Milbon Co Ltd

TSE:4919

Earnings Call Analysis

Milbon Reaches Record Sales but Misses Targets

Milbon's former CEO reflected on his 16-year tenure, highlighting the brand's resilience despite economic crises and the pandemic. Through strategic initiatives in premium care, global expansion, cosmetics, and digital transformation, Milbon has sustained growth and transformed with the changing market. FY 2023 saw record-high net sales driven by hair care products. Yet, revenues fell short of forecasts due to slower hair coloring growth. Profit projections weren't met due to rising manufacturing and raw material costs, coupled with an unfavorable product mix. Despite these challenges, the company remains committed to creating beauty market futures and delivering sustainable growth.

A Snapshot of Haircare Industry Dynamics

Investors may note the subtle shifts taking place within the haircare industry, as a company's financial narrative unfolds. There has been a dip in hair coloring product sales, which edged down by 0.8% year-on-year; a reflection of changing consumer priorities which now involve more outdoor activities over salon visits. Yet, optimism lingers as the company was able to bolster its hair care category by 4.9%, driven largely by premium brands and successful new product introductions. The company's strategic initiatives, such as the development of high-value hair color products, an organic range expansion, and a 'Smart Salon' operational model, point towards future growth prospects.

Innovation and Customer Engagement Driving Sales

For a company to stay ahead in the ferociously competitive beauty market, innovation is key. To that end, the company's milbon:iD platform has racked up 670,000 members, a critical factor in their vision of integrating salons with e-commerce. Fascinatingly, their new STYLE STOCK feature will allow clients to access a personalized library of past hairstyles and product recommendations, enhancing their engagement and spotlighting the potential for upped repeat purchases.

Price Strategies and Market Responses

A value-based pricing strategy has seen the company thrive, even amidst fluctuating raw material prices. With rather audacious increases—such as a 29% hike in home-use product prices over the past decade—the company has not only weathered volatility but also managed to optimize manufacturing costs. The decision to hold prices steady for hair coloring products, due to stiff competition, contrasts with the move to bump up prices for select hair care products starting fiscal year 2025; a strategic move investors should track closely.

Riding the Waves of Global Market Changes

Externally, international markets pose their own challenges and opportunities. Sales in China saw a moderate growth of 3.8%, a significant feat considering the economic downturn. The trajectory in the Chinese market is heading upwards, with sales expected to spike by 10% on the local currency basis in the fiscal year 2024. The U.S. market is also poised to turn profitable by 2025. These individual foreign market strategies are crucial to understanding the company's global footprint and growth.

Financials Craft a Considerate Outlook for Investors

A substantive 6% year-on-year increase in net sales targets speaks to the company's robust sales strategies. Factoring in an anticipated augmentation of the operating margin from 11.6% in fiscal year 2023 to 13.0% in fiscal year 2024, it's clear the company is working diligently toward achieving its ambitious profit margin goal of 18.6% by fiscal year 2026. While fiscal year 2024 seems promising with operating incomes forecasted to surge by 19.5%, the reality of raw material price increases and their impact on manufacturing costs remain a crucial aspect for investors to monitor.

Commitment to Shareholder Value

In alignment with their shareholder-centric approach, the company has solidified its commitment to deliver a stable and generous return. A year-end dividend of JPY 48 per share for fiscal year 2023, cumulating to a total annual dividend of JPY 88 per share, reflects the company's pledge to sustaining shareholder satisfaction over the long term.

Earnings Call Transcript 2023-Q4

[佐藤 龍二, executive]

Good morning, everyone. Allow me to start with a few words of gratitude.

In December 2007, I was entrusted by Milbon's Founder, Ichiro Konoike, with the responsibility of running the company. And over the following 16 years, dedicated myself to this mission as Representative Director, President and CEO. I would like to sincerely thank all stakeholders for your ample support and feedback over the years.

My first year as President was 2008, which, as I'm sure you remember, was the year the failure of Lehman Brothers caused the massive strain on the world's financial system. Over the following years, we saw many natural disasters taking place, and more recently, even in pandemic in the form of COVID-19.

