Shiseido Company, Limited (OTCPK:SSDOY) Q1 2024 Earnings Conference Call May 10, 2024 4:30 AM ET
Company Participants
Kentaro Fujiwara – Chief Operating Officer
Ayako Hirofuji – Chief Financial Officer
Conference Call Participants
Akiko Kuwahara – JPMorgan Securities
Shima Yamanaka – SMBC Nikko
Mitsuko Miyasako – Mizuho
Oliver Matthew – CLSA
Kentaro Fujiwara
So first off, as we have already announced on April 24, Mr. Yokota, the current CFO, will sit down at the end of June due to personal reasons. From July 1, Mr. Yokota will be succeeded by Ms. Hirofuji currently, Chief Investor Engagement Officer and Chief DE&I Officer, who assumed the position of Deputy CFO in May.
Since joining the company in 2005, Ms. Hirofuji has served as a company in various capacities, including Corporate Planning, President of overseas subsidiaries, General Manager of Strategy and Finance Department, General Manager of Investor Relations Department. And from this year, Chief DE&I Officer, she is very well versed in the company’s global expansion and reform practices. And Mr. Yokota has been CFO since January 2021 has made many accomplishments during the difficult times, including the COVID crisis.
We shall strive for a smooth handover and aim to achieve sustainable profit growth and build a resilient business structure in 2024. We will complete our business transformation under the new structure while attaining growth and structural reform.
As for the FOCUS project, a renewal project of a general core system, which Mr. Yokota has been leading, its introduction is almost complete, and we are now entering the value-creation phase through the introduction of a new core system. I will lead this project directly as COO.
I would like to start by inviting Ms. Hirofuji to say a few words.
Ayako Hirofuji
My name is Hirofuji, and I assumed the position of CFO in July. I’m strongly aware that Shiseido is now in a very important phase to establish a highly profitable structure. So this is restructuring in Japan and other in other countries and regions.
I would also like to support from the finance aspect, Shiseido strong desire to further strengthen the core areas through further selection and concentration to achieve sustainable growth, as stated by our COO, Fujiwara.
In addition, we have had many direct dialogues with investors and analysts in the capacity of the Investor Relations. We deeply appreciate your expectations for the future, and we are committed to connect them to the management of our company. The strategic framework of SHIFT 2025 remains unchanged.
We will accelerate growth by aggressively investing in our brand, human resources and innovation, and we will achieve an early recovery in business performance by streamlining costs, so we will earn your trust.
Kentaro Fujiwara
Thank you. I would like to explain about the progress of the reform. First of all, in the first quarter of this fiscal year, we made a good start as we achieved a real sales growth rate of plus 3% and core operating profit of plus ¥11.3 billion, despite an environment in which some effects of treated water release and inventory adjustments remain in China and travel retail.
The highlights include the steady implementation of structural reforms, the recovery of market conditions and the increase in market share in the local Japan market and Prestige China market due to strategic marketing investments to firmly maximize the recovery. There’s no change to our full year forecast. Deputy CFO, Hirofuji, will explain the thinking behind this forecast later. In the rapidly changing in a complex market environment, we will maintain our strategic focus on agility through fixed cost reductions while maintaining investments for long-term growth and on capturing market share by nurturing brand value.
We will continue to maximize earnings in the second quarter and beyond while maintaining our strategic focus, as mentioned above. In the following section, we will — I will explain in more details what the status of our Japan Travel Retail and China business, which are the core of our structural reform. In Japan, growth has accelerated each quarter since last year. And in the first quarter, we achieved growth well above market and increased our market share.
In particular, our core brands, which have been a large ship and investment, have achieved growth in the upper 20% range, while our Hero products have achieved high growth of over 30%, leading the overall growth. We will continue to accelerate effective sales generation through well-balanced investment allocation.
We are also very encouraged by the accelerating growth momentum in the mid-price segment in the first quarter. As people resume meeting others and enjoy and enjoying themselves such as cherry blossom viewing without masks, we see an increase in their aspiration to take care of the skin or put a nice makeup since they will meet other people. We believe that Elixir, high growth of plus 20% in the first half of the year, is helping to boost the overall mid-price market.
I would like to reiterate the measures to support the strong growth, I mentioned earlier. In our Japan business, where we are building a new growth model, our focus is on our core brands in terms of brand strategy. Our core brand, Shiseido and Clé de Peau Beauté are growing at high rates of over 40% and 30% of local customer purchases, respectively.
