Aeon Mall Co Ltd

TSE:8905

Earnings Call Analysis

Strategic Shifts Amidst COVID-19 Impact

Due to COVID-19's impact, the company faced declines in profitability and growth, particularly in the overseas business, which is a primary growth driver. To turn things around, they plan to expand and improve profitability through new store openings and increasing existing store performance. Domestic malls and urban shopping centers have also been hit by the pandemic, causing the company to enact structural reforms and marketing campaigns. Despite having to address a lower ROIC of 3.7% against a target of 5%, the company is poised for strong growth, especially in Vietnam where preemptive investments have been made. These strategic maneuvers aim to create new businesses and enable the company to reach its financial targets and enhance profitability by FY 2025.

Strong Start to the Year with Reviving Mall Sales

The company kicked off the year with a boost in operating revenue, achieving record highs, and saw growth across operating income, ordinary income, and net income attributable to owners. Particularly noteworthy is the rebound in sales at both domestic and international malls, signaling a broader recovery trend.

Impact from the Pandemic Easing and Overseas Business Surging

Post-pandemic recovery has been brisk, especially as China's easing of its zero-COVID policy coincides with strong seasonal events like the Chinese New Year, driving substantial sales growth in China and Vietnam. Signs are encouraging, with sales since April, even amid economic slowdowns, maintaining high growth as compared to pre-pandemic levels in 2019.

Strategic Initiatives and Medium-Term Plan Afoot

The company's 3-year medium-term management plan focuses on integrated ESG management, geared towards creating economic, social, and environmental value. Growth measures extend to discovering commercial opportunities overseas, business model innovation in Japan, and fostering a health and wellness platform. Efforts in Cambodia, for example, range from establishing new logistics centers and advancing e-commerce to fostering a conducive environment for Japanese businesses seeking expansion in Asia.

Substantial Reforms and Improving Operating Income

Tough decisions led to terminating operations like QUALITE PRIX, and while this accounts for extraordinary losses, the aim is to redirect resources towards more profitable ventures. A significant improvement in operating income by JPY 1.5 billion is projected by the end of FY 2025, with expectations to double that amount by FY 2027.

New Business Ventures and Sustainability Efforts

The company's third growth measure involves creating innovative business models to navigate rapidly changing landscapes, such as addressing logistics challenges and promoting sustainable practices within mall operations, such as resource recycling initiatives and decarbonization goals.

Targets Set for ROE Improvement and Sustainable Growth

With an objective to revamp its Return on Equity (ROE), the company has set a goal to elevate ROE up to 9% by FY 2025. This goal hinges on measures like business investments, controlling debt leverage, and addressing various social issues head-on to ensure continued trust from stakeholders. A DuPont analysis of ROE underlines the need to improve the net income ratio, stabilize asset turnover, and manage financial leverage.

Investment in Growth and Efficient Capital Allocation

The company is cognizant of strategically investing in growth areas and efficiently managing capital, with plans to achieve positive free cash flow and reduce interest-bearing debt. To further garner investor trust, a dialogue is intended to review and enhance management structure and financial strategies. By fostering collaboration, the company seeks to meet shareholder expectations and adapt robustly to market shifts.

Earnings Call Transcript 2024-Q1

[Yasutsugu Iwamura, executive]

Now this is Iwamura, AEON Mall. I'd like to thank you for this opportunity.

So I would like to explain the financial results for the first quarter. Please refer to Page 3. In the first quarter, we achieved a record high operating revenue. We secured growth year-on-year in operating income, ordinary income and in net income attributable to owners of the parent. Domestic and overseas malls sales are showing a recovery trend. In terms of the first half performance plan, we are generally in line with the plan at each profit level.

Please turn to the next page, please. This shows the existing mall specialty store sales by country year-on-year basis. First, in China, economic activity and consumption have been brisk since the zero-COVID policy was eased last December. The Chinese New Year, the first time in 4 years, and there were no restrictions on activities, was celebrated in January and February, boosting in the demand for return trips to hometowns and travel and others resulted in the strong cumulative first quarter results, showing 121.8% growth year-on-year. In addition, from April onward, due to a reaction to the temporary closure of the stores due to the expansion of COVID-19, both April and May sales grew faster than planned.

