4927 pola orbis holdings inc. - triaslin.trias.co.jp/en/report/doc/9/4927_polaorbis...

YAMATO

- Ethos of Japan-

This Memo is for reference purposes only and is not intended as a solicitation for investment. The contents contained herein areprepared based on reliable information that already exists in the public domain. The Company, however, does not guarantee complete accuracy. Any pinionrinformation contatined in the Memo is relevant as of the day of the Information Meeting and/or Company Visit, although the views and/or facts may be altere d without prior notification.

Final investment decisions shall be made by investors themselves based solely on their own judgment and responsivility.

Copyright © 2012 Trias Corporation All rights reserved. | 1

An investment research platform to support a Japanese Economic Renaissance June 1, 2012

【Summary】

Established in September 2006 and founded on its cosmetics operations, POLA ORBIS

HOLDINGS INC. (hereinafter “POLA ORBIS Group” or “the Company”) is a provider of health

and beauty products. While POLA and ORBIS comprise the Company’s two flagship skincare

brands of its centerpiece beauty

care business, it also offers an

array of unique brand products.

In addition, POLA Chemical

Industries, Inc. (hereinafter POLA

Chemical)—with its strength in

anti-aging and skin whitening

base technologies—is primarily

responsible for the research,

development and manufacture of

these brands.

Shinobu Suzuki established the

Company in Shizuoka prefecture in

1929. POLA was founded on the

entrepreneurial spirit to personally

deliver the finest products tailored

to meet the individual needs of every customer—a spirit that continues to inform the core corporate

values of POLA to this day, “Respecting the Individual”, “Finest Hospitality” and “Beyond Quality”.

Today, the POLA ORBIS Group is engaged in the task of becoming a high-profit global

enterprise based on its management philosophy of “Inspire all people and touch their hearts”.

Satoshi Suzuki—the founder’s grandson and current CEO of the Company—had taken the

necessary steps in rebuilding its flagship brands even before the transition to a holding

company. Having made the transition in 2006, POLA ORBIS began to accelerate development

of new brands. In addition, it acquired H2O PLUS, an American cosmetics firm specializing in

4927

TSE 1st

Section

POLA ORBIS HOLDINGS INC.

Inspire all people and touch their hearts ～Staying true to its founder’s legacy, the Company aims to become

a highly profitable global enterprise in the pursuit of beauty

YAMATO

- Ethos of Japan-





marine-based skincare products, in July 2011. And in February 2012, the Company also

purchased Jurlique, an Australian provider of natural, high performance skincare products,

thereby improving its portfolio of both domestic and foreign brands.

By undertaking initiatives to strengthen its domestic operations and globalize its brand portfolio, the

POLA ORBIS Group is committed to achieving by 2020 net sales of more than \250 billion,

overseas sales ratio of more than 20% and operating income ratio of 13-15%—enacting a dramatic

leap forward in both scale and quality.

History of the POLA ORBIS Group

POLA: Core Brand Embodying Founding Spirit

In order to realize his goal of personally delivering the finest products that are tailored to meet the

individual needs of every customer, POLA founder Suzuki opted to create and develop cosmetics himself

and market them by visiting customers at their own homes. In 1940, Suzuki established the predecessor

of POLA Chemical, which currently develops and manufactures products of the POLA ORBIS group. In

1946, he launched the predecessor of POLA Inc. (hereinafter POLA), which handles the flagship POLA

label cosmetics. He gradually expanded a nationwide marketing network of so-called “POLA Ladies”,

who carried out door-to-door sales, while creating an R&D and manufacturing regime that enables POLA

to continue catering to the personalized needs of individual customers.

In the 1980s, demand for beauty products increased as the quality of life and standard of living rose in

tandem with Japan’s economic miracle. Against this backdrop, POLA entered the fashion industry in

1981 and expanded its lines of business; in 1989, moreover, POLA began selling its brands through

department stores, launching a sales channel that did not exist before.

