Aeon Co Ltd

TSE:8267

Earnings Call Transcript 2020-Q1

[Kaori Miyake, executive]

Good afternoon. My name is Kaori Miyake, and I'm in charge of Investor Relations at Aeon. Thank you very much for attending this briefing on Aeon's financial results for the first quarter of the fiscal year ending February 29, 2020. I will now report on the first quarter results.

Improper accounting was recently discovered at Kajitaku Co., Ltd., a subsidiary of Aeon Delight Co., Ltd., which is a consolidated subsidiary of the company. Aeon Delight subsequently set up a Special Investigation Committee and has conducted a fact-finding investigation.

In light of the investigation results, on June 28, Aeon Delight disclosed its fiscal year 2018 operating results and retroactively revised its operating results for the past 5 years. Aeon is recognizing the financial effect of the provision at Aeon Delight as a lump sum in the first quarter consolidated operating results.

Accordingly, as shown on the slide, we recognized in connection with the case a JPY 14.5 billion reduction to operating profit and a JPY 7.9 billion reduction to profit attributable to owners of the parent. I will provide a supplementary explanation of this matter later. Also IFRS 16 has been applied at overseas subsidiaries beginning in the current term, which had a positive impact of JPY 2.4 billion on the operating profit line and a negative impact of JPY 1.3 billion on the ordinary profit line. As shown on the right side of the slide, excluding the temporary impact of these factors, consolidated operating profit and ordinary profit were nearly unchanged from the previous year.

Next, this slide shows the results by segment excluding the impact of the lump sum recognition of the financial effect of the Kajitaku case and introduction of IFRS 16 overseas. Although the results of the General Merchandise Store Business and Supermarket Business fell short of expectations and profits fell, the Health and Wellness Business and Shopping Center Development Business, which are pillars of the group's earnings, delivered strong performances and profit increases of more than JPY 1 billion each.

The International Business also posted a profit increase. Although profit from the Financial Services Business fell slightly, the decrease is attributable to sales promotion investment to promote cashless payment, and the results are in line with plan. The Services and Specialty Store Business returned to profit growth in the preceding fourth quarter and was able to maintain profit growth in the first quarter as well.

As I mentioned earlier, Aeon Delight has revised its past operating results in light of the recently discovered improper accounting problem at Kajitaku. I will now provide an overview of this issue. Kajitaku has a housekeeping support business, providing housekeeping and house cleaning services to consumers; and a store support business, selling photocopiers and ID photo machines and providing maintenance services to retail stores, et cetera. The accounting problem was discovered in the store support business.

As shown on the slide, the results of the investigation of the Special Investigation Committee set up by Aeon Delight revealed that the recording of fictitious sales, failure to book purchases, inappropriate recording of maintenance fee revenue, excessive sales measures involving conclusion of loss compensation contracts and other actions took place over a long period of time. The investigation committee severely criticized the attitude toward compliance issues, the lack of a compliance structure and organizational vulnerability at Kajitaku, mainly in the accounting department. For details, please refer to the document Aeon Delight disclosed on June 28.

Aeon recognized the financial effect of this case as a lump sum loss in the first quarter consolidated operating results. Going forward, we will record maintenance fee revenue according to maintenance contract periods. Although we have temporarily recorded an allowance for future compensation for losses, we will move toward the solution of loss compensation contracts at Kajitaku and Aeon Delight. Aeon Delight will, of course, implement urgent measures to prevent a recurrence. Aeon considers this a problem to be addressed group-wide and will devise concrete measures and make improvements to enhance awareness of compliance issues and strengthen governance.

Next, looking at Aeon Retail's results. Profit decreased by JPY 1.3 billion. Despite the impact of unfavorable weather in April, quarterly same-store sales recovered to 99.9% of the prior year level, showing a sales trend improvement over the preceding fourth quarter.

In nonfood specialty store operations, as shown in the graph on the right, HOME COORDY, which sells household and recreational merchandise; Kids Republic, which sells children's goods; and Glam Beautique, which sells health and beauty care products, delivered strong results. Same-store sales of satchels for elementary school students and home renovation-related goods and services were up substantially year-on-year, ahead of the October consumption tax increase, increasing by 39.8% and 13.6%, respectively, as Aeon Retail was able to assuredly anticipate and respond to the front-loaded demand for these. On the other hand, the gross profit margin decreased year-on-year, reflecting factors, including a lower-than-expected sales contribution from high-margin clothing sections. Food sales and agricultural produce, dairy food and dry grocery sections, which are vital for drawing customers, were lower than expected.

Amid further intensification of competition, Aeon Retail is getting back to basics, reviewing sales floor configurations and introducing and expanding growth product categories. Stores and merchandising departments will work together to rapidly revamp sales floors and aim for trend improvements in the second quarter and beyond.

Turning now to the Supermarket Business. The graph on this slide shows year-on-year results for the first quarter and the preceding fourth quarter. Although the first quarter sales trends showed a recovery compared to the preceding quarter, the number of customers and sales remained below the prior year level. The sales decrease had a substantial impact on gross profit. Expenses rose due to factors including reinforcement of sales promotions and higher electricity unit costs, and operating profit decreased. One cause of the sluggish sales was our inability to fully ascertain customer needs, and we will work to improve this.

At Daiei, which is working to return to profitability, first quarter profitability improved by JPY 1.3 billion. The same-store number of customers at food sections was maintained at the prior year level, and Daiei successfully reduced loss and price reductions by utilizing an ordering system based on demand forecasting and firmly establishing low-cost operations.

With regard to regional integration of supermarket companies, in April, we concluded merger agreements concerning the operating companies in the Hokkaido and Tokai, Chubu regions. In other areas as well, we are proceeding with discussions aimed at integration by March 2020. We will make announcements for each merger as the details are finalized.

Next, let's examine profit by area. The proportion of operating profit generated overseas reached 26.4% in the first quarter. In the ASEAN region, the year-on-year improvement trend continues with first quarter operating profit increasing from JPY 7.9 billion to JPY 8.5 billion year-on-year even when the impact of IFRS 16 application is excluded.

In China, profits were at the prior year level, excluding the impact of IFRS 16 application. The results for the retail operations in China are from January to March due to a difference in accounting periods, and profit essentially decreased slightly, due in part to the impact on some companies of a warm winter.

In addition, profit fell at Aeon Fantasy's operation in China on a decline in unit prices due to the impact of a discount sale. On the other hand, Aeon malls operations in China delivered favorable results with specialty store sales at 17 existing malls continuing to show double-digit growth due to store refurbishment and other factors. Although we do not think that the trade friction between the U.S. and China has had a major impact on our results through the first quarter, we will closely watch the situation and engage in business in accordance with a customer-first principle.

There is no change in our full year earnings forecast from the figures announced at the beginning of the term. Although we have recognized the financial effect of the Kajitaku case as a lump sum loss, as I explained previously, going forward, maintenance fees, which are included in the amount recognized as a lump sum loss, will be recorded as revenue according to contract periods.

With regard to Kajitaku store support business, we have suspended new transactions and are focusing on improving existing contracts. While doing so we will examine the ongoing viability of Kajitaku's business activities and assess a future course of action. The amount of loss recorded in connection with the Kajitaku case exceeded our initial estimates. Since July and August, months leading up to the October consumption tax increase, and September, the month immediately preceding the increase, will be a major selling season, we want to accurately ascertain customer needs during this period. We will further strengthen business management to ensure that group company profit plans are steadily executed and mounting all-out effort to achieve the targets we pledged to achieve at the beginning of the term. This concludes my presentation. Thank you.