Aeon Mall Co Ltd

TSE:8905

Earnings Call Transcript 2019-Q1

[Masahiko Okamoto, executive]

Thank you very much for attending our results briefing despite your busy schedule. I am Okamoto, in charge of Administration Division since May this year.

Now I will talk about consolidated results for the first quarter of fiscal year 2018. Fiscal year 2018 is the second year of Medium-Term Management Plan, which started in fiscal year 2017.

Overseas Business continued to be strong. In the first quarter, operating income turned positive, both in China and ASEAN. As for business in Japan, as a result of firm performance of existing malls, operating revenue and operating ordinary and net income attributable to owners of variant all reached record levels. Results for the first quarter were in line with plan.

Next, I will discuss progress of our growth initiatives during the first quarter. First of all, as for capturing Asian growth opportunities, Page 4 shows specialty store sales trends in existing malls overseas. Specialty store sales for Overseas Business as a whole continued high level of growth or double-digit growth. The factors are: firstly, rising income and consumption; and secondly, population growth in market area of malls opened in regions where urban development is taking place.

It seems growth rate of visitor traffic in China slowed down. There were 2 major factors. Firstly, growth rate of visitor traffic was as high as 14% in the first quarter of fiscal year 2017. As a reaction to that, visitor traffic growth rate slowed down.

Secondly, at the existing malls, which opened 3 years ago, following upon contract expiration, renovation was carried out for replacement of tenants to have more attractive specialty stores. As a result, sales opportunity loss occurred.

Both are onetime factors and there was no major change to the trend. Also in ASEAN, high level of growth continued, both in Vietnam and Cambodia. In this way, malls in Overseas Business performed very well.

10 Chinese malls out of 17 and all of the 7 ASEAN malls became profitable. Even at loss-making malls, sales increased steadily and there is prospect of shifting to profitability at all the malls.

The next slide shows progress and profit improvement in Overseas Business. Quarterly trend is indicated. In the fourth quarter of fiscal year 2017, Overseas Business overall recorded positive operating income. In the first quarter of fiscal year 2018, China and ASEAN were both profitable.

As you see in the table, operating income improved by JPY 400 million to positive JPY 265 million in Overseas Business as a whole.

Improvement in profit in China seems to have slowed down compared to the first quarter of fiscal year 2017. All of the 4 new malls which opened in fiscal year 2017 opened in the fourth quarter near the end of the fiscal year. So openings of those malls are in this fiscal year in real terms. Therefore, in fiscal year 2018, there is an impact of losses from 6 new malls, including 2 new malls opening in this fiscal year.

On the other hand, profit improvement at the existing malls more than offset losses from new malls and positive profit will be secured. As I discussed, Overseas Business entered into the stage of making full-fledged scale profit contribution as a growth driver for our company.

After this fiscal year started, we opened AEON MALL Yantai Jinshatan, the 18th mall in China on May 25. At this mall, the latest digitalization is utilized actively and its initiatives are ahead of those in malls in Japan. It is located along the coast.

Recently, development of the area has been progressing rapidly. Resort hotels from overseas were also constructed. The area is developing as a resort area, which can attract tourists, both from inside and outside China.

At this mall, we will reinforce initiatives to capture demand of tourists, both from home and abroad, that are expected to increase going forward and expand visitor traffic.

As for existing malls, AEON MALL Wuhan Jinyintan, which opened in December 2014, marked its third year when contracts with specialty stores would expire. As is the case with Japan, by taking the opportunity of contract expiration, a large-scale renovation was carried out. This mall has been performing well since its opening. Annual visitor traffic exceeds 16 million. It already became profitable in fiscal year 2016. As a result of renovation, we were able to replace tenants with better specialty stores under good conditions.

In the same way, at AEON MALL Suzhou Yuanqu Hudong, marking its third year since its opening, a renovation of about 20% of the total was carried out.

In ASEAN, we opened AEON MALL Sen Sok City, the second mall in Cambodia on May 30.

