alone, so we believe these results are rather powerful.

Through these initiatives, we want milbon:iD to be more than just an e-commerce site by creating new purchasing experiences and product information touch points with customers, thus raising the number of active purchasers.

Our Smart Salon strategy includes an element of offering experiences at brick-and-mortar salons with milbon:iD as the underlying core. There were a total of 23 brick-and-mortar Smart Salons as of December 31, 2023. But since then, this number had grown to 44 as of June 30, 2024. The red dots on the map show a visual representation of the Smart Salons spread out across Japan. It has been only approximately 18 months since the start of this initiative with new Smart Salons opening one right after another.

So it's too early to derive much statistical data, but allow me to go over a successful case study. Customers have access to a wide range of product experiences at Smart Salons. “DAGASHI” being a slam dunk with customers. DAGASHI lets customers choose and buy a 1-day supply of hair care sachets. And the strategy here is to leverage this initiative to incentivize customers to purchase Milbon products. Customers often want to try samples before committing to high value-added products at higher price points, and this service addresses these needs well.

Some salons offer mini-sachets containing 4 Aujua products under the campaign banner of find the best fit for you in 4 days. These salons sell Aujua Mini sachets to close to 500 customers every month. And this initiative has translated into purchases of Milbon products on milbon:iD. The rollout of this Smart Salon initiative first took place in February 2023 with a single salon. So it's difficult to draw any statistical conclusions and make determinations in terms of policy going forward. But once we reach the 2-year mark, I think we'll be able to offer more granular information to stakeholders. So this is an area to look forward to.

Next is a breakdown of the sales composition of hair coloring products in the Japanese market. Allow me to direct your attention to the pie chart. The slice on the left represents the percentage of gray color products, while the slice on the right represents fashion color products. Gray color products account for approximately 40% of sales and grew by 7% on a year-on-year basis. While fashion color products, which account for the remaining approximately 60% were down 4%. As such, overall sales saw a slight increase. Gray color products performed well with our Villa Lodola brand of organic hair color and products and Ordeve Crystal High Bright, which was released in 2023, having been well received as high value-add products that go beyond just gray hair solutions.

Up until last year, Villa Lodola had a sales force of 8 specialized staff. But starting in 2024, we shifted to a sales structure consisting of over 300 field persons. And the number of salons carrying the Villa Lodola brand is also on a steady upward trend. In the second half, we will continue working to advance the brand alongside a robust growth trajectory.

In terms of fashion color products, we started offering eyebrow and hair coloring coordinated proposals with the IM brand of cosmetics we launched this year. This concept of matching hair and eyebrow colors has been very well received by salons and by their customers and has made a significant contribution to the sales growth of cosmetics. That said, we continue struggling in terms of fashion color products as it has been difficult for our efforts to translate into the adoption of hair coloring products.

To reiterate, our concept of matching hair and eyebrow colors has been well received, but ultimately, this hasn't really translated into an increase in shipments of hair coloring products. We have taken this insight seriously and have thus initiated comprehensive reforms in fashion colors. This involves a thorough review of our marketing strategy for hair coloring products.

Within this, we seek to convey the value proposition of our brand through renewed branding efforts and offer a way for salons to grow sales and profits without getting dragged into price competition.

Next is the current status of the overseas market. Here, good performances in other regions have allowed us to offset the negatives of a deteriorating market environment in China. As such, we made strong progress toward the full fiscal year target. The pie chart on the left contains a breakdown of sales by country and region. South Korea, China and the U.S. account for just under 80% of total sales. On a per country basis, the category of hair care products performed very well in South Korea. Hair coloring products are also on a recovery trend, driving sales in our overseas operations.

We faced a challenging environment in the Chinese market, which has seen declining salon visit frequency. In particular, hair coloring products were down, making for a challenging situation as these tend to correlate directly with customer numbers at salons. Many people are sounding the alarm about the market for cosmetics in China, but it should be noted that Milbon isn't dependent on travel retail to begin with. Rather, we offer professional brands for use by salons and brands for in-salon sale.