Next, Vietnam. In addition to the purchasing demand during Tet, the Chinese (sic) [ Vietnamese ] New Year in the country, the launch of promotions tailored to the local activities, such as International Women's Day, led to an increase in customer traffic, resulting in the continued strong sales in the first quarter. On the cumulative basis, it grew [ 155.4% ] year-on-year.

Looking at the sales trends, since April in the second quarter last year, of existing malls grew 149.8%, compared to pre-COVID-19 FY 2019, thanks to the government shift to live with-COVID policy. As for this year, April was 94.5% year-on-year, May was 98.2% year-on-year. Although slowdown in economic growth and has had some impact, growth remains high compared to FY 2019. April, 149.8%, and May, 155.8% showing a continued high growth.

Lastly, Japan, the Japanese government relaxed its requirement to wear mask in March. And in May, the government lowered the category to type 5. With this done, customers become more willing to go out and boosted desire to consume. For the cumulative basis for Q1, it grew 108% year-on-year, surpassing the last year's actual performance.

Next page, please. Here, allow me to explain the major [ policies ] in the first quarter regarding our Domestic Business, which has a significant impact on our consolidated results. In March this year, Makuhari Toyosuna Station opened. This is a new station on the JK line adjacent to AEON Mall Makuhari Shintoshin. In conjunction with the opening of this new station, we collaborated with the local government and held various events, resulting in a significant increase in number of customers attracted to our facilities in March, as much as [ 113.9% ] year-on-year. And thanks to the renovation we had in April, specialty store sales from March to May were higher than the average of the entire AEON Mall.

We will continue the renovation efforts in fall 2023 and beyond. And by deepening the value we offer, we'd like to create new customers by providing new values to our customers and increase their motivation to visit our stores. In Japan, the tradition to post-COVID [indiscernible] is currently in full swing. And in order to predict and analyze customer trends under such circumstances and to take advantage of the social change will aggressively launch sales promotion plans that will motivate customers to visit our facilities during the busy Golden Week holiday season. We successfully maximized the number of customers by conducting more than 1,000 activities and events at the facilities nationwide during the busy Golden Week holiday season.

Our directors, including me and executive officers toured malls not only in Japan, but also in other countries during the Golden Week season. And wherever we visited, our malls were visited by many customers. We were actually quite impressed by the vitality and momentum of consumption, which is a result of people being liberated from the restricted daily life.

For the financial results, please refer to Pages 6 through 11. We have disclosed the profit and loss by country and specialty store sales situation as well as the financial statements.

Now please go to Page 13. In this section, I will cover the progress of our 3-year medium-term management plan from FY '23 to FY '25, which was announced at the time of our year-end financial results in April. In order to further evolve our ESG management, our growth initiatives, we have set 2 action policies, promotion of regional shift in Japan and overseas and the creation of health and wellness platform. We are now committed to a truly integrated ESG management to create economic, social and environmental value for our stakeholders. To be exact, we'll carry out those 3 growth initiatives and will have the foundation to support growth, build a strong financial foundations and resilient organizations from the perspective of sustainability.

Now please go to Page 15. The first of the 3 growth measures in the medium-term management plan is discover and commercialize business opportunities in overseas growth markets. In Cambodia, we established our AEON Mall Cambodia Logi Plus in June last year with the aim of developing new services that will make a difference in the market beyond the framework of commercial facilities and promoting logistics and e-commerce businesses.

In the logistics business, we opened the Sihanoukville FTZ Logistics Center in June this year. This facility enables nonresidents to hold inventory, which enables a stable supply of growth for international transactions and also enables a seamless handling through in-house operation of all customs clearance and warehouse operations. It is located in a special economic zone adjacent to the Port of Sihanoukville and international deepwater and a port hub with the largest cargo volume in Cambodia and is expected to grow as a new hub in Southeast Asia as cargo volume increases with the Cambodia's economic development.

