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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
I would now like to present to you the 2021 Q1 results and full year outlook. Please look at Page 3. I would like to go over the key points for the first quarter. There are 4 key messages I would like to convey the global business portfolio, one of Shiseido's strengths, contributed to offset the sales decline in Japan due to the state of emergency. Led by China, all other regions helped to offset, resulting in positive sales growth.
Now the company continues to focus investments on growth areas. Also, global transformation such as transfer and JV of the Personal Care business and partial termination of license with Dolce&Gabbana are proceeding as planned based on our midterm business strategy WIN 2023. In the full year outlook, we have included the impact from this global transformation but we maintain the same outlook for our existing businesses.
Next is Page 4, the Q1 P&L executive summary. Net sales was JPY 244 billion, an increase of 6% on FX-neutral basis. E-commerce continued high growth with global EC total of over 40% increase versus last year. Also, the sales of skincare beauty brands such as Shiseido, Clé de Peau Beauté, IPSA and Drunk Elephant, which we focus our strategic investments, grew by double digits, driving the overall growth. The global skincare sales ratio was 64%, an increase of 2.7 points.
Operating profit was JPY 10.9 billion, up by 67.6% versus last year. On top of the sales increase, the company executed appropriate resource allocation in line with the market changes in areas such as marketing, investments and expenses. As a result, the net profit for the existing businesses was positive JPY 13.8 billion. However, the impairment loss of minus JPY 15.3 billion on trademark rights of Dolce&Gabbana was booked, resulting in a net profit attributable to owners of parent to be minus JPY 1.5 billion. EBITDA was up by 31.4%, maintaining double-digit margins.
Next is Page 5, the sales trend comparison with last year. As you can see, compared to the previous year, we are achieving solid growth. The Japan business was impacted by regional state of emergency, including metropolitan areas, from January 8 until March 21. However, the strategic promotions to capture traffic recovery contributed to the net sales growth in March.
All other regions except for Japan have turned into positive growth versus last year. In China, especially with the big impact last January and February from COVID-19, the net sales result was positive 41% versus previous year. Even in comparison to 2019, it was positive 24%, exceeding its growth above pre-COVID level. Travel Retail, Americas and EMEA are all recovering to the 2019 pre-COVID level.
Next is performance by brand. The Prestige skin beauty brands, the area the company strategically focuses its investment, has contributed significantly to the overall growth. I will be explaining more in detail about these brands in the next slide. Brand Shiseido had a growth of 22%.
The men's series, SHISEIDO MEN, has been rolling out its renewal from March worldwide. The series reinvents itself, incorporating the company's expertise in 3 main triggers for men's skin problems to provide evolved skincare solution for men. On top of the already existing skincare line, SHISEIDO MEN added makeup items such as BB cream and eyebrows in response to the expanding demand.
Clé de Peau Beauté grew by 19%. The high-end line Synactif, revamped with further lymph vessel research has started its launch from Japan and Asia Pacific in January with other regions to follow. The rinse-off mask infused with 24-karat gold that was launched at the same time is also selling well.
Drunk Elephant marked a growth of 30%. In Q1, the brand expanded its footprint in Mexico, Middle East and Europe such as France and Italy. The brand will expand into Asia Pacific, Travel Retail and other European countries within 2021.
Now on to the next page, please. ELIXIR started a global sustainability campaign from April to reduce plastic waste. In China, the brand launched refill packages in January. Going forward, these actions to reduce environmental burden will accelerate not only in Japan and China but to other Asian countries and regions. By 2025, the key products from ELIXIR aims to be refillable.
ANESSA launched a region-exclusive product in collaboration with Pokémon in Japan, China and Travel Retail, attracting new consumers to the brand that contributed to the growth in sales and market share. EFFECTIM was launched in March for Japan and in April for China. The brand is focusing to heighten brand awareness in each of the regions by effectively targeting digital engagement.
Next is Page 9, about the Japan business. The Japan market has slower traffic recovery than expected, especially in January and February due to the impact of state of emergency. Even under such circumstances, there was encouraging local consumer momentum in March, thanks to strategic promotions to capture traffic recovery post state of emergency such as Beauty Day and renewal of the specialty store brand BENEFIQUE.
