Aeon Mall Co Ltd

TSE:8905

Earnings Call Transcript 2020-Q1

[Masahiko Okamoto, executive]

Good morning. I am Okamoto from AEON Mall Co., Ltd. Please turn to Page 3.

As I explained in the financial results briefing in April, we started to apply IFRS 16 in the first quarter of FY 2019, which is a new standard for leases in International Financial Reporting Standards. This is applied to non-Japanese consolidated subsidiaries, and lease transactions in Japan use the Japanese standard as before.

As we often receive many questions about it, I'd like to explain about IFRS 16 first. This slide shows overview of IFRS 16. In IFRS 16, lessees recognize all leases as asset acquisition with financing at lessees. These transactions are operating lease transactions described in the notes of consolidated financial results and the securities report. This time, operating leases of overseas subsidiaries are recorded on the balance sheet. As store openings in China are mainly by master lease agreements, PL, BS and cash flow statements are affected by the change.

This slide explains impact on financial statements as shown by the graph on the right for BS. Right-of-use assets are posted in assets and lease obligations are posted in liabilities. As a result, right-of-use assets increased JPY 93.2 billion and lease obligations rose JPY 119.4 billion. And this makes financial indicators such as Net DE ratio look different, but actual cash flow remains unchanged. Operating leases are already considered as liabilities in analysis by rating agencies and financial institutions, and financing is not affected significantly. Impact on PL is described in the middle.

Rent we pay is not recorded anymore. Instead, depreciation of right-of-use assets and interest expense of lease obligations are posted. Depreciation is recorded by a straight-line method and an even amount of depreciation is posted. However, as interest expense of lease obligations is calculated for the balance of lease obligations, interest expense will decline as the balance of lease obligations decrease. Therefore, we estimate JPY 1 billion decrease of ordinary income in FY 2019. And then this first quarter under review, we recognized a negative impact of JPY 294 million but we expect positive effect and profit will be observed year-after-year. As I mentioned earlier there are no changes in the cash flow statement except for classifications for cash flows from operating and financing activities.

That is all for a brief explanation of IFRS 16. With this background, I will explain the financial results for the first quarter FY 2019 on Page 6. Operating revenue was JPY 80.6 billion, which is an increase of JPY 3.9 billion or 5.1% year-on-year due to steady performance of Domestic Mall Business as well as mall sales of Overseas Business, which substantially exceeded the previous year result. Operating income grew JPY 2.4 billion to JPY 15.1 billion, up 19.6% year-on-year. We could record significant increase in operating income due to the appreciation of IFRS 16, which decreased operating costs by JPY 1.3 billion, which is the difference between rent decrease and additional depreciation. But even excluding the impact of IFRS 16, operating income grew JPY 1.1 billion or 9.1% year-on-year to JPY 13.8 billion as indicated by the table on the right.

Ordinary income was up JPY 600 million or 5.1% year-on-year to JPY 12.8 billion. This is because part of rent, which was recognized as operating costs before, is now recorded as interest expense as a result of applying IFRS 16. Excluding the impact of IFRS 16, ordinary income rose by JPY 900 million or up 7.5% year-on-year to JPY 13.1 billion. Net income attributable to owners of parent improved as well, and we could make a great start of FY 2019 with a record high result for our first quarter even on the standard before applying IFRS 16. It looks equity ratio, DE ratio and net DE ratio deteriorated. However, as described in the reference, the numbers excluding impact of IFRS 16 maintained the previous level as 31.7% for equity ratio, 1.3x for DE ratio and 1.2x for net DE ratio.

In this fiscal year, we used these indices excluding the impact of IFRS 16 for year-on-year comparison and analysis. However, as Overseas Business have moved to the phase to generate cash flow, we will consider to introduce new management indices in conjunction with preparation of a new medium-term business plan starting from FY 2020. We will let you know when that is fixed.

This slide shows operating income by segment. For domestic operations, more business performed steadily to cover the decreased income of Urban Shopping Centers and the Domestic Business recorded profit growth as a whole. Urban Shopping Center business started to see effects of renovation. And as explained at the previous briefing, specialty store sales of existing facilities have been increasing year-on-year since the fourth quarter of the previous fiscal year. Revitalization measures are ongoing and profit improvement is expected in the second half of FY 2019.

Regarding Overseas Business, both China and ASEAN businesses are showing strong performance. Total results were better than the original plan. This slide shows overseas earnings performance. Operating income of China was JPY 1.5 billion to record net profit even after excluding the impact of IFRS 16. Please refer to the light and dark blue parts of the bar chart. As for ASEAN, Cambodia, Vietnam and Indonesia were all in the black, and their performance continues to be healthy. ASEAN recorded operating income of JPY 700 million. And same as China, they recorded net profit even after excluding the impact of IFRS 16. Operating cash flows are growing in our Overseas Business as the number of malls increases. In FY 2019, they have moved into the phase to contribute to earnings on a full scale.

