AXXZIA Inc. Q4 FY2025 earnings call

• Overall 2025 July Fiscal Year Results • Total consolidated revenue reached 13.47 billion yen, +10.5% YoY and +1.5% versus previous guidance, hitting a record high. Operating profit reached 0.51 billion yen, -44.1% YoY but +16.7% versus previous guidance, with the YoY decline caused by worsened cost ratio from the consolidation of M&D Corporation. • Cost of goods sold ratio increased 5.7pp YoY due to M&D consolidation, but organic cost ratio (excluding M&D) remained stable. Selling, general and administrative (SG&A) expense ratio improved 1.8pp YoY: payment fee ratio fell 2.8pp to 15.0% due to strengthened control from expanded in-house live sales, while personnel cost increased significantly from headcount growth at headquarters and M&D, and advertising expense remained flat with an advertising ratio of 25.7%. • Cash and deposits decreased by 0.938 billion yen during the fiscal year due to twice-yearly dividends and share repurchases for shareholder returns; the projected payout ratio for 2025 July fiscal year is 72.8%, and the company will continue returning profits to shareholders to improve capital efficiency. • Progress has been made in diversifying the company's revenue portfolio: reliance on China EC has decreased, while Japan EC has expanded its share, steadily reducing regional concentration risk. Product portfolio concentration on AG Drink and Essence Sheet has also gradually decreased, with growing share for growth category products and AGTHEORY cosmetics.

• Group Synergy and New Product Launches • Subsidiary M&D will launch its first proprietary fragrance brand BELLE BAI in October 2025, developed by AXXZIA R&D and manufactured by Yuit Laboratories. This transforms M&D's business model from pure import distribution to proprietary brand operation to improve profit margin, and leverage group R&D and manufacturing synergy. • A new mid-price inner care product PQ Drink Plus was launched in September 2025, and the company will increase advertising investment to drive its sales growth.

By region: 1. China: 9.7 billion yen in revenue, -3.1% YoY, accounting for 72.2% of total consolidated revenue. China EC sales were flat YoY, as strong growth of AGTHEORY cosmetics offset the decline of AG Drink on Douyin. 2. Japan and other markets: 3.7 billion yen in revenue, +74.1% YoY, accounting for 27.8% of total consolidated revenue (up from 17.7% YoY). Japan domestic revenue grew approximately 2x YoY driven by the consolidation of M&D Corporation; organic Japan EC sales grew 76% YoY, and direct retail sales grew steadily driven by inbound demand. By brand: 1. AGTHEORY: Full brand revenue grew driven by strong expansion of AGTHEORY cosmetics. 2. AXXZIA: Overall brand performance was sluggish after a large decline caused by China market backlash from treated water discharge, but sales volume of Essence Sheet was flat YoY in 2025 July fiscal year; in Japan, bundled sales of Essence Sheet and AXXZIA MATE FOR EYES grew steadily. 3. Venus Recipe/RevWell (growth segment): Overall performance was solid; the segment's The Pure Drink steadily expanded its revenue share after replacing The White Drink.

• For the 2026 July fiscal year, the company projects total consolidated revenue of 14.44 billion yen, +7.1% YoY; operating profit of 0.57 billion yen, +11.0% YoY; operating profit margin of 3.9%, flat YoY; net profit attributable to parent shareholders of 0.37 billion yen, with diluted EPS of 16.23 yen.
• By region, 2026 July fiscal year guidance is: China revenue of 10.19 billion yen (+4.7% YoY), Japan revenue of 3.832 billion yen (+11.9% YoY), other regions revenue of 0.417 billion yen (+28.5% YoY).
• The full mid-term strategic and financial plan will be announced on October 9, 2025, as the company is still adjusting the plan amid its ongoing business model transformation.
• In China, the company will focus on three priorities: 1) stabilize growth of the three core products (AG Drink, Essence Sheet, The Pure Drink) via celebrity ambassador partnerships and continued efficient live commerce with mid-tier influencers; 2) nurture AGTHEORY cosmetics and PQ Drink Plus as the 4th and 5th core growth pillars via micro-influencer marketing, increased RED exposure, and dual in-house/influencer live sales; 3) expand the customer base from upper-income to middle-income consumers via newly launched mid-price products to drive new customer acquisition.
• In Japan, the company will increase advertising investment to 1.5x of 2025 fiscal year actual spend to accelerate growth. Key priorities are: 1) expand touchpoints: expand distribution to variety stores offline, increase Japanese customer acquisition at existing direct stores, drive traffic to domestic EC via SNS influencer collaborations and live sales online, and introduce a subscription model to strengthen CRM and improve customer lifetime value; 2) strengthen sales of strategic Japan-focused product LisBranc, a low-to-mid price sensitive skin care line that matches Japanese market demand, while continuing to push sales of Essence Sheet and AXXZIA MATE FOR Eyes.