We are building a foundation for sustainable growth by steadily increasing the number of loyal customers. We are also focusing on creating new markets. In the new category of foundation serum, our company-wide challenge in Japan during the period, two products have already been launched in the first quarter already contributing to 6% of the first quarter revenue growth in Japan and further growth is expected as TV commercials have been launched since April.
In the Elixir category, we launched Total V Firming cream in the second half of last year, which leaves the creation of the anti-aging market. Since the launch, it has maintained a top market share with strong sales growth. In addition, Shiseido and Clé de Peau Beauté raised their prices in April, but the volume decline after the price revision was not as significant as anticipated, and we have confirmed that demand is firm.
Next, as a touchpoint strategy, we developed a free experience model in the drug store channel, which will change the way the stores and shelves are built and improve them into easy-to-understand shopping areas with fewer and more carefully selected SKUs to achieve higher sales growth.
The pilot project was launched last year. Based on success of the pilot, this year, we will proceed with a full-scale rollout at a little more than 3,000 stores centering on mainstream stores. In addition, the growth rate of e-commerce sales in the first quarter of this fiscal year was in the high-20% range, largely accelerated from lower 10% growth throughout FY 2023. Going forward, we will continue to purchase — process three strategies to achieve 30% growth by 2025.
The first is to strengthen the customer EC, which integrates a flying and online sales. This will be achieved through our Omise Plus service, which allows offline customers to freely make purchases online as well, thereby, improving LTV such as through continued use of the brand.
Second, we will aggressively expand into specialized EC sites, aiming to make more new customers, and we will strengthen our own platform. In July this year, we will revamp the design and functionality of the Watashi Plus platform to further strengthen the relationship between consumers and the brand to achieve sustainable growth.
The progress of structural reform is shown on page 6. In order to transform ourselves into a new growth model, we have implemented human capital transformation, Mirai Career Plan. And I would like to relate our thinking and approach to the business transformation. Behind this necessary reform, there is strong conviction that we have to build a structure that enables Shiseido, the mother market, Japan business, to generate stable earnings and value.
And an organization that enables our employees to thrive and play active role. To this end, Japan, business needs a business transformation, not simple cost reduction and sustainable growth, building a profitable foundation and human capital transformation as pillars of our transformation.
In addition to narrowing the focus to our core brands, we strengthened investment by focusing on hero products and create new markets to achieve sustainable growth. As I explained so far, we have achieved solid results in Q1.
In terms of building a profitable foundation, selective brands and touch points contributed revenue growth, optimize and business spending significantly improved the OP margin, compared to last year, generating a good cycle.
And human capital transformation, to achieve business transformation, we need to change the way we work and the skill we possess. We have identified the capabilities required invested in human capital, such as reskilling for employees who will work with us and implemented an early retirement support package for those who chose to pursue their future career outside the company.
The application period of the early retirement support plan ended on May 8th, and with the 1,477 applicants. As I explained the effect of this plan is expected to be JPY10 billion in two years, of which JPY3 billion is expected to be realized after Q4 of 2024. To follow-up the progress efficiency improvement included establishment of profitable foundation, COGS was reduced by about JPY1 billion already due to improved mix by focusing on core brands by improving the mix and promoting SKU optimization, we aim to further expand earnings through growth.
In terms of marketing and other expenses, streamlining sales promotion materials will begin in the second half, while the benefits of reviewing IT systems are already realized since Q1 and other expense savings will likely be realized in Q4. These reforms will not be easy. Nevertheless, we are determined to carry out these reforms with strong conviction that they are necessary for Shiseido to continue to stock in the future.
With the key message that there is nothing that cannot be changed that I will continue to work. So that’s the Japan business will transform itself as an organization to be able to create the new future of Shiseido, an organization not being afraid of change.
Next is about Travel Retail business. Channel inventory adjustment is underway as planned. And those in Korea, Hainan Island were just adjusted to the appropriate levels at the end of last year and the end of first quarter, respectively. We expect monthly shipment sales to turn positive from May.
Future growth will be achieved by optimizing inventories and returning to sales growth trajectory, especially among travelers. We plan to raise the sales ratio of travelers to 70% or 80% level by 2025. We will also promote more stable growth and profit generation by streamlining sales in Japan, Europe and United States.