The first mall in Cambodia is located at the center of capital, Phnom Penh, and the second mall is located in a suburb about 10 kilometers from the center of the capital. To differentiate the second mall from the first mall, the second mall is strengthening its entertainment functions in its MD composition.

The mall is operating one of Cambodia's largest amusement complexes through establishment of a water park and introduction of an indoor amusement park, a TV station with a TV studio and providing entertainment experiences more advanced than those in Japan.

Besides, AEON HALL, established as a place for local community, is a far bigger hall than the ones in Japan. The specification allows holding of wedding ceremonies and concerts. Because of the specification, positioning of this hall is overwhelming as an event hall in the region.

It also houses governmental services, including a driver's license renewal office, ID card issuance center and passport center and a financial zone that brings together in-store branches of 5 large banks to enhance convenience for customers.

In Cambodia, it is said, peoples' lifestyle changed dramatically after the opening of the first mall in 2014, as people use the expression before AEON and after AEON. With the opening of the second mall, AEON MALL Sen Sok City, we will further enhance branding and reinforce capability to attract customers in Cambodia.

Let me move on to status of sales and growth initiatives in mall business in Japan. In the first quarter, specialty store sales at existing 73 malls grew 0.1%, before adjustment for weekend and holidays. In May, sales were sluggish due to unseasonable weather conditions and poor performance of cinema because of absence of hit movies.

But in June, on a flash-report basis, sales trend turned positive and increased 4.3% year-on-year. On a normal basis, sales have been on a year-on-year upward trend. We think that is due to effects of development of latent sources of domestic demand and becoming the overwhelmingly dominant mall in each region we are promoting as growth initiatives.

Next, I will talk about initiatives for business in Japan for the first quarter. Please go to Page 12 of the material at hand. We opened THE OUTLETS HIROSHIMA on April 27. We opened this mall as a project for community origination to meet needs for regional revitalization.

There are 3 concepts, a full-fledged outlet mall, entertainment and harmony with local community. This mall targets a wide market area, including domestic tourist and inbound tourist from overseas. It allows visitors to experience the local flavor of Hiroshima, including regional foods and specialties.

Trend to the survival of the fittest is seen in retail facilities in Japan. In such a situation, it is becoming difficult to provide new values for customers by just following conventional format.

On the other hand, if we can change our model by responding to needs of each location or area, we can capture demand from each area and increase sales and visitor traffic.

This facility opened with a new format that is different from conventional malls. From the soft opening on April 24 to June 30 specialty store sales were about 30% higher than plan, showing very strong performance.

Now I will touch upon characteristics of THE OUTLETS HIROSHIMA. In Chugoku and Shikoku areas, there was no full-fledged outlet mall, and this format was desired by people in the areas and many tourists visiting Hiroshima. We realized the outlet mall of the largest scale in Chugoku and Shikoku areas by attracting 127 outlets.

As for entertainment, we introduced a year-round ice-skating rink and an amusement facility, where advanced VR is used.

We are also reinforcing initiatives with an awareness of collaboration with local community, including operation of a bowling center in collaboration with Hiroshima Toyo Carp. Hiroshima Electric Railway donated streetcar, a symbol of Hiroshima, to us. Through a combination of the streetcar and projection mapping, attractive space is produced, where retro style and advanced technology are integrated. Visitors are enjoying it.

In a zone under the third concept, harmony with local community, many stores were attracted. They include a miscellaneous goods store created by creators and craftspeople from the Setouchi area and Hiroshima. Food stores carrying local specialties and restaurant where visitors can enjoy local delicacies of Hiroshima.

In addition, the city of Hiroshima opened a shop as a hub of information on local specialty goods and tourism under the name of V BASE.

Next, I will talk about Happiness Mall Project on Page 16. We are reinforcing Happiness Mall Project with 4 pillars: Health, wellness, community and opportunity.

As for specific initiatives for health, we are conducting more walking at AEON Malls throughout Japan. As was shown in the video, at AEON MALL Miyazaki, a mall walking program overseen by the Center for Preventive Medical Sciences, Chiba University, was adopted in the mall in conjunction with the floor space expansion in March, creating a space and opportunity for promoting awareness of health.