Launch of Second Flagship Brand, ORBIS

During this period of unprecedented prosperity, it became clear that sustaining the original business

model would become increasingly difficult as women were entering the workforce in greater numbers and

ensuing lifestyle changes meant that fewer women remained at home to visit—diminishing opportunities

to develop new customers and inhibiting future growth. In response to such market changes, POLA,

which was then headed by President Tsuneshi Suzuki, the founder’s son, launched the ORBIS brand

featuring oil-free skincare products in 1984. The brand was the first among domestic competitors offering

products in the middle-tier price range and sold exclusively by mail order catalogue. In doing so, the

POLA brand was strategically excluded in order to clearly differentiate the label from ORBIS.

YAMATO

- Ethos of Japan-





The ORBIS mail-order system

was launched at a time when

the prevailing consumer

perception was that ordering

through catalogues was

inconvenient. In spite of this,

ORBIS would go on to perfect a

system that extended from

order processing and product

delivery to payment collection

and follow-up services, building

up an extremely advanced and

comprehensive management

regime. It exploited this know-

ledge and experience base

when it was one of the first major Japanese companies to launch a Web-based sales channel in 1999.

Market Development through New Brand Portfolios

In 1992, pdc, a brand designed

for general sales through such

retail outlets as drug stores and

variety shops, was launched.

Beginning with its investment in

Future Labo Inc., a brand

dedicated to TV shopping

channels, the Company rolled

out a series of new brands

under development, including

decencia, ORLANE and

THREE (ACRO Inc.).

The Company has been

developing these brands on a

comprehensive basis, targeting specific user segments, tailoring performance, brand value, price ranges

and marketing strategies to each segment, based on the recognition that user needs are growing

increasingly diverse as luxury goods markets such as cosmetics become increasingly mature.

YAMATO

- Ethos of Japan-





Positioning of POLA ORBIS Group in Japan’s Cosmetics Market

Market Trends in Skincare Products

According to data compiled by the Ministry of Economy, Trade and Industry, cosmetic sales in Japan

reached \1.4 trillion in 2011. As seen in Chart 1, while the market remained flat from 2005 to 2008, hovering

at some \1.5 trillion, it regressed in the wake of the Lehman Bros. collapse. Nevertheless, sales from

skincare products—the core market for POLA ORBIS Group—has remained relatively stable. As a result,

skincare products accounted for slightly less than 45% of total cosmetics sales in 2010, up from the

43%-level recorded since 2005.

【Chart 1】 Sales Trend of Domestic Cosmetics Market

41.0% 43.6% 44.6% 43.8% 43.9% 43.1% 43.9% 43.8% 44.9% 44.6%

0

300,000

600,000

900,000

1,200,000

1,500,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(\million)

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Skin care Non skin care Ratio of skin care

Source: Ministry of Economiy, Trade and Industry; compiled by Trias Corporation

YAMATO

- Ethos of Japan-





Positioning of POLA ORBIS Group

In this context, the POLA ORBIS group, as seen in Table 1, is the third largest cosmetic manufacturer in

terms of sales in fiscal 2011. It is the second largest player, after KOSÉ Corporation, in terms of operating

income ratio.

【Table 1】

Operation Scale of Major Cosmetics Makers based on Actual Results for Fiscal 2011

Overall SalesShiseido

Company, LimitedKao Corporation

POLA ORBIS

HOLDINGS INC.KOSÉ Corporation

Securities code 4911 4452 4927 4922

Fiscal term FY3/12 FY3/12 FY12/11 FY3/12

Net sales for cosmetics

(unit: \million)673,467 537,937 141,453 125,385

Operating income

for cosmetics

(unit: \million)

37,671 15,411 11,192 13,253

Operating margin

for cosmetics

(before internal transfers)

5.6% 2.9% 7.9% 10.6%

Intended segmentDomestic cosmetics/

Global businessBeauty care

Cosmetics in Beauty

Care BusinessCosmetics

Source: Each company; compiled by Trias Corporation (Net sales = Sales to outside customers)

As seen in Table 2, POLA tops the list of cosmetics companies engaged in door-to-door sales, while ORBIS

ranks third in mail order and Web-based sales.

