Aeon Co Ltd

TSE:8267

Earnings Call Transcript 2022-Q4

[江川 敬明, executive]

Hello, everyone. I'm Hiroaki Egawa, Executive Officer for Finance and Business Management. Thank you very much for taking the time to participate in Aeon's earnings briefing today.

So without further ado, I'd like to provide a summary of our consolidated financial results for fiscal 2021 and discuss our fiscal 2022 earnings forecast.

Firstly, to sum up the key points, even though fiscal 2021 was the first year covered by our new medium-term management plan, as we alluded to in our announcement on April 1, it was a challenging period for Aeon because the COVID-19 pandemic has continued to linger for much longer than we initially anticipated. On the other hand, with the pandemic entering its second year, each of our business segments took steps to ensure business continuity despite the pandemic conditions and began preparing for a post-pandemic world. It was reassuring to see some positive results from cost control measures and other efforts. As a result of such efforts, profit improved sharply from the previous fiscal year, moving back into positive territory.

For fiscal 2022, we are targeting record-high operating revenue of JPY 9 trillion and the recovery on each profit line to pre-pandemic fiscal 2019 levels through properly responding to the expected impact of COVID-19 and the current uncertainty in the operating environment.

I'd now like to go into more detail about these points. In fiscal 2021, for most of the period up until the end of September when the last state of emergency was lifted, either a state of emergency or priority measures aimed at halting the spread of COVID-19 had been in force. After that, the number of infections abated for a while, but the Omicron variant rapidly gained a foothold in early 2022, which prompted the reintroduction of priority prevention measures that were removed until late March, roughly 1 month after the end of Aeon's fiscal year.

Operations were heavily impacted by such an adverse external environment. And as we announced last Friday, profit fell short of our initial forecast. But operating profit still increased JPY 23.7 billion year-on-year to JPY 174.3 billion.

Profit attributable to owners of the parent returned to the black, growing sharply by JPY 77.5 billion to JPY 6.5 billion. This was mainly the result of JPY 28.2 billion in ordinary profit growth, along with a JPY 27.4 billion reduction in COVID-19-related extraordinary losses.

Next, turning to operating revenue by segment. Revenue was up in the Health and Wellness, Shopping Center Development, and Services and Specialty Store businesses. In the Health and Wellness business, we pushed ahead with a growth strategy focusing mainly on expanding the number of drugstores capable of processing prescriptions, opening new stores and concluding M&As. Pursuing this strategy helped to make up for the dropout of the special demand for merchandise sales seen last year, thus leading to revenue growth this year. And compared to fiscal 2019 before the pandemic, operating revenue was up a sharp 17.3%.

In the Shopping Center Development business, operating revenue rebounded from the significantly negative impact on sales last fiscal year when operations were completely suspended during the first state of emergency. As for the Supermarket and Discount Store businesses, revenue came in lower this fiscal year due to the dropout of special demand for food seen in fiscal 2020. But we continued to capture growth in dine-in demand, which drove operating revenue above the pre-pandemic level.

Operating revenue in the international business was impacted by COVID-19 restrictions in countries where we have a business presence. While in the General Merchandise Store business, revenue was hampered by a sluggish recovery mainly in nonfood categories.

Next, let's take a look at operating profit by segment. As you can see at the top of the screen, operating profit increased in the Health and Wellness business and the 4 segments listed below it. I will go into more detail later, but operating profit rose in the Financial Services business and General Merchandise Store business, thanks to initiatives aimed at improving profitability by controlling SG&A costs.

Operating profit growth in the Services and Specialty Store Business and Shopping Center Development business was boosted by a recovery in sales as the impact of COVID-19 receded. As for the Discount Store and Supermarket businesses, operating profit was dented by the absence of special demand for food seen in the previous fiscal year, but it still grew sharply compared to 2 years ago before the onset of the pandemic. Operating profit in the International business declined slightly due to the impact of lockdowns overseas.

Looking at quarterly trends in operating profit. As you can see at the bottom of the screen, consolidated operating profit recovered to growth of JPY 2.5 billion in the fourth quarter after declining in the second and third quarters. By segment, the 4 businesses at the top of the list all recorded operating profit growth in the fourth quarter. In the Health and Wellness business, growth was due to sales rebounding strongly from last year. In the Services and Specialty Store business, profit recovered from a downturn in the third quarter caused by the dropout of the positive impact of a blockbuster movie title in the previous year. In the International business, COVID-19 restrictions were eased overseas, while in the Supermarket business, operating profit recovered from the year-earlier decline and was boosted by cost cutting.

