Aeon Mall Co Ltd

TSE:8905

Earnings Call Transcript 2022-Q2

[Yasutsugu Iwamura, executive]

Good morning, everyone. I am Iwamura from AEON Mall. Thank you very much for taking time out of your busy schedule to participate in our financial results briefing today. Now I am going to explain an overview of the financial results for the second quarter of FY 2021. As FY 2020 was significantly affected by COVID-19, my explanation on financial results, sales and other figures will be in comparison to FY 2019, which was not affected by the virus. Please turn to Page 3.

The spread of COVID-19 has continued in Japan, China and ASEAN, and we operated with various restrictions such as closure of specialty store areas due to government requests and regulations. As a result, the consolidated results for the second quarter were recorded as shown on the slide. Compared to FY 2019, operating revenue was 95.7%; operating income was 67.4%; ordinary income was 64.4%; and the net income attributable to owners of the parent was 75.3%. As such, each profit level finished at around 70% of the plan announced for the first half, and we had to face quite severe results.

Please turn to Page 4. This table shows operating revenue, gross profit and operating income by segment for Q2 in comparison to FY 2019. In Japan, in areas subject to the state of emergency, we were affected by shorter operating hours, a request for the closure of specialty stores in designated industries or business types, and a ban on serving alcohol in restaurants. In addition to those directly affected stores, even in the areas not subject to the state of emergency, consumer sentiment cooled off due to voluntary restraint and, as a result, operating income of the domestic business decreased by JPY 9.9 billion compared to FY 2019. In China, localized outbreaks of COVID-19 occurred and some areas were affected by closure of stores due to announcement of restrictions on activities. However, the Chinese government's thorough virus containment measures led to quick lifting of restrictions and operating income increased by JPY 1.1 billion. In ASEAN, operating income decreased by JPY 700 million due to significant impact of the spread of COVID-19, especially in Indonesia.

Please turn to Page 5. Now let me explain the revenue performance in each country. First, let's look at China. The upper graph shows the change in comparable store sales in FY 2020 and FY 2021 compared to FY 2019. The blue line shows sales in FY 2021 and the gray line indicates sales in FY 2020. In China, pre-COVID double-digit growth trend had continued until May and had maintained strong performance. But in June, an outbreak occurred in Guangdong province, and it temporarily affected the business to record 97.5% compared to FY 2019. However, owing to the government's intensive containment measures, the outbreak ended early and it recovered to 106.9% in July. In late July, another outbreak occurred in another region, and some of our malls were temporarily closed in August to record a sales decline to 83.8%, but this outbreak ended early as well, and the preliminary report for September shows a recovery to 104%.

Please turn to Page 6. Next is about ASEAN. This slide shows the performance in Vietnam. In Vietnam, the number of COVID-19 cases increased in the Southern region, including Ho Chi Minh City, since May, and specialty store operations were temporarily closed at 3 malls around Ho Chi Minh City. Since then, the outbreak did not die down and both northern and southern areas in Vietnam implemented strict lockdown, which led to significant impact to close specialty stores, excluding GMS. However, Vietnam's social segregation measures were lifted on September 21 in Hanoi and substantially relaxed on October 1 in Ho Chi Minh City. Although there are still some business restrictions, the government is taking active measures to balance containment of the virus and economic recovery, and we expect the consumption trend will recover quickly.

Please turn to page 7. Next is about business in Japan. On April 25, the state of emergency was announced in the 4 prefectures of Tokyo, Osaka, Kyoto and Hyogo, and 30 facilities, including 15 directly managed malls in those areas, temporarily suspended their operation. Since then, the state of emergency was lifted on June 20, but it was declared again on July 12, and the target area was expanded in stages. The government understood the shopping centers' measures to prevent infection. And instead of closure, they requested us to shorten business hours and stop serving alcohol. However, the sales trend did not recover in Q2 as the number of new cases increased significantly nationwide and consumer sentiment declined even in areas not subject to the state of emergency.

