Aeon Mall Co Ltd

TSE:8905

Earnings Call Transcript 2023-Q1

[Yasutsugu Iwamura, executive]

Good morning, everyone. I am Iwamura of AEON Mall. Thank you very much for attending our results briefing despite your busy schedule today. Now I will give you a summary of financial results for the first quarter of fiscal year 2022. As for performance, revenue and other numbers, as I did last year, I will give you a comparison with FY 2019, which was not affected by COVID-19.

Page 3, please. In the first quarter, although status of infections of COVID-19 varied country by country, improvement of vaccination rate in various countries led to reduction of risks of aggravation. Besides, as countries changed direction to normalize economies coexisting with COVID-19, customer traffic recovered.

In China, the impact of restrictions on activities based on a zero-COVID policy was small in the first quarter. As a result, operating revenue and profit at each level increased year-on-year. However, domestic sales did not return to pre-COVID-19 levels, and consolidated operating income was JPY 2 billion lower than FY 2019. Operating revenue and profit at each level were generally in line with plan for the first half.

Page 4, please. The table indicates results by segment. Profit increased overseas mainly in China and Vietnam. And operating income increased JPY 800 million from FY 2019. In China, some malls were closed temporarily in the first quarter. About JPY 600 million of fixed cost during that time were transferred to extraordinary losses.

In Japan, the number of new cases of COVID-19 trended downward. However, due to continued self-restraint mood and changes in consumption behavior and mindset during the with-COVID-19 period, operating income decreased JPY 2.9 billion from fiscal year 2019.

Page 5, please. I'll explain revenue performance by country. As the fiscal year ends in December overseas, the first quarter is from January to March. In China, specialty store sales at existing malls for the first quarter were 94.4% compared to FY 2019. The Omicron outbreak spread throughout China beginning in mid-March. Under the strict behavioral restrictions based on the zero-COVID policy, people refrained from going out.

Beginning in April, a 2-month lockdown was implemented in Shanghai, and people continued to refrain from going out as sluggish sales trend continued. Since the lockdown was lifted at the end of May, sales have been recovering. We expect sales will return to conventional growth track in July or after.

Page 6, please. In Vietnam, as the government shifted to a with-COVID policy to return to economic growth, specialty store sales at existing malls for the first quarter increased significantly to 145.2% compared to FY 2019.

By category, product sales, food and beverage increased significantly from FY 2019. We can see continued strong appetite for spending of consumers in Vietnam. Amusement and cinema also showed a recovery trend from April onwards, and sales continue to grow.

In Cambodia and Indonesia, trends of sales and customer traffic haven't recovered to a pre-COVID level yet. However, as the number of COVID cases is on the downward trend and the impact is decreasing, we expect a recovery trend from July onwards.

Page 7, please. In Japan, specialty store sales at existing malls for the first quarter were 88.0% compared to FY 2019 as the Omicron outbreak which spread rapidly after the new year subsided and the number of cases declined. Sales at our malls gradually improved although sales didn't fully recovered to a pre-COVID level.

For the summer holiday season, we expect people will be more active in domestic travel or homecoming than last year. Therefore, we will launch sales promotional measures to capture outing demand before traveling or demand for eating, drinking and amusement and days off. Currently, new social problems are occurring such as power crunch and risks of heat stroke caused by continuous hot days. By advocating co-sharing, hoping people will switch off the lights at home and have a good, cool and comfortable time from the daytime until the evening, at AEON Mall, we provide solutions to communities and attract more customers.

Pages from 15 to 21 show the 3-year medium-term management plan and from 23 to 28 show management policies and long-term vision. So please confirm them.

Page 30, please. Now I'll explain new measures for growth based on 5 management issues and future vision. Firstly, achieve profitable growth in our overseas business and accelerate new mall openings. We are advancing initiatives to achieve high profit growth by accelerating mall openings in China and ASEAN, a remarkable economic growth. I'll explain profit growth model for all overseas malls to show how overseas malls achieve profit growth.

We select and open malls in areas of remarkable economic growth with potential on urban development. Trade area population at the time of opening is normally 300,000 to 400,000 in Japan and 1 million overseas. In some cases, after mall opening, attractiveness and convenience of the area enhances urban development progresses and population inflow into the area increases.

Besides, as a result of direct job creation and revitalization of regional economy through creation of operation-related businesses, double-digit annual sales growth continues after opening.

In the bottom-left graph, the vertical axis indicates operating revenue and horizontal axis the number of years after opening. In the beginning, after opening, as income and consumption levels are still [ lower ] in the mall opening area, revenue and expenditures are balanced. However, due to high sales growth, double-digit annual revenue growth is achieved.

On the other hand, as real estate cost accounting for majority of operating expenses stay almost constant, revenue growth directly contributes to profit growth. And profit of overseas business is accumulated. In the seventh or the eighth year, profit level reaches the same level as a mall in Japan. A mall in Japan means a large mall, which is #1 in the region as a standard format, generating annual facility sales of JPY 30 billion, operating revenue of JPY 3 billion and operating income of JPY 1 billion and profitability of about 30%.

