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Edited Transcript of 4911.T earnings conference call or presentation 8-Aug-19 10:59am GMT

Q2 2019 Shiseido Co Ltd Earnings Presentation

Tokyo Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Shiseido Co Ltd earnings conference call or presentation Thursday, August 8, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Masahiko Uotani

Shiseido Company, Limited - Chairman, CEO & President

* Michael Coombs

Shiseido Company, Limited - Corporate Officer, CFO, Charge of Strategic Finance, Financial Acc., IR & Bus. Dev.

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Conference Call Participants

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* Katsuro Hirozumi

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Keiko Yamaguchi

Goldman Sachs Group Inc., Research Division - Executive Director

* Nobuyoshi Miura

Citigroup Inc, Research Division - Director and Analyst

* Ritsuko Tsunoda

JP Morgan Chase & Co, Research Division - Analyst

* Wakako Sato

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst

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Presentation

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Michael Coombs, Shiseido Company, Limited - Corporate Officer, CFO, Charge of Strategic Finance, Financial Acc., IR & Bus. Dev. [1]

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I'd now like to explain our results for the second quarter and for the first half of fiscal 2019. On the slide are some of the headlines for Q2 as well as the first half. I'll explain these points in detail later, but I'd like to clearly emphasize that our momentum accelerated in Q2, leading to the positive results of the first half, which are on track with our full year forecast in both sales and operating profit.

Starting with our recent second quarter results, reflecting our highest-ever sales, operating profit and net profit, I'll then move on to focus on key points for the first half. Starting with our second quarter performance. Net sales amounted to JPY 291 billion, accelerating from the 6% we delivered in Q1 to 9% on a like-for-like basis, while recording our 10th consecutive quarterly increase. Operating profit rose by 25.4% and operating margin was 10.3%. Overall sales, both by brand and region, gained momentum in the second quarter. Prestige most notably grew by 14% globally, and China, Travel Retail and EMEA, each outperformed the plan, achieving solid double-digit growth.

Japan was also able to overcome the high hurdle of 15% from Q2 of last year, despite lower buyer sales. Operating profit was JPY 30 billion, and the operating profit margin was 10.3%, growing JPY 6.1 billion and 25.4%, respectively, over prior year. This is due to an improvement in our marketing ROI, along with some improvements in our brand mix. Net income was JPY 18.9 billion, the same level as in the previous year due to the impact of some nonoperating income and loss and also extraordinary income.

As we look at our momentum across regions, I'd like to clearly emphasize that our sales momentum accelerated across most of our regions. And Asia Pacific maintained double-digit growth, particularly China, Travel Retail and EMEA gained strong momentum in the second quarter. I'll be covering each region in more detail shortly. By category, we accelerated our growth in Prestige, Cosmetics and Personal Care in Q2 versus Q1.

Next, a look at our China business, where we maintained our sellout momentum of Prestige brands. The market remained robust, continuing its solid growth. The cosmetics market showed recovery and achieved over 20% growth in the month of June, the second-highest monthly growth rate recorded in 36 months. Moreover, in the e-commerce market, average sales prices per unit increased due to the annual 618 e-commerce festival.

Moving on to overall sell-out, our Prestige sales increased by over 40% and gained market share in Mainland China, indicating continued strong momentum. By brand, Shiseido and Clé de Peau Beauté were strong drivers, showing significant growth. Shiseido grew by over 40% and Clé de Peau Beauté by approximately 50%. This outstanding growth was mostly led by increasing sales per store rather than store expansion. Makeup brand NARS also tripled its sales. In Cosmetics, made-in-Japan brands, ELIXIR and ANESSA achieved strong growth through the strengthening of our cross-border marketing with Japan and Travel Retail. In our China-focused brands, AUPRES improved momentum, but was still slightly behind last year, and Za drove real channel sales in drug stores and achieved higher contribution from the 618 campaign as a result of higher traffic. E-commerce sales in China remains strong driven by growth in all categories, growing at nearly 40%. In comparison to the situation in Mainland China, which I mentioned, Hong Kong was slightly impacted by traffic being down.

Moving on to the Japan business, where we overcame the high hurdle of 15% growth from Q2 in 2018, despite lower buyer sales. Our sell-out recorded growth of 1%, against a backdrop of 1% to 2% across the overall Japan cosmetics market, maintaining a stable leading position. Looking at the right side of the slide, although the hurdles of the first and the second quarter of 2018 were challenging, we've managed to overcome these successfully. Inbound sales grew by 6%, but viewing tourists and buyers separately as we do, individual tourists saw continued high-teen growth while buyer sales decreased by 20% due to the impact of the new e-commerce law in China. This particularly affected our ANESSA and SENKA brands. Our sell-in growth was 3% on a year-on-year basis. However, when we look at it on a 2-year stack, we achieved 15% growth, which was helped by the renewal of Shiseido, Ultimune, ELIXIR White, HAKU and d program. Particularly, Shiseido contributed strongly with its campaign called Defend & Regenerate.

We also had adequate stock because our supply issues were recovering, and we were able to increase inventory levels for the campaign in the second quarter, leading to high-growth of brand Shiseido. As one of our challenges, we had some supply issues on Revital, mainly with Wrinklelift cream, although we were able to demonstrate some recovery. In addition, we had a negative effect on summer products, such as sun care and the deodorant, from the unfavorable weather at the beginning of summer.

Our Travel Retail business continued its strong sell-out, achieving over 20% overall growth within changing market dynamics and maintained approximately 30% growth in Prestige and Cosmetic brands in Asia. Shiseido, NARS and IPSA maintained high growth, largely exceeding prior year levels, especially in Asia. In addition, ANESSA was up by approximately 30%. Clé de Peau Beauté recovered somewhat and was up by over 10%. However, it still had supply issues in some key SKUs, such as face wash.