Please move on to page 8. I will now explain the outlook for the second half of this fiscal year and onward for businesses overseas and in Japan. First, in China, sales are currently recovering as the impact of COVID-19 is coming to an end, and we expect to return to pre-COVID-19 double-digit growth in October. We expect to maintain this trend in the next fiscal year onward and will continue to promote measures to grow sales, including the renovation of existing malls.

As for Vietnam, we were severely affected by the lockdown since July with restrictions on going out and store closures but the lockdown was lifted on the 1st of October, and a lot of customers visited malls last weekend. Vietnam is a country with high future growth potential, and customers are highly motivated to spend. And as vaccination rate gets higher, we can go back to pre-COVID growth trend in the early part of next year as our facilities implement strong infection control measures. Although it is not mentioned on the slide, the same idea is applied to Cambodia and Indonesia, and we expect to return to pre-COVID double-digit growth early in the next fiscal year.

In Japan, the current number of cases has decreased significantly with the increase of vaccination rate, and we expect sales will return to pre-COVID FY 2019 level in November. While revenge consumption and increasing domestic consumption demand toward the end of the year are expected, the consumption trend is expected to be different from last year. So we will make every effort to secure sales by formulating good sales measures not to miss out on any demand and recover from the stagnant results of the first half. Page 9 to 13 show specialty store sales by business type, income statement, balance sheet and cash flow statement. Please check them out later.

Next, I'd like to talk about the initiatives we are currently working on to achieve sustainable growth based on the 5 major challenges in promoting those growth initiatives and the goals. Please turn to Page 15. The first major challenge and goal is to achieve profitable growth in overseas business and accelerate the new mall openings. Although our overseas business is currently affected by COVID-19, accelerating new mall openings in China and ASEAN remains as a pillar of our growth strategy.

At present, we are on track to secure land for new malls, both in China and ASEAN. Up to now in China, we have done area-dominant mall openings, mainly in 4 areas of Beijing, Tianjin, Shandong, Jiangsu, Zhejiang, Hubei and Guangdong. Now we also added the inland province of Hunan as a new development area to achieve 29 malls by 2025 and continue to secure potential locations for new malls. In ASEAN, our top priority area is Vietnam, and we are rapidly securing land for new malls there.

In Vietnam, we have concluded memorandums of understanding on mall development with local government and have continued to propose development projects, not only to improve the convenience of life, but also to contribute to local economic development through our mall openings. We will continue to promote such strong cooperation with local government and build a cooperation for mall development to contribute to the development of local communities.

Please turn to Page 16. We are operating 33 overseas malls with 22 in China and 11 in ASEAN and strengthening the profitability of existing malls is another major factor in business growth. We'll continue aggressive facility renovations, and in order to respond to rapidly changing market demands, we will strive to diversify and upgrade the value we offer. In the first half of this fiscal year, we renovated 8 malls as shown here. Needs of overseas customers are changing faster than those in Japan and the external environment is changing rapidly as well. Therefore, we set the contract period of 3 years with specialty stores that is shorter than contract in Japan, respond to changes in the environment with agility. In the growing overseas market, we'll focus on renovation and expansion in order to increase the scale and improve the quality of our malls in line with market growth.

Please turn to Page 17. The second major challenge and goal is maximizing the appeal of physical malls through customer experience. The behavioral change caused by the spread of COVID-19 has brought about major changes in our lifestyle, and one of them is accelerated expansion of e-commerce. Until last year, for those who had not used e-commerce, it was just an alternative to in-person service. Nowadays, its usability offered by service providers and quality of service have been improved, and the service is not just an alternative but provide new value beyond convenience. With such a major shift in shopping, we, as a physical mall operator, are strongly aware that we should think how we can enhance the value that customers can experience only by visiting a mall. One element of this is food experience.

