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Edited Transcript of 4911.T earnings conference call or presentation 6-Feb-20 10:59am GMT

Full Year 2019 Shiseido Co Ltd Earnings Presentation

Tokyo Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Shiseido Co Ltd earnings conference call or presentation Thursday, February 6, 2020 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

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Conference Call Participants

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* Akiko Kuwahara

BofA Merrill Lynch, Research Division - Research Analyst

* Hisae Kawamoto

UBS Investment Bank, Research Division - Director and Cosmetic & Toiletry Analyst

* Keiko Yamaguchi

Goldman Sachs Group Inc., Research Division - Executive Director & Analyst

* Nobuyoshi Miura

Citigroup Inc, Research Division - Research Analyst

* Oliver James Gray Matthew

CLSA Limited, Research Division - Head of Consumer, Japan and Korea

* 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 [1]

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I'd like to explain our results for fiscal 2019 and the fourth quarter.

Let me start by explaining the key highlights of the fourth quarter. Shiseido sustained solid growth, thanks to the agility of our global business portfolio. We managed to mitigate the impact of the Japanese market slowdown with continued strong momentum in China, Travel Retail and EMEA, with our global brands achieving steady growth. We also implemented proactive cost management through close monitoring of risks and opportunities, flexibly responding to market changes.

Moving on to Slide 4. The fourth quarter's net sales amounted to JPY 284.9 billion, a 4.1% increase like-for-like excluding the impact of business withdrawals in Japan; the adoption of U.S. accounting standards, ASC 606; and the acquisition of the American skincare brand, Drunk Elephant.

China, Travel Retail and EMEA posted strong growth, with like-for-like sales growing 21% in China, 24% in Travel Retail and 19% in EMEA. This positive momentum offset the deceleration in our Japan business, which faced the impact of the tax hike as well as the inbound slowdown. Our global brands maintained their robust momentum, with Shiseido, IPSA, NARS and Dolce&Gabbana all achieving double-digit growth, underpinned by the success of key product launches and renewals.

Operating profit was JPY 10.5 billion, an increase of JPY 3.6 billion. Operating margin stood at 3.7%, up 130 basis points. This is primarily due to Shiseido's strength in cross-border marketing, which produced significant results in China and Travel Retail as well as the rapid growth of our core global brands. While optimizing investments in a volatile market environment, our policy of aggressive strategic investments for long-term growth is unwavering. Net profit attributable to owners of parent was JPY 1.1 billion, up JPY 3.7 billion.

Moving on to our full year results. 2019 was a turbulent year for us with the business environment changing rapidly. We were, however, able to grow steadily. Sales, operating profit and net profit all set new record highs. Operating margin reached 10.1%, an improvement of 20 basis points over last year. Net sales amounted to JPY 1,131.5 billion, representing a 6.8% increase like-for-like. Prestige brands maintained their robust momentum as the major driver of our global growth, with sales growing by 10%. Our performance was mixed across regions. China, Travel Retail, Asia Pacific and EMEA saw ongoing solid performance, while Japan and the Americas faced challenges. Macro uncertainties such as the situation in Hong Kong and South Korea as well as FX fluctuations continued to affect us adversely.

Operating profit was JPY 113.8 billion, growth of 5.1% and slightly above the lower limit of our guidance announced in November. Operating margin reached 10.1%, up 20 basis points versus last year. This improvement was generally due to the same factors as those explained in the fourth quarter results.

Net profit attributable to owners of parent was JPY 73.6 billion, up 19.8% mainly due to higher operating profit as well as a tax benefit from the capital redemption of an American subsidiary. We plan to pay a year-end dividend of JPY 30, bringing the annual dividend to a total of JPY 60, as originally communicated. This marks our fourth consecutive year of dividend increase.

Page 6 sums up our annual performance.

Moving on to Page 7. Our efforts in selection and concentration of brands have yielded results. And our core 8 global brands recorded strong combined growth of 12% in total, contributing to our OPM improvement of 20 basis points. bareMinerals restructuring continues and will be discussed in more detail later. Although excluded from the like-for-like comparison, Drunk Elephant sales for the last 2 months are consolidated in our 2019 results. We anticipate strong sales growth from this exciting brand going forward.

Here, let me highlight some key achievements from 2 brands. I'm proud to announce that Shiseido became our first JPY 200 billion brand in 2019. Its sales grew 18% like-for-like, fueled by the award-winning innovative product, Ultimune, and cross-border marketing leveraging digital promotions.

Laura Mercier, an American makeup brand which we acquired in 2016, now has larger international sales than Americas sales. We've leveraged our platform to turn it into a truly global brand. And in 2020, we'll continue to optimize our brand portfolio and improve profitability even further.

On Slide 8, I'll move on to our results by region. China, Travel Retail and EMEA showed solid results while facing macro uncertainties. On the other hand, growth in Japan and Asia Pacific slowed, and Americas sales decreased slightly due to the makeup market slowdown and structural reforms.

On Slide 9, looking at our results by region. Starting from this year, we've introduced changes to our terminology and will, in future, refer to sell-out and sell-in as consumer purchases and external sales, respectively. Growth of the Japanese cosmetic market overall was modest and nearly flat. Our growth was in line with the market, representing 0% to 1% on a full year basis and down 10% in the fourth quarter. In the fourth quarter, inbound demand was slower than expected due to consumption shifts from Japan to other regions, triggered by the Japanese yen appreciation and the Singles' Day promotion event in China. Local demand was weaker than expected in the wake of the tax hike, with some impact from natural disasters, too. Within this flat market, our prestige brands were still able to record steady growth, owing mainly to renewals, new launches and innovative promotions. Uotani-san will touch on the challenges with the Japan business in more detail later.

On Slide 10, the Americas. In our Americas business, the difficult market context continued, especially in makeup. Our like-for-like consumer purchases came in slightly negative, as our makeup brand sales declined on par with competitors. On the other hand, Dolce&Gabbana, Shiseido and Clé de Peau Beauté boosted our sales.

We've been continuously working on the bareMinerals turnaround. Major initiatives in 2019 included clarifying its position as a clean brand; SKU reduction to increase productivity; and optimization of channels, including digital. As can be seen on the right-hand graphs, boutique closures are on track and the e-commerce ratio is steadily increasing. The growth rate is still negative but picking up with a reversal of the trend. The clean category is growing rapidly, and bareMinerals will keep taking steps for its turnaround, leveraging its favorable brand positioning. We're also undertaking various measures aimed at reinforcing cost control.