【Table 2】 Major Companies in Door-to-Door and Catalog & Online Sales

Door-to-Door Sales POLA INC.Nippon Menard

Cosmetic Co., Ltd.

Noevir Holdings

Co., Ltd.Avon Products

Securities code 4927 Unlisted 4928 Unlisted


Net sales

(unit: \million)97,353 54,360 24,581 16,967

Total employees1,311

(as of Dec. 31, 2011)1,100

131(consolidated: 1,931)

(as of Mar. 31, 2012)

444(as of Nov. 30, 2011)

Catalog & Online Sales DHC CorporationFANCL

CORPORATIONORBIS Inc.

Dr. Ci:Labo

Co., Ltd.

Securities code Unlisted 4921 4927 4924


Net sales

(unit: \million)103,176 88,165 47,918 36,233

Total employees2,790

(as of Oct. 21, 2011)721

1,311(as of Dec. 31, 2011)

Consolidated: 695

Nonconsolidated: 628

(as of Jan. 31, 2012)

Source: Each company; compiled by Trias Corporation

YAMATO

- Ethos of Japan-





Characteristics and Competitive Strengths of Flagship Brand POLA

The three corporate values as envisioned by POLA founder Suzuki are “Respecting the Individual”,

“Finest Hospitality” and “Beyond Quality”. How these values underpin its business model and operating

foundations are examined below.

“Respecting the Individual”

POLA continues to place great respect to the individual—that every POLA branch chief, POLA director

and each POLA Lady personally assume responsibility to engage each customer and serve them in their

pursuit of beauty. They are driven to do so out of the company’s fundamental service policy mandating

POLA Ladies to derive joy from that which inspires joy in people, which the founder advocated.

The sales system comprised of the“POLA Ladies”is characterized by their firm understanding of the

POLA brand and value of its product lineup, as well as by a highly evolved network based on

commissions and highly motivated staff. This system—which carries forward the founder’s ideals and his

commitment to serve in every customer’s pursuit of beauty, goals embraced by the entire sales

staff—has proved its efficacy for several decades now.

This network (which counts among its staff a POLA director in his 90s) is not comprised of POLA

employees, but by individual entrepreneurs based on a sales commission contract. Today, the network

boasts over 135,000 POLA Ladies and is supervised by 4,500 POLA directors, with 160 POLA branch

chiefs managing its sales offices. POLA directors manage units that generate monthly sales of \1.5

million, while POLA branch chiefs oversee units generating monthly sales of \10 million—imbuing the

sales network with the proper business orientation and significant revenue generating muscle.

These individual entrepreneurs have been able to sustain this network over time because POLA and

POLA Ladies have maintained close communication and coordination. POLA has currently divided the

nation into 24 areas and deployed POLA employees as support staff in each area. As part of their

operating brief, the managers and staff members assigned to an area hold routine discussions with

POLA branch chiefs and directors—who, in turn, hold constant discussions with the POLA Ladies they

manage—on sales trends and the issues they pose.

“Finest Hospitality”

Among the maxims that have been handed down over the years at POLA is this:“We sell the process of

becoming beautiful; our products are merely a service.”Thus, POLA Ladies do not engage in the simple

peddling of goods: their task is to provide customers with optimal solutions through individual

counseling—in other words, to extend women the finest level of hospitality in their pursuit of beauty.

YAMATO

- Ethos of Japan-





Esthetic treatment services were also incorporated to add further value to the Company’s finest

hospitality.

In recent years, POLA has added another sales channel to its existing home visitation-type sales

(hereinafter “conventional sales model”). The new channel, based on a network of clinic-outlets and

known as POLA THE BEAUTY model (hereinafter“PB”), integrates counseling services, cosmetic

products and esthetic treatment, and is proving successful. As seen in Chart 2, the network was

comprised of 533 clinics as of FY12/11, an increase of 33 outlets on a year-on-year basis, and sales

generated by the new PB model exceeded that generated by the conventional sales model. As a result,

the number of sales branches—which had been on a downward trend, hitting bottom in FY12/10—has

reversed itself in FY12/11. By the fiscal year’s end, the number of sales branches is expected to reach

4,553, a gain of 31 branches versus the previous year.