At AEON Mall Hakusan, which opened in July, we introduced 2 concept restaurant zones shown here in addition to a traditional food court to provide a fine dining experience. The FOOD HALL LOKU on the left is a new business model created by 6 companies operating popular local restaurants in Kanazawa. You can enjoy a variety of cuisines and a large atrium space with a ceiling height of 9 meters. On the right, Grand Chef's Kitchen is a high-quality restaurant zone produced by 5 leading chefs in Japan. They use local ingredients to serve special menu that is only available here. In addition, a student bakery was opened in this food court. It is operated by a local vocational school and plays a role as a platform to connect the local school with customers.

Please turn to Page 18. Another element of value of experience in physical malls is to offer next-generation entertainment. At AEON Mall Shinrifu South Wing, which opened in March, we introduced VS PARK, a next-generation entertainment facility. In this facility, you can experience as if you were participating in a TV variety show. And in the venue of about 3,500 square meters, visitors can experience 31 different activities. We will continue to work in cooperation with specialty store companies to enhance functions that can be experienced only by visiting AEON Mall.

Please turn to Page 19. We are currently reforming the way to develop facility environment. Regardless of the pandemic, there is a growing customer need for facilities that are conscious of biophilic design and for outdoor zones that are open and comfortable. Going forward, we'll promote proposing experiences and creating spaces to relax by utilizing inside and outside of malls, both at existing and new malls.

The example on this page is a plan to revitalize an existing mall. And in addition to increasing floor space of a mall, it plans to create a high-quality open village on a site surrounding the mall and to develop a zone that proposes outdoor and botanical lifestyles as well as a zone to integrate community functions such as wedding halls, restaurants and nursery schools. Also, we plan to work with local government to create a lively atmosphere to encourage exchange of people by forming an environment that meets the new lifestyles of the people living in the community. And this will enable us to provide a new value that has never been found in a mall before.

Please turn to Page 20. The third major challenge and goal is to build next-generation malls and pursue the urban shopping center business. For the development of next-generation malls, we reformed our business portfolio by developing malls in a uniform manner and also by conducting market analysis based on location characteristics and other various perspectives, diversifying development patterns for each location and proposing new value. One example to materialize this concept is AEON Mall Nagoya Noritake Garden, an office complex with commercial facilities to open on October 27. This facility aims to provide a new lifestyle and added-value to office workers through the integrated development of commercial facilities and office space.

We will launch a new office brand, BIZrium based on the concept of work-life blend office, an office brand of AEON Mall, to expand the business of office complexes in Japan and overseas. BIZrium is the office to propose a lifestyle where each individual has flexibility to choose how they work and live as they like and encourage to make full use of the time and place. In combination with the commercial zone, work and life are comfortably connected, allowing more relaxed lifestyles and flexible work styles. Nagoya University of Foreign Studies has decided to open its satellite campus in Nagoya Noritake Garden. This decision was made as they can realize an ideal learning environment in the new normal and create an environment to facilitate communication among students by making full use of the large single floor area of over 7,000 square meters with good accessibility in the center of the city.

On the connecting floor between the office and retail areas, a large clinic equipped with the latest medical equipment, is located as a core of the health and wellness zone, which houses stores with a variety of functions with the theme of health. We can propose healthy lifestyle, not only to our customers, but also to the office workers and students who use the facility. This large clinic is planned to have 20 departments and will be a comprehensive medical center with state-of-the-art medical equipment as well as a medical checkup center. In addition, a variety of health and wellness tenants will open around this facility. As for overseas, in AEON Mall Hoang Mai, scheduled to open in the Central District of Hanoi, Vietnam in FY 2023 or later, the first overseas BIZrium will open as an office complex with commercial facilities.

Please turn to Page 21. In the Urban Shopping Center Business, we began operating under a new structure in March after a company split and merger. The new OPA specializes in management and operation of 8 urban commercial facilities mainly located in transportation terminals, and it is creating new value through concentration of management resources. As for another OPA, which was merged by us, we are transforming them into community-type shopping centers to increase frequency of customer visits. In addition to maximizing synergies by coordinating sales measures with malls in each area, we will improve profitability by having facilities in different locations, collaborate on sales promotion and other activities. Currently, we are slightly behind the plan due to the pandemic, but let me explain a little about our latest efforts.