Furthermore, when looked at by country, China saw the highest growth rate of our sell-out, reaching over 45% growth. In South Korea, we opened 7 new doors, 2 for NARS, 2 for ELIXIR and 1 each for Clé de Peau Beauté, Laura Mercier and IPSA. In Singapore, our Shiseido Forest Valley contributed to total Changi retail sales being up by over 25%. We also had an impact from a softening fragrance market and buyer sales, and we're carefully watching this situation.

Next, I'll talk about our Asia Pacific business. Our sales in all countries, areas and categories grew in this region. Sell-out-wise, we gained market share of Clé de Peau Beauté in all key markets. In addition, on a sell-in basis, we saw growth across all of the region, particularly in the ASEAN countries.

Moving on to EMEA. Market trends varied by country, with Italy and Spain up and the U.K. and France down. Sell-out-wise, we saw strong performance from Dolce & Gabbana, narciso rodriguez, NARS and Shiseido makeup. Especially the new launches of The Only One 2, by Dolce & Gabbana as well as Pure Musc by narciso rodriguez performed well and contributed to growth. These positive trends reflect significant growth in sell-in, increasing by 12% year-on-year.

Next is our Americas business, where we saw recovering momentum along with some continuing headwinds in the quarter. Overall, the U.S. market contracted, reflecting a down trend in makeup with up trends in skincare and fragrance. We saw solid performance from Dolce & Gabbana as well as Clé de Peau Beauté.

bareMinerals saw some traction as well in key strategic areas. Major specialty stores, which we have focused, on have showed growth. Restructuring is continued and is in line with our plan, and we're considering more opportunities to close additional and profitable doors. In terms of the international business for bare, we expanded sales in EMEA in countries such as Germany and the U.K. And in addition, in Asia, we launched bareMinerals on Tmall Global on the 28th of July.

At the end of June, we implemented a new best-in-class ERP system, leading to advanced sell-in, originally sales that would have been planned for July. So total sales of 4% on a sell-in basis, excludes the impact of that ERP system implementation.

Turning then -- having covered the second quarter, turning to the first half. Our results put us firmly on track to achieve our full year forecast, with like-for-like sales growth of 7.3% year-on-year, excluding the impact of withdrawal from the amenity goods business and the new ERP system, which was implemented in America. Operating profit declined by 3%, and operating margin was 12.2%, which keeps us on track to deliver our full year forecast of 10% operating profit margin.

Net profit growth was 10%. Net sales amounted to JPY 564.6 billion driven by continued strong momentum in Prestige. Overall, our Prestige brands grew like-for-like by 11%. We achieved over 40% growth on a Prestige sell-out basis in Mainland China. Operating profit was JPY 69 billion and the operating profit margin was 12.2%, in line with the full year plan, along with bold investments, which we continue to make in marketing, in R&D and in people. I will explain comparative differences from 2018 in some of the slides that follow.

Our net profit increased JPY 4.8 billion over the previous year to a total of $52.5 billion. This reflects a decrease in tax expenses stemming from recognizing a loss in a U.S. subsidiary for tax purposes in the first quarter.

Slide 14 shows our first half P&L, and it's really just a summary of the points that I've just covered, so I'll move on. When we look at our like-for-like sales growth for the first half, our withdrawal from the amenity goods business in 2018 had the effect of reducing our sales revenues by JPY 2.4 billion, while the advanced sell-in related to the implementation of a new ERP system in America in 2019 provided a JPY 4 billion increase, which is merely a timing shift from Q3 into Q2. In addition, the overall FX impact for the first half was negative JPY 8 billion, mainly driven by weakness of the euro and the RMB against the yen. Like-for-like net sales, excluding these impacts, increased by JPY 38.5 billion, equivalent to 7.3% growth.

We've achieved rapid growth in our core brands, propelled by continued marketing investment, resulting in increased sales for all 8 of our core brands. In the first half, Prestige brands Shiseido, NARS and Laura Mercier and Cosmetics brand ELIXIR performed particularly well. The selection and concentration of brands is continuing to contribute to the long-term improvement in our profitability.

The next slide shows our cost structure in the first half versus the same period of last year. Even though our top line growth grew firmly by 7%, the COGS ratio remained flat year-on-year. This is largely due to the fact that increased outsourcing costs could not be offset by favorable profit -- product mix. Total investment in marketing was roughly level with the prior year. We strategically shifted more of our marketing to digital, which now accounts for approximately 50% of total media spend, up 10 percentage points versus a year ago, contributing to improved marketing ROI, along with reduced POS personnel costs in America as a result of restructuring.

Our personnel expenses were slightly reduced as a percentage of total sales, reflecting some enhancement of productivity. Other SG&A increased by 1.2 percentage points, mainly due to new offices to improve working environments as well as some freight mix we had in order to deal with out-of-stocks.

On the subject of improving out-of-stocks. This has been one of our critical challenges and we've initiated various actions. While we've not yet fully recovered, the situation is definitely improving and this slide explains some of the progress that's being made. First, we were able to increase production capacity by over 10% in the first half on a volume base. We've also reduced the opportunity loss by 35% when compared with the same period last year. However, we do still have out-of-stocks in certain key SKUs.

Secondly, we further trimmed our SKU portfolio in the first half of 2019, cutting an additional 1,147 SKUs. Cumulatively, we've reduced over 3,800 out of the 4,500 SKUs we planned to reduce last year -- since last year. We're currently also investigating more opportunities to further rationalize our SKU portfolio. We've also prioritized producing certain SKUs in order to minimize out-of-stocks. These initiatives have combined to contribute to overall improvements in production efficiency.