Lastly, Drunk Elephant's PMI is proceeding smoothly following its acquisition in November of 2019. Sales achieved outstanding growth, and 2 months are consolidated into our 2019 results. The Drunk Elephant team, including founder, Tiffany Masterson, joined us in Tokyo for the Shiseido Group 2020 kickoff conference in January. It was an exciting moment to welcome them into the Shiseido family.

Next, let me turn to Asia Pacific. The market situation in South Korea remained difficult, I apologize, in the fourth quarter, with sales declining more than 20% year-on-year. However, strong growth in ASEAN and Oceania partly offset this negative impact, resulting in overall steady growth. Year-to-date, total external sales achieved 6%, and excluding South Korea, grew by 10%. In the fourth quarter, ASEAN countries grew over 20%. On the other hand, markets in Taiwan and Thailand softened due to a decrease in tourist traffic. As a result, total growth slowed to just 2%.

On the next slide, in China, our overall momentum in the Chinese cosmetic market continued throughout the second half of 2019. Mainland China maintained its strong trend, especially in prestige, unsurprisingly boosted by Singles' Day, while Hong Kong remained challenging due to the prolonged protests. In such an environment, our consumer purchases grew by approximately 20% on a year-to-date basis and even more in the fourth quarter. Based on market intelligence data, Shiseido was the fastest-growing company in the China prestige market in the fourth quarter.

The graph in the middle of the slide shows quarterly consumer purchase growth in Mainland China by category. Prestige maintained its momentum of more than 40% throughout the year with some acceleration in the fourth quarter. The share of prestige in our China business portfolio went up by nearly 400 basis points, reflecting our relentless focus on this category and leading to improvements in profitability.

We managed to achieve robust sales in Double 11 in 2019 despite the growing size of the event and fiercer competition. In order to meet diversified consumer needs, we offered a variety of products together with exclusive items, thanks to the concerted effort of both our sales and production teams. We've been participating in Double 11 for 9 years with our 2016 to 2019 CAGR at 80%.

e-commerce reached 1/3 of our total sales, growing by nearly 40%. At the same time, online sales grew steadily, too, as we regard the off-line channel as an essential consumer touch point for our sustainable growth in China. Strong growth in cross-border e-commerce in Hong Kong also continued. While prestige and made-in-Japan cosmetic brands like ELIXIR and ANESSA performed well, AUPRES and SENKA have been struggling and require revitalization.

Moving on to Travel Retail. The estimated growth of the travel retail market in 2019 was nearly 20% led mainly by prestige skincare, while fragrance has remain highly competitive and challenging. Shiseido Travel Retail business reached landmark sales of JPY 100 billion this year, growing fourfold in just 4 years. This sustainable momentum was achieved through strong partnerships with key operators. Our consumer purchases grew by mid-20s in 2019 and accelerated in the fourth quarter to over 30%. Growth was particularly robust in Asia. The main drivers of the momentum were continued strong performance of core brands such as Shiseido and NARS, along with successful introduction and expansion of new brands such as IPSA and ELIXIR and exclusive and limited items. In terms of challenges, the fragrance market remained sluggish.

Moving on to EMEA. This region posted laudable results considering the market situation. New launches in fragrance boosted sales. K by Dolce&Gabbana, Rose&Wood (sic) [Rose&Rose] and Wood&Wood from ISSEY MIYAKE and Pure Musc from narciso rodriguez were key contributors. The successful launch of Clé de Peau Beauté in Harrods in the U.K. is also worth mentioning. Though sales volume for this brand is still modest, it almost doubled in EMEA in 2019.

The following page shows our operating profit by reportable segment. Consolidated operating profit margins stood at 10.1%, an improvement of 20 basis points from the previous year. Profits declined in Japan and Asia Pacific, but strong growth in China, the Americas, EMEA and Travel Retail offset that, contributing to an overall improvement. Profitability in the Americas and EMEA has been steadily improving. Americas deficit narrowed by JPY 3.4 billion on a statutory basis. Commercial-based profits have increased from reductions in fixed costs following structural reform of bareMinerals and an improvement in marketing ROI from the shift to digital.

As a result, the region turned profitable excluding PPA and Center of Excellence expenses, which are represented as 1 + 2 in the chart. Center of Excellence costs are increasing due to the addition of global service functions of our Technology Acceleration Hub. Overall, we saw a significant improvement in 2019 from the Americas, which is expected to continue in 2020. EMEA's commercial-based profit increased, too, mainly due to strong sales growth of fragrance and prestige brands. Excluding PPA and Center of Excellence costs, it almost broke even, resulting in a JPY 5.8 billion swing in statutory profits. 2020 should see a continuation of this trend.

Moving on. We've been enhancing our production and shipment capabilities to meet the medium to long-term growth in demand.

Firstly, an update on our opportunity loss situation. We were able to halve the amount of opportunity loss through prioritized product allocation and improved production efficiency. Thanks to the unprecedented speed of construction, our new Nasu factory started shipments on December 24, Christmas Eve, of 2019. The new Nasu factory mainly produces cosmetic brands previously manufactured at the existing Osaka factory, allowing us to allocate Osaka's spare capacity to prestige products. Our new Osaka factory will come onstream at the end of 2020 and is on track.

Our SKU reduction efforts are continuing in line with plans and yielding more productivity. We've optimized 4,300 SKUs and are on track with the plan. Having said that, there is still a lot of room for improvement. Our inventory levels went up significantly in 2019 partially because of the stock-up ahead of global new product launches in 2020, but the biggest challenge for us is tackling demand forecast accuracy and optimizing our inventory policies. We remain committed to bringing down our overall COGS ratio in the medium to long term.

On the next slide, I'd like to touch on our cost structure. Last year was somewhat different from the historical trends since 2014, characterized by the following 3 tendencies. Firstly, our COGS increased by 130 basis points. Within this number, 40 basis points came from changes in accounting, namely the adoption of ASC 606. While brand mix improved, thanks to robust growth of prestige brands, this was more than offset by negative impacts from increases in our inventory as well as outsourcing costs. Additionally, the Nasu factory's depreciation and U.S.-China tariffs also had an unfavorable effect.

Secondly, on our marketing investments, which had been on the increase, these decelerated by 90 basis points in 2019. However, as we promoted stable and strategic investment into core brands, the absolute value of our investment increased on an FX-neutral basis. We also carried out optimization in line with the market deterioration in Hong Kong and South Korea. In addition, with more media now being digital, along with POS personnel decreases in the Americas, our marketing ROI is steadily improving. Digital media now represents more than 50% of our total media spend.