In the next 3 segments in the list, the breadth of operating profit declines narrowed in the fourth quarter. Factors included the easing of restrictions in ASEAN countries and the Shopping Center Development business and increase in gains on the securitization of receivables in the Financial Services business driven by brisk home loan services and gross profit margin improvements and progress made on controlling expenses in the General Merchandise Store business. In the Discount Store business, operating profit was more or less flat year-on-year.

I'd like to provide a bit more detail about each segment. First, the General Merchandise Store businesses, Aeon Retail operations. The positive JPY 13.7 billion on the left side of the screen represents the improvement in Aeon Retail's operating profit after excluding the impact of business restructuring, including the transfer of the product procurement division and the Tohoku business. The breakdown of that amount is shown immediately to the right.

Gross operating profit rose JPY 19.2 billion, absorbing an increase of JPY 5.5 billion in expenses. The gross operating profit growth owes to higher sales in the food category, which accounts for roughly 60% of sales, as well as a 1.7 percentage point improvement in the gross profit margin in the apparel category.

Expenses came in somewhat higher this year, rebounding from efforts made last fiscal year to cut down on marketing and promotion costs, but our company-wide cost-cutting efforts are still yielding results. Compared to fiscal 2019, we have slashed costs by JPY 15.5 billion, including a JPY 9.2 billion reduction in personnel expenses, which is noticeably helping to lower fixed costs. By continuing to steadily propel initiatives for improving gross profit margins and cutting costs, we are targeting a return to operating profitability for Aeon Retail in fiscal 2022 on the back of a recovery in sales.

In the Financial Services business, in addition to government cash handouts overseas, significant contributions to operating profit growth came from a reduction in bad debt expenses as a result of an improvement in the nonperforming loan ratio, thanks to persistent efforts to refine the credit screening process and strengthen the collection of receivables. We also work on getting new members with the use of WAON Points, and the customer base in this business grew even larger with the number of active credit card holders in Japan surpassing 30 million.

In the Services and Specialty Store business, earnings at the major subsidiaries improved sharply, with operations recovering from the widespread temporary closures seen in the previous fiscal year.

In the Shopping Center Development business, operating profit declined in ASEAN countries due to the significant impact of lockdowns but increased in China and Japan. Particularly in China, this business was affected locally by the government's strict virus containment measures, but tenant sales still outstripped pre-pandemic levels over the full year. Progress was also made with the opening of new malls in Japan and overseas.

In the Health and Wellness business, earnings were brisk because we ramped up our growth strategy, focusing mainly on expanding the number of drugstores capable of processing prescriptions and opening new stores. As for M&As, after acquiring Pupule Himawari in December last year, we also have plans to welcome Kokumin into the group in June this year.

In the International business, we worked on strengthening online supermarket operations in China, but earnings were impacted by lockdowns as well as the easing of restrictions on eating and drinking establishments in Hong Kong. The situation was similar in the ASEAN region, but operating profit increased by virtue of a recovery in sales and cost cutting.

In the Supermarket and Discount Store businesses, operating profit increased compared to the level before the pandemic, as I explained a few moments ago. We are continuing to meet new needs of customers with online supermarket shopping, online delivery, better self-checkout systems and the opening of stores in collaboration with Welcia. We also pulled out of the Ministop business in South Korea and the Philippines. Ministop will instead focus its management resources on Japan and Vietnam in an effort to reinforce its business platform.

These graphs show weekly year-on-year same-store sales from the fourth quarter to the present. The top graph shows sales in the apparel category of the General Merchandise Store business, sales for the Services and Specialty Stores business and tenant sales for the Shopping Center Development business.

Sales surged during the year-end and New Year periods before turning downward for some time, owing to the rapid spread of the Omicron variant, but are now recovering again. The lower graph shows same-store sales for the food category of the General Merchandise Store business and sales of the Supermarket business. Sales have remained generally flat year-on-year, with the stores steadily capturing demand for well-entrenched dine-in demand.

Next, I'd like to talk about the outlook for fiscal 2022. First, I will discuss our scenario assumptions concerning COVID-19. In our scenario, we anticipate a decline in infections in April and then an increase in cases caused by a new variant sometime in or after September before dwindling by the end of the third quarter. We don't think the government will declare a state of emergency triggering the closure of stores, but we do expect priority measures to prevent the spread of infections to be enforced in some regions.

