Aeon Mall Co Ltd

TSE:8905

Earnings Call Transcript 2021-Q2

[Yasutsugu Iwamura, executive]

I am Iwamura of AEON Mall. Thank you very much for attending results briefing of AEON Mall for the second quarter of fiscal year-ending February 2021, despite your busy schedule today. The briefing is held via conference call as was the last time. I would appreciate your understanding.

Now I will give a summary of financial results for the second quarter. Please go to Page 3. During the first half, we implemented shortened business hours and temporarily mall closures in Japan and abroad in response to the global spread of COVID-19. We resumed operation, as specialty stores of all the malls, on April 1 in China and on May 28 in Japan. In reopening our malls, we placed the highest priority on the safety of our customers, tenant staff and mall employees. To prevent the spread of infection of tenant staff is very important to directly ensure safety and security for customers. While implementing measures for that in collaboration with tenant staff, we have engaged in mall management and operation in response to changes in consumer behavior during the COVID-19 pandemic. As a result, we made sure to capture the trend of revenge buying and operating revenue exceeded the original forecast.

On June 15, we completely redesigned the AEON MALL app to improve usability. As a result of the usability improvement, efficiency of sales promotional activities increased, and sales promotional projects switched from the ones led by the headquarters to sales promotional activities suitable for situation in each region, led by each mall. We were also able to break away from dependence on large-scale events to attract customers.

Digitalization we've been promoting in operation and management functioned well. And we were able to promote initiatives such as web conferencing and teleworking further to increase efficiency of work. As a result, cost decreased as a whole and profit at all levels exceeded plan significantly. However, we struggled to give detailed responses to infection of tenant employees, the impact of the second wave of spreading infection and others in the second quarter. That said, I feel we were able to control the situation well, basically.

We have left our full year projections unchanged from our previous announcement. Although we have seen recent signs of recovery in specialty store sales at malls in Japan and overseas, the impact of COVID-19 remains unclear.

Let me move on to results by segment. Please go to the next page. Firstly, I will talk about business status of China. For reference, the accounting period for companies outside Japan ends in December and the first half is a period from January to June. I will also briefly explain business status of the third quarter, the period from July to September, so that you can understand more recent situation.

Business status in malls in China is as described on the top of the slide. We reopened all 21 malls for specialty store business by April 1. On July 20, we began reopening movie theaters, which had been closed due to government orders. By early August, movie theaters were reopened at all malls. As for sales after reopening, specialty store sales recovered steadily. Sales recovered to nearly the same level as the previous fiscal year at 99.6% in August and 101.2% in September. By business type, dining already increased year-on-year, although we struggled with dining in Japan. Besides, recovery of amusement and cinema are remarkable. By area, in Jiangsu/Zhejiang provinces and Hubei province, growth rate was close to conventional growth of double digit. Going forward, we expect total sales will also recover to double-digit growth.

Next page, please. Next, I will explain business status of ASEAN. In Vietnam, to prevent spread of infection, the government enacted social isolation measures, severely restricting travel outside the home. Therefore, we closed operations of specialty stores, the 4 malls out of 5 malls. By April 24, all malls resumed specialty store operations. In Vietnam, thanks to further infection control measures taken by the government, people have a high sense of security about resumption of daily life. Partly due to such a background, specialty store sales in July at 3 existing malls turned positive at 103.3% of the same period of the previous year, excluding AEON MALL Tan Phu Celadon, which was expanded and renovated last year. In August, customer traffic and sales decreased due to confirmed COVID-19 cases in late July. However, in September, specialty store sales recovered to a level outperforming the year ago period due to progress of virus containment measures.

In Cambodia, we shortened mall operating hours at 2 existing malls for a time until returning to normal in June. In August, we reopened more movie theaters as specialty store sales at 2 existing malls were in line with the previous year on a like-for-like basis.

In Indonesia, we reopened specialty store operations on June 15 at 2 existing malls that had been closed temporarily since March 31 due to large-scale government social restrictions. However, as the number of COVID-19 cases continued to grow, the large-scale social restrictions remained in place. As a result, both customer traffic and sales decreased significantly year-on-year, as 2 existing malls operated under restrictions.

In China and ASEAN, progress is different by country and by area. However, as we are seeing recovery trend, except Indonesia, I think we will return to high-growth promptly. Therefore, as we planned before, we don't change the target to realize 70 malls overseas by 2025. For that target, we are searching and securing new properties in an accelerated manner in areas where high growth is expected, both in China and ASEAN.