Next, let’s look at the Chinese business. Even with the moderate market growth, reforms are underway that will enable stable growth and profit generation by identifying growth areas and market making focused investments. We feel that market in China is changing faster and faster. That is why I’m pleased that we have been able to move quickly to optimize our organization.
Even amid such volatility and uncertainty, we have been able to protect our profitability by maintaining a lean organization and a disciplined approach to investment. Our focus area, high Prestige grew by high single digit, NARS grew low 20% growth rate. As a result, the group as a whole was able to increase its share of the prestige market in Q1.
In International Women’s Day promotions, we achieved strong sales with more than a double year-over-year growth as a company on TikTok, growing e-commerce platform and due in part to the development of new programs and 6 times or more year-over-year growth achieved in prestige sales and achieving better than the market growth for prestige category in Tmall, JD and TikTok combined, in order to achieve even higher quality growth. We launched a campaign in April to communicate a brand value at Shiseido ANESSA and Drunk Elephant already begun full-scale communication in April.
Meanwhile, operational reform has been underway since last year, in line with our growth strategy. The organization structure is transformed to the one speedily addressable to cope with market changes and off-line stores are being optimized to improve productivity.
The cost reductions being promoted as part of the global transformation are based on the action plan to exceed annual targets and to ensure that even if the effect of the individual actions fall short of expectation, additional actions will be taken. So that targets are surely meet
In Q1, approximately JPY3 billion of savings was generated. In addition, we have already started the initiatives to improve the employee productivity worldwide. The benefit of this initiative will be realized mainly from the second half onwards. We will continue to accelerate company-wide efforts to deliver over JPY15 billion in 2024 and over JPY40 billion in 2024 and 2025 to surely generate profits. That is all from me. Thank you. Next, Ms. Hirofuji will report on the first quarter earnings.
Ayako Hirofuji
Now I will explain our business results. First of all, on Page 11 is the summary of P&L. Sales grew 3.2% year-on-year in real terms, with the negative growth in China and Travel Retail steadily narrowing and steady growth in Europe and the US and Asia Pacific with momentum accelerating, particularly in Japan. Core operating income declined JPY1.2 billion to JPY11.3 billion, partly because the previous year had a high profit structure with JPY12.5 billion in the first quarter out of annual JPY39.8 billion.
Though the profit decreased compared to the previous year, we had a good start exceeding the target. The impact of lower sales in Travel Retail was more than offset by the increase in income in Japan and other regions. Operating income was a loss of JPY8.7 billion, a decrease of JPY19.3 billion from the previous year. As Mr. Fujiwara explained, we recorded a provision of about JPY18 billion in the first quarter for structural reform expenses for the early retirement support plan.
As for the briefing on February 10, we expect it to grow — record provision for the second quarter. However, we recorded it in the first quarter with the number of applicants that was highlight and calculation could be performed for the amount of provision. Profit attributable to owners of the parent company decreased by JPY12.0 billion from the previous year to a loss of JPY3.2 billion. This is due to the fact that JPY20.1 billion of the JPY30 billion and non-recurring items was recorded in this quarter. We expect both operating income and quarterly profit attributable to the parent company to return to profitability from the second quarter onwards. In terms of cash generating ability, EBITDA margin was 9.8% compared to the annual plan of 11%.
Next on Page 12, sales results by brand. In the first quarter, Shiseido had negative growth in China and travel retail due to the lingering impact of treated water release and inventory adjustments in distribution. However, despite these circumstances, the high presence of the Clé de Peau Beauté, as high prestige brand was a success and grew by 7%. Drunk Elephant also continued to perform well, growing 30% from the – more than double growth in the first quarter of last year. The fragrance brand also achieved strong growth, let by Narciso Rodriguez, which led the overall growth. Elixir also achieved positive growth with double-digit growth in Japan, contributing to the positive growth despite negative growth in China. Anessa also grew in Japan and China, but was affected by inventory adjustments in Travel Retail, resulting in flat sales year-on-year.
Next, on Page 13, sales trends. In the first quarter, overall, we turned to positive growth. While sales in China and Travel Retail were below the previous year’s level, as expected, it was compensated for by growth mostly in Japan, the Americas and Europe. The biggest highlight was Japan’s high growth of plus 20%. The business transformation measures such as brand selection and focus, strategic investment allocation, our steadily yielding results and strong growth is being achieved centered on core brands.