In the e-commerce business, in addition to the e-commerce platform, we are promoting initiatives to improve purchasing convenience in and Cambodia, including development of showrooms linked to e-commerce in real stores. In June this year, the company held its briefing session with the aim of promoting the overseas expansion of Japanese companies as well as creating growth opportunities in [ Asia ] for Japanese companies and to build a platform that provides convenience to the Cambodian market.

Now Page 17, please. The second growth vision is to pursue business model innovation in Japan. So customers' consumption behavior and the purchasing habits are changing at an accelerating pace. We will promote reform of our existing business model to strengthen our ability to attract customers and improve profitability in our Domestic Business.

On the 20th of this month, we will open FULALI KYOBASHI as a temporary facility until the redevelopment work complete. The building will feature a variety of food and beverage zones and stores, including kitchen carts and food stalls as well as an 8,500 square meter event space. It also has a new gathering place and information dissemination center in Kyobashi area and will create a sense of anticipation among customers for the future redevelopment projects.

In addition, as a new store format different from that of the shopping mall, we will start a demonstration experience of PARADE MARKET, a mobile store business, in which we will provide rental services for mobile vending vehicles and locations for opening stores. We intend to diversify the value we provide by discovering revenue sources that are not just limited to the rental incomes from the shopping mall tenants stores, but also utilize all of our assets.

Please go to the next page, please. In society where issues faced by each region are becoming increasingly diverse and complex, we will develop businesses, and that respond to the issues and needs of each region by focusing on local living areas and conducting thorough market analysis and research, rather than just unified nationwide approach. The direction of future malls development will also be based on the location characteristics of the areas, where stores are to be opened. By promoting a variety of development patterns, we'd like to go for new value proposals.

JIYUGAOKA de aone is scheduled to open this fall, located just 2-minute walk from Jiyugaoka Station. It will be in the largest commercial area in Meguro ward, where many unique specialty stores and restaurants are located. The large green terrace consisting of about 1,000 square meters will be arranged to host a variety of hands-on social events throughout the year, such as yoga and food [ market ]. The terrace will be a place where residents and visitors to Jiyugaoka can enjoy relaxing and calm atmosphere, while strolling the street. The goal is to create a pathway to the health and a place for relaxation, where residents and visitors can truly enjoy the leisurely time.

Next page, please. With the external environment and the customers' values changing at an accelerating pace, we have been working to deepen our existing business. However, some of our facilities have not responded adequately to those changes, and they are built in to attract customers and generally, the profits are declining. Thus resulting in the less capability to generate cash flow.

In addition to increasing our competitiveness and improving operational efficiency within the trade area, including investment and revitalization, we'll carry out fundamental structural reform from real estate and financial approaches. In order for us to execute drastic structural reforms for several stores by 2025, we will post an extraordinary loss of approximately JPY 6 billion in 2023, and we will go for the reform. In June this year, we decided to terminate the management and operation of [ QUALITE PRIX ] as of the end of June. This will result in a temporary extraordinary loss, but we will continue to steadily implement drastic business restructuring reforms. And by concentrating human resources on new business and more profitable opportunities, we plan to improve operating income by JPY 1.5 billion as of the end of FY 2025 and JPY 3 billion as of FY 2027.

Now please go to the next page. The third growth measure is to create new business models that break away from existing business frameworks. In an era of rapid and uncertain changes, we will not only grow our existing businesses, but make further efforts to create businesses, which will create new values. In the logistics industry, in addition to the driver shortage and the soaring fuel price problems in 2024, total overtime hours for drivers will be capped with the serious challenges going on in the Japanese domestic logistics space. We started our engagement to create joint distribution services from Kinki, Tokai regions to Nagoya area.

This joint delivery service collects goods from the products -- production plants and the warehouses of each company and delivers them to AEON Mall and other commercial facilities within the same area. They are improving the efficiency of both the collection and delivery within the area. [indiscernible] joint distribution center and actually, we have received a lot of locations and also they are supporting us. We have received many inquiries. So actually, we have prepared a video for companies, opening new stores to deepen their understanding of our joint delivery service.

