Aeon Mall Co Ltd

TSE:8905

Earnings Call Transcript 2023-Q2

[Yasutsugu Iwamura, executive]

I am Iwamura of AEON MALL Company Limited. I'll explain about the overview of the financial results for the cumulative second quarter of fiscal year 2022. As in the previous year, I will explain the figures such as financial results and sales by comparing them with the FY 2019 results, which were not affected by the COVID-19.

Please turn to Page 3. In the second quarter, we recorded increased results in operating revenue, operating income and ordinary income year-on-year. Operating revenue was 98.8% of the first half plan, largely in line with the plan, but we fell short of the plan in each profit item as cost reductions were smaller than usual due to factors such as the sharp rise and unit cost of electricity.

Net income attributable to owners of parent significantly declined to 55.5% compared to the previous year, and there are 2 major reasons for it. One reason is that extraordinary losses increased by JPY 3.2 billion year-on-year. This is because fixed cost of JPY 1.7 billion during the temporary store closure period in Japan and overseas were transferred from operating costs to extraordinary losses and an impairment loss of JPY 1.7 billion and a provision for loss on store closings of JPY 2 billion were recorded as extraordinary losses as a result of the resolution to scrap and build some aging facilities.

Another reason is that total income taxes increased by JPY 4.2 billion year-on-year. This is a rebound from the decrease in income taxes for the previous fiscal year as a result of absorption of OPA, our subsidiary, and the recognition of deferred tax assets in the previous fiscal year. We will disclose the specific names of properties subject to the scrap and build in the press release or other media as soon as we are ready to make an announcement after completing arrangement with relevant parties.

Please turn to Page 4. The table on this page shows financial results by segment. For overseas operations, we secured an increase in profit, mainly in China and Vietnam. Operating income increased by JPY 1.6 billion compared to FY 2019. In Japan, we were significantly affected in terms of attracting customers due to changes in consumer behavior and mindset under the pandemic and operating income decreased by JPY 8 billion compared to FY 2019.

Please turn to Page 5. From this page on, I'll explain the revenue performance in each country. In overseas market, the fiscal year ends in December, so the first half is from January to June. In China, specialty store sales in existing malls for the cumulative second quarter were 87.8% compared to FY 2019. In the first half, the Omicron variant was spread across China from mid-March and we were significantly affected by the strict restrictions on behavior imposed under the zero COVID policy.

However, since June, the economy has been on a gradual recovery trend, in particular, areas that have shown high growth potential such as Suzhou and Wuhan have been recovering to double-digit growth as before COVID. The outlook for COVID measures in China is currently uncertain. Some say the zero COVID policy will continue, but with measures to support the economy by the national government and other consumption stimulus measures implemented by local governments such as electronic coupons, which are expected to be enhanced further. We will develop sales measures to capture the growing demand with the economic recovery for sales increase.

Please turn to Page 6. Next is Vietnam. From this fiscal year, we have shifted to a policy to bring the economy back on a growth track under the government's with-COVID policy, and the existing malls' specialty store sales for the cumulative second quarter grew significantly to 147.6% compared to FY 2019. In Vietnam, with the easing of restrictions on behavior, international travels have resumed, but with the rising cost of travel, including a significant increase in airfares, demand for domestic and regional consumption is growing.

Under these circumstances, AEON MALL facilities, featuring shopping, amusement and dining are widely supported, and this has resulted in the strong performance in synergy with sales measures implemented at each mall. This is not shown in the graph, but in Cambodia and Indonesia, the number of COVID cases is declining recently, and restrictions on behavior have substantially eased and will work to achieve an early recovery in sales through sales promotion measures.

Please turn to Page 7. Next is about Japan. Existing mall specialty store sales for the cumulative second quarter were 86.8% compared to FY 2019, partly due to the number of holidays was less by 1 day compared to 2019. And there was a double-digit increase in sales due to the last-minute demand before the consumption tax hike in 2019. The sales have not recovered to the pre-COVID level and the result in September 2022 was at 80.3% of FY 2019 according to the preliminary figures for the month.