We have announced price increases in Japan this year, the effects of which are expected to be felt from the second quarter onward. In the first quarter of this year, we achieved a high growth rate of plus 20% due to the effect of fuel volume growth, including the rush demand before the price increase. The trend up to April may suggest that the volume decline after the price hike will not be as large as expected.
In China and Travel Retail, although growth is still negative due to the impact of treated water release and inventory adjustments, the negative growth rate is steadily decreasing. In addition, EMEA continues to grow — continue to perform well. Europe in particular has achieved double-digit growth for five consecutive quarters, since the first quarter of last year.
Page 14 and 15 are about Japan and China business. But since Mr. Fujiwara has already explained some of the key strategic points, I will simply focus on data and business in these two regions.
First, let’s look at Japan. As shown in the dotted line graph, the scale of the local market as a whole was returned to almost pre-COVID level. The good news is that, year-on-year growth momentum is in the mid-price segment is accelerating.
On the other hand, it is also true that the mid-price segment is the one with the most significant negative growth, compared to 2019, even in the first quarter of the year. We will accelerate the initiatives that are currently yielding positive results to achieve a further turnaround from this point.
Next, in China, we saw negative growth as expected, but the strong performance of Clé de Peau Beauté and NARS that we see as offering the best return on investment in the current environment contributed to share expansion in the prestige segment.
The brand SHISEIDO also had the largest and longest lasting effect of treated water buildings. We will continue to implement measures to achieve a turnaround from the second quarter onwards.
So Page 16 there are the four regions for Travel Retail. As I explained, we have been working to optimize inventory levels since last year. And as our priority restricting shipments with strong determination, as a result, the channel inventory has been optimized, and we expect a full-scale recovery in the second half with the solid shift to a healthy business model focusing on travelers.
In the Americas, double-digit growth achieved by branch SHISEIDO and Drunk Elephant contributed to overall growth of 9% and 22% when Dr. Dennis Gross Skincare, included. EMEA also maintained strong growth led by SHISEIDO and Drunk Elephant as well as fragrance category narciso rodriguez.
In Asia Pacific, the growth was driven by Southeast Asia, especially by Thailand. We will continue to accelerate growth in Americas and EMEA and balanced regional portfolio as a mid-to-long-term initiative, rather than a quality-based approach. With respect to fragrance category, which shows a good momentum globally, we will implement initiatives to maximize business opportunities.
Page 17 shows the COGS ratio. The solid line shows the value reported in the institutional accounting and the dotted line shows like-for-like COGS ratio. The gap between the two, which used to be large in the past, but narrowed as planned.
Special factors such as product supply due to business transfers, impairment loss and structural reform expenses related to factory transfers are expected to be reduced this year. So the solid and dotted lines are expected to remain close to each other.
Our year-over-year increase in the like-for-like COGS ratio in the dotted line is 24.1%, which is attributable to increased excess inventory write-offs, due to the slowdown in China and Travel Retail and unfavorable brand mix.
After Q2, especially in the second half, the product mix is expected to improve, thanks to a decrease in excess inventory, full-fledged recovery in China and Travel Retail and the impact on price increase in Japan are focused on the core brands and optimize SKUs. We are taking measure seriously to reduce COGS in an effort to achieve the target set in the midterm plan.
Page 18 is about core operating profit by segment. First, the OP decrease in Other segment is due to a significant decline in investment sales to — sorry, inter-segment sales through Travel Retail and China.
In region, a large decline in sales of the Travel Retail, which has the highest profitability caused lower profit. Despite salary increase due to inflation and higher expense for digital investment, the overall consolidated year-over-year core operating profit decrease was managed to ¥1.2 billion level, thanks to an increase in profit and stabilized profitability in Japan and other regions. The overall cost control and strategic allocation of marketing investment contributed more efficient and effective sales growth.
In Japan, the business transformation is steadily yielding results and measures are being taken to accelerate growth, while lowering fixed costs and structure is being formulated to retain profits from higher gross profit, driven by sales growth.
Thanks partially to the rush demand before the price increase, the profit margin of 9% in the first quarter is higher than our actual capability that we are making steady progress towards the target of over ¥20 billion for the full year.
In China, sales declined due to the impact of the treated water release, but early implementation of measures to optimize the organization and reduce fixed costs and the organization is now in the position to respond quickly to the rapid changing market environment.