Next page, please. Next, I will talk about business status in Japan. This slide shows business status of 84 directly managed malls, excluding malls for which we have contract for property management with AEON Retail. In Japan, by May 28, all malls were back in operation. After reopening, specialty store sales at 83 existing malls were 88.0% of the year ago result due to rush demand, leading up to the end of special stimulus package, cashless redemption campaign, revenge buying and so on. However, July and August sales were 83.1% and 78.6%, respectively, showing a downward trend compared to the previous year due to the signs of the spread of COVID-19 once again since mid-July, and shortened summer holiday of elementary, junior high and high schools.

Sales are now on a recovery trend. Preliminary September sales figure was slightly higher than 80% of the year ago result but recovered to higher than 85% in the latter half of the month. There was special demand or rush demand ahead of the consumption tax increase last year. Therefore, in comparison with the year before last, specialty store sales recovered to the same level as the year before last in the latter half of the month. Customer traffic also steadily increased, and sales of dining, amusement and cinema increased considerably. At the bottom of the table showing sales trend, the number of visitors is indicated. By time of day, the number of visitors recovered to normal level during day time. However, as people refrained from eating dinner outside the home, the number of visitors from evening hours dropped year-on-year. I think the concern about COVID-19 is still continuing.

Next page, please. This slide shows year-on-year comparison of specialty store sales by business type at 83 existing malls. After reopening at large specialty stores, home appliance, furniture and interior accessories showed double-digit growth year-on-year. Small and medium-sized specialty stores, miscellaneous goods, hobby items and food remained firm. So-called trend of consumption from staying at home continued due to voluntary refraining from going out.

So far, I gave a summary of financial results for the second quarter and talked about business data by segment. Although business performance is on a recovery trend, COVID-19 is still impacting our business significantly. However, as detailed sales promotional activities at each mall and attitude to work on new things are enhancing, we take this situation as an opportunity to change our conventional business model and implement various additional measures with a sense of speed.

Please go to Page 12. As we explained in the past, AEON established AEON COVID-19 prevention protocol, indicating disease prevention standards and others by listening to opinions of knowledgeable persons and experts. Based on the protocol in collaboration with tenant staff, AEON Group is working on measures for safety and security of customers and provision of value for the future. However, there were differences in operations by mall. To ensure these initiatives are implemented and to understand issues to tackle with in the short term and mid- to long terms, all the directors, including myself, control malls' nationwide directory, implement on-site visit, listen to opinions of employees and make and implement measures with a sense of speed.

After we confirmed the situation of malls thoroughly, we examined behavior under Vision for 2025 we announced in April 2018, a 3-year medium-term plan which started in fiscal year 2020. Before the second half of this fiscal year started, we held an internal briefing on policy for initiatives and future direction. I will share a part of the content with you today. On the middle left, behavior changes of consumers or customers are shown. Firstly, digital, e-commerce and contactless payment are promoted in their consumption and purchasing behaviors. Secondly, how time is spent at home is changing, and what is required at home and how to live is changing. Thirdly, daytime population is shifting from urban centralization to more decentralization to suburban areas and regional cities. Fourthly, more and new ways to use outside spaces for extraordinary experiences and an increase in the number of health-conscious people and naturalists.

It is certain that e-commerce markets expanded due to temporary closure of schools and teleworking forced as a result of the spread of COVID-19. As consumers who didn't use e-commerce noticed its convenience and easy suppliers are making efforts to improve services, I am sure e-commerce markets will continue to expand at an accelerated pace. On the other hand, as consumers are freed from commuting and other movements, have more free time and spend more time at home, I think value of places and time for living changed dramatically after COVID-19 pandemic occurred. As the real life, which was regular life, became extraordinary, more people pursue value of the real life, which is different from the value in the past.

How we can provide customer experiences for customers leads to big business opportunities for us. As future direction of initiatives, we will promote the following: firstly, create next-generation malls for the post-COVID-19 era. Secondly, respond to new needs created by the COVID-19 pandemic and respond to needs from megatrends, which already started before the pandemic. Thirdly, redefine needs lost due to the COVID-19 and create new needs. Fourthly, review store opening strategies and establish CRE strategies in response to the with-COVID-19 and post-COVID-19 eras.

We are going back to our management philosophy to reexamine what kind of value we should provide for communities, partners and customers and how we should enhance corporate value as a life design developer in the megatrend of social changes, and we are cascading our ideas down to measures. Without being restricted by the current business category of shopping mall, we will promote goods consumption and experiential consumption one step further and add the viewpoint of emotional consumption or mental satisfaction to merchandising. At the same time, our facilities will go beyond the framework of shopping, introduce functions to create communication to promote exchanges among multi-generations, among customers and between specialty stores and customers and provide one-stop multi-functions and hybrid functions responding to the new normal.