In wellness, we present Opera de AEON MALL, opera concerts at various malls in cooperation with Japan Opera Foundation. At AEON MALL Makuhari Shintoshin in April, an opera held at Kandu, a work experience theme park for children provided a new and different opera appreciation experience, including an exciting video, accompanied by a narration. The events received positive reviews.

We will continue to develop malls which will excite customers when they come to AEON MALL and make customers smile when they go home. As we expand Overseas Business, we are also expanding relations with overseas specialty store companies with the purpose of providing new experiences and discoveries for customers.

We are actively attracting overseas specialty store companies to Japan. Let me give you some examples. In April, A! Xiang, a popular rice noodle restaurant in China, opened in AEON LakeTown Mori. A! Xiang is a rice noodle restaurant established in China in 2000 and has over 500 directly operated stores in China. They have other branches in 17 AEON Malls in China.

In Japan, the branch opened in AEON LakeTown Mori is their first branch. As you see in this slide, we are also attracting other specialty stores operating in China and ASEAN. By attracting specialty stores, which are topical overseas, we will enhance attractiveness of our malls further.

Let me move onto the second growth initiative in Japan. Initiative for becoming the overwhelmingly dominant malls in each region. We are pushing forward development of malls that command the highest customer support and which are #1 in the region in attracting customers. Malls with strong ability to attract customers are selected by specialty stores as their store opening destinations. Amid consolidation of large stores, such malls can capture local markets.

As for initiatives for becoming the overwhelmingly dominant mall in each region, the first initiative is promotion of highly effective revitalization. Specialty store sales at the 18 existing malls that underwent renewal in fiscal year 2017 and the first quarter of fiscal year 2018, increased 8.0% year-on-year, showing very good results. There is more than 10% difference compared to malls which didn't undergo renewal.

As for examples of renewals carried out, in the first quarter of fiscal year 2018, in March, a large-scale renewal was carried out at AEON MALL Sakai Kitahanada and AEON MALL Miyazaki reopened with expanded floor space.

As was shown in the video, at AEON MALL Sakai Kitahanada, large specialty stores, mainly dealing in merchandise for daily needs such as MUJI store, UNIQLO, GU, electronics and sporting goods stores were attracted to a space that was vacated by a department store. By bringing in strong tenants on an overwhelmingly large scale with a new and unprecedented business model, the mall is increasing the number of customers significantly, generating ripple effects throughout the mall.

At AEON MALL Miyazaki, a new wing was built at the site on the south side of the mall that had been used as a parking lot. In addition, a major renewal was carried out in the existing wing.

Even before floor space expansion, it was the most supported mall in the region. As a result of floor space expansion, satellite shops of local department stores, fashion department store brands, which had not been attracted, and 37 stores, which are their first stores in South Kyushu were attracted. And the mall became the overwhelmingly dominant mall in the region.

After floor space expansion, GLA increased 20% and specialty store sales increased 30%.

As for new malls, in addition to THE OUTLETS HIROSHIMA I explained earlier, we opened AEON MALL Zama in the first quarter. We also opened AEON MALL Iwaki Onahama in June in the second quarter. We were selected as a collaborator for Onahama Port Hinterland development project and opened this mall.

This is our first mall in Fukushima Prefecture. By utilizing geographical location with tourist facilities, such as aquamarine park visited by 2 million people per year and as an interchange organically connecting to city center, we opened the shopping mall, which would attract many visitors.

The mall also has functions as a disaster preparation base. In preparation for emergencies as countermeasures against tsunami and flood damages, the first floor is used as parking lot with [ sturdy ] structure, and floors from the third floor to the rooftop will serve as a temporary shelter in the event of a disaster.