So while the issue of declining visit frequency remains, the fact is that customers continue visiting salons. So we have been able to keep the impact of headwinds in the Chinese market to a minimum. In any case, while we do face a challenging environment when it comes to sales, now is the time to carry out thorough initiatives to improve our structure. We will work together with Milbon China and local salon operators in the country to devise a forward-looking strategy addressing customer wants and needs and are thus working to deliver growth on this front.

Next, we saw strong growth of hair care products in North America. Sophistone is a hair coloring product we position as key in driving further growth. And this product too has posted a steady performance. Circling back to what Mr. Murai said earlier, in June, Milbon took out a booth at Premier Orlando 2024, one of the largest trade shows in the U.S. and used this opportunity to increase brand awareness for Sophistone.

Lastly, the segment of others includes our operations in the EU. In the EU and especially in Germany, we sell products directly to salons and are starting to get a good feel for what is effective in getting salons to switch over to our products from other manufacturers and other aspects of driving successful activities by salons.

Our operations in Germany are still small, but we have been gradually increasing the number of salons carrying our brands and growing sales. We want to leverage these results and learnings carrying out market research outside Germany and entered distributor contracts in the various countries that make up the EU zone. Through this, we will expand the sales channels available to us in the EU.

We want to work together with distributors that resonate with Milbon's business model and with our approach of delivering growth by offering training to both salons and stylists. We don't want to rush things on this front, so we will gradually and steadily take on these distributor contracts.

I would now like to go over our long-term growth story for overseas markets. Milbon is already the #1 player in Japan. So our next milestone is achieving the #1 position in Asian markets, excluding Japan. South Korea is a trendsetter when it comes to the beauty market in Asia. So the idea is to capture the leadership position in South Korea as part of our efforts to achieve supremacy in Asia. In fact, many salons operated by young stylists in South Korea's major metropolitan areas already use our hair coloring products. This generation of young stylists also comes to our industry events, and we also receive a growing number of offers from these salons to work with Milbon.

We will continue driving this strategy to grow our presence in the market for hair care products with a special emphasis on hair coloring products and aim for the #1 position in the South Korean market. We then want to leverage the gravitas achieved in Japan and South Korea to achieve a ripple effect, allowing us to expand our market presence to Southeast Asia and ASEAN by offering products attuned to local trends.

Milbon believes that this, together with our training structure in each country will allow us to become #1 in Asia, excluding Japan. Concurrently, we intend to grow our presence in Europe and North America, thanks to our successes with hair coloring products with hair care products as the cornerstone. First, for next year and the year after then, Milbon now has a shot at the top spot in terms of share for the brands carried by the distributor we have a contract with in California on the West Coast of the United States. By achieving the #1 position in several key markets, we seek to solidify our presence as a global player.

I would now like to go over Milbon's ESG initiatives. FTSE and MSCI have updated their rankings with Milbon scoring a B by MSCI and 3.5 by FTSE. Our rating had stood at 2.3% last year, so we believe this higher score indicates our efforts haven't gone unnoticed. Starting in 2023, Milbon has been selected for several ESG investment-related indices. In 2024 and in light of a positive evaluation by FTSE, Milbon was selected for inclusion in the FTSE Blossom Japan Index. Going forward, we will continue adequate disclosures to ensure Milbon continues being the object of ESG investment and work to receive recognition by the markets for our work.

Next is the outlook for the third quarter and beyond. Starting with sales in Japan in terms of hair coloring products, while we do expect growth in the market for gray hair products, a recovery is not in sight for the fashion color category. Conversely, we expect a strong performance from hair care and new eyebrow cosmetics and thus believe we will be able to offset the delay in hair coloring sales.

In terms of overseas sales, while we are yet to see signs of recovery in the Chinese market, we expect strong results in South Korea and the United States, especially in the category of hair care products to drive growth in overseas operations overall.