In terms of cash management, this slide outlines our cash flows in the first half of this year. Net cash provided by operating activities was JPY 20.7 billion. Cash flow used for investing activities was JPY 63.3 billion, mainly due to investment in new domestic factories as well as our global innovation center and some expanding counters for Prestige brands globally. Net cash provided by financing activities was JPY 22.8 billion, mainly due to securing a long-term loan for the investments which I mentioned. As a result, cash and cash equivalents decreased by JPY 21.3 billion to JPY 90.5 billion at the end of the second quarter. Although free cash flow was negative, we will continue to prioritize investments to secure mid- to long-term sustainable growth.

In terms of what drove our momentum in the first half, we continue to invest in marketing, R&D and people for our sustained growth, focusing on key growth drivers. Prestige is definitely an area where we're growing rapidly, while benefiting from strong demand from Chinese consumers and in Travel Retail through our unique cross-border marketing strategy. Also, we have a well-balanced and diverse geographic portfolio which can deliver continued sustainable growth in overall company sales. E-commerce, which accounted for 12% of our total sales, was up by over 30% year-on-year in the first half, largely driven by China. All of these initiatives contributed to accelerating our strong momentum.

Lastly, I'll touch on our full year forecast. Our consolidated net sales total forecast has been brought down by JPY 8 billion, and we've factored in 3 important changes. Reflecting our strong first half results, we've revised our sales up by a total of JPY 4 billion, including favorable momentum in China of JPY 4 billion; in EMEA of JPY 4.5 billion; and Travel Retail of JPY 2 billion, while having to go down by JPY 6.5 billion in Japan, mainly due to out-of-stocks, lower buyer sales and unfavorable weather. So net, that number is a JPY 4 billion increase.

Secondly, we factored in the mandatory full year application of U.S. accounting standard ASC 606 in the fourth quarter of this year, leading to an JPY 8 billion downward revision. And then thirdly, FX impacts reflecting current market conditions have revised our net sales down by a further JPY 4 billion. And for these 3 reasons combined, we've reduced our total sales outlook down by 4 -- by JPY 8 billion in total. Although we're not revising our operating profit forecast from the initial plan and maintaining our original plan, we've identified some potential risks of FX on our operating profit of approximately JPY 2 billion in the very worst case. We're constantly monitoring markets and if necessary, we'll consider a revision to this at the end of the third quarter. The net profit forecast for the year has been revised upward by JPY 7.5 billion, mainly due to a decrease in taxes resulting from the redemption of capital contributions by a U.S. subsidiary.

That's all from me. Thank you, and I'll hand over to Uotani-san.

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Unidentified Company Representative, [2]

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So now we will move on to a presentation by Mr. Uotani.

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [3]

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[Interpreted] Good afternoon, everyone. To become #1 globally, the most important thing is to put a smile on your face. That's something I learned from 20-year-old female golfer. So even though I'm not a Cinderella, but I try my best to put a smile on my face. The second quarter results and first half results were presented by Michael. And brand portfolio and regional portfolio, with those, we have been able to deliver solid results at Shiseido.

Again, on the full year forecast, as just explained, the basic direction hasn't been changed. The JPY 8 billion downward revision, we can't avoid. This is due to the U.S. accounting standard ASC 606. And basically, we've made an upward revision in terms of sales. And operating profit forecast remains the same as JPY 120 billion and operating margin of 10.3%. And we have finally come to this stage in terms of operating profit margin against the OP margin target of the VISION 2020. And net profit is up by JPY 7.5 billion, up 35.2% year-on-year and dividend forecast is JPY 60 as planned, which is an increase of JPY 15 from 2018. We will review the end dividend forecast, depending on the business performance in the second half.

And these are key issues for the second half of 2019. The brand is the major reason why we have been able to deliver strong results for the last couple of years. We have 8 core brands, including Cosmetics and Personal Care and we have worked on the issues in Japan, so we will continue on those challenges. And we think it's a great opportunity for us to strengthen the already strong brands.

And looking at inbound sales, as explained earlier, inbound sales grew -- buyer sales were down, even though we have recorded positive growth from regular travelers. So we expect to see similar trend in the second half. And China, we are seeing a good trend. There is a report regarding the U.S.-China trade friction, but thankfully, our business in China, sell-out for Prestige grew by 40% and similar trend was also witnessed for Cosmetics.

And out-of-stock is also an important challenge for us to tackle. We have made a 35% improvement in terms of opportunity losses. But we still have JPY 30 billion-plus opportunity losses.

Improvement of profitability in America and EMEA, we have worked on these issues against a VISION 2020 target, and this continues to be an important target. I would also like to touch on these initiatives later on. Talking to any managers, everyone says -- talk about uncertainties, and we are seeing a huge FX volatility. So we need to closely monitor market trends and cautiously manage the business. And company's agility to adapt to changes is something that's very important. Sometimes you need to add or increase or decrease costs to prepare for the next year. And we need to be quite agile, and we have been able to do business quite in an agile manner, but that we will be more agile going forward.

And we will continue to strengthen Prestige brands, especially Clé de Peau Beauté, skincare main line, you must have seen when entering into this room, lotion and milk will be renewed to offer luxury feeling with package design, new package designs, which was led by a brand manager. And we have already received good reaction. And that will be launched on August 21. We have talked about bringing the brand into Europe and slightly behind the schedule, but at Harrods, in our large-scale Clé de Peau Beauté will have a section or a counter.

