Aeon Co Ltd

TSE:8267

Earnings Call Transcript 2021-Q3

[Kaori Miyake, executive]

[Interpreted] Hello. I'm Kahori Miyake, Executive Officer in charge of IR at Aeon. Thank you very much for setting aside time to participate in this online briefing on Aeon's consolidated financial results. Just before Japan's second state of emergency was declared on the evening of January 7 last week Aeon opened its distribution centers to the public to reassure consumers that we have plenty of food and daily necessities in stock. At Aeon Cinema, we have ensured that theaters are not filled to more than 50% capacity, even after restrictions were relaxed after the previous state of emergency was lifted.

We are also remodeling theaters to provide wider spacing between seats and to install partitions. In November 2020, based on the most up-to-date scientific information, we updated the Aeon COVID-19 Protocol for Infectious Disease Control, which was instituted in June 2020. We are continuing with our telework system without any relaxation of standards on the assumption that this way of working will go on to become the norm. We are taking actions such as these to ensure that customers can continue to feel peace of mind when using Aeon stores and facilities. And we will continue to provide safe sales flow and workplace environments by combining a wide range of infectious disease control measures.

I will now report on the financial results for the third quarter. This slide shows our consolidated results for the 3-month period from September through November 2020. We recorded higher operating revenue and profits at all levels for the first time since the fourth quarter of the previous fiscal year, thereby demonstrating the group's resilience. Operating revenue increased 1.2% year-on-year to JPY 2,122 billion, a record for the third quarter. Operating profit increased JPY 17.4 billion year-on-year to JPY 34.2 billion, also a record figure.

Ordinary profit and profit attributable to owners of the parent, both also increased year-on-year. This slide shows the results by segment for the 3-month period. From the top, the General Merchandise Store Business, Supermarket Business, Health and Wellness Business and Financial Services Business each posted profit growth. The Shopping Center Development Business, Services and Specialty Store Business and International Business posted modest profit declines, but stayed in the black. From the next slide I will discuss earnings trends from the first quarter when the impact of COVID-19 was greatest.

Note that although the Financial Services Business recorded a sharp 15.2% year-on-year increase in operating revenue, this was due to the acquisition of an insurance company in the third quarter. The impact of the acquisition on operating profit is minimal. This slide shows year-on-year change in operating revenue in the first, second and third quarters of fiscal 2020. Please note that the figures on this graph are for reference purposes only as they have been adjusted for the life insurance company acquisition that I just mentioned and intersegment adjustments associated with the reorganization of the Supermarket Business.

In the first quarter, operating revenue declined sharply in the Shopping Center Development Business and Services and Specialty Store Business due to temporary store closures after the state of emergency was declared, but has been on a recovery trend since then. The Health and Wellness Business and Supermarket Business continue to post operating revenue growth. Although the pace of this growth is gradually beginning to level off.

This slide shows quarterly year-on-year change in operating profit by segment. The impact of a special demand is beginning to ease off in the Supermarket Business and Health and Wellness Business, but both businesses continue to see profit growth. The General Merchandise Store Business and Financial Services Business returned to profitability improvement in the third quarter. The Shopping Center Development Business and Services and Specialty Store Business have also achieved significant improvement and are coming close to matching their prior year levels.

While the impact of COVID-19 on the International Business has varied by country, profit has more or less recovered to prior year levels, and it will not have a significant effect on consolidated results. Over the next four slides, I will discuss the 4 businesses in the middle of this chart. The earnings performance of each of these businesses is seeing significant change. First, let's look at Aeon Retail. Apparel sales were affected by above-average temperatures in November, but food sales remain firm. Rental income from tenants recovered sharply due in part to a blockbuster movie attracting more customers to stores.

Gross profit margin also improved, and ongoing cost reductions are being achieved through cuts to marketing and promotion expenses, electricity costs and so on. The business consequently returned to profitability improvement in the third quarter. We reduced inventory by 13.2% compared with the beginning of fiscal 2020 and by around 20% year-on-year. Initiatives implemented in response to the emerging new normal, include increasing the number of stores offering online shopping and delivery services to 197, an increase of around 10 stores since the last briefing.

As well, all stores offering online shopping services now provide an in-store pickup service. Online sales increased 25% year-on-year in the third quarter. Aeon Retail has increased the number of stores offering the Regi go customer self-scanning and self-checkout service from 14 stores at the time of the previous briefing to 22. United Supermarket Holdings, Scan & Go, has been rolled out at stores of their subsidiary, Kasumi as well as Maruetsu and Maxvalu Kanto stores, bringing the total to about 100 stores.

We began installing automated shopping basket disinfection devices as an infectious diseases control measure to increase customer safety and peace of mind and improve operational efficiency. We are constantly revising our COVID-19 countermeasures as the number of new cases continues to rise. Now let's move on to the Financial Services Business, which returned to profit growth, seeing a year-on-year profit increase of more than JPY 10 billion.