And lastly, we saw an increase in other SG&A. This includes onetime costs of improving the working environment to boost productivity and innovation, along with freight mix effects as well as PPA for Drunk Elephant, among other factors.

On the following slide, I'd like to talk about our consolidated statement of cash flows. Our cash generation included the sale of strategic shareholdings while actively investing for our long-term growth, mainly represented by CapEx for production capacity enhancements as well as the acquisition of Drunk Elephant. Drunk Elephant's acquisition was financed by a bridge loan, which will soon be switched to long-term debt. Our debt-to-equity ratio at the end of December 2019 was 0.5, and our interest-bearing debt-to-EBITDA stood at 1x.

On the following slide, looking at our KPIs. Our return on invested capital deteriorated due to an increase in our interest-bearing debt following the acquisition of Drunk Elephant, but both return on invested capital and return on equity achieved the original 2020 targets. On the other hand, our cash conversion cycle deteriorated for the second consecutive year. Continuing from last year, we aim to minimize out-of-stock items and secure inventory of products and raw materials. At the same time, our demand forecast accuracy needs improvement, and all of this resulted in a cash conversion cycle of 149 days.

On the following slide, we now have a transformational program in place to build and implement one standard IT platform across all of our global operations, recognizing that people, processes and systems are key to sustaining and accelerating our success. That journey is now well underway. Successful implementation of our FOCUS program will be a key enabler for us to reach an operating profit margin of 15%, unlocking value across every area of our business. Through our newly established business transformation function, we're concretely moving towards being a data-enabled organization.

Let me now summarize our achievements and challenges in 2019. As to achievements, firstly, China and Travel Retail sustained their strong momentum and drove our growth. Our focus on prestige and skincare, continuous shifting to digital, strengthening our cross-border marketing as well as renewals and new launches together worked as our growth engine. Secondly, we managed to improve profitability in both EMEA and the Americas. Supported by its significant growth in commercial-based profit, EMEA almost broke even on a combined basis of commercial profit and brand holder costs. Americas commercial-based profit also achieved major progress by reducing fixed costs and improving marketing ROI. Unfortunately, it didn't get into the black just yet, but it is steadily improving.

Thirdly, we carried out proactive cost management while ensuring investments for long-term growth amid the continuously changing business environment and multiple market uncertainties.

On the other hand, one of the biggest challenges is addressing and capturing local demand in Japan. We aim to pursue consumer-centered innovation activities to solidify our position towards success in our home market. Our Americas and EMEA businesses must continue with further steps to improve profitability, and the revitalization of challenging brands is also required. Finally, we'll strive to improve our inventory management, including demand forecast accuracy and our IT system capabilities.

That's all from me, and I'll now pass the mic over to Uotani-san. Thank you.

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [2]

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[Interpreted] Good afternoon, everyone.

This is a very challenging situation we are in right now, but Shiseido's resilience, agilence (sic) [agility] is being challenged. We are in a very challenging situation, but we will do everything we can in a short period of time. And of course, we will continue to make investments for a long period of time to enhance our growth over the long term. This is one thing we would like to convey to you.

And in making plans for our fiscal 2020, as you can see here on the screen, the various initiatives we have taken up until now to grow, and we will continue with that. And we have acquired Drunk Elephant. And for the issues that we have been facing, these are a reality. We have to accept that, and we need to incorporate that and make plans. And from the beginning of this year, maybe around 3 years -- 3 weeks ago, coronavirus issue appeared. And this is a challenge we need to address as well. So I would like to talk about fiscal 2020, assuming these situation. And looking at the full year forecast sales, a 7.8% increase, so around 8% increase. This is including Drunk Elephant. Operating profit, slightly below 3% increase; net profit, plus 5.4%; EBITDA, 15.6% increase. So cash flow will increase significantly.

And now going back to VISION 2020. I would like to review the situation again. We have started this reform in 2015. We have been growing steadily. The sales target in 2020, JPY 1 trillion. We have been able to achieve that 3 years ahead. And OP, we have been able to achieve that 2 years ahead of plan. And what is important is CAGR, 8%. We have been able to continue with this, and as a strong commitment. We would like to take initiatives to continue going forward.

However, having said that, we have been able to front-load the achievement. And therefore, we cannot leave the plan for 2020 as is. We have made revisions twice. And first, in 2018, we made a revision. And last fiscal year, at the same time this year, in February, if we have been able to achieve that, we can achieve JPY 1.29 trillion, OP of JPY 150 billion. I have talked about this. This was 1 year ago that I talked about this.

And from this perspective, OP of JPY 150 billion, what has happened? And I would like to explain about this now, operating -- sales against the sales of JPY 1.29 trillion. At the beginning of last year, Japanese sales that we had forecasted decelerated very much last fiscal year, and an extension of that, fiscal '20 too. We need to lower the forecast, reflecting the forecast. So we have lowered the sales by JPY 50 billion; and the Americas, JPY 17 billion; and FX as well. So it went down to JPY 1.20 trillion, and Drunk Elephant will contribute by JPY 16.5 billion. So in the end, our latest forecast is JPY 1,220 billion.

And OP, America and Americas -- Japan and Americas. So the decline in Japan had a very big impact on the OP. So we cannot achieve JPY 150 billion but maybe JPY 130 billion. We do believe we can achieve that. But at the same time, other factors, as just described, geopolitical issues and others, if we reflect that, then JPY 122 billion; and also, Drunk Elephant amortization and depreciation. It's JPY 117 billion, this is the latest forecast.

Compared to last year, we made a plan to increase, but this is the current situation we have. And against last fiscal year, this is the situation. So JPY 74.1 billion of growth organic and plus Drunk Elephant, in total, would increase the sales by 8%. OP, the same, so from -- starting from last year's JPY 1 trillion -- JPY 113.8 billion and we add this plus JPY 0.7 billion and start from JPY 114.5 billion and then organic growth, so JPY 12.5 billion, and then plus 10.9% growth in OP. We would like to achieve that, and that's our intention. But against that, various factors happened.

And Drunk Elephant at the last part. This is a long-term investment. That's how we positioned this. So there's goodwill. But fiscal 2019 spring, comparing to that, so the goodwill has some impact and therefore increased by 2.8%, as you can see.