Kanazawa FORUS aims to attract more customers by introducing a large lifestyle specialty store in October, and it is undergoing renovation to increase the frequency of customer visits by transforming into a store to propose a high-end lifestyle. In addition, business creation department was established in OPA in March to establish a new business pillar for the Urban Shopping Center Business. From the perspectives of new business development and digital transformation, we intend to offer new value to our customer base different from AEON Mall. And in addition to our own resources, we are considering collaboration with external partners.

Please turn to Page 22. The fourth major challenge and goal is pursuing digital transformation. Business innovation through DX is critical to become a sustainable company. We have established DX Promotion Department as a specialized organization in this fiscal year in order to achieve transformation to solve social issues, and we are accelerating our efforts in cooperation with internal and external partners. In DX promotion, we believe as we achieve increased convenience, people's feelings and personalities will be more important. So we set our DX vision as achieve people-centered digital transformation. Based on this vision, we define the value we offer to each stakeholder as KGI and work on not only value creation for customers, but also value enhanced for our employees.

As for initiatives based on co-creation with external partners, we take into account the challenges of local communities and major changes in the consumption environment, and we have started a new project using the open innovation program operated by Creww Inc. We invited applications from start-up companies that will work together to create a new future of living by combining our management resources with external technologies and networks and received entries from about 120 start-ups. We'll continue to be cautious of the concept of sympathy and co-creation, meaning creating together and will work toward early commercialization by utilizing expertise of external parties. We will announce the project when it takes shape.

Please turn to Page 23. On this page, I'd like to show you a few examples of digital applications we are promoting now. First one is a mobile ordering service to meet customers' need for take-out services. This service allows customers to order restaurant menu items on the AEON Mall app, pay for them on the mobile phone and receive them without waiting at the restaurant. This service will be introduced as needed, mainly in new malls in Japan.

In China, at AEON Mall Guangzhou Xintang, which opened in May, we introduced the AEON Mall membership system for efficient CRM using WeChat, which is widely used in China. Other examples include AI information system, face recognition lockers, large LED vision panels and signage installation, et cetera. We provide many services that utilize digital technology in China as well as in ASEAN to enhance the value of the customer experience.

In Cambodia, while it is difficult to operate as usual due to the pandemic, we broadcasted live commerce shows using the AEON Hall and Mall as a studio. It was conducted by specialty store employees, completely produced in-house at AEON Mall. It was broadcasted for 7 days in a row and recorded 32,700 views in total to receive a great response from customers. Such initiatives will continue mainly by local employees and will enhance our technical skills so that we can develop new content to make a new source of revenue with the business to integrate online and off-line, including live commerce.

Please turn to Page 24. However, the initiatives explained so far are still limited to digitalization and have yet to realize the transformation we are aiming for. We believe our vision of the future should evolve the value we offer by backcasting from the future for the medium to long term from the perspective of stakeholders. In the short term, the proportion of providing value and service to customers will be larger, but in the long term, we will create new businesses that provide solutions to regional issues through digital transformation, and we materialize our management philosophy of Life Design Developer. We will continue to provide information regularly, including the co-creation program with external partners I mentioned earlier.

The fifth major challenge and goal is to formulate and pursue medium-term strategies and accelerate reforms based on ESG perspectives. On this page, I'll explain our initiatives based on ESG perspectives. In order to realize a decarbonized society, which is increasingly demanded by society, we have formulated a new AEON Mall Decarbonization Vision and set a goal of reducing the total amount of CO2 and other emissions in Japan to 0 by 2040. We have been working on streamlining air-conditioning systems, introduction of highly efficient energy-saving equipment, installation of solar systems on the rooftops of malls and introducing LED lighting. In FY 2020, we achieved a 55.1% reduction in energy consumption per unit of floor space compared to FY 2010.