As for inbound sales, there were still tours coming to Japan last January so the Q1 result was over minus 30% versus last year. Compared to 2019, it was about minus 65%, which is in line with the trend from Q4 of last year. For April and May, we can assume that traffic recovery will continue to struggle due to the state of emergency in main areas of Japan again. However, compared to the same state of emergency period of last year, which required the stores, including department stores, to be closed as well as the company not adequately ready for online initiatives, the impact for this fiscal year should be relatively smaller.
In Page 10, I will introduce some of the initiatives in Japan business. BENEFIQUE went through a brand renewal in March. The active promotion before launch such as product reservation significantly contributed to the momentum recovery, resulting in about 20% growth versus last year in consumer purchase for March.
Also in March, a dedicated EC platform, Omise Plus, for specialty stores opened. There are about 500 stores that are taking part in the platform. It's an omnichannel platform with online shopping and counseling and also providing personalized information to the consumers to improve consumer satisfaction.
We also had a 6-day event online and offline in collaboration with Isetan Department Store in 6 Shiseido brands. On top of the physical visits to the event venue, there were more than 1,000 bookings for online counseling during the event period and 24 live streaming programs totaling to about 200,000 virtual audiences. This online/offline hybrid event allowed us to expand our touch points with consumers. Next, Page 11 on China. China continued to achieve strong growth both online and offline, accelerating growth over 2019. While the scale of online events is expanding in the market, on March 8, in the International Women's Day event, our major brands, mainly in Prestige, improved their ranking due to our strategic investment. Especially, Shiseido ranked #3 in sales on Tmall, and NARS went up in the ranking by 3 grades, showing solid results of our proactive marketing efforts. 2021 is the 40th anniversary year since Shiseido started business in China. We will actively undertake anniversary events on Tmall as well as various other promotions.
Next, on Page 12, about Asia Pacific and Travel Retail businesses. In Asia Pacific, restrictions imposed are different by country and by region. While stay-at-home orders continue in countries like Thailand, Malaysia and the Philippines, sales are recovering steadily in Taiwan, which account for over 40% of revenue in the region. E-commerce sales also increased substantially.
In Travel Retail, China continued its growth, driven by Hainan, and returned to positive growth globally as well. We are actively making focused investments both online and offline, including opening of 11 new counters in Hainan in Q1.
Moving on to Page 13. In the Americas, while challenges in the makeup category continued, skincare and fragrance drove overall sales. As for Drunk Elephant, while global consumer purchases were flat year-on-year, e-commerce sales grew over 20%. Although COVID-19 impact and restrictions are also different by country in EMEA, we expanded e-commerce sales in owned.com and retailer.com and achieved market share gains in 4 major countries, mainly driven by skincare.
Page 14 is about the cost structure. The cost of goods sold started to deteriorate from the second quarter of 2020 due to the impact from COVID-19, but as you can see, it's gradually improving after hitting the peak in Q3 of 2020. On a year-on-year basis, the COGS ratio went up by 3.8 points mainly because of negative FX impact on elimination of unrealized profit due to yen depreciation and increasing fixed costs related to the new Osaka Ibaraki factory despite improvement in product mix due to growth of skin beauty brands.
Regarding marketing investments, as we are accelerating digital shift especially in Japan, EMEA and Travel Retail, where the percentage of traditional media spend used to be high, the global digital media ratio went up to 80%. While making focused investments on China, operating profit improved year-on-year due to appropriate resource allocation in line with the market changes, among other factors.
Next, on Page 15. In the management of cash flow from operating activities, we have been able to reduce inventory as planned by rigorous management of the inventory reduction targets by each region and also with the use of AI in improving demand forecasting accuracy. As a result, the cash flow from operating activities came in at nearly JPY 30 billion. On the other hand, free cash flow was negative JPY 12.1 billion, mainly due to CapEx of about JPY 38 billion associated with payment for Kurume factory in Q2, investment into system and so forth. Cash and debt are at healthy levels, realizing a stable financial base.