We forecast consumer sentiment to recover to pre-pandemic levels in the second half of the second quarter, then dip slightly before recovering again. Even though the number of COVID-19 cases is currently on the rise, we think the situation will change up ahead as more people get their third vaccination shot and therapeutic drugs become widely available. Over the first 2 years of the pandemic, we continually worked to adapt to the so-called new normal. Our efforts to implement the growth strategies called for in our medium-term management plan are predicated on the idea that coping with pandemic conditions is now a matter of course.

For fiscal 2022, we are forecasting operating revenue of JPY 9 trillion, operating profit between JPY 210 billion and JPY 220 billion, ordinary profit between JPY 200 billion and JPY 210 billion and profit attributable to owners of the parent in the range of JPY 25 billion to JPY 30 billion. Please note that we have factored into our operating revenue forecast of JPY 9.0 trillion contributions from newly consolidated subsidiaries and the shift to the new revenue recognition accounting standard. If the revenue recognition standard that was used in the previous fiscal year were to be applied, the forecast figure would be JPY 9.2 trillion, which is a 5.6% year-on-year increase.

We haven't disclosed earnings forecast for each business segment, but we are targeting profit growth in all segments, and we anticipate a return to profitability in the General Merchandise Store and Services and Specialty Store businesses. Also, we have presented forecast ranges for the operating profit line and below to reflect a number of rapidly escalating uncertainties, including instability in world affairs and the supply of resources and materials, rising distribution costs and foreign currency movements.

Next, I'd like to touch on capital investment. In fiscal 2021, we invested less than expected due to delays caused by the continued spread of COVID-19 infections and ongoing close reexaminations of our investment plans.

In fiscal 2022, we plan to invest between JPY 450 billion and JPY 500 billion. This is slightly higher than the average amount of capital investment for the period covered by the medium-term management plan because in addition to investing the amount carried over from last fiscal year, we have earmarked funds for the opening of new stores in Vietnam, which is currently a strategic area for Aeon; investment in a next-generation online supermarket center in Chiba that is slated for a 2023 opening; investments in online supermarkets, e-commerce and semi-automated self-checkout registers in the General Merchandise Store business; growth investments in Supermarket business distribution centers and so on.

The amount fluctuates somewhat every fiscal year, but the average of fiscal 2021 and 2022 corresponds to the level of investment called for in the medium-term management plan. We intend to execute highly precise growth investments while taking into account the balancing of these with cash flows.

The last thing I'd like to mention is our dividend forecast. Given our stable dividend policy, for fiscal 2022, we plan to pay an annual dividend of JPY 36 per share, the same as last year.

That's all for me today. Thank you for your attention.

[Akio Yoshida, executive]

Hello, everyone. I'm Akio Yoshida, President of Aeon Co., Ltd. Today, I'll be briefing you on the main points of our progress towards achieving the goals of the Aeon Group medium-term management plan during the first 12 months since its launch. A look back at the operating environment during the past fiscal year reveals many unpredictable events that increase the instability of the consumption environment from the prolonged impact of COVID-19 to rapid price increases, earthquakes in the Tohoku region and the invasion of Ukraine. Peace and peace of mind became even more important in the daily lives of our customers, and we are keenly aware of how important it is for the Aeon Group to respond to those needs.

This slide outlines the main initiatives undertaken during the first year covered by our new medium-term management plan. Group companies undertook various initiatives in line with the plan's 5 growth strategies focused on our digital shift, products, health and wellness, our regional shift and Asian markets.

Among our main KPIs, online sales reached JPY 130 billion, nearly double the result in pre-pandemic fiscal 2019. In addition, our private brand sales totaled JPY 1.2 trillion, 20% above the fiscal 2019 result. While implementing our growth strategy, we also made progress with business restructuring, which we've been working on for some time. Today, I would particularly like to focus on the main points in our efforts to accelerate our digital shift, product development, creation of Aeon Living Zones and structural reforms.

I will start with the acceleration and evolution of our digital shift. We aim to provide optimal customer experiences through the combination of off-line and online approaches with a focus on customer perspectives. Our digital shift provides the basis for advancing all other group strategies and is positioned as the highest priority among group initiatives.

On a policy level, our digital shift involves measures in 3 key areas: accelerating the development of digital business, digitalization of store and headquarter operations and development of a common digital infrastructure. We've been pursuing these as core initiatives.