[Presentation]

[Yasutsugu Iwamura, executive]

In addition to realizing cost reductions and maintaining the logistics quality for our partner companies, we will further promote the common use of packing materials and hangers, thereby contributing to the establishment of sustainable logistics next -- network.

Next page, please? To address on the waste and resource issues, we have incorporated the concept of a circular economy into our mall operations. We are now promoting initiatives to recycle resources generated inside the mall, such as de-plasticization, food recycling and clothing collection. AEON Mall Toyokawa, which opened in April this year, uses food waste generated in the facility as biogas energy. All electricity generated is consumed at the mall. By significantly curtailing the food waste, we'll achieve reduction in the local environmental burden and waste disposal load.

Please go to the next page. To realize decarbonized society, we have formulated the Aeon Mall decarbonization vision. The goal is to reduce the total amount of CO2 and other emissions in Japan to 0 by the year 2040. As one of initiatives to achieve this goal, we will promote the Vehicle to AEON MALL initiative, which is an evolution of the conventional Vehicle to Home concept to create a locally produced and locally consumed renewable energy together with the local communities and customers. In May this year, V2AEON MALL services began operating at 3 facilities in the Kansai area. V2AEON MALL encourages customers with the solar panels at home to discharge surplus electricity generated at home into the mall via their EVs, and the points are going to be awarded in appreciation for their collaboration.

Currently, in collaboration with the University of Tokyo and Koshigaya City, we are researching how a decarbonized society should be involving the local community. We will continue our efforts so that everyone in the community can comfortably participate in the creation of a decarbonized society.

As I explained this point earlier, in the first quarter, more sales in Japan and overseas are on the improving trend. And we secured an increase in operating revenue, operating income, ordinary income and the net income attributable to owners of the parent, all of which are generally in line with the clients at each income level with respect to the performance plan for the first half. Although our business performance is progressing as planned, but we're not going to be satisfied with the status quo. We will continue to provide new value by accurately responding to the needs and wants of customers based upon insight analysis, which lies even further ahead of -- ahead ended post COVID-19.

In the beginning of the presentation, I explained our Vision 2030. AEON Mall will be a regional co-creation business entity. We will focus on the future of the region and our company. And at the same time, we will focus on current mall operations. From late July, we will enter the summer vacation season when many families visit our stores. Social changes such as the rising temperature and rising electricity costs will become the greatest opportunities for us. We will promote the fact that customers can truly spend a comfortable time in a cool environment by visiting malls, and we will thoroughly notify our customers in advance of the planned events. And actually, we would like to have more visitors compared with the population we had during the Golden Week season.

And furthermore starting from this current fiscal year, our new 3-year medium-term got started. And we have introduced the exact members and system. This is going to help us in order to increase our [ speed and factors ]. And we would like to go for the implementation of the activities we are supposed to work on. We would like to go beyond the traditional framework, of course, and we would like to move into the next step, getting away from the [indiscernible] phase and would like to go step by step for further improvement. We will work with a variety of partners to respond to the changes in the actual world and the local conditions. We'll implement our midterm plan by making changes in a flexible manner.

This concludes my presentation. Thank you indeed.

[横山 宏, executive]

This is Yokoyama, in charge of finance and accounting. Now I'd like to explain our initiatives to enhance corporate value. As you know, on March 31, TSE actually requested its listed companies to be conscious of the cost of capital and stock price in order to improve corporate value. With this, we analyzed again the current situation as well as our policies and measures in order to improve our corporate value.

Would you please go to Page 25. What you see here are our target performance indicators and the share prices. For target performance indicators, we have set the targets of ROIC of 5% or higher, EPS growth rate 7% and the net interest-bearing debt EBITDA ratio of 4.5x or lower as of FY 2025. As described in this document, none of the indicators has reached their target, partly due to the impact of the selected performance after 2020 when the COVID-19 had broke.

Looking at the share price indicators, we used to have a PBR times above 1. But since 2020, when the COVID-19 broke out, PBR times tended to fall below 1. When PBR is broken down into [ PL ] and ROE, we came to realize it is actually ROE, which had a major impact for the poor performance.