From here, I will explain progress on global transformation and the outlook for this fiscal year. First, on digital transformation on Page 16. We are establishing a joint venture with Accenture, Shiseido Interactive Beauty. To respond easily to changing consumer and market environment, the new company is to strengthen Shiseido's digital marketing initiatives, support expansion of ICT functions and transform the business model in Japan. With the establishment of an independent joint venture, we aim at creating a new culture and accelerate DX with speed, which cannot be realized solely by Shiseido.
FOCUS went live with Drunk Elephant in March and in Singapore in April. And now the Americas, including Drunk Elephant, and Asia Pacific are on the integrated system, which is the first step for the global solution system, enabling cross-regional data sharing. We will proceed and aim at completing rollout in all the regions by the end of 2023.
Page 17 shows impact from transferring and setting up a joint venture of Personal Care business on our sales and/or OP forecast. Please bear in mind that the deal is yet to be closed. As of now, transfer of new company shares in Japan and asset transfer in China is scheduled in July, and asset transfers of the related business from fully owned subsidiaries in Hong Kong and Asia Pacific are planned in September.
And the associated negative impact on sales from these transfers is about JPY 54 billion. On the other hand, as we will continue production and distribution of Personal Care products after the business transfer, we are forecasting to generate JPY 21 billion in sales in the second half. As for the operating profit, we have factored in JPY 6 billion op decline from lower sales and also from an impact -- also an impact from nontransferable fixed costs.
On Page 18, I will explain extraordinary income and losses factored into the outlook. The extraordinary income from the transfer and JV of Personal Care business is forecast to be JPY 87 billion. The extraordinary loss associated with the partial termination of license with Dolce & Gabbana is JPY 35 billion. Of that, JPY 15.3 billion is impairment loss on trademark rights, and the remaining JPY 20 billion is onetime expenses to do with the partial termination of license such as retirement premiums. In addition, extraordinary loss of JPY 4 billion is forecasted for organizational reform in EMEA.
Page 16 (sic) [ Page 19 ] shows the fiscal year 2021 full year outlook. The forecast for existing businesses remains unchanged, but the forecast now reflects the impact from the Personal Care business transfer and JV and partial termination of license with Dolce & Gabbana. In the first quarter, due to recording JPY 15.3 billion impairment loss on trademark rights, net profit was in red. But in the third quarter, as we forecast to book extraordinary income of JPY 87 billion from the transfer of the Personal Care business, the full year net profit is revised to be JPY 35.5 billion.
Reflecting all these impacts just explained, EBITDA for the year will be JPY 166.5 billion and free cash flow about JPY 100 billion. There is no revision to the dividend forecast. As the impact from COVID-19 is still uncertain, we will review the forecast at the timing of the second quarter earnings presentation by closely monitoring impacts from the state of emergency in Japan and the recovery in each country.
Finally, on Page 20, as you can see, we will proceed with various transformation initiatives as planned, including focused investment for growth and review of the business portfolio. We will steadily implement structural reform aiming at achieving operating profit margin of 15% in 2023.
With that, I'd like to conclude my presentation. Now we would like to go into the Q&A session.
First from Hirozumi-san of Daiwa Securities.
This is Hirozumi from Daiwa Securities. Can you hear me?
Yes, we can hear you.
So one question. First, for China, how do I look at the segment? Sales have been growing 40% to 50%, but it looks like the profit is going down, 47% but minus 60% in profit. So how do we look at this? How do we take that? Sales is going up but the profit is going -- the sales going up so much but the profit is going down. Why is that?
For the China business, Q1 OP was JPY 2 billion, and OP margin was 30%. And it's a JPY 3.3 billion minus versus last year. In terms of the sales, in Q1, we book an increase of JPY 20.8 billion but the gross margin dropped significantly. And after that, there is a price changing in the transfer prices within the group, and there are prices in the changes. So if you exclude the impact from the transfer price within the group, on profit basis, it's actually in line with the previous year's level in terms of increase in sales and profit.
Of course, China market is recovering, and recovery is exceeding the pre-COVID level. And the market continues to be very competitive. So within that kind of environment, we are very proactive in our investment into the China market. And as a result, Prestige, the premium market share had been expanding, especially with the skincare area.