【Chart 2】 Net Sales Composition Ratio by POLA’s Sales Channel

20%30%

40%50%

40%40%

40%

50%30% 30%

20%

0%

20%

40%

60%

80%

100%

FY12/05 FY12/08 FY12/10 FY12/13 Forecast

(Composition

ratio)PB (POLA THE BEAUTY) Esthe Inn Door-to-door sales

With the success of the PB model, POLA has begun detecting changes in its customer demographic.

While the customer base of the conventional sales model has been contracting with the advance of

Japan’s aging population, the Company has seen a greater number of women in their 20s and 30s

comprising its PB customer base. As a result, customer growth has stabilized, while more and more

younger women are registering to become POLA Ladies.

Nevertheless, POLA does not believe that the aforementioned trends spell the end of the conventional

sales model. Instead, it sees the need to meet the increasingly diverse needs and lifestyles of women

in Japan through a variety of services and sales channels in order to continue providing optimal levels of

hospitality.

YAMATO

- Ethos of Japan-





Obviously, adjusting the Company’s business model to cater to changes in its operating environment is

no easy task. What makes it possible is the commission-based network of POLA Ladies, a highly

motivated sales corps that has remained committed to assisting every customer in their pursuit of beauty

for many years. Thus, POLA’s strength lies in respecting the individual and the finest hospitality, and

a corporate regime enabling it to sustain these qualities, regardless of the changes made to its sales

channels; it is what differentiates the Company from all other competitors.

“Beyond Quality”

POLA Chemical—whose R&D and manufacturing excellence has proven indispensable to the POLA

brand—has been central in the Company’s pursuit of proprietary, beyond quality, wondrous and moving

beauty backed by science for decades. Today, POLA Chemical develops and produces over 3,000

cosmetics and health food products, not only for the POLA and ORBIS brands, but also the full array of

other domestic brands as well, serving as a crucial base for the POLA ORBIS Group’s R&D and

manufacturing needs.

One of the key strengths of POLA Chemical is its ability to scientifically process effective skincare agents

and has demonstrated exceptional expertise in the anti-aging and skin whitening fields. Some 250

researchers are engaged in basic and applied R&D, resulting in numerous patents, both pending and

applied, as well as actively delivering presentations at international conferences and submitting papers to

professional journals worldwide.

Among POLA Chemical’s representative research findings has been Rucinol®, a highly effective

nonmedical skin whitening agent that gained considerable market recognition. POLA Chemical

researchers had to examine several hundred plant extracts before discovering an effective agent in

Siberian pine. They then isolated the agent, enhanced its properties, and developed a process that

inhibits tyrosinase, an enzyme the forms melanin. While other cosmetics companies have also conducted

research in melanin formation, POLA Chemical was the first to develop a melanin formation inhibitor.

As of January 2012, POLA Chemical has accumulated over 13 million skin samples that were collected

as a result of POLA’s counseling service and collated data from them. Based on this data, the company

has been engaged in research in order to develop leading-edge skin analyses technologies, which it

believes will lead to extrapolate parameters for future skincare products tailored to meet the needs of

customers on an individual basis.

As a result of its record of achievement, POLA Chemical has built up an extensive knowledge base,

ranging from the development of prescription pharmaceuticals and R&D for ease-of-manufacturing

expertise, to the development engineering of safe products and health science research—all this in

addition to its fundamental strength in basic research.