Now please turn to Page 26. Here, I now like to look into the cost of capital. In our company, the efficiency indicators, ROE and ROIC correspond to the cost of equity and WACC, W-A-C-C, respectively. The cost of capital is calculated on a CAPM basis and is generally set at 6% to 7% based upon the past trends. WACC is calculated based on the weighted average of this cost of capital and the cost of debt and is set at approximately 3% based on the past trends. In order to increase corporate value or in other words, to improve the share price, this ROE is [ recorded ] to exceed the cost of capital. But as shown in the below graph, the equity spread has been negative since FY 2020. ROIC is the same. It has been below WACC. On the basis of this year's profit plan, ROE will recover up to 5.9%, and we will set a target to further improve this up to 9% as of FY 2025.

Please look at Page 27. Here, I now like to discuss the challenges and the measures to improve ROE. What you are looking at is the so-called DuPont analysis of ROE, which breaks it down into 3 components: net income ratio, total asset turnover and financial leverage. The net income ratio has been trending downward due to the impact of COVID-19 and other factors since FY 2020 and large impairment and others are behind the decline. Although the total asset turnover has been stable, we need to improve profitability by steadily executing the growth measures set forth in the medium-term business plan.

Financial leverage is on an upward trend as we have accumulated interest-bearing debt to meet the capital needs for the expansion of the overseas store openings, but it is rather difficult to apply excessive leverage any further in light of the [ evaluations ] made by the rating agencies. We intend to control leverage by maintaining the current level of leverage for utilizing [ liquidation ] scheme. In light of these points, in order to improve ROE, the first and the foremost priority is going to be maximizing net income, in other words, to achieve the profit target set forth in the medium-term management plan.

Please look at Page 28. The document you are looking at here is a summary of what we will do in the areas of business, financial and sustainability to achieve our goal of ROE 9% or higher in FY 2025. I will not go into details here, but you can see that the measures are mostly linked to measures in the medium-term management plan shown on the right-hand side. In the area of the business, we will make necessary investment in Japan and overseas, will keep an eye on the growth and efficiency opportunities. And in the area of financial, we will improve efficiency through the balance sheet control and achieve positive free cash flow. In the area of sustainability, we believe that we must continue to honestly address various social issues, such as decarbonization, resource recycling and utilizations of human capital in order to earn the trust of all the stakeholders, including shareholders, investors and to become a company to be chosen continuously.

Now please turn to Page 29. What you see here is our business portfolio. The right axis represents profitability, operating income ratio. And the vertical axis represents growth and operating revenue growth rate, mapping the position of each business in FY 2019, FY 2022 and FY 2025. The size of each circle represents the business scale or amount of operating revenue. In the top right quadrant, the overseas business is mapped, although the overseas business, which is the growth driver, has deteriorated in terms of the both profitability and growth in FY 2022 due to the impact of the COVID-19. But in the post-COVID year, we will achieve business expansion and profitability improvement through both new store openings and high growth at existing stores.

The Domestic Mall Business is mapped in the lower right quadrant. Domestic Malls are also declining in profitability due to the rising construction costs and further affected by COVID-19. But the issue here is going to become most important is that our capability to attract as many customers as possible. We need to actually conduct -- actually quite large campaigns in order to actually gain the attention from the customers. It's very important for us to be selective where we are going to make investment. It's very important for us to make a profit out of these investments. That is going to give us the stable profit [ sessions ].

Urban shopping centers are mapped in the lower left quadrant. Due to a rather slow response to the consumer trend changes, we had continued sluggish performance, and we are further affected by the COVID-19. So profit deteriorated in a big way. We will carry out our drastic structural reform efforts here so that we can generate positive profit in FY 2025. And in the upper left quadrant, we will continue to create new businesses by creating new value in this era of uncertainty [indiscernible], where the pace of change is so rapid.

As of now, we do not have any operations making contributions to the performance. But as explained in the outset, it's very important for us to have really good engagement with partners working on this original calculation, and we'll go for it as soon as possible.