The bottom-right table shows change in operating income margin in AEON Mall Wuhan Jingkai in Hubei, which opened in 2015. In the initial year, operating income margin was 2%. However, along with annual profit growth, operating income margin improved and reached 40% in a fixed year, and operating income exceeded JPY 1.4 billion. Despite temporary impact of the zero-COVID policy in China on performance, I think high profit growth will be achieved from the mid- to long-term perspective.

Page 31, please. This slide shows property opening plan by country to achieve profit growth. Aiming for a 52 mall network by FY 2025, we'll steadily open malls under the next 3-year medium-term plan. We position Vietnam as the most important area, plan to open 10 malls during the 3 years starting from FY 2023 and enter into the phase of accelerating more openings by investing management resources.

Page 32, please. In Vietnam, we are pursuing area-dominant mall openings in the south focused on Ho Chi Minh City and in the north, focused on Hanoi. We concluded cooperative agreements regarding shopping mall development with Ho Chi Minh City, Hoc Mon Province in April this year and with Dong Nai Province neighboring Ho Chi Minh City in May. We are steadily making preparations for further more expansion in southern and northern areas.

Recently, we decided to open the first mall in central area, AEON Mall Hue in Hue Province in central area. In June, we concluded a cooperative agreement regarding mall openings with Da Nang City, a major city in central area. In addition to southern and northern areas, we'll accelerate area-dominant mall openings in central area.

Page 33, please. In China, we are pursuing area-dominant mall openings in the 4 areas shown here. We currently operate 22 malls. Aiming at the 29-mall network, we are securing candidate sites for mall openings.

Properties in Hubei Province in inland areas are contributing to profit significantly. By positioning inland areas where economic development is remarkable as key areas, we'll expand mall openings in Hubei and its neighboring Hunan Province.

Page 35, please. Secondly, maximize the appeal of brick-and-mortar malls through customer experience. As demographics and consumer behavior change at an accelerated pace, we cannot avoid shrinking revenue if we give conventional mall operation in Japan. The biggest mission as a developer is to attract customers. In order for AEON Mall to continue to be places for people to gather, it is indispensable to provide value for customers from new ideas and perspectives by thinking outside the box.

I think increase in the number of devoted mall fans will lead to more customers, higher frequency of mall business and market share gain within the market area. For that purpose, AEON Mall needs to be a bigger presence, a nice thing of every customer. We need to have a number of different contact points with customers and provide high-quality experiential value customers can emphasize ways at different situations.

Customer experiences include not only visiting malls to enjoy shopping but also understanding culture through community, interaction and social contribution through participation in sustainable activities such as clothing collection held at malls. In providing experiential value to customers, I think providing comfort in stay is most important.

Page 36 shows a summary of comfortable spaces, and Page 37 shows convenience as a value to be provided. So please refer to them. Through creation of customer experience and by diversifying and deepening experiential value for customers, we hope customers will be our mall fans. We aim at creating malls customers would visit spontaneously.

Page 38, please. Since the outbreak of COVID-19, we've been taking anti-infection measures by prioritizing safety and security of customers for 2 years. Consideration of measures to [ curb ] the unknown virus with various original ideas led to accumulation in new know-how, building of strong measures against big risks of spread of serious infection diseases and pandemic, which may occur again in the future surely led to BCP measures for the future from the mid- to long-term perspectives. Also in joint research with Waseda University, we conducted for 1 year from April last year effectiveness of our infection control measures were highly evaluated.

Page 40, please. Thirdly, build next-generation malls and pursue the urban shopping center business. As for direction of future property development and revitalization of existing malls, we will not only develop malls but also create a variety of development models according to changing needs of society, communities and customers and location characteristics to maximize revenue from developed properties. We will deepen relationship between customers and our malls by proposing new lifestyle communities, providing diverse value for community issues and providing solutions for living.

Page 41, please. The Outlets Kitakyushu opened as the second mall, and there's a concept of a regional innovative commercial facility in April this year. A theme park, Space World, was on this site. We heard people in the community say there is no attraction as a facility where people made lots of memories was closed and [ non-resident ] population decreased. Therefore, we needed to create a place attracting customers from a wide area to provide solutions to these voices and issues of the community, not conventional shopping mall format, but leisure contents for experience and entertainment element had to be fulfilled.

We were particular about regional innovative type, the outlet format with reinforced live entertainment functions. We also think this facility needs to be a hub for customers to visit the area broadly, not the destination. We will not develop new formats for our own convenience. We continue to build diverse development patterns from our desire to create value truly needed by communities.

Page 43, please. Fourthly, pursue digital transformation to solve social issues. We believe in the importance of human sensibilities and individual personalities. Our vision for DX is to achieve digital transformation centered on human sensibilities.

In this vision for DX, what is important is not technology first but humanity first approach. We don't consider what to do with the use of the latest digital technology. To realize our vision, we begin by considering what is value to be provided to communities, partner companies, customers and employees and [ WAON ]. And then by using new technology for embodiment, I think we can provide essential value to all stakeholders.