The prolonged life under the pandemic and the more than expected inflation have led to a change in our customers' behavior and mindset. In order not to give in to the trend of COVID infection, we will implement anti-infection measures thoroughly and measures to attract more customers, which can motivate them to take action by analyzing the market, including customer behavior, and also work to increase sales through sales promotions to capture new demand created by government measures to stimulate consumption such as the national travel assistance program as well as by international tourists to Japan, which is now more attractive for them as a result of yen depreciation.

Please turn to Page 29. From this page, I will explain our new growth initiatives based on the 5 priority issues and future vision. The first one is to achieve profitable growth in our overseas business and accelerate new mall openings. We are steadily opening new malls in the medium-term management plan toward a goal to achieve a network of 52 overseas malls by the end of FY 2025. In Vietnam, which is the top priority area, we are executing area-dominant store openings in the South region, mainly in Ho Chi Minh City, and the North region, mainly in Hanoi, and we have concluded cooperation agreements with 7 local governments.

In June, we signed a cooperation agreement with Da Nang City, a major city in the central region, about opening of new stores. Going forward, we will accelerate the area-dominant store openings in the central part in addition to the southern and northern parts in Vietnam as planned. In China, we are working to secure candidate sites for new malls to establish a network of 29 malls in FY 2025. Going forward, we will focus on inland areas with remarkable economic development, and it is decided to open the first mall in Hunan province, which is adjacent to Hubei province in 2024.

Please turn to Page 30. In the overseas business, we are working to strengthen earnings capacity of existing malls through renovations and floor space expansion in parallel with new store openings. And the AEON MALL Tianjin Zhongbei in China, despite an impact of travel restrictions to Tianjin from outside the city due to the zero COVID policy, implemented renovations and floor space expansion and the facility was preopened on September 9 in preparation for a grand opening in November. With more than double-digit sales growth every year since its opening in 2012, we converted its parking lot on the third floor into a retail space to improve its profitability further. And overseas business will continue to make strong sales growth as well as promote floor space expansion and revitalization of existing stores, so that we can attract more customers, secure competitive advantage, and increase our market share.

Please turn to Page 31. In Cambodia, AEON MALL Logi Plus was newly established to operate first multifunctional logistics center business in the country to serve as a platform for overseas logistics. In September this year, an expressway, connecting the capital, Phnom Penh, and the southern port city of Sihanoukville was partially opened as planned. Now the completion of the expressway in 2023 is clearly in sight. So construction of our facility is underway to start operations in time for the expressway opening. Through our logistics business, we will not only improve convenience for our customers, but also improve business environment for a wide variety of businesses as well as new business opportunities and will contribute to the further development of Cambodia.

Please turn to Page 32. The second priority issue and future vision is to maximize the appeal of physical malls through customer experience or CX. What is most important in CX is to provide a comfortable and cozy space. In addition to improving the inside of malls, we are also working to create a facility environment to provide a place for customers to relax by incorporating features to appeal to customers' senses such as comfort and pleasure to meet the growing needs from customers for an open and comfortable exterior zone.

In the AEON MALL Toki in Gifu Prefecture, which is scheduled to open in this October, we aim to make it a center for interaction in the community by creating a place to bring people together with an open terrace with lush greenery and a lawn area. On weekends, various events will be held to create a rich and relaxing time. In addition, a restaurant with open-air terrace seating and a food court will provide an extraordinary experience where visitors can enjoy a relaxing meal.

And to make our customers feel even more comfortable, we work to realize AEON MALL, meaning a mall with a good sound, with a comfortable sound environment such as background music in the building. AEON MALL Toki introduces automatic volume control equipment in its auditorium, hallways, food court, and other areas, and more speakers than regular malls. This improvement will help customers hear announcements and background music more clearly, even when the mall is crowded.