The main contributing factor was cost cuts, mostly it comes to marketing and promotion expenses and bad debt expenses. We curbed bad debt expenses in the third quarter in Japan and overseas. After conservatively building up our allowances for doubtful accounts in the first half, both in Japan and overseas. We enhanced our online services in response to the emerging new normal. We are working on bolstering our nonface-to-face services by providing online insurance consultation, shifting Aeon Bank counter services online, providing online ID checks for customers applying for cash cards and other such initiatives.

The Aeon Financial Service results released today appear to be at variance with the figures for year-on-year differences because Aeon Financial Service changed its fiscal year-end, meaning that the accounting period used for the previous fiscal year's results differs from Aeon's accounting period. Earnings in the Financial Services Business are trending higher than our initial forecast as reflected in the upward revision of the full year forecast for Aeon Financial Service announced today.

Moving on to the Shopping Center Development Business, tenant specialty store sales are improving, and the third quarter sales are now close to reaching prior year levels. Based on preliminary figures, tenant specialty store sales at malls in China and Vietnam turned positive year-on-year in the fourth quarter of their fiscal year's, which runs from October through December. Domestic tenant specialty store trends suggest that a blockbuster movie in the third quarter, which spurred a sharp recovery for the cinema business, also had a positive knock-on effect on tenant specialty stores.

As a result, looking at year-on-year quarterly operating profit trends, domestic earnings recovered sharply, thanks to the tenant specialty store sales recovery and cost savings from a range of measures, including sales promotion streamlining through the use of apps. Operating profit has also returned to positive territory year-on-year in China. COVID-19 infection rates vary among ASEAN countries and the impact of the pandemic on earnings overall has been limited, with profits seeing only a slight year-on-year decline.

One of the initiatives we are implementing in response to the emerging new normal is the streaming of coverage of events held at Aeon malls to allow people to experience the events from home. We are also utilizing apps to encourage customer traffic outside of peak times. The services and specialty store business is working on implementing thorough going infectious disease control measures and responding to consumer needs amid the pandemic.

The graph on this slide shows a year-on-year comparison of the quarterly operating profit of companies whose earnings have been volatile. All of the companies have seen a strong earnings recovery. Aeon Entertainment, in particular, made a rapid return to profit growth, thanks to the impact of Demon Slayer: Kimetsu no Yaiba, the highest growing movie of all-time in Japan.

Mega Sports also returned to profit growth by responding to demand for at-home fitness goods as well as increased demand for camping goods due to the desire of consumers to avoid the 3 Cs of closed spaces, crowded places and close contact settings; COX has doubled its e-commerce sales. To meet demand for fashionable masks, which did not exist prior to the pandemic, COX opened stores selling masks at commercial facilities, such as the underground Yaesu Shopping Mall in Tokyo. The results of these initiatives have been reflected in earnings performance, with profit growth being recorded for the 9 months of fiscal 2020, despite the impact of COVID-19.

With the remodeling of its cinema in the Myoden area of Ichikawa City, Aeon Entertainment became the first company in Japan to install partitions between movie theater seats to prevent infection via airborne droplets. This slide shows quarterly operating profit by a geographical area. As mentioned earlier, in Japan, there was a return to operating profit growth due to the recovery of the General Merchandise Store Business, Financial Services Business, Shopping Center Development Business and Services and Specialty Store Business.

Operating profit in ASEAN countries and China also began to see an improvement, albeit modest, from the second quarter onward. This slide shows cumulative consolidated operating results for the first 9 months of fiscal 2020. Operating revenue returned to year-on-year growth due to improved performance in the third quarter, and the year-on-year difference is narrowing for profit at all levels. This slide shows cumulative results by segment for the first 9 months of fiscal 2020.

Although we have been significantly impacted by COVID-19 in fiscal 2020, we have managed to record a profit in 5 out of 7 segments, of which, 2 segments recorded considerable profit growth. All segments are trending close to or ahead of the initial company forecast. As a result of which, as mentioned earlier, we have upwardly revised our full year earnings forecast. This slide shows the steady progress we are making with reforms alongside responding to the COVID-19 pandemic.

We decided an intra-group reorganization as the way forward for Discount Store Business reforms. Our efforts to help counteract climate change continue to be rated highly by third-party organizations. Ministop is currently taking on the challenge of transitioning to a new business model. To conclude my presentation, I will discuss our earnings forecasts for fiscal 2020. On December 23, 2020, we upwardly revised our operating revenue and operating profit forecasts. We have left our forecast for profit attributable to owners of the parent undetermined because a significant amount of uncertainty remains.

This revised earnings forecast did not assume the declaration of a second state of emergency, which came into effect on January 8, where the third wave of infections had started at the time of disclosure. And thus, the forecast does factor in an increased number of cases. While it is difficult to determine the impact of the second state of emergency at this stage, we believe we can overcome this situation by drawing on the experience and knowledge we have accumulated over the past 12 months.

With the continuing spread of COVID-19 and the declaration of a second state of emergency, many Aeon employees, especially those working on the front lines at stores and shopping centers, are having to cope with a worrying situation on a daily basis. But they continue to work on maintaining our role as a community lifeline for local customers. We are committed to ongoing efforts to improve our earnings for the remainder of fiscal 2020, while making the safety and peace of mind of our customers and employees our top priority. This concludes my presentation. Thank you very much.