And now looking at the consolidated sales for the world. The target is 8% like-for-like. Excluding Drunk Elephant, it's 7%. And looking at the Japanese market, the growth is 1% to 2%, so we expect 2%. And inbound, we do not expect to see much growth this year. So we're looking at the same level as last year. In Americas, 3% increase, we have controlled it that way; and the -- with the new brand acquired, plus 14%. So for Americas and Japan, so the market situation is different. But the high-growth that we have been able to enjoy up until now, we cannot expect that. So we have looked at the reality and reflected that.

And for the future, what is very important is the drivers of our growth will be global brands, focusing on prestige mainly like before, Shiseido, Clé de Peau Beauté, NARS, the sell-in, JPY 200 billion was achieved. So double-digit growth has been continuing. Clé de Peau Beauté, it has achieved JPY 130 billion-plus. And NARS sell-out, and this is consumer purchases, and we have achieved and exceeded JPY 100 billion last year. So strong brands are steadily growing, and we would like to continue with this trend.

And what is driving the growth are new products. And this year again, we have prepared new products to create innovation to enhance the brands, not only prestige but also, as you can see, Revital. Last year, in the medium term announcement, Revital, we need to have new brands, and there's very strong demand from China, and this will be rebranded. We are already preparing ANESSA. I talked about WetForce. So I talked about technology maybe 3 years ago that we are able to increase the efficacy with water. And now we have a new product with heat. And ELIXIR, d program, we have various new products upcoming.

As you can see on the right-hand side, for Drunk Elephant. It is already becoming a #1 skincare brand but after I made this announcement, which was really surprising was Europe and even in Japan. A lot of people know of this in the industry, so it's starting to pick up its popularity. So as I have first thought, we should be able to make it even stronger in the Americas. So it's already strong in the Americas, but we can make it even stronger. And it's already there in the U.K. a little bit, but we want to expand into the Europe/EMEA market, roll out in Europe and are early stages here. And Asia, if you look at Japan, there are things that we need to do in Japan to get the authority. But we will pick up this pace to be able to roll out in Japan and China.

In December in New York, I had an investor conference meeting. I think it was about 20 investors that came. What was actually very surprising was a lot of the institutional investors in the U.S. knew all very well about this brand and knew very well about the clean category. And we got great comments saying that we have great insight for focusing on clean brand and it's on a growing area. And there's not many companies in the beauty market that's grown this fast. And so you can grow the brand dramatically with Shiseido's network. We heard these great comments. It was in the Nikkei MJ the other day -- yesterday, in the article. But the values set or the way of marketing and the people talent is something that we don't have in Shiseido. So it's a real generic add-on and a positive for us. And it was great voices that we heard from the investors. And yes, we did hear the feedback. It's a little bit pricy.

Now talking about innovation. I would like to mention a few points, but sustainability, of course, is a very important point within the innovation. Working with Konica, we have been doing a lot of development together with Konica. And finally, we are prepared to launch some initiatives with them for sustainable packaging and biodegradable packaging. And not only that, the refillable, reusable, the Loop, that's something that Governor of Tokyo has started, Ms. Koike has started. But that's something that we would like to do to use the shopping platform Loop for reusable packaging.

And IFSCC, we had an employee that won an award, making -- strengthening holistic beauty innovations based on leading dermatologic research. In February -- on February 21, what we have in La Crème for Clé de Peau Beauté, we will be launching that. It's won an award from the IFSCC. So we have been tapping into new technology, too. And devices, too, we would like to continue to expand on, in terms of the evolution of the innovation.

Now for environment. That's something that's very important for us, and we discussed about environment in ESG discussions. Us too -- for Shiseido, we say ESCG. E is, first of all, as you see, CO2 emissions, achieve carbon neutrality. We have these KPIs within Shiseido. And so we do announce this externally. So this is something that we will continue to work on to target. Diversity is also a very important part of S of the ESCG within Shiseido. The female leaders exceeded 40% in 2020, and we're taking actions to do so. And as of the General Shareholders' Meeting in March, right now, it's 45% already. But we are planning to announce -- to have female directors and auditors, 46%.

And the 30% Club, I think you're all aware of. I am the chair of the 30% Club, so working with the japan Business Federation to work on this. And we started TOPIX Executives Meeting with 19 CEOs of listed companies. There's various CEOs from companies like Kao as well, and also other industries to work on this 30% Club.

Now this is just to show you the diverse global management. This is very important for us. As -- we are a Japanese company, but we make sure that it's very global. And we have great talent from around the world to participate in the management. And that creates the company that is very resilient. And that's what business is about. Whatever crisis happens or what crisis can happen, we have all these learnings and great talent to help out and to support. So this diverse global management is something we will continue to pursue.

Now talking about Japan. There are various ways to look at Japan and Japanese market. But some of the challenges we see is, yes, it is true in the past few years, though inbound had such significant growth that although we had been saying that we can't be too reliant on inbound, but yes, it is true. And it is a fact that we had been quite dependent on inbound demand. And so that's one of the challenges; and also the insufficient responses to changes in values and purchase behaviors of Japanese consumers, that's another thing that we had been learning and reflecting; and also lack of flexibility and agility in processes and corporate culture. Now things have been doing well -- going well in the company. So I think that success experience has given us the lack of flexibility and agility. And we have been working on this a lot, but the product shortages and supplying -- supply constraints is also another part of the challenge. So therefore, with these challenges, we feel that we were creating a delay in response to the market changes in Japan.

So for Japanese market, we want to do a structural reform. And here are the 3 outlines. One is the repositioning of Japan business as the world globalizes even more, how do we reposition Japan business. Japanese market, the market itself is not having big growth. It's only growing about 1%. So if the market is not growing rapidly, what do we need? It's not about volume but probably about quality, so 2% to 4% growth in sales. Of course, the OP, we want higher profitability, but we need to focus on stable profitability. And looking at inbound, that should be a plus or add-on to the base Japan sales.

And the innovation platform, the Japanese Beauty to the world, that's really the platform. We're a Japanese company. So development that we do in Japan, as a Japanese company, is kind of going back to the backbone of the company. So in R&D area, too, we have set someone that will be focusing more on this Japanese Beauty to the world concept in development.

And also, how do we manage the business. We want to clarify and separate management of local and inbound and export businesses, divide these 3 separately, so that each of these areas or pillars have their P&L and marketing. Of course, some will be common, but we want to be able to see it clearly and separated. And more than anything, we want to really grow the local in Japan.