For our digital transformation initiatives, based on DX vision, we received DX certified business operator certification in January 2022. For the purpose of creating innovative businesses and services, we started initiatives with external partners through AEON Mall co-creation program last year.

Besides, we prepared environments for co-creation with external partners for other ongoing initiatives and already started demonstration experiments to create new businesses. I hope to make announcement at the right timing. In addition, as DX personnel skills required for all business became clear, we are actively engaged in human resource development.

Page 45, please. Fifthly, pursue medium-term strategies, accelerate reforms based on ESG perspectives.

Page 46, please. Given the severe power supply and demand situation this summer, we are implementing aggressive electricity and energy-saving measures in response to the government's request for power conservation.

In addition to outside measures such as turning off lights outdoors, by carefully watching situation on weekdays and power crunch, we turn off interior lighting and stop air conditioning systems partially. However, we are continuing to improve interior ventilation as anti-infection measures. By ensuring sufficient ventilation volume, we are reinforcing electricity and energy-saving measures.

Page 47, please. To achieve a decarbonized society, we formulated AEON mall decarbonization vision and set the target to reduce total domestic CO2 emissions to 0 by 2040. Prior to 2040 target, all malls in Japan will be operated with effectively CO2-free electricity by fiscal 2025.

To achieve the target certain decarbonization vision, we will not only buy CO2 credits but also generate renewable energy locally for local consumption and transform ourselves from CO2 credit purchase company to generating company. As for purposes to be involved in power generation business, firstly, there is always a potential risk of rise in base rate of electricity caused by rise in crude oil price in the future.

Secondly, in procurement of CO2-free power through purchase of known for sale certificates, introduction of carbon pricing such as high carbon tax is forecasted in the future. There is also a risk of rise in procurement unit price due to future increase in demand for known for sale certificates. In light of risks such as increasing cost burden, by promoting power generation business in areas where we operate malls, I think we can contribute to electricity supply at stable cost and local economic circulation.

As 7 malls described on this slide, operation with 100% CO2-free power generation is realized. AEON Mall Kawaguchi and AEON Mall Nagoya Noritake Garden are operated with effectively CO2-free electricity and gas. In the autumn of 2022, in collaboration with partner companies, we'll start procurement of renewable energy through low pressure distributed solar power generation facilities via self-directed transmission and plan to supply about 65 megawatts of electricity generated from 740 locations nationwide.

Electricity generated from solar power plants is equivalent to the electricity consumption of 4 AEON Mall facilities. As electricity cost increases, we have launched a power generation business as a functional strategy to reduce electricity costs and expenses and contribute to achievement of decarbonized societies.

Page 48, please. We adopted the circular economy concept in mall operation to cope with issues of waste and resources by assuming shift from the idea of reducing waste, 0 waste and complete recycling of all waste. We'll build a circular economy zone in every region.

To achieve recycling-based societies, we'll realize circular malls with stakeholders such as customers, AEON Store Association members and local communities by eliminating plastics and through food recycling and clothing collection initiatives.

Page 49, please. As we didn't have many opportunities to discuss our initiatives for human capital, I'll explain our vision and some initiatives. As social situation and business environment are changing rapidly and uncertainties are enhancing in social environment, it is needless to say we need to transform our attitude to work by changing our way of thinking.

In this corporate transformation and driving force [ energy ] of individuals, generating power of our organization. In particular, human resources are the most important management resources to achieve sustainable corporate growth. We had internal discussions again about ideal human resources and organization to practice our philosophy as a corporate group continuing to innovate in such an era.

As a new vision to [ AMAT ], we set future ideal for all human resources life design producer. We define future ideal for our organization as a group of professionals who continue to innovate and clarify our vision regarding human resources, and our organization as a driving force would change.

Our mission is to solve community issues as empathy and co-creation with various stakeholders are indispensable. We will develop human resources capable of creating and nurturing relationship to change our organization. Through specific initiatives in pursuit of diversity, HR development, health management and work style reform, we aim to enhance corporate value by using human capital.

Page 50, please. Let me briefly explain our diversity initiatives. To enhance organizational power further, we need to build a system for diverse human resources to work with motivation employee and active role. The shopping malls we operate have so many female customers. Viewpoints unique to women are indispensable in our business.

Also in pursuing diversity, we've been focusing on creating opportunities for women's empowerment. With the KPI for promoting women's empowerment, which is to increase the ratio of female managers to 30% by FY 2025. In FY 2021, the ratio was 19.4%, close to double of the average of Japanese companies.

However, women's empowerment is just a partial element of what diversity should be. The essence of diversity is not achievement of quantitative KPI, but creation of environments for employment of diverse human resources regardless of age, gender, nationality and with or without disabilities to nurture corporate culture to accept individual characteristics. In that sense, our diversity initiatives are still immature. By pursuing initiatives further and establishing a system to promote key initiatives, we'll enhance corporate value.

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

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