Our online supermarket business has been growing rapidly with average annual growth above 20%, thanks in part to the strong growth in demand for online shopping during the COVID-19 pandemic. It is now one of Japan's largest online supermarket businesses. Group-wide, online supermarket sales exceeded JPY 70 billion in fiscal 2021, equivalent to the sales generated by 35 brick-and-mortar supermarkets that generate average annual sales of about JPY 2 billion each. Last year, our online supermarket business turned profitable, and we've expanded the product lineup from conventional grocery items to include fresh foods and nonfood items. In addition, we have improved customer convenience by diversifying product pickup locations, including a click-and-collect option, and by providing more precise home delivery times. Such initiatives are contributing to the stable growth of the business.

E-commerce sales account for only about 3% to 4% of food sales in Japan. Considering the 20% to 30% ratio in more digitally advanced countries like China and the U.S., we see huge potential for the growth of online supermarkets in Japan. We're looking forward to the launch of full-scale operations next year of a next-generation online supermarket developed in a partnership with Ocado. In addition to rapidly expanding our market share, we want to create an online business that will make Aeon the first name online shoppers think of when they think about online deliveries.

Our store digitalization initiatives are focused on improving customer convenience and operational efficiency. The Regi Go and Scan & Go services shown on this slide are being rolled out to more of our premises and are now being used by about 1 out of every 5 customers shopping at our stores. The convenience provided by these services is beginning to bear fruit, with average customer spending by users of the services about JPY 400 higher than that of customers using self-checkout counters.

In addition to making greater use of these payment methods, group companies are shifting to all self-checkout stores. By using these payment methods and combinations that best fit the characteristics of each store, we expect to achieve greater efficiency of cash register operations, which typically account for about 30% of each store's personnel expenses.

Our subsidiary, USMH, has begun on a trial basis sales outside Aeon Group of its digital transformation solutions under the brand name Ignica. By introducing Ignica solutions at retail tech trade fairs, USMH has taken its first steps into a new business domain as a solutions provider who also possesses thorough frontline knowledge of retailing.

Aeon Group stores in China are at the forefront of the group's digital transformation efforts, and online supermarket sales account for about 11% of overall sales in China. The use of mobile devices at our stores in China has improved labor efficiency by about 90,000 staff hours per year. We intend to introduce our Chinese subsidiaries' digital know-how to all group companies.

Our development of shared digital infrastructure is an effort to create a vital platform for connecting with our customers. One example is the launch of a comprehensive app that gives customers access to Aeon Group services. The WAON point system now has about 100 billion customer points following last year's point system integration. We plan to expand our customer base by switching to point-based sales promotions and creating new loyalty programs.

As this slide shows, Aeon Retail's efforts to incorporate the use of AI tools into its business processes have begun to yield concrete results, including a 1 percentage point reduction in losses resulting from price markdowns. Last year, we opened the data innovation center, which is promoting greater use of data and AI across the group. By utilizing data in various ways, we hope to increase the speed with which we pick up on customer-related changes and accelerate operational reforms.

Next, I'll present our efforts to use our supply chain to create unique value. In our medium-term management plan, we position products as the most important domain. We believe that the steady promotion of related measures will have a major impact on our profits. In particular, we aim to develop and propose unique values that only Aeon can offer by putting emphasis on the development of private brand products.

As I mentioned at the beginning of today's presentation, rapid inflation is pushing up the prices of many products. We think this environment provides us with a key opportunity to gain customers' understanding of the value provided by our private brand products, and we're taking appropriate action. For example, we have maintained the price freeze on our Topvalu products that we announced last September. And as this slide shows, sales of Topvalu food products have contributed to the increase in sales of our food products and now account for a larger share of total food sales.

We position this price freeze as a way to raise customer awareness about our Topvalu products and increase their market share by providing products at prices that encourage more customers to try our Topvalu products and that help them maintain their living standards. We believe that increasing the number of Topvalu fans will support the continued growth of Aeon Group over the long term.

This fiscal year, we are planning to launch a Topvalu rebranding initiative. As I just mentioned, an increasing number of customers are trying our Topvalu products, and we plan to introduce products in previously untapped categories and to develop products with unique concepts not seen in similar offerings from other companies.

One such product shown in the photo on this slide is Premium Nama beer, which we launched in March. We believe this new beer product will raise the sales competition of mainstream Topvalu products, including by shifting some sales from our Barreal series, which is designed to appeal to consumers on a price basis.

The new product has been favorably received by customers and is performing strongly, with 1.1 million cans sold in just under a month since its launch on March 8. We believe that private brand products enable us to draw on our strengths as a retailer and reflecting customer feedback and product development. I see plenty of potential for expanding revenue from private brand products in the future.