The Americas, EMEA and Asia-Pacific also posted higher profits due to higher gross profits from the revenue growth and cost efficiency, while improving profitability in each region, we will further accelerate growth in the Americas, EMEA, Asia-Pacific and Japan local in order to optimize regional balance of profitability.
Finally, Slide 19 shows 2024 forecast with the opportunities and risks. The closing of Dr. Dennis Gross, which was not included in the February report was successfully completed in February. The sales impact on consolidated results for the current fiscal year is expected to be approximately ¥14 billion, with a minor impact on core operating profit.
Due to expenses specific to the first year and amortization costs on the intangible assets contributed — contribution to profit this year would be minor, but it has double-digit EBITDA margin and plans to increase earnings by expanding the scale and internalizing the product production.
And other opportunities going forward includes continued momentum in Japan Local market, which performed extremely well in the first quarter, especially for our core brands and maximizing sales for non-Chinese visitors in Japan, which already outperformed the level of 2019 and further acceleration of the growth in Americas, EMEA and Asia. In addition, there is possibility of uplift in foreign exchange rates due to the continued depreciation of yen.
On the other hand, the changes in China, consumer sentiment of partition behavior will affect not only in China business, but also Travel Retail and Asia as well as Japan. There are opportunities, but seeing a risk at the moment. Therefore, the full year forecast remains unchanged. And we continue our efforts to maximizing our profits.
Question-and-Answer Session
A – Unidentified Company Representative
As more questions concise. And we will take one question from one person at a time. And when we go around all the questions, we will take second round questions. Now for Securities. Kuwahara, San. Yes please.
Akiko Kuwahara
Yes, please. Hello. This is Kuwahara from JPMorgan. Thank you very much for your meeting. One question is about the structural reform and also the first quarter performance.
Kentaro Fujiwara
Now the core operating profit is — was exceeded the target, as you mentioned. And how — to what extent did it exceed? And what is the background? Is it the revenue or the profit margin or the cost of goods sold or the SG&A costs. And also in the appendix 4, Page 24, in fact, the rate of the SG&A cost increased to 7.8% — 70.80% But depending on how you look at it, so is the personal care Shiseido business were separated. And because of that, the COGS went down by five percentage points.
Akiko Kuwahara
And so it seems to be supporting the good performance. So it seems to me that the cost for the structure reform this time is not so easy to see. It’s not so visible. So if you think that is not the case, please explain in detail?
Kentaro Fujiwara
Then let me answer your question. So the core operating profit of 11.3 billion. And so we exceeded some billion yen above the target. And also good performance was in Japan, which exceeded the — in the sales and also the cost control was also strengthened. And in addition, there’s the timing shift of the costs, for instance, the Chinese profit. So this is about the profit in China. There was a shift in the timing.
Year-on-year, last year was ¥39.8 billion and ¥1.12 billion. So there is a shift in the timing. So it is not against the target, but then year-on-year, there’s a ¥1.2 billion reduction in the profit. So that was the result.
And so mainly Japan and also China saw the form is difference in terms of the revenue and also the time shift. Timing shift.
Akiko Kuwahara
Thank you. What about the rate of SG&A? So it’s 70.8%. Now is it better than target? Or — now this is the first quarter, so it tends to be high. And do you expect that this is going to keep going down from second quarter onwards? Is that possible to think in that way?
Kentaro Fujiwara
Yes, you’re right. In regards to SG&A rate, there’s no major gap with the plan or the target. But then there’s the year-on-year the ForEx cost. Some — so there is, to be honest, the increase in the ForEx cost year-on-year. So due to the ForEx impact, the cost has expanded because of the weaker yen. And so that is also reflected in this SG&A increase. And so for this plan again, I guess, so there’s no so much gap against the target.
And also going forward, as Mr. Fujiwara said, we will proceed steadily with the structural reforms. So from second quarter, almost, we would like to show a better result.
Akiko Kuwahara
Thank you very much. One last thing. Japan, how — why is it doing so well? What is the background? So is it the creation of the new market, or are there any other elements that’s pushing up the good performance in Japan? I understand it’s the last-minute purchase before the price increase. But why did it perform so much better?
Kentaro Fujiwara
So then let me answer to that question. First thing, our growth strategy to focus on the core brands and the core brands steadily demonstrated growth, leading the overall growth of our business, in particular, branch Shiseido, and also credit grew significantly, and this growth comes from the new customers. And that is good news for us. And in that, there’s a foundation serum, which will lead to new markets, and we managed to capture a good sort of new customers.