And as for Shiseido, we will continue to strengthen Ultimune. And in September, we had a Makeup Big Bang last year, and we have a second round of Big Bang with new foundations. Foundation has higher profitability. So we'd like to strengthen sales for new foundations.

Dolce & Gabbana, it's in the 30 year. Since we entered into the license agreement, we developed this men's product, K by Dolce & Gabbana, together will be launched in September. Dolce & Gabbana makeup, which we were engaged in product development and package development, will be relaunched in autumn this year.

As mentioned earlier, these brands are seeing growth in Asian markets, so we are also bringing these brands in Asia. IPSA is brought into Thai market, which is quite successful, to offer brand experience to consumers. And we are strengthening e-commerce efforts, including Lazada. And NARS have tripled sales so far. We will continue to expand the doors up to 20 stores by the end of 2019.

This morning, we made an announcement about entering into a license agreement with Tory Burch, exclusive worldwide license agreement. This brand, as you may know, was launched in New York by Ms. Tory Burch. It embodies U.S. luxury, which is slightly different from European essence. This is a lifestyle brand with high brand equity. In the U.S. -- mainly in the U.S. and in Asia and the Middle East, the brand is offering fashion items, bags and shoes. They have 250 boutiques, and the brand is available at 3,000 department stores and online site is available. And the brand awareness is already high.

Beauty is a new category and from January next year, we will be engaged in offering Tory Burch product. I personally met Ms. Tory Burch and she started up the business herself, and she has established a foundation to help women's empowerment and support the start-up of entrepreneurs. And I felt that we share same set of values. So that's why we decided to enter into this license agreement. The important point here is that the fragrance brand -- the Shiseido's fragrance brands are all European brands, but now we can add this U.S. brand in our fragrance category. So overall, we have an expectation to grow fragrance sales. And also, we hope that this would help improve profitability of the Americas region.

Moving on to Japan. As you can see on the slide, we expect inbound tourist sales to grow by mid-teens, but inbound buyers, we expect it to go down by high-teens. And we think that the similar trend will continue in the second half of this year. But inbound tourists are still growing -- inbound tourist sales are still growing. We have done business for a long time in China and people support our brand. That's where we have competitive edge. They trust our quality. And more number of tourists in Japan, I think is a [follow-wind] for our business.

For the last couple of years, we have been focusing on what we call cross-border marketing, linking China, Japan, Travel Retail. For example, focus products, make sure that the focus products will be available everywhere. And we have integrated promotions and integrated advertising activities. That's something as Shiseido has a strength. In Shanghai, we have a dedicated team for cross-border marketing to send out information. So customers visiting Japan can buy the same product in Japan.

And regarding the consumption tax increase, we've done analysis for the last round of consumption tax increase. Before the tax increase, sales grew by 3% or so. Customers bought mainly skincare products. And we saw inventory build-up of skincare product at home. So this time around, we are relaunching Clé de Peau Beauté and launching Shiseido's new products and also big plans for Shiseido, ELIXIR. We will also have new products, making sure that customers buy these products before the consumption tax increase. So we hope that customers buy one additional item, and we are hoping to achieve trade-up among customers.

And post-tax increase, as customers already have inventory of those skincare items, we would like to launch new products to stimulate demand among potential consumers. And we are planning to have a large-scale promotions throughout Japan in autumn. So we would like to respond to rush demand and make sure to minimize the reactionary fall after the consumption tax increase.

And now going to China. Going forward, we will monitor the market. And Prestige, we would like to grow 30% to 40%, sell-in and sell-out. We think we will be able to continue that, mainly with these brands that are described here. Cosmetics, it's the same, ELIXIR and ANESSA will be the focus point. ANESSA, looking at the first half, there are 2 reasons that we had suffered in a challenging situation in Japan. One is weather and another is less buyers now. But instead, China has grown significantly on the other hand. Therefore, as long as there's final demand from the consumers, whether it's in China or in Japan or Travel Retail, ANESSA remains to be a very strong potential and brand, and it's not staying -- staying here.

AUPRES in China. We have renewed main products. And we have started to enhance them in e-commerce. We are partnering with Alibaba. And next year, we will have renewal of the products, renewal. And we would like to enhance our initiatives in China. For Chinese consumers, we want to provide products and promote products in e-commerce, which fits the consumer behaviors of the Chinese more. And in order to do that, we have 2 major distributors, Alibaba Group, Watson Group. In China, we have strategic alliances, so partnerships for Alibaba, we have a dedicated team, about 20 people. Right near Alibaba, we have opened an office in Hangzhou, and they are there all the time. And they are doing data analytics together. So developing markets, and we have people from R&D as well. So we are developing products together. The first one, AQUAIR, is the first product in China. This will be launched in September and Double 11 this year. More than the past, through this kind of a relationship, we would like to be much more well prepared.

And Watsons, they have 15,000 stores, and this is a very big drug store in China, Asia. We are cooperating. We have signed an agreement, and we are going to take initiatives together. The first step, d program. So there are more sensitive skin people in China compared to before. And we are developing products together, basically in Watsons, dedicated products. We have started to sell products in China, and it's going very well. This is different from ordinary channel. We have started to have products in Tmall, in e-commerce. So I think initiatives together, taken with Chinese players, will be more important going forward.