Now please go to Page 30. What you are seeing is our overseas business, Japan business and the consolidated results as well as ROIC performance by business. And also it shows our plan as of FY '25. We need to improve our business portfolio. We have to actually have both profitability and growth. Their efficiency is going to be quite important in our investment activities. We used to pay more attention to R-O-I-C, ROIC, to make adjustment on the question of efficiency. The plant number in FY '25 is 3.7%, not reaching the target of 5%.

By business, Japan business is 5.3% in 2025, above the target. But overseas, the business actually is forecasted to be 2.4%. This overseas ROIC is, again, a consolidated basis. Again, we have to address this issue. Again, going forward, we do believe that there's going to be the strong growth in Vietnam. So we made advanced investment. Actually, just looking at FY 2025, ROIC improvement is going to be rather slow.

Would you please go to Page 31. The top section of the document you see here shows the overseas more profit and loss as well as the change in ROI sale by project. The bottom section shows the number of overseas malls opened and ROIC by project. Looking at ROIC by project, ROIC kind of overseas more generally exceeds the target of 5% after 8 years. Since the opening of our sales and operations began in [indiscernible] FY 2015, the percentage of malls in the 8th year and beyond will increase from FY 2025 onwards, though we cannot expect to see a big improvement before FY 2025. But after FY 2025, we do believe that we should be able to actually enjoy the really good growth opportunities. Again, we can keep an eye on the target of 5% due to the eighth year factor.

Would you please go to Page 32. Next, I'd like to now explain our cash flow allocation. The left shows the current status. As you see here, we are in a phase where we will continue to invest for our growth. And operating cash flow exceeds investment cash flow due to the COVID-19. Operating cash flow was above over the investment cash flow. Free cash flow has remained on the negative side. And the money we need to have for investment. Of course, we had to work on the liquidation of the existing assets, and also we should be able to leverage financial techniques. But all in all, actually, interest-bearing debt tends to go up, and this is going to have a negative impact upon us.

And the right shows our [indiscernible]. Of course, we're going to continue to make investments outside of Japan. So all these growth strategies are defined in the medium-term business plan, needs to be executed as shortly as possible. And FY '28, we are hoping to achieve positive free cash flow. Once in the block, we'll reduce interest-bearing debt to improve the net interest-bearing debt/EBITDA ratio to within 4.5x, which is our target.

Please turn to Page 33. Next, here, now I'd like to explain the shareholder returns. Our dividend policy is to increase dividends in a stable manner and aim at payout ratio of 30% or higher. As I have explained this point on the previous page, we are having some of the longer period, having a negative cash flow. So we have to actually try to increase the return by generating profit. With the COVID-19, EPS has come down, but we still believe in a stable dividend payout. Even though it was not good enough, I thought now we were able to meet with the minimum expectations for the shareholders.

Free cash flow for FY 2020, when we began, we've gone [ past there ]. Again, the current payout ratio, 30% could be further raised. This is going to be a part of our return to shareholders. I believe this is going to be quite possible. I think [indiscernible] extend returns to the shareholders is quite important. Therefore, we need to actually make the free cash flow [indiscernible] as soon as possible. It's very important for us to work on the growth measures, and we need to achieve all these numerical targets. That is going to actually help us to improve ROE and ROIC improvements. And that is going to help us to produce surplus free cash flow.

Now Page 34. I have so far explained the corporate value enhancement from a financial perspective, such as cost of capital and management index that we are committed to ESG management. We believe it is going to be quite important for us to have sustainability and activities in collaboration with this co-creation perspective. And out of this, we are hoping that we, as a company, can be preferred and selected continuously. I try to explain the theme of efforts to enhance corporate value from the financial perspective, but I do not believe that this is going to be only [indiscernible] for our company.

Based on what I have explained, we will continue to have further dialogue with our investors and shareholders in order to review and improve our management structure and financial strategies need to be further enhanced. And for that, we need to receive your collaboration.

This concludes my explanation. I would like to thank you for your kind attention.

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