80% of the sales of the foundation serum come from new customers and about half of the customers are in the 20%. So this new launch has turned out to be very successful. And since April, we started the TV commercial. So going forward, we expect that there will be even more new customers and so that we will continue to grow into the future.
Akiko Kuwahara
So thank you very much. Very clear.
Operator
Thank you for the question. SMBC Nikko
Shima Yamanaka
Thank you very much for taking my question. Shima Yamanaka of SMBC Nikko. Related to the previous question, the global cost reduction efforts, of which first quarter, JPY3 billion and the full year, JPY 11 billion, that is JPY15 billion. So that was the explanation you gave us. But in terms of the support for the career, human resource that will be realized in the second half. So that means the first quarter, you already realized some of the good elements. So it might be already realized in the first quarter. So there might be some uplift.
And then in the first quarter, we don’t see any impact on the price increase, yet, right? So in the COGS statement, you said that the impact on the price increase, the impact you are showing in this paper is a little bit of conservative, in my view. So you can just give us some color on that?
Kentaro Fujiwara
Okay. So first of all, I would like to talk about the human capital transformation, JPY3 billion impact, a little less than JPY3 billion, to be honest. So 50% of that was driven by Japanese efforts, and the remaining 50% is China and other regions. That is the impact of the first quarter, impact of the human capital transformation.
And COGS, there should be some adjustment in terms of the timing, but this 3 billion impact will be continued in the fourth quarter. It’s not the case, but at least our plan, which was already announced, 15 billion for 2024, we are on track. And GTC committee, if there is an uplift or downlift, it’s some ups and downs always be recognized. Whenever there will be some shortfall, we are trying to compensate with other initiatives so that we will generate profits through these initiatives for the full year.
Shima Yamanaka
Thank you. So the first quarter, 3 billion, is slightly above your original target?
Kentaro Fujiwara
Yes. Thank you. For the first quarter, you’re right. So in terms of the impact of the price increase for the second quarter onwards. For the price increase in Japan, I already explained, like a 2 billion yen or so impact for this year is expected. So that will be realized after the second quarter. So far, in the previous presentation explained, in the first quarter, where were some advance payment of realization of sales. However, the progress to date, there was no rejection compared to the rush demand in the first quarter. So as I indicated in the guidance, the opportunity must be maximized. So we do not miss any opportunity. So we are now keen to achieve that. Thank you very much.
Allow me to add one thing. For Japan, the first quarter, there was the impact on the COGS. As I explained, the core brand, the focusing on the core brand initiatives and brand and product mix are now contributing into the COGS improvement greatly. So this effort will continue. And then after April, we will realize the price increase impact. Then there should be some good momentum.
Shima Yamanaka
Thank you very much.
Operator
Thank you very much. Next, we would like to invite from Mizuho.
Mitsuko Miyasako
My name is Miyasako from Mizuho. One moment. Oh, okay. Thank you for this opportunity. So overall, the business seems to be performing well. So my question is surrounding the eliminating all the risks. And since Mr. Fujiwara is here, about China, about the global sustainable, the water release seems to be affected. But then there’s COGS, which is very close to ALTIMUNE. And I wonder, the businesses affected by this very similar products and also for the foundation, there’s a shift and also lack of balance with the other brands. So the cons — and so there may be some other, the new cons may come up in the market. So the sales seems to be a bit unstable from my understanding. If it’s not correct, please correct me. And so in the first half, so for the three years, the revenue growth is set to be 5%. So what about the stability of data sales growth going forward?
Kentaro Fujiwara
Thank you for the question. So one thing I can say is that in regards to brand Shiseido, from April, we are — we have launched a campaign. And out of the impact of the treated water release, unfortunately, there are some customers who moved away from the brand started to come back and we hear such voices because they find other products not comfortable to use. So we would like to push these customers who are coming back to Shiseido, and we have launched a campaign for that since April.
And it’s not the campaign such as the 11/11 and other marketing events. And in — so we would like — what we are doing is to explain the efficacy and effect of the products that we sell. So it is the comfort in use and also the — this combination of ingredients to maximize the effect. We promote and communicate. We will communicate and promote those aspects. And the result of this promotion will, in the end, push up the effect of the large-scale promotions in June to start with.