And how to strengthen brand equity in China? We are thinking about this. So we are thinking of utilizing sports. And this is the strategy we have. As you already know, China's age structure is changing, and the income is increasing. And there is a policy 2030 for health. So I think this was launched by the government in 2016, and it's promoted. So medical sports industry should be enhanced and should grow. This is a policy hammered out by the government. And in that sense, sports population in China, it's said that people doing marathon is -- has increased significantly, but it's so low. So it will -- we will see explosive growth going forward. So Shiseido brand, ANESSA brand, we would like to cooperate. So first, in tennis, there is a very big event, called WTA, Women's Tennis Association. So at the end of last year in Singapore, maybe you saw that in Osaka as well, so the top 8 of the year will be playing together. So for the coming [10 years], and this will be held in Shenzhen. And we will be the main sponsor, title sponsor. So Shiseido WTA Finals Shenzhen, and this is the name of the game. This has been announced already. And from consumers in China, we are receiving many messages and big response from China.

The other one is 2022 Beijing Winter Olympic Games. And towards that, winter sports will become more vigorous. So figure skating, ISU Grand Prix series, Shiseido China Cup. So of course, this requires investment, but looking at the Chinese government economic policy, there's a reduction in tax. So we would like to utilize that. And we would like to give returns to the Chinese society and therefore, we have decided to become sponsors of these sports events.

And next, this is something that would really make you smile. Finally, Nasu factory will be complete soon. We have been waiting for this for a long time. As you already know, we have 3 factories operating fully. Some are operating 24 hours a day, and there's so much increase in outsourcing since last year and opportunity loss of JPY 30 billion. So we would like to solve this problem, and therefore, we are taking initiatives. As for the SKUs, so we will reduce 4,500. We originally had 11,000 to start with and we will be reducing by 4,500. But on top of that, we will reduce 1,300 more. The businesses and supply have had discussions and they are long-tail products, and we can become more efficient in manufacturing. So altogether, we will be able to reduce 5,800 SKUs. We will take this initiative at Nasu factory. As you can see in the picture here, the exterior has been completed. We are working on the inside, and this will be completed in November. And then Osaka Ibaraki factory, this will be 1 year from now. We are targeting 2020 to complete the construction and it's steadily progressing.

ESG. Of course, this is related to environment, like plastic; or s, contributions to society. There are a variety of things we can do. But today, of course, we are engaged in all of the initiatives we can. But as reflecting the corporate mission, we are enhancing our activities. But I would like to focus today on gender diversity. I would like to touch on this point only. Today, in Japan as well as overseas, this is talked about a lot. Women's capability should be utilized more. Such companies have better performance. And looking at Shiseido, looking at Board of Directors and auditors, the ratio of females has increased to 45%. And ratio of female managers, this includes Japan's headquarters in Shiseido Japan, Japan business, 32%. By the end of next year, we would like to increase this to 40%. And this is a target we have set to activate the women's participation in Japan.

And I have been sponsoring to develop a Women Leader Development Program. So we gather women, potential leaders. It's around 15 people in one class. We have had this kind of an engagement for the past year. We stimulate each other to grow, and this is the third year already. It's very, very effective in various ways. People are stimulated by each other. They are very positive and engaged in work as well as life. I really feel that difference. I would like to continue.

And not only inside, we would like to enhance this kind of activity outside as well. So we are the 14th country -- and the 30% Club Japan, this has been established. And we would like to be engaged proactively, and therefore, I have assumed the post of Chairman in Japan. There are 37 companies now. So there's around 11 people, Japanese, participating. And we would like to have many listed companies in Japan, top companies in Japan, to come up with solutions that fit the Japanese culture. We would like to enhance this going forward. And MSCI Japan Empowering Women Index. This year, we are #1 again.

And at the end, right now, in one word, the economy is uncertain and the market environment is changing very much. There are many things we cannot foresee. And therefore, in order to achieve the 2019 plan, we need to monitor closely what is happening in the market.

In China, we are doing consumer research once every 2 weeks. So in some other categories like cars, there's less willingness to purchase cars. But fortunately, consumers are still willing to purchase cosmetics. And looking at such situation, we are reviewing the situation on a monthly basis, and ask the CFO -- I am asking the CFO to monitor the situation every week. If there are any changes in the numbers, we need to take measures and operate and run the PDCA quickly.

But having said that, we are not rolling out our business in a short-term perspective only. We need to have a long-term perspective, which is VISION 2020. And ahead of that also, we are making various investments, as you already know. And we don't have the intention to reduce that. We have the responsibility to continue with selection and concentration of business and investments and SKU reduction. Of course, this is something we will continue with.

And as investments, PEOPLE FIRST. People, organization, we talked about the office earlier. So we would like to establish an office where people are excited to work in, that fits the beauty company. So in Japan, Shiseido Japan has moved to Hamamatsucho's new office, and New York office is in a very beautiful area. Singapore, Shanghai, they have also moved. And we are renewing the headquarters as well, from top to down. So this is the same as people investment. We need to create a creative environment, and we would like to make investment and also develop people, hiring people. We would like to take initiatives there as well, and brand innovation, supply chain, global standard IT platform. So from 2018 to 2020, capital investments of JPY 400 billion-plus will be done, I have mentioned this. And we are smoothly spending. Well, I shouldn't say, maybe spending smoothly. So even if things happen in a short period of time, we would like to be resolute about this. We would like to continue to make investments, looking at 5 years, 10 years ahead from now. And going forward, I would like to ask for your support.

Thank you very much. That's all from me.

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Questions and Answers

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Unidentified Company Representative, [1]

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[Interpreted] Now we would like to open the floor for Q&A. (Operator Instructions)

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Keiko Yamaguchi, Goldman Sachs Group Inc., Research Division - Executive Director [2]

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[Interpreted] This is Yamaguchi from Goldman Sachs. In this uncertainty, thank you very much for solid results briefing. You said that you will remain vigilant. And I have a question regarding Page 36. The final page, 2019 and medium term, short term. Thank you very much for your detailed explanation about the China market and the Hong -- impact from Hong -- demonstration in Hong Kong. I have a question on that.