Milbon has carried out a number of strategies over the years: its premium hair care strategy, a global strategy upholding a global vision, a new initiative in the form of the cosmetics business. And lastly, a digital transformation strategy focused on meeting customer needs against the backdrop of today's changing environment. Thanks to these efforts, Milbon has been able to continue delivering growth.

The company continues challenging itself in order to achieve new goals attuned to today's changing times. But I believe these initiatives and efforts will pay off as the bulk of growth is still ahead of us.

Aujua has exceeded JPY 10 billion in sales as has our global strategy, but I nevertheless view these milestones as a pit stop toward even greater results. I would, therefore, like to entrust my successor with continuing this process and will do my utmost to support him and the company in their endeavors through my position as Chairperson. I'll be 65 this year.

Looking back in 2014, we started thinking about putting in place a succession plan and formulated a blueprint for this purpose. Additionally, between 2015 and 2019, we carried out a leader incubation training program. Within this, every year, 10 employees would participate in this leader incubation program for a total of 42 program graduates over the years, who then implement what they have learned. We, therefore, made steady efforts and progress in the execution of internal discussions amongst company directors on the topic of human resources to succeed me as company President.

Then in 2021, we appointed 2 Board directors and 8 executive officers from among graduates from the aforementioned Milbon Corporate University project, allowing us to put a robust structure in place. Additionally, at the time, a unanimous decision was made to entrust Mr. Hidenori Sakashita with the post of new President. Mr. Sakashita is a talented individual with a bright and forward-looking personality and with a sense of balance. Furthermore, I believe Mr. Sakashita is an individual with a strong sense of responsibility and commitment.

He has experience as a sales field person in product planning, corporate planning, as President of Milbon USA and in the Corporate Strategy Department, meaning he has amassed vast experience over the years. In 2023, this appointment was finalized by the Nominating Committee and to the Board of Directors, setting the beginning of a new business succession structure starting in March 2024.

Milbon has an unwavering commitment to creating the future of the beauty market along with salons and stylists, and this commitment will remain the same going forward.

Additionally, the Milbon Way is the core pillar of our company's corporate philosophy and will remain so going forward, albeit naturally in a flexible way allowing us to adapt to changing times. Through this, we intend to continue delivering sustainable growth.

To reiterate, there are several challenges over the short term, but over the long term, I believe Milbon has the potential to deliver considerably further growth going forward, and this is a sentiment I would like to share with all stakeholders. We request your continued support and feedback going forward. My sincerest thanks for everything over the past 16 years.

[村井 正浩, executive]

My name is Masahiro Murai, Managing Executive Director at Milbon. I will be going over the financial results for fiscal year 2023.

First are consolidated operating results. Please bear in mind that the rightmost column shows the percent performance versus the revised plan announced on November 10, 2023, and not to the initial plan.

Net sales reached a record high thanks to a strong performance from hair care products in Japan and overseas, but fell short of the revenue target due to a slowdown in growth of hair coloring products.

Profits fell short of projections due to deteriorating manufacturing costs resulting from production adjustments, soaring raw material prices and an unfavorable product mix due to lower-than-expected hair coloring product sales. These factors were coupled with higher-than-expected SG&A expenses, ultimately resulting in a decrease in profits.

This waterfall chart illustrates the impact of the various factors in terms of year-on-year change in consolidated operating income. We recorded higher sales. So naturally, this led to an increase in gross profit. However, we recorded disposal and write-downs associated with our hair dryer product. These disposal and write-down amounts had a significant impact, and we ultimately recorded a decrease in profits.

Next is consolidated sales by product category. Hair care products delivered very strong results in Japan, growing by 4.9% year-on-year. Not just that, but overseas operations fared even better, delivering sales growth of 19.4%. Lastly, milbon:iD, too, progressed as planned.

Next are new products. I'd like to invite you to briefly peruse this page. But overall, Aujua's new in Inmmetry Line posted strong results. Conversely, Milbon & unfortunately fell short of the fiscal year 2023 target.

Here, we have Miincurl, which posted a strong performance. Elujuda Sun Protect, too, delivered a strong performance with a progress rate of 128.5% versus the forecast.

