4936.T

Overall Financial Performance

• Despite a challenging operating environment caused by China-Japan relations tensions, the company delivered 7.8% year-over-year revenue growth led by strong performance in Chinese e-commerce
• A 10 million yen operating loss was recorded due to stepped-up advertising investment in China, upfront investment for Japanese sales expansion, and higher payment fees tied to sales growth
• The balance sheet remains healthy, with an equity ratio of 78.7% maintained

China Market Initiatives

• The company views the Chinese market as experiencing a gradual recovery with signs of hitting a bottom, with all major brands delivering sales growth
• The core product The Pure Drink from the Venus Recipe brand has been approved for sale as a functionally labeled food, and will be positioned as the company's third core inner care product after AG Drink and Essence Sheet, with sales growth targeted by promoting the product's effect based on scientific evidence

Japan Market Initiatives

• A new directly operated store, AXXZIA Namba CITY, is scheduled to open in March, located directly connected to Nankai Namba Station to reach a broad customer base; the store will carry AXXZIA products in addition to group products such as M&D's Belbay
• Expansion into specialty cosmetics variety stores is being strengthened, with a successful limited-time event held at @cosme TOKYO in January featuring an Instagram live with actor Atsuko Maeda; the company is actively increasing exposure for the Lisblanc brand as a focused brand
• On the Japanese e-commerce front, influencer live sales and affiliate posts are being implemented on TikTok Shop to increase exposure, raise brand awareness, and acquire new customers, while the company is also working to develop in-house live sales capabilities
• A new Japan-specific product, Essence Sheet Premium Glow, is scheduled to launch in May. This product is a re-formulated version of the company's second best-selling product (over 6 million cumulative units sold) adapted for the Japanese market, priced at 3,300 yen for 20 sheets (compared to the existing 60-sheet pack priced at 9,900 yen) to lower the barrier to trial for new customers; the product targets consumers concerned about dryness-related dullness and fine lines, will be promoted via TikTok and other social media, will be available via e-commerce and specialty cosmetics stores, will be sold in bundles with facial devices to drive repeat purchases and improve customer lifetime value

Third Market Initiatives

• In Malaysia, influencer marketing has performed very well, with quarter-over-quarter sales growth of 99.5%. E-commerce is the core sales channel, with existing KOLs' regular live sales driving increased repeat purchases; the company will soon be listed on the e-commerce site operated by a top KOL to drive higher average order values and repeat purchases, while continuing to onboard new KOLs to acquire new customers
• In Singapore, the company operates both retail and e-commerce: a pop-up store has been open at the established department store TANGS at Tang Plaza since December, and a live sales event with popular local actress Joanne Peh was held that strongly contributed to sales growth; the company will continue to expand retail distribution at department stores while strengthening online sales to drive growth
• In Hong Kong, products including the popular AG Drink XI and Essence Sheet have been launched at the first overseas flagship @cosme HONG KONG, which opened in December, targeting Hong Kong residents and tourists

• Management maintains its commitment to achieving the full-year financial plan, and will continue to strengthen investment in the Chinese market in the second half of the fiscal year to grow profitable sales in China and drive operating profit growth
• All planned new product launches and channel expansion initiatives outlined in the full-year plan remain on schedule for the second half, with no upward or downward revision to the stated full-year targets shared in this call

Overall consolidated interim cumulative results: Total net sales reached 6.77 billion yen, a 7.8% increase year-over-year. Operating loss was 10 million yen, compared to an operating profit of 110 million yen in the prior year period. Net profit was 20 million yen, down from 60 million yen in the prior year period.

By geographic segment:

1. China: Net sales hit 4.9 billion yen, achieving a 13.7% year-over-year increase. Revenue contribution share rose from 68.9% to 72.7%. Within China, overall Chinese e-commerce sales grew 14.9% year-over-year, driven by strong growth on Douyin and Tmall after the company strengthened in-house live streaming sales following positive performance from the W11 shopping festival.

2. Japan and Third Market: Combined net sales were 1.8 billion yen, with combined revenue contribution share falling slightly from 31.1% to 27.3%. Japanese sales declined partially, primarily due to falling inbound demand linked to China-Japan relations tensions. The Third Market, led by Southeast Asia, saw strong overall growth, with Southeast Asian sales up 196.5% year-over-year.

By brand:

1. Age Theory: Led by Chinese e-commerce sales, grew 19.9% year-over-year. The brand's AG Drink series exceeded 2 million total cumulative boxes sold.
2. Venus Recipe: Led by growth from PQ Drink Plus in the inner care category, grew 17.4% year-over-year.

Cost structure: Gross margin improved 2.1 percentage points, driven by sales growth of the high gross margin AG Drink product. Cost of goods sold was 1.766 billion yen for an overall COGS ratio of 26.1%. Selling, general and administrative expenses reached 5.023 billion yen for an SG&A ratio of 74.1%, an increase of 4.2 percentage points, driven by higher advertising investment in China, upfront investment for Japanese sales expansion, and increased payment fees tied to Chinese e-commerce sales growth.

• Ongoing tensions in China-Japan relations have created a challenging operating environment, and have contributed to a decline in inbound demand that negatively impacted Japanese sales in the second quarter
• Rising KOL fee inflation in the Chinese market has led to visible operating margin pressure
• Higher than expected investment in sales expansion in China and Japan has led to an operating loss in the interim period, though management frames this as intentional upfront investment for future growth

Q: What were the factors behind the year-over-year sales decline in Japan in the second quarter (November to January)?

A: [Answer text was not fully included in the provided transcript.]

Q: What was the performance of the Chinese market in the second quarter?

A: [Answer text was not fully included in the provided transcript.]

Q: What is management's view on the current operating deficit?

A: [Answer text was not fully included in the provided transcript.]

Q: What is the company's policy regarding its reliance on the Chinese market, and what are its plans to grow sales in Japan and other third markets?

A: [Answer text was not fully included in the provided transcript.]

Q: What is the current status of deficit performance in China and Japan individually?

A: [Answer text was not fully included in the provided transcript.]

Q: What is the current status of KOL fees, and how is the company responding on e-commerce platforms?

A: [Answer text was not fully included in the provided transcript.]

Q: What are the company's plans to grow fragrance sales in regions outside of China?

A: [Answer text was not fully included in the provided transcript.]

Q: What is the current profit status of Southeast Asia, particularly Malaysia, and what are the future outlooks for the market?

A: [Answer text was not fully included in the provided transcript.]

Q: What impact have geopolitical issues had on the business, and what is the future outlook?

A: [Answer text was not fully included in the provided transcript.]

Q: What is the status of M&D's parallel import business, and what is the company's in-house fragrance strategy?

A: [Answer text was not fully included in the provided transcript.]

Q: What is the company's level of reliance on KOLs, and what impact have geopolitical issues had on sales?

A: [Answer text was not fully included in the provided transcript.]

Q: What is the go-to-market and pricing strategy for new products?

A: [Answer text was not fully included in the provided transcript.]

Q: What is the sales strategy for Essence Sheet in China and Japan?

A: [Answer text was not fully included in the provided transcript.]

Q: What is the business development outlook for the Malaysian and Indonesian markets, and what is their potential for earnings contribution?

A: [Answer text was not fully included in the provided transcript.]