Going forward, we will strive for a new goal to operate all AEON Malls in Japan with effectively CO2-free electricity by FY 2025 by procuring offsite renewable energy and promoting direct renewable energy contracts in each region, et cetera. Since the majority of CO2 emissions come from electricity use, achieving this target would mean the total domestic CO2 emissions in 2025 can be reduced by 80% compared to FY 2013. Initiatives for decarbonization will be promoted both in Japan and overseas, aiming to reduce the total amount of CO2 emissions from all business activities to zero. We will also restructure our procurement method and strengthen the initiatives.

We declared our support for the recommendations of TCFD, a task force for information disclosure of business risks and opportunities posed by climate change in 2020. This is the first time for us to include information on our efforts to address climate change in an integrated report in line with the disclosure framework recommended by TCFD. We will continue to enhance the disclosure about the progress of initiatives through integrated reports.

Please turn to Page 27. As part of our efforts to solve social issues, we started human rights due diligence in 2020. At AEON Group, all executives and employees aim to gain a deeper understanding of human rights and realize a society in which human rights are respected based on the AEON Human Rights Policy. This AEON Human Rights Policy clearly states the implementation of human rights due diligence. It is implemented in accordance with our guidelines. As stated in the United Nations guiding principles on business and human rights, we will continue the efforts to build a sustainable value chain to play a role as a leader in ensuring human rights.

Please turn to Page 28. This page summarizes our initiatives to solve social issues. We provide venues for vaccination, which is now in full swing in Japan, and about 30 malls are currently being used as vaccination sites. Vaccination at malls has been well received by everyone and has become more popular than other sites and municipalities across the country. We believe local residents appreciate the benefits of getting vaccinated at the place with good accessibility where they come to shop on a daily basis. Also for overseas at AEON Mall Binh Duong Canary in Vietnam, about 3,300 people working at factories and commercial facilities in the city were vaccinated. In addition, the AEON Group's workplace vaccination is also conducted at malls for all group employees and employees working at malls. We'll continue our efforts to provide safety and security at our facilities, not only for the community, our customers and our employees, but also for all employees who work at our malls.

Please turn to Page 29. Let me explain our efforts to strengthen our governance. At the General Meeting of Shareholders held in May, we increased the number of outside directors from 2 to 5 with the aim of reflecting more external opinions in management. All of them are independent directors and including 2 outside auditors, we now have 7 independent directors. Each of them has expertise in a variety of fields, such as overseas corporate management, digital, human resource development, diversity, accounting and law.

In June this year, we established a new Management Strategy Advisory Committee in order to link their knowledge and expertise to management improvement. As described here, we have been discussing the themes essential to the realization of our policies and resolution of management issues, such as DX promotion, ESG management and diversity. We meet once a month for about 4 hours of discussion per meeting. With a lively exchange of opinions, meetings get so meaningful that 4 hours are not enough to finish. We'll continue to have deeper discussions on a variety of topics to achieve a goal of truly integrated ESG management.

Please turn to Page 30. Lastly, I'd like to touch upon the integrated report that was disclosed on the IR website in August. We published our first integrated report in 2019 and have continuously improved it so that you can gain better understanding about our ESG management in terms of both financial and nonfinancial information. In this FY 2021 edition, we have added new items such as DX promotion, TCFD and human rights due diligence that I explained today with detailed description, and I appreciate if you take time to read it. Through this integrated report, we hope to deepen our discussions with you and reflect your opinions in our management and realize a goal of truly integrated ESG management.

That is all for the explanation of the slides. While the first half finished with quite severe results, we are confident that we'll be able to secure sustainable growth for medium to long term as a plan for new facilities is progressing as planned despite pandemic in ASEAN and China, which will be a driver for the future growth. Currently, in China, the growth is already returning to pre-COVID level. In Japan and ASEAN, we are coming to a stage where people start to move more actively due to relaxing restrictions and increased vaccination rates. We are determined to return to our pre-COVID growth trend in Japan and overseas by the end of this fiscal year by carefully capturing customer consumption trends and behaviors and implementing measures at the right time, not to miss any commercial opportunities.

That is all from me. Thank you.

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