[Unknown Analyst]

[Interpreted] I have 3 questions relating to COVID-19. And one about the medium-term management plan. Firstly, you mentioned the declaration of a second state of emergency, but how has customer behavior changed since then? Secondly, you also mentioned revisions to the Aeon COVID-19 Protocol for Infectious Disease Control. What precautions are being taken by Aeon?

And thirdly, it seems customers have become used to this situation and customer behavior has not changed. But how do things look from your perspective as managers of a company operating stores and shopping centers? Lastly, with regard to the new medium-term management plan, which I believe you're scheduled to announce in April, what are the main points currently being discussed?

[Unknown Executive]

[Interpreted] First, with regard to your COVID '19-related questions, customer behavior is similar to that seen after the state of emergency declaration in April. But we are not seeing as much of the hoarding and other such behavior we saw back then. That said, sales of basic products consumed at home, such as food and daily necessities, are running higher than before the second state of emergency.

As for infectious disease control measures, rather than considering new measures, I think the most important point is to avoid becoming complacent about implementation of the measures that are already in place. In recent months, we have increased investment in infectious disease control measures, including replacing our ventilation equipment. We must ensure that our infectious disease control measures are being carried out properly and that employees remain vigilant in their approach.

Therefore, head office and store employees have been holding twice-weekly meetings on coronavirus countermeasures, and these meetings continue to be held even when the infection rate was declining. With regard to your question about the medium-term management plan, we have been engaging in continued discussions at the top management level since last year. And with the COVID-19 infection still spreading, we have been discussing what to do with the plan.

We believe that the most important point is to correctly ascertain the changes in our operating environment and accelerate our responses. Some of the changes in our operating environment have arisen as a result of the pandemic, while others that were already underway even before the pandemic, have been hastened by it. For example, we were already moving forward with digital transformation initiatives, but the pandemic has sped up the digital shift. We have been discussing how we ought to respond to this and how to further accelerate our responses.

We intend to announce more about the next medium-term management plan at a later date. After having gained a more accurate understanding of the changes occurring in our operating environment and customer behavior and fully incorporating that understanding into the plan. Looking back over our history, we are proud of our track record of responding to similar major changes in the operating environment and achieving sustained growth through constant transformation.

We regard the changes currently taking place is another opportunity for us to transform ourselves and take some big steps forward.

[Unknown Analyst]

[Interpreted] I have 2 questions. Firstly, in October, we received an explanation about Aeon Retail's revival plan. Third quarter results show a return to profit growth, with support from a higher gross profit margin, cost cutting and other measures. Could you provide us with more information on the progress made thus far and any remaining issues? And secondly, regarding the Financial Services Business, it is difficult to understand the extent to which organic profits improved on a quarterly basis due to changes in Aeon Financial Services accounting period.

The impact of inappropriate accounting at overseas subsidiaries last year, bond liquidation and so on. Excluding such extraordinary factors, how much did real profits improve in the third quarter?

[Unknown Executive]

[Interpreted] With regard to your first question, since the start of the fiscal year, Aeon Retail has been proceeding with major reforms aimed at increasing inventory turnover and gross profits by significantly reducing inventories and reducing and being more selective with purchases. Inventories have been sharply reduced from the levels in the first quarter, and stock turnover has been greatly accelerated. These improvements continued into the third quarter.

Although gross profit fell temporarily, owing to the posting of a loss on valuation of products, it rebounded in the third quarter and is now trending largely in line with forecasts. At the same time, we are moving ahead with cost cuts, especially cuts to fix costs.

Our cost structure, which previously had a high cost ratio, has changed significantly, with fixed costs reduced. We now are becoming increasingly able to generate a profit even when sales weaken somewhat. The cost structure has changed enough that we will be able to handle the slight decline in sales expected in the fourth quarter.

To answer your second question, the first factor supporting profit improvement in the third quarter is the decrease in bad debt expenses. The conservative approach taken in the first quarter and, of course, efforts on the part of the company, enabled us to reduce the allowance for doubtful accounts.

Another factor is the large cost of the major cashless payment promotion campaign we carried out in the third quarter of previous fiscal year. The absence of that large cost in this year's third quarter contributed to the decline in expenses. These are the 2 major reasons for the profit improvement, while regulations being introduced by various governments overseas are creating adverse conditions for the top line, we are continually making efforts to deal with those regulations and avoid large losses.

The top line situation remains severe, but conditions have improved enough for Aeon Financial Service to be able to generate stable revenues. And that is the main factor supporting the upward revision to their earnings forecast.

[Unknown Analyst]

[Interpreted] Would it be right to assume that 1/4 of the upward revision to your full year forecast, essentially represents the margin of improvement you expect to see in the fourth quarter?

[Unknown Executive]

[Interpreted] It is hard to say because the impacts from various factors differ in degree at different periods in the year. But I think it's fair to assume that things are steadily improving.

[Portions of this transcript that are marked

[Interpreted] were spoken by an interpreter present on the live call.]