Our effort to develop unique products and services now includes the in-house development of private brand food products. As this slide shows, several group companies are establishing new processing centers. We are establishing centers that will not only produce products imported by our customers but will also help us increase our gross margin. We will supply customers with products that deliver new value by, for example, developing a lineup of restaurant-quality food products. We also will endeavor to increase operational efficiency and thereby improve productivity by incorporating new engineering technologies into our production lines and making greater use of robotics and the latest refrigeration technologies.

Next, our Aeon Living Zones initiatives. As the next step in our ongoing regional shift, we are integrating our multi-format store network with businesses and digital services to work on the creation of Aeon Living Zones that are rooted in the respective regions. Following last year's reorganizations in Hokkaido, Kinki and Kyushu, we carried out reorganizations in the Chugoku, Shikoku and Tohoku regions in fiscal 2021. Fuji and Maxvalu Nishinihon transitioned to a holding company structure in March of this year following the completion of their restructuring.

Maxvalu Tokai, which completed their reorganization before other companies, has seen integration effects to the order of over JPY 1 billion. That has resulted in strong business results and an upward revision of business performance for fiscal 2021. We would like to draw on these integration effects plus the foundation for leveraging management resources, like Aeon's know-how of each company in new initiatives like new product development and store digitalization. We are hoping to not only create synergies within the integrated companies but also facilitate more group-wide sharing of know-how across companies in each region and then link this to increased revenue.

As this slide shows, we continue to make progress with creating bases that act as regional hubs to respond to the various needs of each region. From the perspective of profitability, we continue to advance initiatives aimed at shifting away from our conventional profit structures. The shopping center you see here has a 100% tenancy rate in its commercial areas right now and is extremely popular because of its proximity to a railway station. We have also secured a stable revenue base with the addition of rent income from office areas, and this has proven to be a highly profitable model.

Dramatically changing the store formats and product lineups at supermarkets recently developed by USMH has received a high level of support from customers. Average per customer spending overall at the new stores is approximately 30% higher than at existing stores, and the format is highly competitive. These new stores operate under the brand name BLANDE. Initiatives to create new formats such as these are aimed at capturing demand from new customer demographics and also with capturing different kinds of demand from existing customers. By establishing a positioning that differs from existing formats, we can boost the density of our presence within markets and increase market share.

As shown on this slide, Welcia reached JPY 1 trillion in sales, the first in the drugstore industry to do so. 70% of Welcia drugstores are now able to process prescriptions. And they drew on this rank to boost the presence of its stores as health care centers for local communities through actions like moving quickly to participate in a free PCR testing program. The business environment for pharmacies is set to see unprecedented changes, including the digitalization of medical care. And there are also ongoing debates about deregulation of the industry.

Looking ahead to the rollout of electronic prescriptions in January 2023, Welcia is proceeding with measures to diversify its sales channels. These include efforts to expand e-commerce sales of nonmedical goods and increasing the number of options for customers to receive prescribed medicine by, for example, installing lockers that enable customers to pick up their medicine at any time, 24 hours a day. Welcia is looking to transition toward a more robust earnings structure by working to enhance productivity through introducing robotic prescription dispensing systems and systems for providing medication guidance online.

Here, I'll end my discussion of the main points relating to the group's long-term strategies. I would now like to touch upon the downward trends of the Shopping Center Development and Services and Specialty Store businesses caused by the impact of the COVID-19 pandemic. As mentioned during the explanation of financial results, these 2 businesses are currently trending upward as the number of COVID-19 cases drops. Because the number of shopping center customers is closely correlated with the performance of the Services and Specialty Store business, particularly in the amusement and entertainment domains, we expect earnings to increase as the pandemic comes to an end.

The number of films shown at Aeon Entertainment cinemas this year is up 110%. And we expect to see roughly twice last year's number of major films expected to gross over JPY 1 billion. The distribution issues caused by COVID-19 have been resolved, and we predict that sales will recover.

We have also seen growth in the sectors other than those in which a recovery was linked to external environmental factors. For example, Aeon Fantasy's online business, which was not impacted by the pandemic, sales increased 40% over last year, with business now starting to operate in the black. We're looking to put the Shopping Center Development and Services and Specialty Store businesses on a steady path toward growth by boosting customer numbers and creating new pillars of growth.

We're also making progress with structural reforms of group companies that have been experiencing issues. We went ahead with the sale of Ministop subsidiaries in South Korea, Qingdao and the Philippines. Funds obtained from these sales will be concentrated domestically and in Vietnam, a growth market for Ministop. The aim is to achieve a rapid recovery of business performance.