So according to the latest information, we are capturing a lot of new customers — and in addition to that, when it comes to competition in Chinese market, in particular, the differentiation with the local brands, in terms of the effects and the efficacy, the Japanese and also the European, US brands are in a better position. So we have launched the campaign focusing on cream so that we will have sufficient differentiation with the local Chinese products or brands. And so we will launch some activities to enhance the brand value.
And also, at the same time, in parallel, we will try not to deal with the major KOL and those and we launched the promotion in the right scale. And another point, the biggest good news is that in the first quarter, we have faced the reduction in the profit. But then as a result of the significant structural reform since last year, we are securing the profit, meaning that even if there’s a fluctuation in the top line, we have completed this pattern of business or the style of business in which the profit is always secured.
And since Chinese market is rapidly changing, when we find the right investment, then we will do so rapidly. But then if we find that some investment will not work, then we’ll quickly restore from it so that we will secure the overall profit. And so that means that you have launched a lot of cost control so that the profits went upwards. Yes, that is correct. And about China profit, I would like to supplement some information. So yes, it is the less revenue and a higher profit. So the revenue went down and the cost was controlled, but then the marketing cost was increased. So apart from the marketing, we are tightening the cost aside from marketing cost. So that’s why, as Mr. Fujiwara said, the — although the revenue goes down, then our profit can be secured.
Mitsuko Miyasako
So what was the cost item that you controlled other than the market other than marketing?
Ayako Hirofuji
So it’s a back office related and also the human resources reform, which we already announced before, and we have already launched that cost control and there’s a good result coming up from this.
Mitsuko Miyasako
Thank you very much.
Operator
Now from CLSA, Oliver.
Oliver Matthew
Hi. I’m not sure if you can hear me, but let me go ahead. Congratulations Hirofuji on your new role and very clear presentation. I have a question about Dr. Dennis Gross and the Derma segment opportunity. Two things. One, how big an opportunity could this be for you longer term? And also, could you talk about the speed of the rollout? Because I think telephone (ph) was a similar acquisition, but it did take quite a long time to get going. You’re only just going in China now and maybe that was covered. Should we expect you to be a bit faster for Dr. Dennis? Thank you.
Ayako Hirofuji
Thank you very much, Oliver. And the first point is that for the opportunities of the derma category, we are very positive on the to having for the big opportunity for the Derma because of the one is that this is a growth category in the world, not just for the Americas, but also the Europe and also Japan and China as well. And thanks to acquiring for the Dr. Dennis grows, so we fill it up to a good portfolio in the derma because of the before, so we don’t have any appropriate for the brands. So I expect it to Dr. Denis growth is really capturing for the market share and adding for the further growth in our business.
And the second point is a low route speed. So first of all, we are more focused on to the USA markets. So this is very important to build up to the strong fundamental in the whole market for the Dr. Dennis Gross. Then, of course, if there is an opportunity, so we expect it to roll out to the other regions, but don’t saw agent or donors.
Oliver Matthew
Okay. Understood. Thank you very much.
Oliver Matthew
Thank you very much. Next from Mitsubishi (indiscernible).
Unidentified Analyst
Hello. This is (indiscernible) from Mitsubishi Trust Bank. Thank you very much for this opportunity and briefing. In regards to the structural reform, quantitatively, in Q1, there’s good results according to the briefing. And so for 2024, 2025 for the JPY 40 billion, do you feel that there are some actions are brought forward? That’s my first question. And also, this may be a little too early to ask, but — so the — when the structure reform indeed brings the better profitability, will there be any policy for the return — so could you repeat the last part — now about the shareholder return? Thank you.
Kentaro Fujiwara
So as pointed out about our Global Transformation Committee JPY 40 billion. To be honest, we are in the first quarter. So at this timing for this JPY 40 billion, we cannot say that we are overachieving it. And also, we are doing well. So it’s very difficult to say anything about the results.
So we do have this JPY 3 billion result with the — in the first quarter, and we would like to continue with the good work and also in our tracking. So there will be some negative fluctuation in how we’re going to compensate for it, offset it and would be the main target of this activity and of the restructure reform. So we are not considering to bring forward the targeted, JPY 40 billion, but then we would like to steadily achieve this JPY 40 billion target of this initiative. That’s what we think is very important.