In the great East Japan Earthquake, which happened in 2011, this area was affected by about 1.5 meters of tsunami. AEON MALL and Aquamarine Parkside as well as AEON MALL and city center side are connected with a pedestrian deck, which is higher than 6 meters, maximum assumed inundation height. In the event of a disaster, the mall will open the in-mall accesses to evacuation deck to serve as a temporary shelter for evacuating residents.

As there were no large malls in Fukushima Prefecture, about 50% or 60 specialty stores in this mall are their first stores in Fukushima Prefecture and are attracting customers from the entire area. The mall has lots of restaurants, food merchandising stores and amusement facilities, and is a mall enjoyed by families, including customers in the region and tourists to the aquamarine park.

Next, I will talk about capturing urban growth opportunities. At OPA, operating Urban Shopping Center Business, renewals of existing stores are being conducted in stages to strengthen profitability. At Canal City OPA, in March, the basement floor reopened after renewal. A character goods shop and specialty stores selling Japanese sundries and other items were opened to cater to customers who come for sightseeing from other parts of Japan and overseas. Renewal is being implemented to bring in large topical specialty stores in winter 2018.

A sequential renewal is also in progress at Shinsaibashi OPA. In April, large specialty stores with strong customer drawing power were introduced on the seventh and eighth floors. Dining area renewals will be completed in fall 2018 and business format that overemphasizes [ apollo ] will be converted into format to propose lifestyles.

As for optimal financing mix and organizational structures to support growth, we issued bond for individuals to secure diverse funding vessels. We nicknamed the bond, Happiness Mall bond, partly to reinforce branding of Happiness Mall I discussed earlier. To motivate them to visit the mall, we distributed cinema tickets and sent invitations to Happiness Mall events, such as operatic performances and Rakugo, traditional Japanese comic storytelling as benefits to bond purchasers.

Sales were very strong and demand far exceeded the amount of issuance. Main purchasers included senior citizens, our new target in particular, women. We were able to confirm that there are many potential investors among our customers. For realization of diversity management, for the purpose of supporting great efforts of employees working while raising children, we are promoting expansion of AEON Yume-Mirai Nursery Schools. As you see on Page 24, new AEON Yume-Mirai Nursery Schools were established at 4 malls at the start of fiscal year 2018, expanding the total to 24 locations nationwide.

Besides, as ESG initiatives, we implemented initiatives to contribute to the community in conjunction with the opening of AEON MALL Iwaki Onahama. The initiatives include donation of special vehicle to the facility and implementation of disaster drills.

I will discuss BO on Page 25. Growth rate of ordinary income was smaller than growth rate of operating income, partly due to booking of issue cost of bonds for individuals that I mentioned earlier. Net known operating profits and expenses reduced by JPY 320 million in the first quarter. Income before income taxes were up 11.2% year-on-year to JPY 11,913,000,000, as net extraordinary gains and losses were up JPY 968 million.

As described in the summary of financial results, it was mainly because of an extraordinary loss of JPY 948 million recorded in the first quarter of the previous fiscal year on the cancellation of a lease contract due to the purchase of land and buildings of AEON MALL Hiroshima Fuchu. As a result, net income attributable to owners of parent rose 13.7% year-on-year to JPY 7,897,000,000.

Page 26 shows quarterly operating income change by segment. As for change of operating income, Overseas Business accounted for 80% of the increase in operating income and drove growth in our income. In China, profit increased overall as profits of existing malls accumulated steadily, more than offsetting the losses at new malls, which opened mainly near the end of the previous fiscal year. In Japan, profit increased as a drop in profit of Urban Shopping Centers was more than offset by profits of mall business.

For Urban Shopping Center Business, we are working on initiatives to improve profit and expect profit will increase in this fiscal year.

The next slide shows year-on-year comparison of operating revenues, operating loss profit and operating profit by segment. As for balance sheet and cash flows, main items were changed, are as described on Pages 28 and 29 of the material. Full year plan and annual dividends for fiscal year 2018 are kept unchanged from the figures announced on April 11.

Page 30 and following pages include medium-term management plan, so please refer to the following pages.

That concludes my presentation. Thank you very much for your attention.