And also, regarding next year, the new factory will be coming on stream. So gross margin is expected to go up, and SG&A increase will be higher than top line growth, but that will start to settle down from next year. And first half, Prestige grew, but due to the increase in outsourcing costs, gross margin remained the same. So is everything going as scheduled and as expected? I'd like to confirm.

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [3]

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[Interpreted] Regarding Asia and Hong Kong, up until June, we have not seen any major impact. But in the first place, in Japan, the buyer sales were down after the introduction of the new EC law. And similar thing has happened in Hong Kong, even though the impact is smaller in Hong Kong compared to Japan. So Hong Kong has been slowing down, even though it's still recording positive growth. July and August, looking at the situation. It's slowing down. So it's on par with last year or so. We're not seeing any major drop in sales.

And about the future outlook, we do not know what will happen. So we will continue to monitor the market situation very closely. But we are not losing customers at all, Clé de Peau Beauté relaunch and new product launches. We would like to appeal those in Hong Kong, to draw as much attention as possible among consumers to generate sales. So we will closely monitor the market situation. But for sure, traffic is down.

The demonstration itself, it's not impacting our business. But the traffic is down because I think that people cancel their visit to Hong Kong. I think that the same can be said among other luxury brands.

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Michael Coombs, Shiseido Company, Limited - Corporate Officer, CFO, Charge of Strategic Finance, Financial Acc., IR & Bus. Dev. [4]

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We are absolutely on track this year to achieve the plan that we had originally communicated. As the slide shows, we have a few areas that are up versus last year and a few other areas that are down. Our goal in 2020 would be to bring our cost of goods down. As a result of having the new Nasu factory up and running, of course, there'll be some additional depreciation, but that should allow us to in-source some of our production. Not everything, we will continue to use external manufacturers, but we'll be able to bring, slowly start bringing more and more production in-house. So that should have a benefit on our overall cost of goods number.

In terms of SG&A, other SG&A, we will continue to drive marketing productivity. It's a big area of spend. We've seen some results from focusing on that in the first half of this year by spending more on digital and focusing on our marketing mix. We will continue to do that. We believe we've really only just begun on that journey.

And we had some additional costs associated with our new offices, but some of them were onetime costs as well. Cost of refurbishment and moving to new office locations, which obviously, will not be reoccurring next year, too. So when combined, we think that the overall cost structure should be more favorable next year than it was this year.

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Unidentified Company Representative, [5]

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[Interpreted] And I would like to accommodate the next question.

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Katsuro Hirozumi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [6]

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[Interpreted] Daiwa Securities. I am Hirozumi. I have one question. So it was very encouraging words that you gave us, but I would like to, again, ask you about the risks, in general. Macro risks, EC law or Chinese renminbi, weather in Japan, China, China-U. S. relations.

So looking at your performance, the top management, the President, how do you forecast the macro risks? Maybe you have incorporated this already. I think everybody is very much worried about this. So this is the only question that I have.

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [7]

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[Interpreted] I have been my 6th year here in my position. So in comparison, this is the time that is the most uncertain right now. And economic impact, macro risks. When there are macro changes, what are the factors which will cause certain changes? If that's clear, that's easy. And then we will be able to forecast how the problems could be solved or economic policies could solve the problems. But right now, the major flow, the starting point is -- it's very difficult for us to anticipate the future. And the starting point, for example, U.S.-China trade friction, this is one of the very big uncertainty. And China's deceleration is caused by this. And this is one of the reasons.

And just recently, Shanghai -- in Shanghai, the discussion had started. I had high expectations, but then the next day, there is a tariff of 10%. The topic came up, so how things will change? It's very difficult for us to have a clear view about this. I think this is the same for all the top management of all the other companies as well.

But having said that, various trade risks, exchange risks, so the more the [repercussions] are, I think there are only 2 solutions or 2 things we can do to address. So one is portfolio. This time in the second quarter, we were able to have such a solid performance and that's thanks to brand portfolio and also geographical portfolio. China, Europe, Americas.

Europe, it grew double-digit, 12%. In Europe, as you know, fragrance is a very big market. And we have certain size there. And we have skincare, we have makeup. We have enhanced Shiseido makeup as well. So we have category and brands. Because we have them, if something happens, it can offset the others. And we have geographical diversity at the same time. Going forward, to -- there are various segments in the consumers, and we would like to develop brands or acquire brands to be able to diversify the portfolio more.

And as for geography, we're not covering all the geographies. So in the long term, we would like to think about going into new geographies. But I think this is the only way to address the uncertainties.

Looking at the business itself, let's say, at another company, cosmetics, were doing cosmetics only. So let's have 1, 2 or 3 other businesses that could be discussed. But looking at Shiseido, within this beauty segment, there are different segments, and we can come up with more portfolios and that can contribute more to the company. So we would like to enhance that.

And the second point, I don't want to be short sighted. That's not my policy. But in order to understand the current situation up until now, maybe once a month, we were monitoring the situation. Or every quarter, we were reviewing, but maybe we should run this in a shorter cycle. If there are any signs, we want to be able to take action. So this kind of an agility needs to be enhanced, I think. This is the only approach we can take.

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Katsuro Hirozumi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [8]

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[Interpreted] Have you incorporate the risk of decline in buyers in the second half?

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [9]

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[Interpreted] Yes, it's incorporated. We assume the same trend will continue as the first half. This decline of JPY 6.5 billion, includes decline in buyer sales.