And based on that, in regards to the capital policy, as we have been announcing in the past, the direct, the return of the — and also we are trying to make a return in a holistic manner. So in that sense, the capital allocation, well, we’ll go, first of all, to the growth, the investment and M&A and then the return to the investors. And so M&A, we will follow some rules and the necessary actions. And so what we would like to do is to make sure that the positive momentum will be in place towards the end of the year.
And for that matter, we will make the solid marketing investment, and we will make the solid business growth. So based on that, we will be able to — we should be able to materialize the shareholder return. That’s the scenario I have in mind.
Unidentified Analyst
And so then you talk to us about the qualitative aspect. But internally, in your company, do you have a sense that your employees cooperated towards the structure reform. So yes, you did share with us some quantitative information. Now, talking about the qualitative aspect of the structural reform, do you have a good atmosphere in place inside of the company to drive forward with a concerted effort among the employees towards the structural reform?
Kentaro Fujiwara
First of all, about the Japan structure reform. In regards to the P&L, we explained in detail to our employees so that our employees will understand why the growth cannot be attained even though data sales are increases. And so, we are explaining that thoroughly. And so we are supporting our employee understanding how they can translate this target of structural reform into their day-to-day work. And so, this is not a simple story or the top-down story of cost reduction of this or that items. So, we would like — we are supporting our employees through frequent communication that the meaning of the transformation is appreciated by the employees, so that there will be a culture in place so that there will be sustained transformation in place with the participation of our employees.
And also, being able to drive our transformation in itself is the capability of the organization. And Mr. Hirofuji also mentioned to secure this ¥40 billion target as a result of the transformation. And in the meantime, we will be working on adding 20% to our target. But when we faced the tough times then we will try to review the target. And so we are running the cycle of reiterating or reviewing our target and the result of our actions on a monthly basis. So we will closely monitor where we are, and we would like to also make our organization globally to be prepared for transformation.
Unidentified Analyst
And now, I hope that you will keep up good work up to the first quarter now that you’ve achieved your target, and I would like to see the good results throughout the year. Thank you.
Operator
Now we are running out of time, so we would like to take the last question, Morgan Stanley.
Unidentified Analyst
Thank you. So my question is very simple. I just wanted to hear about the Japanese April situations. But before that, you had a lot of non-recorded items a lot. So I just want to understand the background. So from the very beginning, you have a very better than the planned or target number. But because there are some known recorded items, right? So the minus 8.7%, but minus JPY 13 billion. Is that the right understanding? Because you originally thinking of minus JPY 8.7 billion. But the JPY 30 billion for annual will not be changed.
Ayako Hirofuji
For the non-recording items, for the non-recording item for the JPY 30 billion for annual, no changes. So the uplift of that is a core operating profit only. We were talking about the core operating profit.
Unidentified Analyst
That means, well, you said that the core operating profit was better than the plan, right? That means that in real or like-for-like is not increased, right? Because the core operating profit was originally JPY2 billion, but you said that JPY 13 billion was now increased, right? So excluding non-recorded items, and then we had the core OP increase.
Ayako Hirofuji
Yes, your understanding is correct. So that means nonrecorded items the reschedules that is not included in the core operating profit increase.
Unidentified Analyst
Okay. I understand that. Very clear. So if the originally, there are two, the second quarter, that’s the nonrecorded IDs, but it’s now realized in the first quarter, right?
Ayako Hirofuji
Two becomes now one. And then prestige 45% and then the prestige. For the second quarter, that was originally that Japan was not so good momentum.
Unidentified Analyst
But I just want to understand what was your thinking? And then I don’t want to be surprised in the second quarter. So can you please share your thinking?
Ayako Hirofuji
Well, thank you very much, rather tricky question.
Unidentified Analyst
No, no, no, I’m not raising tricky question.
Ayako Hirofuji
No, the current situation. So in April, consumer purchase or quantum purchase or the sellout. So the double digit or so growth double digits, sorry, for the consumer purchase. And then before and after the price increase, the credit should be really big impact originally, but it’s rather 50% of our original thinking. So it’s more milder than we thought, okay? So the double-digit growth level in the revenue basis.
Unidentified Analyst
Okay. Thank you. That was the April result. Thank you.
Operator
Okay. So we would like to end the Q&A session. So we would like to close overall the first quarter earnings report. Now IR division, will send you the questionnaire. So I hope you will fill out the questionnaire so that we can leverage your opinion for the better earnings report going forward. Thank you very much for your attendance today.