In December of last year, we increased funding in G Foot by JPY 5 billion in order to strengthen its financial base. The first phase of this effort will be to revitalize the business by unifying all of its brands into a single brand while continuing to close unprofitable stores. Aeon Retail is making progress with initiatives such as efforts to streamline operations and optimize inventory. They have achieved significant results as their efforts to control the bottom line had become more firmly established and systematized.

Inventory optimization has made it easier to introduce new products, and we expect Aeon Retail to return to profitability if they can boost their top line. We'll be pursuing full-scale recovery of the companies I've just mentioned as part of efforts to achieve our targets for next fiscal year.

The pandemic has been a tailwind for the supermarket business and drugstore business, and it's crucial that they continue to sustain their current profit levels. By pursuing all of these initiatives simultaneously, we aim to live up to your expectations by steadily achieving our targets for fiscal 2022. In addition to these financial considerations, we'll also be focusing our efforts on nonfinancial initiatives.

Looking back at our group's history, we began tree planting activities in the 1960s due to a sense of crisis about pollution issues. And so far, we have planted 12 million trees together with members of local communities. We estimate that this work has helped to absorb approximately 40,000 tons of CO2 so far. 30 years ago, we began encouraging customers to bring reusable shopping bags to stores to help address the problem of plastic waste. Currently, 85% to 90% of customers bring their own bags with them.

In these ways, we are at the forefront of initiatives aimed at addressing environmental and societal issues. We recognize the importance of explicitly stating Aeon's corporate stance under our customer-first philosophy.

I would like to clearly express our strong opposition to the invasion of Ukraine. We are conducting fundraising together with our customers in order to provide aid. So far, we have collected approximately JPY 300 million in donations, thanks to support from large numbers of customers. We'll continue to utilize the full breadth of our business capabilities to bring about positive social changes with a focus on the perspectives of local customers. We believe that doing so will enhance Aeon's social value over the long term.

This concludes my explanation of the main points of our progress towards our targets for the first year covered by the medium-term management plan.

[Unknown Analyst]

Firstly, what do you think is necessary to encourage consumers to spend money at Aeon Malls? Recent increases in electricity bills and gasoline prices and so on are directly impacting household budgets, and a lot of consumers are tightening their belts. But large numbers of customers are visiting Aeon Malls. As you've said before, the malls have become something of an amusement spot for consumers during the pandemic.

Secondly, how do you reach your progress so far in the first year covered by your medium-term management plan? And what will you be focusing on over the next 1 or 2 years?

[Akio Yoshida, executive]

To answer your first question, customer traffic has been recovering since the priority measures to prevent the spread of COVID-19 were lifted, except for a period when the weather was extremely stormy. The weather has become warmer in recent weeks, contributing toward growth of apparel sales, which have been sluggish throughout the pandemic, suggesting that significant consumer needs are now emerging.

To borrow your words, how do we encourage consumers to spend money at Aeon Malls in this context? We believe the answer is to have a solid grasp of consumer needs to develop appealing sales floors and offer attractive products. During the Golden Week holiday periods in 2020 and 2021, states of emergency and other measures were in place and people had to stay home over the holidays. This year, travel agencies anticipate demand recovering close to 2019 levels to at least 70% or more.

What are customers looking for in this environment? We need to anticipate this and ensure we offer a good selection of items that they put off buying last year and the year before, such as suitcases, bags and shoes. We will also take the initiative in informing customers that such items are available from specialty stores at Aeon Malls.

Now that we are in the third year of the pandemic, customer behavior will start to change, and it is absolutely crucial that we simply continue the process of anticipating consumer needs and proposing products that meet those needs. We can build on this foundation with various initiatives such as loyalty point initiatives and promotions that stimulate consumption and motivate customers to open their wallets at Aeon Malls.

I visited a number of sales floors the other day to see how things were going following the end of the spring vacation. In the apparel section, customers were looking for light garments that can be layered. I have a positive feeling about the fruits of our efforts so far.

To answer your second question, the medium-term management plan has 5 pillars, and each company is taking action in ways that are consistent with these. With regard to the shift to digital, for example, I mentioned earlier that USMH is transitioning to selling solutions. The business is at the stage where they're shifting from digitalization trials to practical application.