So within that kind of circumstances, in terms of the profit, when we look at the end to end within the Shiseido global group, we actually do have a -- it's actually a growth in the profit. So gross margin has an impact from the group -- the transfer price within the group. But are you using -- for the operating profit, it's also going up as well, sorry. So it's going up by 40%.
So is it good to say that the profit is going up by about 40%?
Yes. Within the company managed numbers, yes, the profit is also growing about 40%.
Okay. So then the sales and profit is in parallel. So when you look at the numbers internally, it's not a weaker number and things are in line with each other, the sales and profit. Is that correct?
Yes.
This year, the -- I believe that I heard before that China's profitability will go down or aggravate. But how should we look at China for the year?
In principle, we are not looking at China to aggravate that significantly.
Okay. So the Q1 looks like what it is right now, but the sales and profit will be in parallel and will correlate -- will grow together. Is that a correct understanding?
Yes. Well, Q1 is a very short period of time. There's marketing investments, and due to the phasing period of the investments, so it's hard to make -- I think it's misleading to judge everything by looking at the Q1 numbers. I think when you look at more the full year impact, depending on the timing -- for example, for Q4, there's the 11/11 event. That's when the sales will boost. And there are preparation costs or investments upfront and point-of-sales material costs, and those will be incorporated or put into the Q3 numbers.
So there are impacts of ups and downs due to the marketing investments. And the segment P&L that we share with you, we apologize, but it will show the impact of the transfer prices within the group. So that's why you're seeing this number as is.
Next, Yamaguchi-san from Goldman Sachs.
This is Yamaguchi speaking. I have a question regarding EMEA. Over short term, in Q1, profitability improved quite a lot. Is it to do with Dolce & Gabbana partial termination of license? Please explain the background. And as a result of partial termination of license, what's your outlook for the business in EMEA next year?
Firstly, Q1 result hasn't reflected any impact from the partial termination of license. The reason why the profitability improved is because of higher sales and storefront marketing investments. We made digital shift. And for countries where stores were closed because of lockdown, we controlled marketing investment, and HR costs were optimized. And as a result, SG&A costs declined year-over-year substantially.
And the impact next year associated with that, I'm afraid that we cannot still make any comments. But based on WIN 2023, we will do the rightsizing of the organization in EMEA to match the business size, and we will see an impact from 2022 onward to achieve OP margin of 15% for sure in 2023.
I have a question regarding this year. In Q1, it was a loss of JPY 0.9 billion. I assume that sales are recovering. And on a single year basis -- is the business going to be black on a single year basis?
You mentioned the OP margin target of 15%. This partial termination of license with Dolce & Gabbana, you won't incur brand cost, which used to be high. So the OP margin of 15% -- reflecting that you are targeting to achieve OP margin of 15%, correct?
Please let me confirm your question again. Is your question about whether we will enjoy breakeven this year on a single year basis? Well, the COVID-19 situation is still unclear, and there is still uncertainty about the outlook. That's the reality. But naturally, we expect to see year-on-year improvement.
Whether we will be close to breakeven, that really comes down to the business Q2 onwards and the impact from -- potential impact from COVID-19. But the greater sign is that brand Shiseido are performing well in countries like Russia, so we are seeing greater signs of improvement.
And brand holder cost is going to go down, but the license agreement will continue up until the end of 2021. So as of now, we are not forecasting any major decline in the brand holder cost.
So is it fair to say that the brand holder cost decline will start to be reduced from next year onwards? Correct?
Yes. It's fair to assume that we will see a reduction or decline from brand holder cost next year onwards.
Next, UBS Securities, Kawamoto-san.
This is Kawamoto from UBS.
Sorry, your voice is a little bit small. If you can speak up a little bit for us, I'd be very appreciative.
Yes. Okay. Can you hear?
Yes, we can hear you now.
China -- as for China, in -- by 2023, the margin will improve by 5 points, what I heard in the small meeting. And within that, ANESSA and EFFECTIM, what kind of contribution will it have? In 2018, ANESSA margin was over 40%. But in ANESSA, the OP margin, is it still 40% in China? And are there any improvement points for that?