I will talk about some initiatives we are currently working on. Next page, please. Regarding disease prevention, AEON COVID-19 prevention protocol was established with opinions and supervision of many experts. Based on the protocol, we installed AI-based thermometers at building entrances and increased internal air circulation in malls and adopted entry restriction standards based on in-store customer management system data. We listened to opinions of experts and knowledgeable persons to transform tentative initiatives we took after reopening into evidence-based permanent initiatives.

Next page, please. In food courts, we reduced the number of seats as a measure to prevent infection. However, with consideration for safety, we increased the number of seats and increased sales. To be more specific, based on opinions of experts, we installed acrylic panels to serve as partitions between seats and thought out the layout. We also installed air purifiers, which are effective in breaking down and removing viruses, to provide customers with a sense of security. Besides in offices and break rooms in specialty store zones and employee break rooms in mall back offices, we installed ventilation equipment and equipment to prevent infection. We also distributed handbooks and guidebooks, which explain measures for COVID-19 as preventive measures for mall employees.

Next page, please. This slide shows examples in which large spaces in our malls and large-sized mall parking lots are utilized. All malls, both in Japan and overseas, are equipped with large-sized parking lots in which some thousands of cars can be parked on the assumption that customers visit stores by car. In China, as measures for nighttime economy promoted by the Chinese government, we used mall parking lots for nighttime markets and summer festivals. These policies are mainly for cinemas, amusement facilities, restaurants and others that have been particularly affected by COVID-19. In Japan, we held drive-in theaters and drive-in public viewings at about 70 malls nationwide and received favorable comments. In drive-in theaters, you can watch movies without having contact with other people. In drive-in public viewings, you can watch movies and sporting events and enjoy concerts. For measures to promote physical and mental health in which customers have been showing high interest since pre-COVID-19, we will reinforce health and wellness initiatives of Happiness Mall further.

Next page, please. This page shows examples of initiatives tailored to local markets. On top of Happiness Mall to provide value matching needs of local customers, we will enable sustainable continuation of malls and sustainable management of our company as a result. The AEON MALL app I mentioned in the beginning was just introduced and we are in a stage to increase the number of downloads of the app.

The cumulative number of downloads is approximately 1.5 million. The app is received well by customers. The number of downloads increases by 200,000 to 300,000 every month. So far, AEON mall tried to create synergy by implementing uniform sales promotional projects throughout the country.

However, as the app spreads, we can realize narrow but deep marketing. If so, each mall, which is a local community base, can organize sales promotional projects and events tailored to needs and lifestyle of customers featuring characteristics of the local community. In collaboration with specialty stores, we already implemented campaigns customized for each store, such as distribution of coupons, which can be used only at specific stores in a mall.

Each mall implements PDCA and improves what didn't go well and rolls out success cases nationwide. Nationwide rollout is no longer a purpose. We changed our approach and rolled out good projects nationwide. As a tool for that, we intend to evolve the AEON MALL app.

AEON MALL Matsumoto implements joint sales motion projects in collaboration with Matsumoto PARCO and involving local shopping districts with the purpose of recovering consumption, which dropped due to the spread of COVID-19 and rediscovering joy of walking. Relocation of an entire branch of the Uki City Hall to inside AEON MALL Uki is an example of reinforced functions of a mall as a local community center. There are cases in which government service centers opened their centers in our malls, but this is the first government branch relocated to a mall in Japan.

Next page, please. We have been actively promoting digitalization in mall operation. In March this year, we have reduced the burden of back-office operation of tenant staff significantly by introducing a system enabling interactive communication. In addition, online connected interactive events are held simultaneously at a few AEON MALL locations in Japan. We are also expanding live commerce that we implemented in China and started to provide food delivery unique to AEON MALL in each country. The details are as shown in this slide. We aim at new channel expansion through combination of in-person and online. We will divide digitalization promotion clearly into digitalization and digital transformation as our digitalization promotion was vague so far. At the same time, we will promote enhancement of value of the real malls in consideration of not only customer experience, but also employee experience in digital transformation.

Next page, please. In addition to the measures I discussed, we will continue to promote the strategy to become the dominant mall in each region. In China, we renovated AEON MALL Wuhan Jinqiao in June and expanded and renovated AEON Wuhan Jinyintan in July. Although there is no mention in this slide, we started renovating 4 malls in Tianjin in August one after another. In Japan, we expanded and renovated AEON MALL Takasaki and renovated 7 malls.