From Page 9, more detailed explanation is provided for the Overseas Business. Specialty store sales continued to record a higher rate of growth. In China, despite the uncertainty in the business outlook due to the trade conflict with the U.S., our malls maintained double-digit growth as shown in the table and continued to outpace the national macro trend. Sales growth is accelerated by promotional sales associated with social events and mall revitalizations.

In Vietnam, floor space expansion was completed for AEON MALL Tan Phu Celadon, which is the first mall in the country. Some of its zones were opened early before the grand reopening in June. Same as China, they're showing a high rate of growth.

The numbers for Cambodia are from the first mall only. Opening of the second mall, Aeon Mall Sen Sok City, tentatively decreased the sales of the first mall. First mall is in the center of Phnom Penh, and it focuses on the sale of goods. And the second mall is in the suburbs, and it offers leisure facilities for amusement and dining. Customers seem to use these 2 malls according to their needs. 1 year after the opening of the second store, the sales of the first store is on the rise.

In China, increasing number of malls have already operated for 3 to 4 years since opening. It is time for renewal for them by rent revision and tenant replacement for more up-to-date tenants.

In Japan, contract with specialty store expire in 6 years in general. In China, 3 years are common. And this first quarter under review, 4 malls were reopened after renovation. On April 30, AEON MALL Suzhou Xinqu; on May 1, AEON MALL Wuhan Jingkai; on May 24, AEON MALL Guangzhou Panyu Square; and on May 24, AEON MALL Hangzhou Liangzhu Xingcheng.

Economic growth has slightly slowed down in China, but we will continue to maintain the growth which outpaces the national macro trend by flexibly addressing the changes in the market and customers through constant improvement of malls. As a measure to generate new demand, we implement promotional sales associated with social events for sales growth. For instance, in China, International Women's Day was celebrated on March 8, 2019, and it was a half-day national holiday for working women and we had promotional sales and held events targeting women that increased specialty store sales by 20%.

Next, please turn to Page 12 for explanation of Domestic Business. In this first quarter under review, specialty store sales were better year-on-year. However, we could not realize a significant growth due to bad early spring weather in March and April and considerable sales opportunity loss as a result of enforcing renovation with expanded floor space before the Golden Week holidays. Having said that, specialty store sales made a significant growth of 16% year-on-year during the Golden Week holidays and the growth in May was 5.3% year-on-year as shown by the tables. As a result, 3 months of this first quarter recorded 2.5% year-on-year growth.

As shown by the graph on Page 13, specialty store sales of existing malls are outpacing shopping center industry and other types of retail. Especially in May, owing to the strengths of our malls that have leisure functions such as dining and amusement in addition to sell of goods, we could respond to demand for leisure during the Golden Week holidays, and the growth stands out in competitors' results. According to preliminary report for June as a result of revitalization, we could record 5.7% sales increase year-on-year by effective measures like renovation by floor space expansion.

Now please skip one page to Page 15. Now let me explain floor space expansion and renewals to the dominant mall in each region, which were mentioned in the past financial results briefings. We executed floor space expansion in 3 malls, they are AEON MALL Higashiura, Natori and Okinawa Rycom. In this first quarter under review, AEON MALL Higashiura underwent its first major renovation since its opening in 2001. About 70% of the mall was renovated with the largest kids and baby zone in the region as well as a dining zone, which is nearly 1.8x larger than the original space.

AEON MALL Natori expanded its floor space as well to add 50 specialty stores to make 240 in total. And total rentable area increased by 13,000 square meters to 80,000 square meters. This renovation made AEON MALL Natori the largest mall in the Tohoku region. For better convenience to customers, the newly expanded second floor features a roofed deck, which provides direct connection to a train station near the mall. Also we are implementing measures for better coordination with local community such as facilities for child care support and lifelong learning. AEON MALL Okinawa Rycom converted part of its Pilotis parking space to retail space. We recruited 8 new tenants and replaced 10 tenants to become the largest mall in Okinawa prefecture.

All of these 3 malls are recording sales increase, which is higher than the rate of increase of rentable area. In addition to these 3 malls with expanded floor space, we implemented major renewals in 8 malls by reviewing or drastically replacing tenants. Including other 8 malls, which had renovation with expanded floor space in FY 2018, these 19 malls with revitalization recorded quite steady growth and specialty store sales at 7.4% year-on-year and effective revitalization is indicated as 7% compared to malls without revitalization.

Page 18 to Page 20 describes details of financial statements. Please refer to these pages for impact of IFRS 16 application.

Now please turn to Page 21. From this page onward, I will explain future initiatives. Our Overseas Business operates 27 malls as of the end of FY 2018 and existing overseas malls are 19 in total, including 13 malls in China and 6 malls in ASEAN.