We will create a space and environment where people will spend time even without a specific purpose, and encourage them to come on a weekday and have a good communication with specialty store staff to provide them with deeper values. We want to make it a habit for local customers to casually visit a mall in their daily lives and increase the frequency of store visits.

Please turn to Page 33. In the mall business, we believe that one of our important roles is to communicate the local attractiveness to the public. So we are implementing community-based localization initiatives at AEON MALLS across the country. AEON MALL Toki focuses on promoting the charm of Toki Mino ware, a traditional ceramic craft of the Tono region of Gifu Prefecture. A Mino ceramic ware store will be opened in the mall in collaboration with the local community, and we collect scrap Mino ware from local residents to create and install art installations made from the recovered Mino ware. In addition, a special website is open to the public to showcase the charms of Toki with interviews with key figures in the community and information on events.

Please turn to Page 34. In this August, Saitama Prefecture, Koshigaya City, and AEON MALL signed a basic agreement on waterfront utilization along the Osagami regulating pond adjacent to AEON Lake Town. Saitama Prefecture has set protecting and nurturing Saitama's abundant water and greenery as one of the key themes of the Saitama version of the SDGs. This time, our collaboration project with Koshigaya City was selected as a waterfront project of Saitama Prefecture, and we held a ceremony to conclude a basic agreement on waterfront utilization in August.

In the waterfront of the Osagami regulating pond, local residents enjoy strolling and jogging. And on weekends, you can see smiling faces of families as they enjoy riding yachts and kayaks and local residents are sitting and spending the time in the grass square, which is a symbol of Koshigaya Lake Town. This place is truly a precious local asset that enriches the lives of the community. And it is also a space with potential, which can be utilized for further regional development and revitalization.

Saitama Prefecture is inviting private enterprises to participate in its project from the planning stage to further improve the waterfront environment, which is its local asset, and we were selected as a candidate facility in June this year. The picture on the right shows an image of the use of the waterfront. We'll work together with not only Koshigaya City, but also with the local residents in this area, to share ideas and promote studies for further improvement of the attractiveness of the waterfront.

Please turn to Page 36. We are promoting the digitization in physical malls and working on initiatives to provide services to customers and support specialty stores in various areas through co-creation with partner companies. In July this year, with the staff BX application service, we have launched an initiative to stream content about recommended products and coordinate suggestions by specialty store staff working at AEON MALLS nationwide via digital signage in our malls. Customers who come to malls can visit specialty stores based on the information from talented staff influencers and enjoy shopping.

Please turn to Page 38. The third priority issue and future vision is to build the next-generation malls and pursue the urban shopping center business. Today, I'll talk about our recent initiatives at OPA. Takasaki OPA executed revitalization in October last year and enhanced its food and cosmetics specialty stores, which were in high demand from customers. Sales in the second quarter under review increased 101.9% compared to FY 2019 before COVID. As such, by steadily promoting the revitalization of each facility, we will work to strengthen profitability as quickly as possible.

Also, Takasaki OPA is working with the co-creation partner selected in the OPA Accelerator program to form an upcycling community to create a cycle between companies and clothes. This initiative is collecting, sorting, redyeing clothes, and reusing them as new clothes to solve fashion loss issues. In June this year, we held the upcycle market and event featuring about 10 upcycling brands from Japan and abroad and even attracted much attention and covered by NHK and other media.

Please turn to Page 39. Kanazawa FORUS is also working with Co-Creation Partners and the OPA Accelerator program. It operates a self-curated store that selects and sells traditional crafts from Ishikawa Prefecture named Mihon-Ichi Kanazawa, and its virtual shop was opened as well. Using the latest AR technology, products can be freely viewed in 360 degrees. And by reading a QR code, a full-scale product appears on the screen, and it can be projected onto a real room or a shelf to help customers imagine realistic usage. This is a demonstration experiment on a new shopping experience.