And the second point here is, of course, without having to have to say this, the consumer orientedness. And I use to think the sell-out or sell-out at the stores, to be funny, it's really about consumer purchases. Because the beauty consultants are selling different products to the consumers. The consumers, our consumers are choosing Shiseido and choosing our products. So we should call it consumer purchases instead of just sell-out, so management and evaluation based on consumer purchase. So we changed the name to CP, consumer purchases. So that's how we will be managing and evaluating. So the sales force, the beauty consultants and the management, this consumer purchases will really be the assessment point, the evaluation point. So that's a very clear point that we want to emphasize on.

And also, because the Japanese consumer trends are changing, too, the values are changing. So we need to have a brand portfolio that reflects the values of the Japanese consumers. Maybe, for example, for men's, we need to focus on this kind of brand or we need another brand for men's. Or are there any areas we can -- we need to divest on. We want to review it once again to reflect the values of Japanese consumers.

The third point of the structure reform outline is overhaul of organization and management structure. And we did have some people announcement, and you might have been surprised, but we had many discussions in November, December towards the end of the year, but we needed to be more agile, and we wanted to be very nimble to discussing about what we should do for a better organization. So looking at the finance area, looking at the R&D, looking at the personnel talents, look at supply chain, everybody will be -- also be co-heading management of Shiseido Japan. So we do have the regional headquarter system. And we have the matrix system with empowerment, but that alone isn't going to be enough for the Japanese market. So we want to become 1 team once again to really focus and be responsible for the Japanese performance. We work together to focus on the Japan performance. So the management is fully aligned with the head office. And also, we want to be more gemba first, a more bottom-up culture. There are the 23,000 employees. It's a great asset. And in a market there's -- facing our clients, our customers, our consumers, and there's many challenges, there's many hints that we can use. We can use that for management. So that's what we mean by bottom-up culture and also diverse talent.

Now Shiseido headquarters is -- has become a lot more diverse. We have a lot more female ratio, and we do have more international talent too. And when I joined Shiseido, there was maybe about 100 foreigners. But I think right now, we have about 400 foreign talent or non-Japanese talent, so it's become a lot more diverse. But when we look at Japan business only, it's not become that international, and I don't see that many senior members that are female. So I want to push this diverse talent in -- for Shiseido Japan, make this Japan team organization a lot more diverse. And these are the things that we are planning to put in place for the structural reform.

Now lastly, I would like to mention about the coronavirus. First of all, if you can take a look at the top of this chart, January 1 to 23, China, year-on-year basis, it was growing at 47%. And Travel Retail, too, this is for Japan, 25% growth.

Japan, local, Yes, there was things that we were comparing from the previous year. So it was minus 3%, but January 1 to 23rd, we had a great start. Now we have the -- then after the coronavirus breakout January 24 onwards, only 40% of our stores or counters are open in China. And there are further closures due to this coronavirus breakout. And all the employees at the China office is also having to have to stay home. Now from February 10, they will start to go back to the office. And I think from then on, 70% to 80% of our stores should be reopening again. But that will -- but the manufacturing could probably only begin February 17. And now this is -- so as you can see, this is dropping significantly right now. And there was a Chinese New Year. However, we've had this kind of impact, and department stores and even drug stores had a big decline. They're saying that the only thing that's selling are masks right now. But as you can see, this coronavirus has given us a great impact. And we've done many immediate responses or emergency responses. But more than anything, we make sure to ensure the health and safety of consumers and employees. To simply put it, we sent thousands of masks to deliver to our stores in Japan as well as to China. It is said that we were the first company to act on this. But ensuring health and safety of consumers, employees is the most important thing. And the second is we -- from today, we'll be launching Relay of Love Project. I'll talk about this a little bit later.

Next, nobody knows how long this situation is going to continue, but we will be suspending and postponing marketing activities for the next 3 months. So we've already made this announcement or have acted on this.

During that period, Alibaba hasn't completely opened either. So -- but we're already talking with them to see what we do, but we will be strengthening the e-commerce and cross-border e-commerce as well. And as we will suspend or postpone marketing activities for the next 3 months, there will be time when consumers will be ready to purchase again where their sentiment will pick up again. So as for that, we will prepare ourselves so that we are strengthening marketing activities in the second half. We're not going to cut marketing activities. In fact, we will strengthen marketing activities so that we are ready for the second half of the year. Now having said that, this is not just Japan, but if you look at the West Coast, in the Americas or in Canada, it's widely impacted. So we will manage and optimize group-wide expenses throughout the year. This is not about marketing expense, but just group-wide expenses throughout the year, we will manage and optimize. So estimating what will happen when SARS broke out, it's like this, what would it look like? And we've done many simulations by brand, by region, by country. It's quite wide to really capture all the details to try to come up with a pre-assumption of what the future numbers could look like. So that's why we wanted to refrain from announcing any numbers including the coronavirus as of now. We want to carefully examine and reflect what is happening and have a better idea of what this future business plan should be like and what the numbers will look like. And hopefully, we can be -- we will be ready to share with you in the half year earnings call. But for this time around, we were not ready. And that's why we intentionally did not want to announce any irresponsible numbers.

And now this is the (foreign language) Relay of Love project. And Shiseido will return the gratitude to China as a friend from a neighboring country, whose company name originates from China's classical literature and whose sales in China started in Beijing from 1981. So we feel that there's something we can do to help out as much as we can. So for the medical treatment and infectious prevention, today, we donated CNY 10 million. And from the next -- from now to the next 6 months, we will contribute 1% of sales from Asian markets, and that's about approximately JPY 2 billion, and we will be donating it into the foundation. And within our products, there's hand soaps, there's [indiscernible], antiseptics, those are things that we can -- and body white sheets, those are things that we can use. So we want to continue to donate as well as offer products that can help out. And if this coronavirus can calm down and can somehow -- can calm down a little bit, and we see a break of this, then that's the time when consumers will want to spend a little bit more. It's the time when people will be more active. So including volunteer activities, we want to offer various support to invigorate people. I don't know what kind of activities it will be, but that's something that we will continue to be looking at. So -- and this is a statement that I had released today.