And for the beauty products with YA-MAN -- the beauty equipment -- what is the beauty equipment market in China and this impact of EFFECTIM? And how would it contribute to your sales margin for this year?
Okay. First, with EFFECTIM. To be honest, we just launched this in China in April, so that's kind of the reality. It just launched. Is this business going to go according to our business plan or not? We can't make any -- it's too early to make any judgments on that at the moment.
The initial reaction after the rollout or the launch, we feel that it's a good rollout. But how -- so with that, is that going to significantly impact the China business overall for this fiscal year? I don't think that will be the case yet. We are right now working more on the brand awareness. So it will be for EFFECTIM more of an investment first.
And when you launch a new brand like this, normally, there's an effort to brand awareness and it grows. And then as it grows, it starts to pay back to the advanced investments, and that's the launch model for new brands. So the profit contribution at this timing -- we don't see a big profit contribution at this stage.
And as for the ANESSA margin of 40%, I think you mentioned, so at the time when the sales was very good globally, the margin for ANESSA was about 40%. But currently, within the material that you are looking at right now, there is the brand sales waterfall chart. But as you can see from that, ANESSA on a whole is struggling a bit. So in terms of your question about the margin, well, if the sales is growing for ANESSA, the margin was about 40% is what we can say.
Then the China margin improvement is more from the premium skincare area. Is that correct?
Yes, that is correct. The premium -- well, the biggest growth is the Prestige, brand Shiseido, Clé de Peau Beauté as well as IPSA, which are contributing brands to the margin. So that would be the correct way of thinking.
ANESSA is going down in sales until March, but I feel like is it recovering from April -- it's recovering from April. So is it right to assume that it's recovering? And as medical beauty penetrates more and grows more, I believe that sunblock and UV care, sun protection will become more popular. So will you be assuming more growth?
I'm sorry, your question is still in regard to ANESSA?
Yes, ANESSA sunblock.
As for ANESSA, first of all, ANESSA sales is slightly lower than what had been on the previous year level. That is impacted heavily by Japan. Last year, we did a relaunch of ANESSA, and there's also a comparison to that relaunch timing. And also, we are still heavily under COVID-19 environment so events and such -- outside events are being restricted, which obviously impacts ANESSA sales. So within this kind of environment, sun care in Japan is still struggling could be the right way to look at this, I believe.
With the market improving or recovering or growing in April, do you see any of it or capture any of it?
I don't think I have the information at the moment. We apologize, we don't have the updated information for April. Yes, we will not be able to share with you the April results at the moment.
Next, Mitsui Sumitomo Trust Asset, [ Koichi-san ]
Can you hear me?
Yes, we can.
This is [ Koichi ], Mitsui Sumitomo Trust Asset Management. I have a question regarding Dolce & Gabbana partial termination of license, overlapping with Yamaguchi-san's question. I'd like to know the concept or the background for this. Why have you made this decision? I'd like to know the background why you have reached this decision.
Originally, this license -- when we signed this license agreement back in 2016, what that was based on is VISION 2020, Prestige First, multi-category business -- doing multi-category business. Up until 2019, we achieved sales growth based on the VISION 2020, but we started to incur COVID-19 impact from 2020. And the business environment has changed dramatically, and consumer needs started to change as well. And this time around, we announced WIN 2023, new medium-term management plan. And in that, our strength in skin beauty brands is going to be a focus where we concentrate our resource to achieve profit growth and sales growth.
So that was the background why we made this decision. It's a selection and concentration of our global portfolio. It's a part of that.
Even when the COVID-19 is kept under control, rather than the improved -- improvement of fragrance, do you intend to focus on skincare products to secure profit? Is that the basic thinking?
Yes. COVID-19 impact is less on skincare compared to makeup and fragrance. The needs for skincare products are quite steady because people's needs are shifting to keeping your skin healthy. And even in the recovery phase after COVID-19, rather than fragrance, skin beauty area, we expect to see faster recovery. Accordingly, our skin beauty strategy, based on our strategy to achieve OP margin of 15% in 2023, we thought that was the right decision to achieve the target.
Next, Morgan Stanley, Miyake-san.