Please turn to Page 41. The fourth priority issue and future vision is to pursue digital transformation. In an age of increasingly complex social issues and drastic changes in the consumption environment, it is essential to diversify and deepen the value we provide through co-creation with external partners. In Japan, we have already started collaboration with various companies. And this year, we implemented an accelerator program in China as well and solicit business proposals from start-up companies in China. In China, there is a growing interest in realizing a sustainable society with its economic development. And by combining management resources with the technologies and networks of various start-up companies, we'll work on open innovation.

Please turn to Page 42. The fifth priority issue and future vision is to pursue medium-term strategies and accelerate reforms based on ESG perspectives. To realize a decarbonized society, we have formulated the AEON MALL decarbonization vision and set a goal to reduce total CO2 emissions in Japan to zero by 2040. And ahead of this 2040 target, we will realize operating all malls in Japan with effectively CO2-free electricity by fiscal 2025. We will achieve the goal set out in the decarbonization vision by purchasing CO2 credits as well as producing renewable energy for local consumption together with people in the local communities, and we will transform ourselves from a company that buys CO2 credits to a company that generates them. In September this year, we launched AEON MALL Machi no Hatsudensho, a low-voltage distributed solar power generation system via self-directed transmission. This initiative of Machi no Hatsudensho is the first step toward the creation of locally-produced, locally consumed renewable energy to produce the electricity used at malls by ourselves.

We will use renewable energy with low environmental impact generated by approximately 740 low-voltage solar power plants in each region for about 30 AEON MALLS nationwide. And electric power generated by the solar power system will be equivalent to the power consumption of 4 AEON MALLS. We will continue to expand solar and other types of Machi no Hatsudensho throughout Japan. And by 2040, we will shift the electricity use in our directly managed malls to 100% locally produced renewable energy.

Please turn to Page 43. To address waste and resource issues, we embrace the concept of circular economy for our mall operations, and we'll work to build a circular economy zone locally by shifting the assumption from reducing waste to zero waste and complete recycling of all waste. To realize a recycling-based society, we will work together with our stakeholders, including customers, AEON Store Association members, and local communities to realize the circular mall through initiatives like eliminating plastics, food recycling, and clothing collection.

Please turn to Page 44. In realizing the circular mall, we will also focus on creating recycling-oriented sustainable malls in the construction sector. We aim to recycle resources throughout the entire supply chain, including not only in the facility operations but also in the process of construction and renovation. To this end, we have started construction with a system that does not dispose of resources as much as possible, recognizing everything as a resource. And by designing without the idea of disposal, we will realize a resource recycling system that will reduce environmental burden, solve the fundamental problem, and does not discharge waste.

Specifically, building materials used in construction of new buildings, innovation and repair of facilities like parking lots are demolition materials, recycled building materials, and materials with low CO2 emissions, and we do not use nonrecyclable materials. As such, we operate with an awareness of resource recycling.

AEON MALL Toki, which will open in this October, is an environmentally friendly building designed with an awareness of the circular mall. And as shown on the slide, we build this mall to be friendly to both people and the environment with solar power generation equipment and well-ventilated building structure.

Please turn to Page 45. As a company with parent-child listing structure, we are aware that the market requires us to strengthen our governance. And in accordance with the TSC listing rules and the corporate governance code, we established 3 committees, that is Nomination and Compensation Committee, Management Strategy Advisory Committee, and Governance Committee. Today, I will explain the activities of Governance Committee. By the amendment of corporate governance code in June last year, a company with a controlling shareholder listed in the prime market is now required to make a majority of the directors independent outside directors or establish a special committee to deliberate and review conflict of interest transactions.

To comply with the amendment, Governance Committee was established in December last year, and it started its activities in February this year. This committee deliberates on the reasonableness and appropriateness of conditions of conflict of interest transactions in the group and its contribution to stronger governance functions is already being felt. Also, we will continue to discuss the requirement for a majority of independent outside directors. As I said, the financial results fell short of the full year plan, but we are aware that the first thing we need to recover is attracting customers. In Japan and overseas, we'll closely monitor consumption trend in the areas where our malls are located and implement proactive measures according to individual situations. That's all from me. Thank you.

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