Next are the results for the Aujua brand overall. The number of salons carrying the Aujua brand continues growing at a steady pace, as does consolidated gross sales.

Global Milbon, too, continues to deliver a strong performance with growth in the number of salons carrying Global Milbon products as well as a year-on-year consolidated gross sales growth of 19.6%.

Allow me to direct your attention to the footnote in red. The U.S. has posted very strong results in terms of touch points. But unfortunately, this slide does not include data for the number of touch points in the country as we changed distributors in the fourth quarter, and this made it impossible to collect the pertinent data. We, therefore, ask for your understanding on this front.

Next are the consolidated sales for hair coloring products, which grew by 1.9% year-on-year overall. That being said, hair coloring product sales in Japan unfortunately decreased by 0.8%, although results overseas remained strong, with year-on-year sales growth of 9.0%.

The results for Villa Lodola are as shown here. We will be going over the details later on. But in 2024, we expect to further expand sales by significantly strengthening the sales force for Villa Lodola. We invite you to review the results for our new products within Villa Lodola.

Cosmetic products registered a slight year-on-year decrease of 0.1% and a rather significant underperformance of 10% versus the planned target. Despite this underperformance versus the target, new cosmetic product releases performed very well. Although admittedly, the absolute sales numbers are still quite small.

Unfortunately, consolidated gross sales for the iMPREA brand decreased by 2.4% year-on-year.

Shown here is the product category of other Realized results for Elmista came in according to plan, although the progress rates shown here is versus the revised target announced in the third quarter.

We invite you to review the consolidated trends in capital expenditures and R&D expenses later at your convenience. But overall, we carried out capital expenditures according to plan.

Next is the trend in Fieldpersons. As you can see, we have been growing the number of Fieldpersons in each country. It may appear that the number of Fieldpersons hasn't really increased in South Korea, but in fact, we have hired an additional 6 FPs. These FPs are currently undergoing employee training and consequently don't yet feature in the figures presented here. We expect these 6 FPs to start making a results contribution this year.

Next are consolidated net sales in Japan and overseas. The figures are as shown here with the overseas business having grown to account for 23.6% of sales.

Next is consolidated operating income in Japan and overseas. We struggled in the domestic business in Japan, and this led to a significant decrease in operating income. However, while we saw a challenging environment in the United States and China, we were nevertheless able to grow profits in these 2 regions.

Here is the outlook for our overseas subsidiaries. We invite you to go over the details later at your convenience. But in terms of the highlights, hair care within Milbon USA, which includes Global Milbon, posted a very strong year-on-year sales growth of 15.7%. Additionally, while the absolute numbers are still quite small, sales of hair coloring products grew by 18.8%, and we have hopes for further future growth.

Amidst the very challenging market environment in the country, salons in China, too, were faced with trying circumstances. As such, given these headwinds, I believe we put up a good fight, with sales of hair care products growing by 12% in the region.

Our operations in Milbon Korea proceeded almost exactly according to plan, as things went smoothly. Sales of hair coloring products grew slightly slower, but hair care product sales grew by 13.9% year-on-year in what was a very strong performance. This business posted lower profits, but this decrease was due to the resumption of educational events and other types of events in the aftermath of the pandemic. We, therefore, saw an increase in expenses related to these events, which, in turn, translated into lower profits.

This concludes my presentation.

[坂下 秀憲, executive]

Good morning, everyone. My name is Hidenori Sakashita. And starting in 2024, I have assumed the position of President and CEO at the Milbon Group. Allow me to use this opportunity to greet investors and stakeholders.

I would now like to go over progress in the execution of the Milbon Group's medium-term management plan and the initiatives for fiscal year 2024.

I would first like to start with an overview of the domestic beauty market in Japan and its current status. Allow me to start in 2020 with the pandemic and then go over the way things evolved in 2021, 2022 and 2023.

2020 was the first year of the COVID-19 pandemic and it was marked by the declaration of a state of emergency. This resulted in salons having to temporarily shut down and consequently to sluggish growth in the beauty industry. That being said, the degree of this decline was less pronounced when compared to other industries and professions.