Now going into the 2020 initiatives. Looking at the mid- to longer term, one of the things that we have been looking at for the basic policy is that of course, we were not just selling cosmetics. We have been focusing on ESCG activities. And that's something that we've been doing globally. And that's part of the reason why we're doing the Relay of Love Project, but we would like to increase trust by promoting our unique ESCG activities. Now the second is continued long-term investment to maintain growth momentum, sales CAGR of 8%. That is something that we will continue to do, including M&A. Now for implementing structural reforms to increase OP margin, the long-term target is 15%. I plan not to change that. We will continue to target 15%. And proactively respond to temporary negative factors such as geopolitical risks and coronavirus. These are things that happened to us, but we do have to overcome it. And it will not be easy. There will be a lot of work to do this year, but that's something we will continue to tackle and proactively respond to these challenges. And with these in mind, on the right-hand side, the 2020 initiatives, we will continue to enhance on the points that we have been working on. So the long-term vision continues and stays the same, and we will do our best. Thank you very much.

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Questions and Answers

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Unidentified Participant, [1]

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[Interpreted] And now we would like to move on to the Q&A session.

We would like to have many people give questions as much as possible. I would like to limit one question per person, therefore. When you ask a question, please raise your hand, please name yourself and give affiliation.

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Wakako Sato, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [2]

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[Interpreted] Mitsubishi UFJ Morgan Stanley, I'm Sato. I have one question. Well, I need to narrow down on one question. I have many questions I want to ask, but just 1 question. Japan business is what I would like to know. Looking at the people assignment, Uotani-san will be the Head of Japan, and China's top -- you were once the top in China, Uotani-san, and something big happens. So on such an occasion -- so Japan business. So you were looking at the store sales. And I don't feel that you are behind others at all, comparing to others. But what are you most concerned about? And OP is not low either. OP margin is not low. From JPY 150 billion, there's a gap and this drop. Is it because of the inbound or is it a drop in sales by Japanese consumers? Or was this a misforecast. Could you elaborate a bit on the market background and Mr. Uotani, you are going to be the top of Japan business. So can you talk about the Japan business a bit more? And what are the actions you are going to take.

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

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[Interpreted] But before that, China, in 2015, I was the top. I just went there. And I decided on Mr. Fujiwara, and that was the HR assignment. Well, that's all. And looking at Japan, Japanese market, looking at the fourth quarter last year, there was a big decline. And this is because the half of the decline came from inbound. And the remaining half was a drop in Japanese market. This is a backlash from the consumption tax hike. And we could not capture that opportunity. So 6 years ago, this is going back to where we started. So the consumers come to the counter. We have been continuing with the reform, starting with consumers. And what we did back then was we said end-to-end very much that time. For consumer products, as we are selling value creation, marketers, R&D is also done. And the product that's developed there, an integrated way from end-to-end, how can we deliver these products to the consumers in the counters? This is something that's very important. We need to be united and looking at inbound consumers.

If you look at the stores, so there was a time that it was -- there is a panic. So many people came all at once. So end-to-end structure at the company has been enhanced once, but now it's becoming a bit weaker. And this is something that's related to what I talked about earlier, what's happening in the market. Or there are many discussions and requests coming from our business partners, and we have not been able to reflect our learnings from that. So operational processes and the culture of the organization that supports it. Now because the numbers were good, so it's not really clear, so maybe there is some room for improvements. And we have heard those voices from our employees as well. And this is a global work that I'm doing. I go overseas a lot. And I am assuming the position of the Head of Japan business, and it's not ideal, I think. But as I mentioned, the low growth market in Japan, we need to stimulate this market, R&D, marketers, capabilities, investments. The headquarter needs to be involved in these initiatives as well as supply chain, there's out-of-stock -- significant volume of out of stock in Japan had happened. So from -- because of these, we have decided on the personnel. We will work collectively.

So the starting point is well -- so the things we need to do this time is what I've been saying that we need to do 5 to 6 years ago.

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Wakako Sato, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [4]

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[Interpreted] So some of the brands you decided to discontinue, I think they became a hot topic like [Decléor], are you going to change that or not?

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [5]

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[Interpreted] So once you have a decision to discontinue with some of the brands -- so maybe there is a small brand you had, which you said you will discontinue, but you will start again, but are you going to review the brands again? Well, it's not that we will start from scratch again. So out of 11,000, we are going to discontinue with 4,500. And one of the reasons is because of the improvement in efficiency. This is 1% of the sales. It was a long tail product, 4,500 SKUs. So no matter who looks at it, it's too much, I think. But there are some products with significance like Ibuki. So we need to look into the details to review, but efficiency is extremely important. But efficiency alone is not the only important thing. But [Decléor], do we revive it fully again? No, we are not going to do that. But the needs of the Decléor consumers, how can we replace their needs? And how can we fill them? We need to think about that again.

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Unidentified Participant, [6]

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[Interpreted] Now next to the next question, the male in the back.

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Nobuyoshi Miura, Citigroup Inc, Research Division - Research Analyst [7]

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[Interpreted] I'm Miura from Citigroup. There are 100,000 people in this venue. But I think there's only one question for everybody. This kind of issue, challenge like coronavirus, Shiseido brand. I think it's probably a good litmus sheet or a time of trial for a company like Shiseido when this kind of break -- coronavirus breakout happens. Now looking at China, of course, there's the impact. But I think everybody is concerned, very concerned that with this kind of challenge that happens, will Shiseido make a big comeback or is it going to take 3 months, 6 months? And when you look at other competitors, too, how do you think Shiseido will make its come back? Please give us some assurance and reassurance.

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [8]

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[Interpreted] Miura-san, I'm quite confident. I'm confident we can make a comeback. This project that I had mentioned earlier, the reason why we decided to do this project is that it seems that China has a great trust and reliability to Japan. And we get the great evaluation that we manufacture safe products. Masks, too, everybody says they want Japanese-made masks. So I think there's 2 ways to look at this. First is the Chinese people, as a result of this kind of coronavirus, they might actually heighten or elevate the trust to reliability to Japan or the Japanese products. So including that -- that is why we had decided to launch this Relay of Love Project. It's not like we are trying to boost any commercial sales, that's not at all why we're doing the project, but we started discussing this. And then when I spoke to the Chinese team about it, they were crying with happiness with this kind of project. And we got a great feedback that it is a Japanese company, a great Japanese company that is willing to help in a time like this. So [Miura], that's one thing, and that it'll actually create more trust and reliability in Japan.

And for our company, we have 9,100 employees. And the last 2 to 3 days, we've been talking with management team and employees, to staff. We've been doing a lot of going back and forth in communication. If you look at the TV news, you see them shouting together, the resilience, the mentality. It's amazing. There is a Chinese lady that is head of prestige brands in China. But she said to me, "Don't worry, it's going to drop now, but we're going to recover in full by end of year." It was very encouraging to me to be able to hear that from her. It's really a Shiseido family, the value, the mentality that Shiseido has. We are a Shiseido family, the things that we've been working on together.