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Wakako Sato, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [10]

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[Interpreted] Mitsubishi UFJ Morgan Stanley, Sato. I have a question regarding the Americas. The ERP system introduction, you said that you had an advanced shipment. So do we see a reactionary fall in sales in reaction to advanced shipment? And North American market is, was the positive news for me, L’Oreal, Estée Lauder -- Estée Lauder not yet. But looking at L’Oreal, the North American business was very bad. So I thought that you -- your results would be similar, but you're outperforming against the North American market. I want to know the reason why. And I want to know the bareMinerals situation and the remaining brands in North America. I'd like to confirm the North American momentum.

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Michael Coombs, Shiseido Company, Limited - Corporate Officer, CFO, Charge of Strategic Finance, Financial Acc., IR & Bus. Dev. [11]

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(technical difficulty)

that's a pure shift from Q3 into Q2. There was some inventory build ahead of the implementation of that system in order to make sure that there would be no business interruption. So we expect to see the full JPY 4 billion that was brought forward into June come out of July, most of July, perhaps some of August. So it's a pure shift and the implementation went very smoothly. And in the end, it wasn't needed, but it's a responsible thing to do.

In terms of the Americas growth, I can maybe hand over to Uotani-san, and I'll add in as well.

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [12]

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If you want, you can go.

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Michael Coombs, Shiseido Company, Limited - Corporate Officer, CFO, Charge of Strategic Finance, Financial Acc., IR & Bus. Dev. [13]

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I can certainly point to a couple of factors. In the U.S., makeup is approximately half of our business. And as we all know, the makeup market in general has been somewhat depressed in the U.S. There's a big -- a lot of channel shifting going on as well from brick-and-mortar. I think you all saw the news about Barneys a couple of days ago. So there's a lot -- there's a lot happening in that sense between channels.

But in terms of overall growth, we are seeing some growth in skincare. We saw good growth in fragrances, especially on Dolce & Gabbana. So we believe that as we further drive the diversity of our portfolio and become less dependent upon makeup, that is going to translate into better results as we build out our skincare and fragrance portfolio in the U.S.

On bareMinerals, the turnaround plans are in place. We are seeing encouraging signs. We may end up closing some more doors during the rest of this year and early next year as part of that plan. We're also seeing some good performance from bare internationally in markets like the U.K. and Germany. So that's -- and that's all going according to plan as well.

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [14]

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[Interpreted] Let me add a few comments. Until 3 years ago, I visited the States and talking to people in the beauty industry. Everyone was talking about the makeup brand. And I was asked why Shiseido is not strengthening makeup. There's -- and I have been explaining that Shiseido is a skincare-focused country -- company. And with the channel shift from store to EC and brick-and-mortar is struggling. And this is impacting directly to makeup. Looking at NPD data, of course, it doesn't cover all the indies in makeup brand, but the market is really slowing down. And big brand, big makeup brands are struggling among other luxury cosmetic brands.

And skincare, on the other hand, is growing. That was negative a few years ago, but it's growing around 9% based on some data. So we have Shiseido brand and Clé de Peau Beauté, even though business space is limited still for Clé de Peau Beauté. And we also have Dolce & Gabbana, since we entered into the license agreement, it's the third year. And we have resolved our legacy issues in -- which existed in distribution channel. But it's now resolved. So it's helping. And our makeup brand is faring well against a tough market. Laura Mercier, bareMinerals, NARS, are seeing market share growth, but it's tough.

So shift of D2C. We are accelerating this shift to direct-to-consumer and bareMinerals, this is a life work for me, to turn this brand around. The brand -- for brand, it's tough, because the U.S. is a makeup market. But bareMinerals had 180 boutiques and was using QVC. But as you know, we have closed down doors, down to 100 boutiques or so. We might need to close more. And the QVC, the business is getting tougher. So we need to leverage remaining boutiques and Sephora and Ulta. The business is improving dramatically. We have getting more support, and it's really fitting their clean category in stores. And online business is improving. And overall, I can say that bareMinerals has improved overall, but it's -- I would say it's getting better. New merchandising, new advertising are working and Hailey Bieber just visited Japan. And we have good advertisement and consumers are coming back to the brand, and we are seeing good signs of recovery. So to achieve and see a full-scale recovery toward the next year.

And in EMEA, high-single-digit, Europe, U.K., Germany, mainly, we are seeing growth. And internationally, we need to grow this bareMinerals brand. JPY 4 billion advanced shipment, gross margin is JPY 3 billion. So we will see a reactionary fall of these numbers, right, in July.

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Wakako Sato, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [15]

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[Interpreted] No, the gross profit was not as big as JPY 3 billion, maybe half of that. So you recorded about half of that gross profit in advance in the first half, right?

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Michael Coombs, Shiseido Company, Limited - Corporate Officer, CFO, Charge of Strategic Finance, Financial Acc., IR & Bus. Dev. [16]

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(technical difficulty)

from Q3 to Q2, the sales brought with them the gross profit as well, that shifted and therefore, operating, some operating profit, which will be reflected back in Q3.

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [17]

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[Interpreted] And if OP is big in the U.S., it's good. But unfortunately, OP is, in the U.S. is not that big. So the impact is limited.

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Unidentified Company Representative, [18]

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[Interpreted] We would like to accommodate the next question.

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Ritsuko Tsunoda, JP Morgan Chase & Co, Research Division - Analyst [19]

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JPMorgan. I am Tsunoda. I would like to ask about Clé de Peau Beauté. In the first half, globally, 6% growth has been achieved. But in the second quarter, how much growth was it? So first quarter, it was 5% growth. So I believe there is some acceleration. And in the plan, second half, 20% growth is the plan. So this probably has impact of the renewal included. But CPB, the out-of-stock issues, this will finally be solved in the second half? Is that the intention?