The COVID-19-related decline was followed by growth resulting from a rebound in demand in 2021 and 2022. It didn't take long for people to once again leave their homes to visit their favorite salons. And the beauty market also benefited from stay-at-home demand and staycation demand, both terms which saw frequent use during the pandemic. In other words, during the pandemic, people took an interest in and prioritized consumption in the areas of health care and beauty solutions at home. Thanks to these factors, the beauty market grew steadily in 2021 and 2022.

Finally, COVID-19 was reclassified as a Class 5 disease in May of 2023 from a previous Class 2 classification. In other words, COVID was downgraded to the status of a common infectious disease, and this translated into a sudden jump in people's mobility, which has now returned to pre-pandemic levels. The end of the pandemic led to the release of pent-up demand for eating out, traveling, et cetera, as consumers make up for the 3 years they had to spend inside during COVID. We have, therefore, identified an urgent need to create value to make beauty a spending priority in 2024 and beyond.

Furthermore, in terms of long-term trends, we have an overall population decline and a stagnation and eventual decline in the working-age population. In other words, we are on the cusp of a new era characterized by a shrinking customer pool. Because of this, there is a need for us to formulate and implement initiatives to act as a new growth driver going forward.

Next are Milbon's results in the domestic beauty market in 2023. Sales of hair coloring products decreased by 0.8% on a year-on-year basis. As I mentioned earlier, we saw strong sales growth in hair coloring products in 2021 and 2022. This growth peaked in 2023. And furthermore, starting in 2023, we saw consumers prioritizing going out and other activities done outside to the detriment of visiting salons. So ultimately, sales dropped by 0.8%. In 2024, we will focus on creating value for in-salon hair color.

In terms of hair care, sales increased by 4.9% on a year-on-year basis. Here, premium brands, led by Aujua, drove growth, and we met the targets we had set for ourselves in terms of new products within our professional brands. These factors, therefore, allowed us to grow sales.

We will be promoting higher value hair color products as part of our strategy for retaking share in consumers' priorities. Within this, our first initiative is offering a new color proposal unique to salons, combining hair color and eyebrow care.

According to consumer survey data, approximately 66% of consumers have at one point or another shown interest in changing their makeup after having their hair colored at salons. Of the people that actually changed their makeup, the most common change was to their eyebrows, coming in at around 60%. We have, therefore, identified market potential in this area.

In discussing this narrative, combining hair coloring and eyebrow solutions, we have received a rather positive response from distributors and salons. We want to leverage this positive response to newly redefined in-salon color services, and we'll be working toward this end.

Next, we want to offer enhanced hair color options featuring our Villa Lodola organic brand. Our Villa Lodola brand offers ICEA-certified organic products in the areas of hair care and hair coloring. In particular, our hair coloring solutions have received a claim as high-quality products. In fact, some salons actually charge a premium of JPY 1,000 for hair coloring treatments using our Villa Lodola products, and in some cases, even a premium of JPY 2,000 or JPY 3,000. We want to leverage this proven track record of success expertise in 2024 and scale it and apply it widely.

More specifically, up until last year, the Villa Lodola brand had a sales force of 8 specialized staff. By expanding this business by adding approximately 350 Fieldpersons starting in 2024, we seek to secure and added 5,000 accounts over the span of 1 year and grow sales by JPY 380 million.

Next, I would like to discuss our Smart Salon strategy, which constitutes one of the core pillars of the Milbon Group's medium-term management plan. Despite this initiative still being in its test marketing phase, this concept resonated with salon owners, resulting in a total of 23 Smart Salons opened in fiscal year 2023. In fiscal year 2024, we intend to expand these efforts nationwide and target a total of 100 Smart Salons by the end of the fiscal year.

This Smart Salon strategy is, therefore, a business strategy that makes possible overwhelmingly higher in-salon product sales. The plan is to generate synergies through the integration of 3 sales areas: a styling station; a tester station for in-store sales; and finally, milbon:iD as an e-commerce framework supporting these efforts. Through these efforts, we intend to offer our clients a better purchasing experience.