This is Miyake from Morgan Stanley. I have a question around the Americas business, have more color to the Americas business. The numbers are improving slightly, but there's cost reduction in areas that didn't exist before and you're cutting some of the marketing costs. And so there's probably many factors that go into the improvement of Americas numbers, the digital expenses, the allocation of the cost, too. So I would like to ask the overall story to this.
And on top of that, the sales for Drunk Elephant e-commerce have been growing about 20% in late '20. But looking at the overall, the demand looks flat. So I do understand the circumstance and the market is difficult, but how should we understand it or interpret it? Maybe the skincare have a lot more potential to grow or -- so how do you just look at the current situation for this brand is what I would like to ask of you.
Let me confirm the questions with you. One is about America OP. How do we think of the operating profit for Americas? Was that your question?
Yes. Compared to last year, you were able to shrink the negative by JPY 3 billion, and I believe there's various factors that go into the improvement in the numbers. So if you can kind of segment it down -- break it down for me; for example, if the cost reduction has contributed significantly. Are there onetime costs or continuous cost reductions? Just give us -- give me more color to that.
Okay. Understood. About Americas, so increase in the JPY 3 billion in the profit. Of course, one of the reason is due to the sales increase, and one of the biggest impact was SG&A reduction. In the Americas, last year, in Q4, along with the digital shift, we did that organizational reform and shut down some of the counters for bareMinerals, and that cut down some of the head count costs.
And about the digital, we have brought the center of excellence in digital to the headquarters. And I think that's what you're referring to, the allocation of digital. But as for that, the original cost was charged to a different region. So the transfer of the center of excellence in digital from the Americas did not contribute to this profit for the Americas.
Okay. Understood. Then the SG&A reduction has contributed the most to the numbers. And so rather than suppressing on the marketing expenses or marketing activities, it's more just the overall SG&A reduction that contributed to the numbers?
Yes. So there's SG&A., and then there's the promotional timing, too. So it would be both. It will be both.
What I can say for sure is that sales is recovering. And SG&A -- we are trying to rationalize our SG&A and make it more effective, efficient. So in the Americas, we would improve by 10 points in the profit for Americas for the WIN 2023 plan. We do have good -- we are on track to achieving that goal.
Understood. Could you share with us about the -- with me the Drunk Elephant portion of the question, too?
Consumer purchase globally, it was -- used to be 0%. But as we have started to do the global rollout, in Q1, Mexico, Middle East and some of the European countries, we had launched Drunk Elephant. However, in the U.S., in more of the offline channel, it's been a negative versus the previous year, and it was offsetting within other areas. So that's the situation of the offline channel.
And now for the timing of the promotion for Americas for new launches, last year, we had a promotion in January. But this year, we will be doing a promotion for new launch in April. So in terms of the consumer purchase, it says 0 -- or it looks 0, but in terms of the sales, there's actually 30%. And because there is the sell-in for the promotion plan in April, so Q2 and onwards in the offline channel, too, in the Americas, we expect it to go up as well. Now for EC, it is -- it has solid growth. And even in the new markets such as EMEA, it is definitely growing.
Mitsubishi UFJ Morgan Stanley, Sato-san.
This is Sato speaking. To be honest, I don't understand all the questions and answers provided by other investors. I'm referring to Page 19. My question is that with the structural reform, you're forecasting JPY 4 billion impact. I didn't understand. JPY 4 billion structural reform, I didn't -- please explain this impact.
And Japan's 14% top line growth, it's not changing, is it? Other companies are forecasting 4% to 5% growth in Japan, and like 16% growth seems quite high. So can you share your view on that?
Let me confirm your question again. Are there structural reform ordinary income impact of JPY 4 billion, correct? Explanation about this JPY 4 billion impact on ordinary income.
First of all, it's in the others. So there are various reasons for this one: Dolce & Gabbana partial termination of license, interest cost is declining. Part of that impact is incorporated. And at each factory, for new installation and construction, there has been a subsidy income that were booked.
Didn't you say that there is a structural reform worth JPY 4 billion to do with Dolce & Gabbana partial termination of license?
It's totally aside from that. It just happened to be JPY 4 billion for both.