In FY 2018, operating revenue of existing overseas malls grew JPY 2.5 billion and gross profit increased JPY 2.6 billion as shown on the table. An average operating revenue per mall rose JPY 134 million and average gross profit per mall was up JPY 138 million. We attempted a simple calculation with figures before IFRS application and provided that the current revenue growth trend will continue, the number of existing malls in FY 2019 will be 24. If we can expect the same profit improvement achieved in FY 2018, profit of existing malls in FY 2019 can be estimated to grow JPY 3.2 billion. We expect further profit improvement in overseas operations like China by increase of the number of malls in the future.

The graph at the bottom shows the trend of actual and planned revenue of AEON MALL Suzhou Xinqu opened in January 2016. As indicated here, its profit has been steadily increasing since its opening. And on April 30, 2019, revitalization measures were executed as contract expired with tenants in the third year after the reopening, and additional profit improvement is expected. If such favorable situation continues, they could even expect that, some years later, the growth to record better profit than Japanese malls. As I said earlier, the number of malls, which have passed 3 to 4 years after opening, is increasing in China and ASEAN. This means it is time to revise rents or replace tenants with more up-to-date tenants.

We're also implementing renovation with floor space expansion as planned. In June 2019, AEON MALL Tan Phu Celadon was reopened after floor space expansion and there are other large scale renewals planned, and we will continue to maintain freshness over malls through revitalization. I did not explain details here, but we will attract more customers and increase sales by evolving our malls by leveraging the expertise acquired in Japan and mall operations of Japanese quality.

Next is about our operations in Japan. As I said, in Japan, contracts with tenants expire in 6 years by replacing them with more up-to-date tenants or specialty stores required by local customers at that timing. Freshness and attractiveness of malls can be maintained and continuously improved. It is critical to keep so-called age of stores young as often said in retail industry, especially floor space expansion is quite effective and we conducted full expansion in 3 malls in this first quarter. All of them increased revenue more than the rate of increase of floor space, and this explains the effectiveness. In this fiscal year, we plan to complete floor space expansion in AEON MALL Takaoka before consumption tax increase, and we'll leverage it to improve sales.

From Page 24, I will explain 3 major topics related to our policy in FY 2019. First point is consumption tax increase scheduled on October 1. We closely analyze the track record of April 2014 when we had the previous consumption tax increase to identify the type of goods sold and timing of sales of them. I cannot disclose specific measures today, but the entire AEON group will implement sales initiatives with the perspective of a developer.

Also AEON Group is promoting cashless payment such as AEON Card, which is a group infrastructure as well as point system by WAON. After the tax increase, sales decrease is expected during year-end shopping season, which usually shows high sales figure. We will closely watch this development and secure sales by proactive planning.

Next page is about inbound tourist market. According to the announcement by Japan Tourism Agency, foreign tourists visited Japan exceeded 30 million in 2018 and expected to be 40 million in 2020. In 2018, 64.8% of them were from China and East Asia. So visitors from Asia are playing an important role in the inbound tourist market in Japan. Also their destinations are expanding from metropolitan areas to provincial cities.

With this environment and our increased publicity in China and ASEAN, we designate malls near airports or tourist sites as malls focus on inbound tourists, and we'll reinforce this initiative further. For instance, we designate AEON MALL Narita as a new model store for inbound visitors and provide various functions to support their stress-free shopping such as measures to welcome foreign visitors, multilanguage displays, improvement of environment and new services for support for their spots and content distribution, et cetera. These measures will be deployed to other malls where inbound tourists are expected to increase and will respond to their demand through coordination with government, collaboration with travel agencies and enhanced PR activities.

Third point is promotion of digitalization. Digitalization of malls is aimed to help customers have more enjoyable time for shopping or event by eliminating time for waiting or saving the trouble of payment. We will enhance convenience for customers in each scene like visiting malls, provision of information, dining and having a rest, and mobility in malls.

As you saw in the video, AEON MALL Suzhou Xinqu opened in Jiangsu province of China in June. We provide convenient services for customers via a smartphone application. We will build a system to improve efficiency in back-office operations for specialty store staff to provide working environment where they can concentrate on their sales activities. By doing so we can contribute to productivity improvement through the digitalization. We have been promoting growth measures with ESG as a core, as we have explained so far.

One of the measures is Happiness Malls. This initiative is to promote mental and physical health by leveraging the strings of physical malls and offering places for real experiences and places to gather for local people. We entered into an agreement with the Saiseikai Imperial Gift Foundation for mutual cooperation to contribute to local communities in regions where both parties operate. As the first phase of the agreement, we will implement initiatives featuring health including AEON MALL Walking at AEON MALL Takaoka.

Please turn to the last page, Page 33. We published integrated report in place of annual report for better delivery of information about ESG. Also to facilitate understanding of integrated report by customers and specialty store staff, we modified the editorial policy of CSR report and published CSR/ESG report. You can access to the report by the URLs on this page. I appreciate if you could look at them.

Medium- to long-term initiatives are posted on the IR page of our website with current status of measures and updates on ESG initiatives. I hope it can serve as your reference.

That is all for my presentation. Thank you for your attention.

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