In Ibaraki Prefecture, we contributed 2 new BLANDE brand supermarkets. Although they're supermarkets, they're completely different from existing Kasumi stores. For example, all checkouts are self-checkouts. I was initially skeptical about whether that would be possible. BLANDE supermarkets are able to function without human checkout operators. That is one of the outcomes of our policy of pursuing digitalization.

We now also offer our Scan & Go self-scanning service at 500 stores. We've been able to make that kind of progress because the service takes off quickly after customers feel satisfied with initial trials. With these digitalization initiatives, I think that each company has managed to shift their perspective and transform their sales floors since the medium-term management plan was announced.

Another area we are working on is, of course, private brands. When we have 2 sales channels, online and off-line, we risk getting caught in a pricing war because it's easy to compare prices online when the products in question are the same. It will become increasingly important for Aeon to create private brand products that are only available at Aeon stores.

Earlier, I gave the example of our new Topvalu beer product. As soon as it went on sale in March, we set our proper sales areas for it on the main sales floors, which customers responded positively to. They are now aware that we will be selling more private brand products.

Another result is that our reorganization is now starting to take shape, as we noted when we discussed the regional shift. It takes time because it involves the integration of companies with differing operations and rules. But once staff get used to the new operating environment, strong earnings performance synergies begin to appear. Benefits appear in many areas. Since only one back office is required, logistics are integrated and larger procurement volumes mean lower costs. Benefits from business integration are appearing in the results of Aeon Kyushu and Maxvalu Tokai, which we strongly feel to be a positive outcome of our implementation of the medium-term plan.

[Unknown Analyst]

So you mean your priority is to have solid product offerings that meet the needs of your customers rather than just lowering prices?

[Akio Yoshida, executive]

Correct. The low prices are also a customer need, depending on the product. We must clearly differentiate strategies for staple items, which are price-sensitive, and for items with added value such as apparel, which are not all about price. The basic principle is to have an accurate understanding of customer needs. That may sound pretty obvious, but I believe it is the core consideration for our business.

[Unknown Analyst]

My first question is what indicators and what kinds of consumer behavior do you intend to pay attention to when working to grasp consumer sentiment? I believe consumer sentiment has become difficult to interpret because of the pandemic and price hikes. What are your predictions for consumer sentiment going forward?

My second question is how do you plan to enhance the digital features of the WAON Point system? And what are your thoughts on collaboration with other companies in the digital and financial fields? I hear that PayPal campaigns and so on are becoming equally as influential as supermarket promotions and note that there is now a closer relationship between Rakuten Points and Seiyu. I understand that you are pursuing various WAON initiatives, but I also see many issues in collaboration outside the Aeon Group.

[Akio Yoshida, executive]

Regarding your first question, I believe that now in the third year of the pandemic, we are less likely to be subjected to physical restrictions as we were in the past. In the first year, we had to close malls, but we probably won't have to do that anymore. We consider this to be a positive because there is no risk of the Aeon Group losing sales opportunities like we did earlier in the pandemic. We expect customers to be highly selective about how they spend money because the increase in electricity and gasoline prices will make them more budget conscious. Most of the items whose prices we have frozen are food and daily use household items. We imagine consumers want to minimize the cost of items they use daily but splash out on single luxury items that they truly enjoy.

It's a complex situation because although consumer sentiment is weak, consumers are also feeling a sense of liberation from the limitations that the pandemic brought about. Recent sales trends have not been too bad, fairly similar to the same period in fiscal year 2019. Sales are trending flat or slightly down as a result of the combination of a rebound from the impact of the pandemic and consumer restraint.

The way people shop has changed a lot, too. For a while, consumers shopped in bulk to reduce the number of visits to stores. That is, they bought a little more than usual per shopping trip. We must do business in a way that facilitates one-stop shopping for customers, which has become ingrained as a habit, instead of visiting several stores to get shopping done as they used to. Per customer spend has increased and remains high. Although customer traffic is down slightly, the total market spend is about the same as a year earlier.

Regarding your second question, loyalty points and cashless payments are an unavoidable trend. Around 60% of all payments are already cashless at Aeon Retail. These cashless payments are mostly made using Aeon cards and WAON Points. We don't use the term economic zone, but I believe we must build Aeon Living Zones that integrate WAON Points, Aeon cards, physical stores and digital channels like online supermarkets.

We envisage building convenient and differentiated Aeon Living Zones by adding other useful features such as drugstores serving as local family pharmacies so that consumers can meet all their needs with a single digital device. We are currently at the stage of pushing ahead with integrating digital channels with the physical stores and loyalty points.