Shiseido China turnover is very low. So I think all of that -- I mean, I'm seeing it really come to life and put together in a time like this. So I'm very confident about this.

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Nobuyoshi Miura, Citigroup Inc, Research Division - Research Analyst [9]

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[Interpreted] Looking at L'Oréal, looking at [VG], looking at all these competitors, I'm sure they're all thinking about the similar things. But what this made-in-Japan, the reliability and all that will boost more in Japan. What kind of initiatives or strategy you have in mind so that you can be ahead of other competitors, so that you can recover quicker or you can do a turnaround much faster than other competitors? Do you have any detailed initiatives?

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [10]

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[Interpreted] Before any commercial based initiatives, the time is as is now. It's not like we're going to do advertisement and do promotion and try to make a lot of money commercially. I think it's the reverse in a time like this. That's why we're doing more about social value activity like this, the Relay of Love Project, for example, to say Shiseido is a company that can be counted on, that can be relied on, and we're partners, we're friends. And when I spoke with the Chinese team, they kept on saying family, that family value set. I kept on hearing that word. So as I said earlier, that's why we have decided to suspend and postpone a lot of marketing and promotional activities intentionally. When this breakout calms down and accelerates again, that's where we can push the accelerator. And that's why we will carefully watch for the -- until the half of the year.

And initially, the marketing activity cost, we did increase by 20% for China. We're not going to cut that altogether because we are suspending some of the marketing activities. We will push that and bring that in or even more to accelerate once this coronavirus calms down.

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Unidentified Participant, [11]

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[Interpreted] And now the next question.

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Hisae Kawamoto, UBS Investment Bank, Research Division - Director and Cosmetic & Toiletry Analyst [12]

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[Interpreted] Thank you very much for the explanation. I'm Kawamoto from UBS. I'd like to ask about the impact of coronavirus, and you just explained about that. But in China, Shiseido (inaudible) Clé de Peau, NARS, ELIXIR, you are selling these brands, AUPRES and other brands. Aren't there any impact on other brands? How are the stores in China overall? And also supply chain. In Wuhan, Tier 2 cities, there is a big impact, I think. How would the impact be on the e-commerce business?

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [13]

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[Interpreted] So AUPRES is not written. This is simply because we cannot obtain information because employees are all at home. We were able to capture this much information only, and that's why we have them here presented. In AUPRES, they're introducing around 1,100 stores and only around 300 stores are open out of that. So this is an emergency situation in China. So how much store sales increasing, decreasing, we cannot capture those information. So after a while, I think we will be able to capture those information. And then e-commerce logistics. Alibaba. Well, Alibaba's office is closed, but we are getting information from them. And when we ask them -- so 2 to 3 days ago, the logistics is not working well, and that was a report in Japan media, but that's not what Alibaba is saying, they have various routes, they have been able to secure logistics. But our products, the priority is not high. So because we are not in a situation where we have our products carried, and we have 200 employees in Wuhan, and there are some people who are infected as well, and so only certain products are being moved in the logistics in China.

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Hisae Kawamoto, UBS Investment Bank, Research Division - Director and Cosmetic & Toiletry Analyst [14]

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[Interpreted] If that's the case, then Kao the other day talked about the risk of profit of JPY 10 billion. So is this too much for you?

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [15]

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[Interpreted] So Kao is thinking about, rather. I think this is about -- they were talking about Japanese -- inbound to Japan. I don't think they were talking much about China. I don't think any company has any numbers at this moment. I have to apologize, this is a bad timing. So this happened because during the New Year holidays in China, so various things are not functioning right now in China, not only logistics, because of the holiday season. So I only have limited information. And based on that limited information, I am talking to you.

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Unidentified Participant, [16]

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[Interpreted] Now going to next question.

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Akiko Kuwahara, BofA Merrill Lynch, Research Division - Research Analyst [17]

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[Interpreted] I'm Kuwahara from Merrill Lynch. As you work on the Japan business going forward, Japanese consumers' preferences have been changing, you mentioned. So can you elaborate a little bit more on response to changes in values and purchase behavior, Japanese consumers? Is it more of the prestige? Is it more of like the clean beauty, like the Americas, what in detail?

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [18]

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[Interpreted] As for the details, I would like to say to maybe wait a little bit more. So I've been working on this project from December 27. So we just really started this. But in general, looking at the Japanese market, of course, [again, all of the] research market, the senior segment, that's a great opportunity. And it is true that Clé de Peau brand or PRIOR, we have our existing brands that are growing. So this kind of senior segment purchasing or mentality, we can probably capture a lot more, and that's actually a strength of the senior segment. At the same time, on the other hand, for the younger generation, it's polarizing, there's the mass, more the lower price zone. As a market, it's quite active. And as for that, we had maybe AQUA LABEL, Integrate. But we could probably activate a little bit more of the lower price or the mass price. So along with the polarization, I think we can have a better brand portfolio to match this polarization as well as distribution channel and the brand portfolio. So that was kind of what we had. And that's why prestige, premium, lifestyle. That's why we decided to divide the portfolio. So brand and channel touch points, we want to organize and restructure it once again.

Also I mentioned briefly, but for men's uno, for example, the men's cosmetics. Looking on other manufacturers, they have more men's products, including makeup, but I -- we feel that, that's a big potential for us, opportunity for us. uno's growing, too. So we want to dig deeper into the Japanese market, and we feel that there's a lot of areas of opportunity for us. And the EC ratio in Japan is much lower than that of the U.S. or China. But we want to make sure we can link together or more seamless of online to offline, offline to online. And who is going to create something like that in Japan? We feel that Shiseido as a leading beauty company in Japan, we want to be the leader of this. So the conventional store channel with department stores, et cetera, we can probably collaborate a little more with it to make it more seamless. And that's another area that we would like to think about for marketing strategy.

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Akiko Kuwahara, BofA Merrill Lynch, Research Division - Research Analyst [19]

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[Interpreted] The one thing I would like to check, so you mentioned about the younger generation, and you'll -- so you said you'd look at the mass price, the lower price. But then I think you need to update into premium or prestige and continue to updating the prestige or upgrading the consumers. Are there any changes in the prestige consumer demographic, are they becoming older, et cetera?

