Aeon Mall Co Ltd

TSE:8905

Earnings Call Transcript 2019-Q3

[Masahiko Okamoto, executive]

Good morning, ladies and gentlemen. I am Okamoto of AEON MALL Co. Ltd. Thank you very much for attending our results presentation today despite your busy schedule. I will explain based on the material distributed to you.

Page 3, please. Also for the third quarter, due to strong performance of Overseas Business and Mall Business in Japan, operating revenue, operating income, ordinary income and net income reached record highs.

Page 4 shows year-on-year comparison of each quarter. Growth rate of operating income of the third quarter was positive 1.2%, which was lower than that of the first quarter and second quarter, but it was in line with our plan. Growth rate for the 3 months of the third quarter slowed down. It is because of a reactionary drop from lump sum payment received at the time of opening of 2 new malls and 1 mall with expanded floor space in mall business in Japan in the third quarter of the previous fiscal year.

In addition, OPA, operating urban shopping centers, has been accelerating renovation causing sales opportunity loss and reducing income. Both are onetime factors. In the 3 months of the fourth quarter, we plan to increase income by double digits.

Page 5 shows operating income by segment. As shown in the tables, for business in Japan, operating income of Urban Shopping Centers was below plan, but operating income of Mall Business was above plan due to strong performance. As a result, for business in Japan, in total, plan was achieved and operating income increased.

As for Overseas Business, business in China was below plan, but business in ASEAN was above plan. As a result, Overseas Business in total achieved plan.

For business in China, consumption slowed down in big cities in coastal areas. However, growth in inland areas, such as Wuhan City and Suzhou City where we are reinforcing store opening continued to be strong and double-digit sales growth continued.

As you see in the bottom table, in China, although plan was not achieved, operating revenue continued to grow significantly by double-digit, in proportion to sales growth at existing malls. Besides, along with an increase in the number of malls, business in China entered into a stage in which operating cash flows can be generated.

Cash flows from operating activities are expected to exceed JPY 10 billion in the fiscal year 2018. Store openings in the future, in China, can now be covered by operating cash flows generated in China.

For the 9 months in total, on a consolidated basis, we achieved plan. Also for the full year, we aim to achieve plan in total, although level is different segment by segment.

Page 6 shows operating profit improvement by segment. As shown on the far right, operating profit improvement of JPY 2,232,000,000. The majority of the improvement was from Overseas Business.

In business in China, although plan was not achieved, profit at existing malls increased, offsetting negative profit of new malls, which opened in a concentrated manner in this fiscal year and at the end of the last fiscal year. As a result, profit improved in China.

Also in business in ASEAN, profit amount increased.

In Japan, in Mall Business, operating costs and SG&A decreased beyond plan and profit improved more than the announced plan.

Next, I will talk about our initiatives for growth, starting with capturing ASEAN growth opportunities. As for overseas existing malls, year-on-year growth rate of existing malls in China for the 9 months was 11.9%.

On the bottom of the page, change in growth rate of specialty store sales in China is shown. The number of malls, which have been opened for some years, has been increasing, entering a cycle of stable growth.

In October, growth rate was positive 1.5%, which was a sluggish growth due to long holiday season of China's national day. During the period, many people did sightseeing or went traveling. But in November and December, growth continued to be double-digit as before.

The figures shown on the far right in the table are those of the first store in Phnom Penh in Cambodia. A decrease in visitor traffic was due to impacts of the second mall in Cambodia, AEON MALL Sen Sok City, which opened in May. The second mall, AEON MALL Sen Sok City, includes amusement complex, which is one of the largest in Cambodia, featuring water park, indoor amusement park and TV station with studios. As a result, in the first mall, visitor traffic decreased mainly in amusement facilities.

So in order to differentiate from the second mall, we carried out renovation of the first mall and attracted upper crust specialty stores than those in the second mall. The renovation led to sales opportunity loss. I think the drop in visitor traffic was onetime factor.

Page 8 shows overseas malls undergoing major renovations. As you saw in the video, we started accelerating mall openings in 2014. The number of malls whose tenants are now reaching the end of 3-year leases is increasing and we are promoting renovation of those malls. Besides, as we secured sites with room for floor space expansion and multi-story car parks can be turned into sales floors due to the design, I think we can continue to grow profit through floor space expansion and revitalization.

As you see on Page 9, 10 Chinese malls out of 17 malls and all of 7 ASEAN malls reported profits. Even lossmaking malls in China increased sales steadily.

Shifting to profitability at all malls came within reach. Page 10 shows overseas quarterly business trends. In the 3 months of the third quarter, operating income of Overseas Business in total was negative but improved by JPY 413 million year-on-year, which was in line with our plan.

As I mentioned on Page 5, for the first 9 months, operating income in ASEAN was JPY 400 million higher than planned, and operating income in China was JPY 400 million lower than planned.

In China, operating income was below plan. However, the number of existing malls with sales and profit growth potential increased and the situation allows stable profit growth. For reference, EBITDA for the 9 months was JPY 72 billion in total. Out of that, JPY 11.8 billion was from Overseas Business.

Page 11 shows an overview of 3 new malls, which opened in the fiscal year 2018.

AEON MALL Guangzhou Jinsha, shown on the bottom, is located on the border of Guangzhou and Foshan cities. This area is expected to experience an increase in population with public transportation and housing development in response to government policies for integrating the 2 cities.