Next page, please. Let me explain new malls overseas. As a new country for us, we will open the first AEON MALL location in suburbs of Yangon, Myanmar in 2023. The AEON Group has contributed to the improvement of education and living conditions in Myanmar, international cultural and human resource exchange and human resources development through the activities made possible through the AEON 1% Club and the AEON Environmental Foundation. The Dagon Seikkan region for the planned site is located about 10 kilometer northeast of the center of Yangon. It is an area where a new urban subcenter plan is promoted. The first AEON MALL location will open as one of core facilities in the region, and expectation is placed on its town development functions.

Next page, please. In Cambodia, the name of the third mall scheduled to be opened in fiscal year 2022 was decided to be AEON MALL Meanchey. The first mall in Cambodia, AEON MALL Phnom Penh, was opened in Central Phnom Penh, partly because it was a first mall in the country. The second mall, AEON MALL Sen Sok City, was opened in an area where urban planning is progressing rapidly in the north of Phnom Penh. The third mall, AEON MALL Meanchey opened as a central facility for urban planning will be built on large reclaimed swamps in an untapped area in the south of Phnom Penh. Both are core social infrastructure projects for urban planning in suburbs of Phnom Penh.

AEON MALL Hoang Mai, the seventh mall in Vietnam scheduled to be opened in 2022, is a project promoted by our company in collaboration with Hanoi City. We will provide a 3000-car parking area, helping relieve the social issue of parking shortages in the heart of Hanoi. In addition to commercial zone, office functions will be offered on the upper floors to respond to enhancing demand for offices with parking areas for cars and bicycles.

Based on area marketing, we aim at providing community-based solutions. Significance of the development, solution of social issues was highly evaluated, and we and partner developer received an investment permit directly from Prime Minister Phuc. These measures become possible by taking full advantage of building-to-land ratio and floor area ratio.

In particular, I think branding power of AEON Group, our know-how of creating malls for urban planning to solve social issues in areas or our business as social infrastructure projects are highly rated overseas. To add new functions to solve issues of each area, it is important to create malls from the viewpoint of using real estate and to enhance value of malls based on CRE strategy. From the above-mentioned viewpoints, we will continue to aim at 70 malls overseas by 2025 and continue to create malls.

Next page, please. As for future initiatives, we will enhance the environment inside our malls to reduce the risk of infection in anticipation of the with-COVID-19 era and a post-COVID-19 era. In addition, we are creating spaces with unprecedented functions, including expansive dining areas, restaurants that respond to takeout needs through outside zones, semi-open spaces and others.

Next page, please. We raised investment funds for growth measures I explained so far by issuing sustainability bonds. Funds raised by issuing social bonds will be appropriated for measures to combat COVID-19 and Great East Japan Earthquake reconstruction support. Funds raised by issuing green bonds will be appropriated for construction of 4 malls in Japan and overseas and others. Prior to issuing sustainability bonds, we created the sustainability bond framework based on the policies stipulated in the sustainability bond guidelines of the International Capital Market Association. We received a second opinion about our framework from the rating agency about the compatibility of these bonds with the sustainability bond guidelines and other principles. In particular, regarding measures to combat COVID-19, we received the following comment: Rent reduction and exemption for specialty stores is considered to have played an important role as a prompt humanitarian aid under declaration of a state of emergency. Also, after resumption of operations, the measure is expected to contribute to recovery or sustainability of regional economies through the ripple effects, and positive social performance is expected.

Next page, please. This slide shows initiatives for environmental conservation. We published AEON Mall Integrated Report 2020 in September and plan to publish [ AEON's ] data book in the middle of October. I hope you will have a look at them if you have a chance.

Please go to page 25. As I mentioned in the beginning, we keep the full year plan unchanged from the plan announced previously.

Next page, please. Due to the impact of COVID-19 on our construction schedule, new mall openings and revitalizations may be delayed for up to 6 months. We have delayed the opening of one mall in Indonesia and one mall in Japan scheduled for fiscal 2020 to fiscal 2021. These delays are only temporary, and we have not changed our 3-year new mall opening and revitalization plans after fiscal 2022.

Next page, please. We have made no changes to capital investment plan and funding plan announced in July in the results briefing for the first quarter. In March 2020, we secured funding in the amount of JPY 30 billion from the issuance of corporate bonds to individuals. In September, we secured JPY 30 billion from the issuance of sustainability bonds. We have also established loan facilities of JPY 50 billion through a new commitment line. We are not concerned about finances as we have secured JPY 140 billion in credit line in total.

Please look at Page 29. Lastly, we plan to pay interim dividend of JPY 20 per share, in line with our original plan. We plan to pay annual dividend of JPY 40 per share, including year-end dividend of JPY 20 per share. That concludes

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