From before, you were worried about visibility of inventories in order to have accurate -- rather than doing accurate forecasting, where are the inventories? Where are their needs? So this state of visibility, so cleaning up the data was the concern. So you have built a system internally and how much progress have you been able to make?

And 20% growth in the second half, this target in the second half, how are you reflecting that also? And also dashboard, not country-based, but globally, cross-functional matrix, brand holder cost allocation. It's not 100%. Somewhere, you want to allocate, you -- I understand you are taking initiatives to do that. And how is the progress here? So data clearance, about the data, how much progress have you been able to make? Please share that with me.

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Michael Coombs, Shiseido Company, Limited - Corporate Officer, CFO, Charge of Strategic Finance, Financial Acc., IR & Bus. Dev. [20]

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(technical difficulty)

quarter in the first quarter, our sell-in grew by 5.1% globally. And that number in the second quarter was 6.3%. Therefore, our first half growth was 5.7%.

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [21]

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[Interpreted] In the second half -- in the first half -- so the reason for the single-digit compared to the first half double-digit is because of Japan, less buyers and out-of-stock issues existed. And last year, this out-of-stock issue was very serious, especially in the third quarter. And against that this year, there's almost no problem. There should be almost no problem this year. So almost, is that the right word, Mr. Tadakawa? Or I would like to say they would be perfectly gone and no more issues at all, but I would like to say instead maybe almost gone. But for major products, we will have renewal. We have enough manufacturing done. So in the second half, we don't believe that out-of-stock would be a big issue for Clé de Peau Beauté. So 20% and China is performing very well. And Travel Retail, they had suffered from out-of-stock as well in the first half, but no longer the case in the second half. Therefore, I think we are okay, and we feel confident in the second half.

And also, as for your question related to dashboard, the IT global standard, we are going to standardize the IT platform. It's a very big platform and we have just started. And inside, there's finance included, supply chain, HR management. So very -- various work streams are included. And financial part is -- so cross-functionally, vertically and horizontally, we would like to be, have visibility. We are taking initiatives, but it will take some more time. As of now by region, we do understand to a certain extent, but it would take some more time to understand the whole picture, but we are progressing. But once the system is complete and with one button, we will be able to see everything.

But even if that's not the case, cost allocation. How are we going to address the cost allocation issue? So in order to make the business plan for next year, we would like to change the system to make it easier to see. So I would like to inform you later at some other point, how to capture cost and things we are scrutinizing internally. We are trying to change that.

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Unidentified Company Representative, [22]

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[Interpreted] Thank you. I apologize, but we are already past the time, but we would like to accommodate the very last question.

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Nobuyoshi Miura, Citigroup Inc, Research Division - Director and Analyst [23]

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[Interpreted] I'm Miura from Citi. I have a question regarding the China market. The business sentiment is tough, but why is the cosmetic market so strong in China? And the market -- I'd like to have your views on the market and the future risks.

And there are, seems to be a concern that other companies like L’Oreal have launched an aggressive marketing campaign from Q4 last year. The same goes for Korea. And the marketing investment, competition, if it continues, is there a risk that your margin will be squeezed or compressed? Could you explain on this point?

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [24]

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[Interpreted] As I explained earlier, overall Chinese market is seeing economic slowdown, for sure. The IT assembly factories, I hear that the factories are closed or people are laid off. And Japanese components, exporters, I heard that they are also struggling. So that's the overview -- the overall market trend. The expensive and durable goods like automobiles, they are seeing that kind of trend. So there are concerns in that area.

But category by category, food and cosmetics, that we are engaged in, we are not seeing a drop in consumer mindset. And there is huge traffic at shopping malls in places like Shanghai. And people say that the Tier 3, Tier 4 cities are struggling, but looking at press report in Japan, they report on tough side of China. And I call the Head of China, Mr. Fujiwara, to confirm the situation in China, and his reply is that there was huge traffic at store fronts and recording record high sales. So I don't know if I'm answering your question, but it's hard to forecast the business sentiment in China. But lifestyle-related business, like food and cosmetics, I think it's more resilient. And price elasticity is quite flexible.

And for instance, we have a partnership with Alibaba to quickly know consumer data because they have data for 60,000 people daily, what category is not selling. And I met Daniel, the CEO of the company in January, and he was saying that consumer electronics was down already. And they sell a lot of categories on their site. And the white ocean or missing spot that we have not been able to fill with our brands and products, we can see what kind of white spots there are, or missing spots, from their advice, based on their analysis. So we can -- could launch new products, and we will -- are finally launching jointly developed products with Alibaba Group. So by working closely with this [research] and retailers, we would like to see more of these initiatives.

And moving on to your second question, the competitor being quite aggressive in marketing spend. And I checked the marketing tools of competitors. And I'm quite surprised, and it's a threat. And when I see price campaigns, I feel it's a threat. But ELIXIR and ANESSA, what we call Cosmetics, from global perspective, it's a Prestige-priced products. Because they are available at drug stores in Japan, they are in the cosmetic category. But for Prestige category and high-end category, we shouldn't offer that price discount. There was other companies' example that sales drop if sales discount was given at other point of sales.

So we offer special kits and we run special promotions, but we don't want to undermine the brand equity or brand value. So we are making a huge investment, doing a sponsor of the sports event to enhance the brand value and brand equity over a long-term perspective. So from our point of view, we're looking at this more on to those areas.

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Unidentified Company Representative, [25]

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[Interpreted] So we will be closing the Q&A session.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]