Sorry, I was confused. You're planning to have a structural reform associated cost. I thought that it has to do with the HR, this extraordinary loss of JPY 2 billion.
It's not only that. It's part of that -- part of that is included.
So on the OP, isn't OP decreasing?
Well, as explained earlier, the partial termination of this license is planned, but this contract is valid until December end 2021. The extraordinary income and losses, there is no impact on the OP line, so it's totally irrelevant. JPY 4 billion just happened to be the same number for both.
Let me add -- well, we expect to see some positive impact from structural reform, but amid COVID-19, the outlook is uncertain, and there is an associated risk. So as for Q1, we thought it's too early to review or revise the existing businesses forecast. So that's why we'd like to review the potential impact from COVID after -- when we disclose Q2 results.
So you haven't changed the forecast for the existing businesses, correct?
After looking at the Q1 results, we thought it's too early to revise the forecast for existing businesses after closing Q1.
The other could be contributing a lot to profit. So I don't really understand. I'd like you to improve your explanation so that it's easier to understand from investor's point of view.
Thank you for your input. We will try to improve the way we present our materials.
Next is Nomura Securities, Iwasaki-san.
This is Nomura from -- Iwasaki from Nomura. Personal Care, on Page 17, in terms of the transfer and JV, sorry, you spoke very fast. Could you repeat for us on Page 17 about the Personal Care business -- about the transfer and JV of the Personal Care? I wanted to hear more about that.
In terms of the sales -- the sales impact, I understand the impact to sales. But the profit -- impact to the profit, JPY 21 billion, the increase in -- so what is the contribution? In terms of the increase from product distribution based on the TSA, how should we look at this JPY 21 billion?
And I believe at the bottom line level -- so at the end of the day, I just want to ask you, once again, how do you look at the overall -- the profit portion due to this transfer and JV of Personal Care business?
First of all, for the increase from product distribution based on TSA and the impact to the gross margin, I think is your first question, we could -- I think it's safe to say that there's hardly any impact there. And if there was, it's very marginal. And these are areas we're still working on the details as well. So we don't think that there is much impact at the moment.
And the next question, is the company accounted for using the equity method?
Currently, the business plan for the new company is not something that I should be explaining at this moment, so I cannot talk much in detail about it. But currently, at the moment, there are -- I believe that there will be investments -- or there will be more investments for growth for the future. But at the moment, within our plan, the profit or loss from -- for the investment of the company accounted for using equity method has not been really incorporated into our numbers.
Then the operating profit -- the nontransferable fixed costs of JPY 2 billion, I think there are some numbers that will remain in the factory. So even -- so having the risk there or the burden there, it doesn't impact the profit that much as well, that it will stay as is for the gross margin.
I think you asked 2 questions in one. So I think to your first question, we will be transferring pretty much the lot of COGS. And with that, the factory fixed cost is together with it. So the fixed costs will be covered with that.
What is written here in this nontransferable fixed cost on Page 17 is more of the SG&A in the headquarters, not necessarily Shiseido Japan, but the SG&A cost for the headquarters. So some of the indirect costs due to the Personal Care being transferred, what will remain?
As for that, this Personal Care business, there's the marketing expense. Because it is a mass business, so there will be more marketing investments and marketing costs. And we are going to reallocate what we have been using for Personal Care into the skin beauty area so that we can heighten the sales for skin beauty brands for our better profit. And not only that, we will pursue and move on with making our costs more efficient.
Next, from Citigroup, Miura-san, please.
I have a basic question. Q1 results for skin beauty ratio went up, and it was great that the top line went up. Someone asked about the gross margin. The gross margin went down by 3.4 points. If you sell skincare products, the margin should naturally go up. What's the reason for the increase in COGS?
Please turn to Page 14. As you pointed out, in Q1 2020, COGS were 21.9%. At the time, we hardly saw impact from COVID-19. And the demand was high, and production supported such high demand. That was one reason.
But after that, we started to see impact from COVID-19 and started to decrease production. For Q1, last year, we hardly had COVID-19 impact. So that's one of the reasons.