From a management perspective, a rising share of cashless payments puts pressure on profits because they require merchant fees, while cash payments don't. Payments are a very important issue for us because by increasing the share of payments using WAON Points and Aeon cards, we can spend merchant fees within the Aeon Group on promotions, thereby creating a virtuous cycle.

[Unknown Analyst]

Firstly, in preparing guidance for the current fiscal year, how much of an increase in utilities costs are you factoring in? Aeon spends over JPY 100 billion on utilities alone. I could understand your profit forecast of profitable business segments like apparel are growing, but I would like to know the extent of the cost increases you expect.

Secondly, the first year covered by your medium-term management plan has been impacted not only by COVID-19, but more recently by accelerating inflation as well. Are you implementing medium-term management plan initiatives on the assumption that consumption levels will return to pre-pandemic levels in Japan, Southeast Asia and China? Or do you need to change course in anticipation of consumption being slightly weaker amid rising costs, including utilities and personnel expenses?

[江川 敬明, executive]

In answer to your first question, yes, we are certainly feeling the impact of rising costs. In the fourth quarter, our electricity bill increased by around 20% year-on-year. Many other costs are also going up. Without mentioning specific figures, I can say that factors contributing to cost increases have been reflected in the profit forecasts we announced earlier. I think further unanticipated cost increases are possible, but our forecast ranges were set with the potential for such increases in mind.

[Akio Yoshida, executive]

My answer to your second question is that we intend to closely monitor developments during the current fiscal year. It might sound strange to say that we've been at the mercy of COVID-19 over the last 2 years, but we did have to respond to many unexpected events amid the pandemic. We must assess how much impact the lessons we learned and the work we did during those 2 years will have amid this fiscal year's business environment, in which everyone is becoming somewhat more accustomed to the pandemic. Provided we accurately estimate the impact of our various initiatives, I don't think we will have to revise our outlook later on.

But in this context, we need to make sure that we work hard toward achieving a recovery. By that, I mean, we need to work out how to repair the damage caused by the pandemic through other measures. We have a multi-format business structure. The Shopping Center Development business, which used to be profitable, turned significantly negative. Fortunately, the supermarket business has conversely turned upward, resulting in some recovery overall. I believe overseas recovery trends are an indicator of the post-pandemic outlook, although there are many uncertainties such as trends in the Supermarket and Shopping Center Development businesses and overseas lockdowns.

Essentially, we need to find a way to revise our plan so that we can solidly achieve our 5-year targets at the end of the period covered by our management plan. We are still compiling data for March, but what we have so far is in line with the forecast that we prepared. The results look favorable given that the priority measures to prevent the spread of COVID-19 were in effect until March 21. I think the outlook will become clearer after Golden Week when we can estimate the first quarter results.

[Unknown Analyst]

Aeon is a huge group of companies. Would it be correct to say that Aeon Holdings and the management teams will be keeping a very close watch on developments and rapidly making changes as needed?

[Akio Yoshida, executive]

Yes. Aeon Holdings communicates frequently with each company and sets clear KPIs. If performance diverges from the KPIs, we take appropriate action, and this process is constantly repeated.

[Unknown Analyst]

My first question is how do you rate your performance in the fiscal year ended February 28, 2022? And what are your thoughts regarding earnings targets for the current fiscal year?

And secondly, the lockdown in Shanghai is now spreading across the city. How do you see its impact on Aeon's business?

[Akio Yoshida, executive]

In answer to your first question, I have to say it was disappointing because we did not reach our stated profit forecast. However, I think we recovered well considering that priority measures to prevent the spread of COVID-19 were implemented frequently throughout the year. Profit attributable to owners of the parent improved by more than JPY 70 billion. This was achieved with our profit adjustments that provide onetime profit, such as real estate sales.

We wanted to start by building a solid foundation, taking actions so that profit will return when the pandemic ended rather than taking future profit prematurely. Operating profit and ordinary profit, which are indicators of our ability to earn money, fell about 20% short. Although I don't want to blame COVID-19, the Shopping Center Development business did struggle as a result of the pandemic. Its earnings were exactly inversely proportional to the number of COVID-19 cases.

Last year, consumers engaged in defensive shopping behavior even more than in the first year of the pandemic. This year, performance of the Shopping Center Development business has recovered significantly from a year ago, although not at 2019 levels.

Regarding your second question, although we operate businesses in China, we have no stores in Shanghai. Any impact of the lockdown would be on the supply chain if any of it passes through Shanghai. But so far, there has been no direct negative impact.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]