I would now like to give you a progress report on milbon:iD, which is the base and core of Smart Salons. We positioned milbon:iD as a KPI within the company's medium-term management plan. Within which, we are targeting 1 million members as a milestone by the end of 2026. Member registrations stood at 670,000 as of the end of 2023, underscoring very strong levels of growth.

Additionally, we have plans to add 2 new functions in fiscal year 2024 with the objective of further improving the appeal of milbon:iD. The first function is a live shopping feature. The implementation of which was, over the past 2 years, discussed extensively within the company. And for which, we carried out a variety of test runs. We will be releasing the new function this fiscal year, allowing for the salon-oriented operation of live shopping content streamed exclusively to milbon:iD users.

The second new function is STYLE STOCK, which involves linking up a trove of content with each user's personal milbon:iD page. This includes, for example, information about the hair care and hair styling products used by stylist doing customers hair, video content showing the styling process, images of fully done hairstyles, comments and recommendations from the stylists themselves, et cetera. Each visit is a new entry to this stock archive, giving customers the ability to go back and enjoy going through a catalog of their past hair styles and consult product information at their convenience. Since this information is contained within milbon:iD, this facilitates and enhances the purchasing process.

Next, I would like to discuss our pricing strategy. Up until now, we have mitigated the risk of raw material price fluctuations by setting the price of new products based on customer value. In other words, we have executed value-based pricing and accelerated the turnover of new products. Here, we show Aujua as an example of our pricing strategy. If you look at the trend in MSRP over the years, our shampoo release in 2017 was priced at JPY 3,500 with the 2023 release being priced considerably higher at JPY 5,000.

This has been the case for products outside the Aujua brand as well with an increase of 29% over the past 10 years in the shipment value per SKU of all home-use products.

On the bottom-left corner, we have a progress report on this product turnover strategy. The manufacturing cost ratio for all products stood at 33.1% in fiscal year 2023. However, the manufacturing cost ratio for products released in the 7-year period between 2017 and 2023 was 30.5%. And Additionally, the ratio of these products to nonconsolidated Milbon sales stood at 68.5% in fiscal year 2023. By pricing new products on the basis of customer value, we, therefore, worked to reduce manufacturing costs.

While the increase in raw material prices has slowed down somewhat in some cases, starting last year, we are now seeing rising prices for other materials. We expect this trend to impact our results in fiscal year 2024 as well. As such, we do believe there are issues and challenges that need to be addressed for brands and product series when it comes to manufacturing costs. We will, therefore, work to solve these on an individual basis.

Additionally, as it pertains to products for professional use, like hair coloring products, we also face issues related to competition, stemming from the fact that this is a B2B business. Put bluntly, we are up against other manufacturers, employing a low-price strategy for hair coloring products. As such, due to this competitive element, we currently don't plan on raising prices for our hair coloring products.

The areas where we will be raising prices are as listed here, with subject items being some of our hair care products, such as shampoos, hair treatment products and other home-use products. These products account for about 15% to 20% of domestic sales. Another important consideration is the timing of implementation, which is planned to start in fiscal year 2025. The MSRP is printed on our products, and we will be keeping a close eye on inventories to determine when to raise prices.

In terms of the benefits from these price increases, assuming an increase of 10% in MSRP, we expect this to translate into an increase in gross profit margin of between 0.5 and 1.0 percentage points over a cumulative 12-month period.

I would now like to touch upon the situation and initiatives of each overseas country.

Allow me to skip China as we will be going over our operations in this country in greater detail on the next page. Regarding South Korea, sales of our mainstay hair coloring products remained steady and grew with higher growth from hair care products.

In the United States, we continue building upon a strong foundation in the country consisting of 10,000 hair care salons as more salons use our hair coloring products. Furthermore, we expect this business to turn profitable in 2025.

In Europe, we will be putting in place a new framework to expand our sales channels in the region.

Lastly, in ASEAN, we continue further nurturing and solidifying our partnerships with distributors in each country in this region, which has grown to a promising sales level.