Lastly, we expect the impact of soaring raw material costs to let up a bit, leading to a recovery in gross profit margin. We will utilize SG&A expenses as planned, and we're working toward our full year operating income target.

In light of these aforementioned factors, the full year forecasts remain unchanged. Milbon will work as a cohesive team toward achieving the targets we have set for ourselves. This concludes our overview of the progress versus the fiscal year 2024 forecast.

Next is the medium-term management plan through to 2026. While we are on track to meet the sales targets, as you are aware, we are behind schedule in terms of profit. As we shared with you back in February of this year, when we formulated the MTMP back in 2021, we didn't expect to face challenges related to our cost structure as it pertains to manufacturing costs, logistics and personnel expenses. More specifically, the issue of personnel expenses is actually one of productivity.

Now allow me to share with you the ways we are addressing these 3 challenges. Starting with manufacturing costs, and as I mentioned earlier, within the context of the hair care business, we seek to address this issue through the development of high value-added products, the use of value-based pricing and price revisions for existing products. These efforts will allow us to improve our manufacturing cost margin. And furthermore, we will leverage our 3 global factories to lower procurement costs.

Also, as I mentioned at the beginning, we expect a steeper difficulty curve in terms of hair coloring products going forward. Times have changed, and whereas previously, it had been hair color in driving sales and profits. It's now hair care products. Against this backdrop, we will work to enhance our profitability in hair care so that this category becomes our leading earnings driver.

The second cost issue we need to address is logistics. We are reviewing a number of things here. For example, the number of orders placed, minimum order requirements and levels associated with the logistics services we offer to our distributors and salons, et cetera, and we expect improvements to come from this. Milbon allows orders to be placed every day, and we don't set minimum order requirements for distributors, and this leads to some inefficiencies in terms of logistics.

As a way to address climate-related issues, deal with a shortage of truck drivers and address social issues, we will ask distributors for their cooperation in consolidating the orders they place with us every week. We believe that this alone will lead to an improvement in the logistics costs.

Furthermore, as it pertains to logistics for delivery to end users, we are thinking of sharing variable costs associated with logistics for milbon:iD and e-commerce. The idea is to distribute this cost amongst our customers, salons, distributors and Milbon itself. And in doing so, we expect to reduce logistics costs. We will carefully consider these ideas, estimating improvement as a percentage of sales and incorporating these into our plan.

Third, we will work to improve productivity that is the ratio of sales improvement to personnel costs. In terms of our approach here, we will be focusing on growing sales at each individual salon, which means an increase in that salon's inventory acquisition amounts. Milbon operates on a filled activity basis covering each individual salon. So this focus of ours is conducive to maximizing results and making a significant contribution to improving productivity.

This field activity has been Milbon's way of operating over the years, which is a very labor-intensive way of doing things, meaning that previously, around JPY 100 million per sales staff was the ceiling. However, nurturing our Smart Salon strategy, milbon:iD and the cosmetics business allows us to grow sales per salon and is a powerful tool for salons having trouble hiring staff and retaining customers to grow sales and profits.

Furthermore, this strategy also leads to employee productivity improvements and improvements to personnel costs as a percentage of sales. The customer experiences offered at Smart Salons are a good way to convert customers into purchasing customers and cosmetics as a new product constituting a tool for salons to add to their toolbox with milbon:iD facilitating a string of steady purchases over time.

These advantages will present themselves to salons using our services and factors like these driving productivity improvements are key focus areas. Last is the MTMP target for 2026. We will be releasing the forecast in February of next year, together with the forecast for 2025, and this will include quantitative data on the aforementioned improvements to manufacturing costs, logistics and productivity.

Lastly, on the topic of dividends for fiscal year 2024, we expect to distribute an interim dividend of JPY 40 per share, coupled with a year-end dividend of JPY 40 per share. We have set a lower bound of JPY 88 per share for the period covering the ongoing MTMP. And furthermore, we have no plans for dividend cuts even after this period.

This concludes my presentation. Thank you for your time.

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