YAMATO

- Ethos of Japan-





2020: Emerging as a High-Profit Global Enterprise

Securing Stable Profits for Core Brands

When Satoshi Suzuki assumed the CEO post of the POLA ORBIS Group in January 2000, one of the first

steps he took was to reaffirm the Company’s founding management philosophy—that POLA was

dedicated to meeting the individual needs of every customer. He also adopted “Counseling First” as

a company-wide commitment. And from that time a significant transformation took place in the

Company’s operations. First, in order to rejuvenate its conventional sales model, it began engaging in the

process of selection and consolidation. As explained earlier, the transition from the conventional model to

the clinic-outlet model that features esthetic treatment and integrates counseling services and cosmetics

products, began with the establishment of PB from 2005. Having embraced the holistic concept of the

interrelationship of skin, mind and body, and how these elements play a vital role in beauty and health,

the Company is able to provide comprehensive solutions that range from cosmetics to health food and

esthetic treatment.

At the same time, ORBIS was launched in 1980s as a mail-order brand and has since developed into

a major market presence. Yet, with the passage of time, the user age demographic has changed, as

have their needs. To respond to these market changes and promote user loyalty on a long-term basis,

ORBIS is undertaking initiatives to enhance added value and rebuild its brand by introducing the element

of aging care to oil-free product concepts.

In addition, the Company has been bolstering its logistics infrastructure. In February 2012, it opened

a distribution center in western Japan, effectively expanding its logistic network to encompass the entire

nation. It is currently in the process of building a distribution system that will ensure next-day delivery of

products nationwide, with completion expected some time this fall.

Leveraging Group Strengths for Overseas Operations

By rebuilding the strength of its core brands in order to secure stable revenue sources, the POLA ORBIS

Group aims to reallocate the cash flow that is consequently generated to facilitate the globalization of Group

operations. Specifically, this means the Company, based on its present brand portfolio, is looking forward to

greater synergy to develop between its distribution and R&D operations in the next ten years. It also intends

to capitalize on the data derived from the 13 million-plus skin samples retained by POLA Chemical as part

of its push into foreign markets, positioning neighboring populations in East Asia as strategic markets due

to the similarities in skin quality they share with the Japanese. As the first step in its globalization process,

the Company has begun to sell its POLA brand on an organized basis in China, while marketing its ORBIS

brand through the Web. It has also commenced counseling-based sales in Russia and surrounding regions.

YAMATO

- Ethos of Japan-





The two overseas brands, H2O

PLUS and Jurlique, POLA

ORBIS acquired in 2011 and

2012 have already established

a presence in the United States

and Europe, and their

penetration of the East Asian

markets are accelerating. Both

brands—one marine-based and

the other, organic—are gaining

recognition, particularly among

affluent Chinese consumers, as

premier skincare products

developed from natural ingredients. The Company aims to step up coordination with POLA Chemical, which

is in charge of technology development in Japan, in the R&D field.

Engaging in Japanese Manufacturing, Hospitality Worldwide

From FY12/11, the POLA ORBIS Group began to push forward its management plan to become as a

high-profit global enterprise. As mentioned earlier, the Company aims to achieve net sales of more than

\250 billion, overseas sales ratio of more than 20% and industry-leading operating income ratio of

13-15% by 2020—a goal accomplished by first securing stable growth in the domestic market and, with

that as its foundation, to establish bridgeheads into East Asia with its core brands, while offering global

brands in both Japan and abroad acquired through M&A and alliances.

The POLA ORBIS Group continues its commitment as a provider of products and hospitality services in

order to facilitate the individual beauty requirements of every customer. Since POLA was established in

1929, the Company has faithfully carried forward the ideals and aspirations of its founder, while instituting

changes in response to changes in the market. Today, in striving to become a global enterprise active

in markets throughout the world, POLAR ORBIS will need to overcome numerous challenges as it bids to

sustain growth in the years ahead. We look forward to the outcome.

YAMATO

- Ethos of Japan-





The earnings forecast for FY12/12 the Company announced on May 1, 2012 is presented here

for reference.