Next, I would like to go over the situation in China. As you are aware, an economic downturn in China has eroded consumer confidence, making for a very challenging situation. That being said, we take a forward-looking approach, forecasting and leveraging changes in our customers and dialogue and work together with each of our salon partners in the region to device pertinent strategies. Thanks to these efforts, we were able to grow sales by 3.8% in fiscal year 2023.

Pre-COVID in 2019, Milbon was #8 in terms of estimated market share. And since then, we have improved our position, rising to #4 in 2023. In light of this, we believe we have been able to show our competitive advantage in the Chinese market.

Additionally, in terms of production, we have, for the most part, completed acquisition of sales approval for our hair coloring products manufactured at our factory in China and will be shifting to full-scale production in 2024.

While we continue to expect a challenging business environment in China, we will continue solidifying our position in the country, relying on our efforts to deliver growth. And furthermore, we already have a structure in place, allowing us to capture demand once consumption trends improve.

Milbon's global strategy is on a steady growth trajectory in China and other regions. And furthermore, we are targeting a sales increase of approximately 10% for China in fiscal year 2024 on a local currency basis.

I would now like to go over our scenarios for the company's medium-term management plan. First, consolidated net sales are on track toward our 2026 goal of JPY 58 billion.

Second, operating income was negatively impacted by an inventory write-down related to our hair dryer product in 2023. This is a temporary impact. But in terms of more permanent factors, we have changes in the cost structure following the end of the pandemic. And this is an issue we need to address.

We had an operating margin of 11.6% in fiscal year 2023, which we expect will increase to 13.0% in fiscal year 2024. That being said, both of these figures are still quite far from our stated target of 18.6% for fiscal year 2026.

Regarding the profit plan within the medium-term management plan, here, we will be addressing 2 changes following the end of the pandemic, namely by adapting to changes in the beauty market and improving the cost structure. Against the backdrop of soaring raw material prices and rising personnel and logistics costs, we will be releasing high value-added products to lower the cost ratio.

In terms of existing products with challenges that need to be addressed, we will be implementing price revisions for these products, thereby working toward a recovery in profits. We will continue analyzing changes in market and cost structure trends towards releasing a profit plan to share with stakeholders.

Here are the assumptions underlying the earnings forecast for fiscal year 2024. We discussed topics related to sales in Japan and overseas as well as in terms of profits. So we invite you to review this information at your convenience later on.

Next is the consolidated statement of earnings. For fiscal year 2024, we are targeting JPY 50.62 billion in net sales, which corresponds to a year-on-year increase of 6%.

In terms of our operations in Japan, we expect a sales increase of 5.8% and of 6.6% from our operations overseas on a yen-denominated basis. Lastly, the operating income forecast is JPY 6.6 billion, corresponding to an increase of 19.5%.

This page contains a waterfall chart detailing the impact of the factors in year-on-year change in consolidated operating income for fiscal year 2024. We invite you to review this information at your convenience later on.

Next are the sales targets for fiscal year 2024 by product category. As you can see from the table, we expect sales for hair care products to grow by 6.5% and by 3.8% for hair coloring products. As I mentioned at the beginning, Japan's working-age population will start declining, which means a declining trend in the number of customers. In light of this, we are aware of the considerable difficulty in significantly expanding the market for hair coloring products. Despite this, we will be creating new value, allowing us to deliver steady growth in this product category.

Conversely, when it comes to the category of hair care products, we believe many consumers are yet to purchase products in store at salons. So we view this as a significant opportunity. Furthermore, by carrying out pricing based on customer value, we seek to turn hair care products into a category with high margins and to continue delivering growth.

This page shows the consolidated net sales and operating income targets for Japan and overseas. So we invite you to review this material at your convenience later on.

We expect to carry out JPY 4.258 billion in capital expenditures in fiscal year 2024, with the breakdown being as shown here.

Last is the topic of returns to shareholders. As planned, we will be distributing a year-end dividend of JPY 48 per share for fiscal year 2023, for a total annual dividend of JPY 88 per share. While there might be some temporary variance, we continue to aim for stable and continuous dividends while maintaining a dividend payout ratio of 50%. This concludes my presentation. Thank you for your time.