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [20]

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[Interpreted] Looking at the total demographic, yes, we're seeing less consumers in the prestige segment. But I think this is true for whole industry, maybe, but there's the first trial. And once the income continues to grow and the lifestyle improves and then you can step-up to a better car, a Crown for example. That's how it used to be, but that's different now. So -- and also, in Japan, sustainability, the sense or mentality to sustainability, it's far behind than the western culture, but it's happening. So these refillable containers or just Drunk Elephant. We're seeing a lot of industry peers that they are interested in Drunk Elephant. So we should be brave enough to try something new as well.

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Unidentified Participant, [21]

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

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Oliver James Gray Matthew, CLSA Limited, Research Division - Head of Consumer, Japan and Korea [22]

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From CLSA. My question is about the 15% operating margin target. I think previously, we thought this would mostly come from premiumization [while] selling more in China and travel retail. But today, you are showing more information about the new IT systems. Could you talk more about the timing from this process? And what kind of benefits you expect from this introduction.

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [23]

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Before Michael [does that,] let me just quickly tell you, 15% is not going to be delivered just by new IT system. If we give a bit of a misperception, that's wrong. What -- if I improve all the profitability of U.S., Americas and EMEA and China more. I mean, [I would say,] by region, we have to deliver 15%. [I'm not going to] saying that there's a lot of inefficiencies in our system, in our process. So there should be a way. So that means he's going to add some more to me.

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Michael Coombs, Shiseido Company, Limited - Corporate Officer & CFO [24]

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And I would just add to that. I think that an area that we are weak in today is business analytics in terms of being able to really have visibility of where the opportunities are, across every line of our P&L, as I tried to show on an earlier slide, there are real -- there's real value in every line of our P&L that can be unlocked once we standardize and optimize our processes and our systems. I've worked in, in such an environment before, and the opportunities are very real for me. But to answer your question, Oliver, I think this is going to take some time. Unfortunately, for us to build and then roll out this standard system across all of our geographies is a multiple-year journey. So you can expect to see that take a good 3 to 4 years. But it's certainly going to be a key enabler on our journey towards reaching 15% through superior business analytics and by turning Shiseido into a data empowered organization.

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [25]

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[Interpreted] So I will say the same thing in Japanese. So the world has changed very, very rapidly. Consumer changes are very rapid, much more than we had imagined. So we need to be agile. We need to act with speed. But looking at the real fact, it takes time. It takes too much time for us to understand the reality. Like monthly results, it takes us 20 days. Looking at global competitors, it only takes them 4 days, global companies, other global company. We are too slow. So therefore, the system enables us to utilize these analytics and the value would be high.

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Unidentified Participant, [26]

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[Interpreted] We apologize, we are running out of time. So the next question will be the last question. The lady in the middle.

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Keiko Yamaguchi, Goldman Sachs Group Inc., Research Division - Executive Director & Analyst [27]

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[Interpreted] I'm Yamaguchi from Goldman Sachs. On Page 30, I'm looking at Page 30, 29 and 30. To grow this much, I can understand that there's just that much cost. But can we elaborate a little bit more about 29 and 30? Yes, I can understand it's growing by 11%. But this growth here or the background story of this growth. Can you share with us a little bit more? GP margin isn't growing that much this year. Or you'll be using a lot of marketing expenses? I'm sure it's both, but the actual basis, where are the numbers coming from? And the image for 2021, you might -- it might be a little bit too fast to say, but this 11% of growth is something that you will be looking at so that you can have that 11% growth for next year, and that's what you'll be acting this year upon? That will be my question.

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Michael Coombs, Shiseido Company, Limited - Corporate Officer & CFO [28]

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What our projections for this year would have been without the unexpected factors we've outlined. And therefore, we regard that as our base. So once we can get those factors out of the way, we believe we'll be back on track to achieve the original targets. So I hope I'm answering your question. I'm looking at the 10.9%. And that was certainly what we would have liked to be presenting as our guidance for 2020. But we then tried to outline the fact that with Hong Kong, Korea and the trade tariffs, they've effectively set us back in that process. Obviously, Drunk Elephant is slightly different because it was a strategic long-term investment, but we believe that our base itself remains as solid as it was before.

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Masahiko Uotani, Shiseido Company, Limited - Chairman, CEO & President [29]

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[Interpreted] In the marketing expense, this is 6.5% for the outlook of 2020. However, the Drunk Elephant growing at 7%. So looking at the sales, this 25%, when the marketing expense cost is -- when it's at 25%, we want to suppress a little bit of the marketing costs, but that -- this is what it looks like this year.

10.9% is the mid to longer term. Well, we want to continue to have our annual growth to 8%. So by 2026, we said it will be JPY 2 trillion, and that was planned in 2018. But then this 10%, what we have now.

In 2019, we finally got a double-digit OP margin, but to lift another 5%, that's quite big. So then the sales can't stay the same. So we need a growth of this level of OP margin growth. And if we could show the cost chart that we saw earlier. This year, if you have a look here. For 2019, not -- actual numbers -- There's a lot of things that's incorporated into this number. We do all of this. And I think we'll land at about 22%, and we don't think that's ideal. So we want to aim for 21%. In order to achieve this COGS ratio or this COGS, we need to make sure we can resolve the out of stock situation, and also whatever we outsource, we can't do it all at once, but we want to do more in-house and decreased the ratio of outsourcing or review the low-profit businesses including Japan and overseas. So the business that has high COGS ratio, the 21% is kind of the benchmark that we have, and marketing investment is 25% to 26%. Globally, that's kind of the level we're looking at.

In R&D, we're looking at about 6%. That's something we will continue, because that's investment for the future. Now personnel expenses, it used to be 27% when I joined. And American investors used to say, you need to cut head counts. But I said, no, that's not right. If we can grow the top line, personnel expense will go down 2%, 3%. And so yes, we did not increase on the head counts, but as an organization, we've been quite stable with the head counts, yet growing the top line has improved this personnel expense by 6 to 7 points, about 6 points in the 5, 6, 7 years. So similarly, the achieved top line 8%, the personnel expenses, the absolute number doesn't really change or even inflation happens, we can suppress it as long as we can continue to grow the top line. And other SG&A, there's onetime costs included. So if we can improve on these other SG&As, I think we can -- it's a journey that allows us to get close to 15%, as much as close to 15% as possible. So as to your question, the growth of 10% in GP margin, that's something that we will continue to aim for. Thank you very much. That will be it for the Q&A session.

[Portions of this transcript that are marked

Interpreted were spoken by an interpreter present on the live call.]