• The China market has maintained a challenging business environment, and high double-digit growth seen in previous periods is no longer achievable. The company's China business also faces structural cost pressure from over-reliance on KOL marketing, requiring the company to continue optimizing cost structure via expanding in-house live sales.
• Traditional advertising channels in Japan (listing ads, Instagram, YouTube) face intensified competition and rising customer acquisition costs, making it difficult to achieve sufficient profitability with existing strategies.
• M&D Corporation's existing import distribution business model has very high cost ratio and low profitability, which is dragging down the group's overall profit margin, and the success of its new proprietary fragrance business transformation is still uncertain.
• Japan's TikTok Shop is still at an early development stage with low existing consumer penetration, and the outcome of the company's heavy investment in this channel is unproven.

Q: What are the specific initiatives and advertising plans to expand Japan sales? / A: The company is developing affordable cosmetics and beauty appliances tailored to Japanese consumer needs, and will strengthen the existing LisBranc brand, which already has 0.5-0.6 billion yen in annual sales, a clear sensitive skin/aging care positioning, and a 3,000-5,000 yen price point that matches the Japanese market. Since traditional Japanese advertising channels have high competition and costs, the company will focus on increasing exposure on TikTok, leveraging its fast-growing GMV after adding shopping features in June 2025. A dedicated TikTok operations team has been set up at the Shenzhen subsidiary and started operations in September 2025, and will be expanded to lead Japanese operations. Offline, the company will expand beyond high-barrier department stores to open new locations in shopping malls and street retail, targeting around 20 direct stores in Japan over the medium term, building an integrated online-offline brand presence.

Q: What is the outlook for the China market, and how does AXXZIA position it going forward? / A: The China market struggled in the first half of last fiscal year, but recovered gradually in the second half after the AG Drink renewal strategy took effect. The Chinese skincare and supplement market is still 3-4x larger than Japan's, with significant room for growth, and AXXZIA already holds a strong position in the Chinese supplement market. The company will continue to optimize its structure by reducing KOL dependency and expanding in-house live sales to accumulate knowhow for re-acceleration, and will now actively consider M&A and alliances with local Chinese cosmetic brands, EC platform operators, and AI-related companies to drive future growth.

Q: Why is the 2026 July fiscal year operating profit margin expected to stay flat YoY despite revenue growth? / A: The flat margin forecast is intentional, as the company is focusing on investing to build out the Japan market, which is a new core growth pillar for the company. The investments include building out the TikTok operations team and other infrastructure to support long-term Japan expansion. These are upfront investments that will take 6-12 months to mature and deliver clear profitability results, so the 2026 fiscal year is focused on laying the foundation for future growth rather than pushing for immediate margin expansion. China's business infrastructure is already mature, so it will continue to perform steadily under the existing strategy.

Q: How will AXXZIA improve group profitability going forward? / A: The main drag on group profitability is M&D Corporation, which accounts for 2.2 billion yen of Japan's 3.4 billion yen 2025 fiscal year revenue but generates almost no profit. Once M&D grows its proprietary BELLE BAI fragrance sales significantly, the group's overall profit margin will improve sharply. For AXXZIA's core domestic business, the company expects TikTok and expanded direct stores (which will capture both inbound and local Japanese customer demand) to be the key drivers of margin improvement going forward.