【Table 3】 FY12/12 Consolidated Financial Forecast

1H 2H Full-Year 1H 2H Full-Year

Net sales 78,937 87,720 166,657 86,400 95,600 182,000

Operating income 5,534 7,319 12,853 4,700 9,100 13,800

Ordinary income 5,962 7,360 13,322 4,900 9,400 14,300

Net income 2,989 5,050 8,039 2,000 5,000 7,000

(\million)FY12/12 ForecastFY12/11

(\million)

Actual Composition Forecast Composition Amount Ratio

Beauty Care Net sales 154,778 92.9% 170,200 93.5% 15,422 10.0%

Operating income 10,787 83.9% 12,100 87.7% 1,313 12.2%

Operating margin 7.0% n.a. 7.1% n.a. - -

Real Estate Net sales 3,089 1.9% 2,900 1.6% (189) -6.1%

Operating income 1,283 10.0% 1,100 8.0% (183) -14.3%


Others Net sales 8,790 5.3% 8,900 4.9% 110 1.3%

Operating income 501 3.9% 300 2.2% (201) -40.1%


Reconciliations Operating income 280 2.2% 300 2.2% 20 7.1%

Total Net sales 166,657 100.0% 182,000 100.0% 15,343 9.2%

Operating income 12,853 100.0% 13,800 100.0% 947 7.4%


Note: FY12/12 forecasts announced on May 1, 2012.

Net sales for each segment include intersegment sales or transfers.

FY12/11 FY12/12 YoY Change

YAMATO

- Ethos of Japan-





Consolidated Key Stock Indicators / Financial Data and Business Results

No. of Shares Issued Dec-11 57,284,039 Total Assets (\million) Dec-11 193,027

No. of Treasury Stock Dec-11 2,000,000 Shareholders' Equity (\million) Dec-11 156,971

Market Value (\million) 1-Jun-12 124,306 Interest-Bearing Debt (\million) Dec-11 1,500

BPS (\) Dec-11 2,839.4 Equity Ratio (%) Dec-11 81.3

ROE (%) Dec-11 5.2 Ratio of Interest-Bearing Debt (%) Dec-11 1.0

ROA (%) Dec-11 4.2 Free Cash Flows (\million) Dec-11 10,957

PER (times） Dec-12 fcst. 17.1 Notes： ROE=Current Net Income÷Shareholders' Equity

PCFR (times) Dec-11 9.3 ROA=Current Net Income÷Total Assets

PBR (times) Dec-11 0.8 PCFR=Maket Value÷(Current Net Income+Depreciation)

Share Price (\) 1-Jun-12 2,170 Ave. Daily Volume=ADV for the last 12 months

Unit Share (shares) 1-Jun-12 100 Ratio=Interest-Bearing Debts÷Shareholders' Equity

Average Daily Volume (shares) 1-Jun-12 145,793 Free Cash Flows=Operating CF+Investment CF

Consolidated

(\million)Net Sales

Operating

Income

Ordinary

IncomeNet Income EPS (\) DPS (\)

FY12/08 170,838 10,868 9,371 6,559 127.91 20.00

FY12/09 162,332 9,706 10,372 4,059 79.16 20.00

FY12/10 165,253 12,270 12,247 7,086 137.36 40.00

FY12/11 166,657 12,853 13,322 8,039 145.43 45.00

1H FY12/12 fcst. 86,400 4,700 4,900 2,000 36.18 25.00

FY12/12 fcst. 182,000 13,800 14,300 7,000 126.62 50.00

Note: FY12/12 forecasts announced on May 1, 2012.

Stock Price Charts and RSI

0

50

100

150

200

250

300

0

500

1,000

1,500

2,000

2,500

3,000Share Price (Close)

1 Month Moving Average

3 Months Moving Average

RSI 14 Days Moving Average (RHS)

（Yen）

70

30

RSI

Source: Prepared by Trias Corp. with Bloomberg data.Note: RSI, Relative Strength Index, is the index representing the ratio of overbought or oversold share prices.

In general, over 70 in RSI shows overbought share price range, while below 30 shows oversold share price range.RSI=averaged share price appreciation for N days÷(averaged share price appreciation for N days

+averaged share price decline for N days) x100

4927 pola orbis holdings inc. - triaslin.trias.co.jp/en/report/doc/9/4927_polaorbis...

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