And another reason is that this is a technical issue. Yen depreciated from the end of December until the end of Q1, and elimination of unrealized profit have seen FX negative impact. Yen was depreciated by 7% or so against dollar and also against renminbi. So our overseas inventory, upon the elimination of unrealized profit, we have seen much of an impact from FX. That was a one-off. And in Q2, if yen starts to appreciate, the situation will be changed, and the impact will be equalized more throughout the year.
But if we specifically look at Q1, such FX factors bring about an impact on the business and COGS. And Ibaraki, Osaka new factory came onstream in December last year. And trainings are underway still, and it's yet to achieve the full utilization. But the production is ramping up, and utilization is going up. And as of Q1, we probably -- we didn't have much of a production, but we incurred fixed costs. At factories, it normally takes 12 months or so to see an improvement in utilization. In the meantime, we do the training to our staff.
So next year onwards, we should naturally see improvement, and with added capacity, we can work on increasing more in-house production. So if we look at Q1 only, I think it's misleading. If we see the second quarter, third quarter results year-to-date, the impact should be more equalized.
There are 4 key points regarding COGS on Page 14. I'd like to know the quantified number for the positive impact and negative impact. JPY 15 billion gross margin should have been improved or even more -- gross profit. But that was squeezed and stayed at JPY 43 billion -- JPY 4.3 billion, sorry. Could you explain more in detail using actual numbers in terms of positive and negative impact on COGS?
I'm checking the data right now. Thank you very much for waiting. Brand mix and product mix had an impact of JPY 1 billion -- positive impact of JPY 1 billion. And FX impact related to elimination of unrealized profit, FX was JPY 4 billion one-off impact. Fixed cost for a new factory, impact was about JPY 2 billion. With the top line growth, the provision for returns was increased. That had an impact of about JPY 1 billion.
There were more negative fact -- they were the major factors, correct?
Yes, those were the major factors.
Another JPY 3 billion to JPY 4 billion came from other factors, correct?
Well, other than that, like last year, bonus provision has been increased. That also had an impact of about JPY 0.4 billion. That's a mixture of factors.
So basically, mix improvement was only JPY 1 billion. That looks strange to me. You are improving the brand portfolio. Is there any reason why you have only seen JPY 1 billion impact from the mix?
Skin beauty brands have expanded. But as you see the chart by brand, makeup brand NARS had grown. NARS margin is lower compared to skin beauty brands. So that's a negative in terms of the brand mix or product mix.
So if you see growth of skincare, gross profit should naturally improve, correct?
Yes, that's correct.
If that's the case, second, third, fourth quarter, you will incur fixed costs to a certain extent, but FX impact will be more equalized or even. And if you continue to see top line growth, impact on gross profit should be more equalized and you should have a more solid gross profit, correct?
Yes, for sure, we should see improvement in the following quarters compared to Q1. In relation to product mix, ELIXIR, ANESSA, while Japan still accounts for bigger part, sales are down for those products -- those brands. And gross margin for those products are high, so the improvement of those brands should also lead to improvement of gross margin.
Finally, globally, margin in China, it's flat, OP margin -- with a slight improvement of OP margin. The same goes for your peers. So you and competitors are forecasting similar trends and similar business trends. From your point of view, from the last year through the beginning of this year, what's the competitive environment like? And what's happening in China?
I cannot comment on behalf of our competitor. But looking at other companies, China and Asia -- they are mainly growing in China and Asia as well and growing market share in China and growing business in China. That's where peers are also investing money into. That's what I assume.
So now it is time so we would like to wrap up the session. Lastly, from myself, as of end of last month, we have introduced a company report. This year, we will be pushing digital transformation, and so the report that we will be issuing as a beauty company, we have realigned or renewed all the design for the company report with the digital transformation in place. Of course, there are areas of improvement, but we have a challenging new area. So that is more digital-friendly and digital user-friendly as well. So please have a look at that.
And the CEO, Uotani-san; and Fujimori-san, the External Director, there's messages from these Board members as well and as is there for the interviews. There's a lot of insights in those interviews as well. So please do have a look at our integrated company report.
Thank you very much. With this, we would like to close the phone conference. Please make sure to hang up the phone. Thank you very much.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]