Together with the AEON MALL Guangzhou Panyu Square, our first mall in Guangzhou City and the AEON MALL Foshan Dali, our first in Foshan City, the addition of AEON MALL Guangzhou Jinsha has strengthened our position to become the area-dominant mall operator in the Guangdong area and increase earnings.

Now I will talk about mall business in Japan. Page 12 shows specialty store sales at existing 73 malls. In the 3 months of the third quarter, specialty store sales at the existing 73 malls increased 1.9%. Sales after adjustment for weekend and holidays were up 1.3% year-on-year in September and October. Growth in November was 3.6%, partly due to effects of Black Friday, I will discuss later.

Please turn to Page 14. This page shows year-on-year's sales comparisons of SC sector and other store formats. As you can see, our growth rate has been higher than that of SC sector and other store formats. E-commerce markets have been expanding. Going forward in Japan, natural selection will progress among brick-and-mortar stores.

We prioritize taking a position to win against brick-and-mortar rivals. One of the initiatives for that is to develop latent sources of domestic demand. We talked about that so far, and I will touch upon a few initiatives for the third quarter.

Firstly, creation and new demand. We held AEON MALL Black Friday event again, a sale common to AEON group. As you know, we started this sale 3 years ago as sales promotion after Black Friday. Black Friday is a Friday on the fourth week of November when consumption increases most as a beginning of Christmas business season in the U.S. Sales increased significantly both in the first and second years. In the third year, we reinforced collaboration with specialty stores, spent sufficient time on preparation and offered products at special sale prices. As a result, existing specialty store sales increased 6.6% and customer traffic increased 2.7%. We achieved favorable results.

Page 16, please. The second initiative to create new demand is Happiness Mall project initiatives. This page shows cases of AEON MALL Higashikurume, Hinode and Shinkomatsu. We are reinforcing Happiness Mall initiatives built on 4 pillars: health, wellness, community and opportunity to provide value unique to a brick-and-mortar mall. At each mall, we are taking on challenges by using ingenuity.

The third initiative is attraction of overseas specialty stores to Japan to provide new experiences and discoveries for customers.

In November, AEON Lake Town welcomed the first Japanese location of Hotel Chocolat, a popular chocolate specialty retailer based in the United Kingdom. U.K. is global #1 in terms of volume of chocolate consumption. Customers are spreading information through SMS and it is becoming popular.

This is a strength unique to our company. By attracting high-profile specialty stores, we will further enhance our attractiveness unique to AEON MALL involved in overseas operation.

I introduced a few initiatives so far. In order to win competition among brick-and-mortar stores, I think it is important to acquire new customer segments and develop latent sources of demand. We intend to welcome creation of new demand in Japan.

As shown on Page 18, the second initiative for creating winning facilities in competition among brick-and-mortar stores is becoming the overwhelmingly dominant mall in each region. As a method to become the overwhelmingly dominant mall in each region, we talked about promotion of highly effective revitalization. In fiscal year 2017 and fiscal year 2018, 22 existing malls underwent renovations. Specialty store sales of the 22 malls increased strongly by 8.6% year-on-year. Compared to malls which didn't undergo renovations, effect was positive 10.2%.

Through floor space expansion and renovation of existing malls, we will realize overwhelming competitiveness to meet diversifying customer needs and enhance satisfaction of mall increase, including staff members of specialty stores, and we aim at overwhelming dominant mall in each region chosen by specialty stores.

Page 19 shows an overview of new malls. I will skip 3 malls shown on the top as we already discussed them before.

AEON MALL Tsu-Minami was built and expanded through scope and build on the foundation of the AEON Tsu-Minami Shopping Center Sun Valley opened originally in 1978 and operated for about 40 years. In this area, there are no large malls. This mall was opened in a blank area of malls. The mall opened with stores meeting needs of the area and has been performing in line with plan.

Let me move on to status of OPA. OPA has been working on renovations in stages at existing stores to strengthen profitability based on area characteristics. OPA is moving away from a fashion-heavy MD and transforming into lifestyle-oriented stores.

So far, OPA implemented store conversion. For the entire OPA, live plan meetings were held. In OPA, discussion was held with directors of the AEON MALL. As I mentioned, OPA has been converting existing stores into lifestyle-oriented stores. OPA has been accelerating renovations, including replacement of specialty stores in large spaces since the second half of fiscal year 2018.

In Shinsaibashi OPA, renovations have been implemented floor by floor. In October, HaiDiLao Hot Pot restaurant, a Sichuan hot pot chain opened. This restaurant also has a store in AEON MALL Makuhari Shintoshin. This restaurant also has stores in malls in China and operates about 200 stores globally, including China, U.S., Singapore and South Korea.

The Shinsaibashi area is crowded with Chinese tourists. The restaurant was constructed (sic) [ attracted ] to meet needs in the area. After opening, numerous Chinese tourists visited the restaurant. The restaurant is attracting more inbound demand. Besides, Hamleys, the entertainment-oriented toy store in the U.K., opened its first stores in Japan in Canal City OPA and World Porters Vivre.

The area of the stores is 3,000 square meters and 5,000 square meters, respectively. The stores do not only sell merchandise, but also provide entertainment experiences like theme parks, attracting customers to the buildings.

By promoting renovations, using introduction of these leading stores as a hook, we aim at profit improvement. In this fiscal year, sales opportunity loss is incurred temporarily due to accelerated renovation and profit improvement is slowing down, but improvement in revenue and income is expected for the next fiscal year onwards.

On Page 21, I will discuss PL. Growth rate of ordinary income was lower than that of operating income. It is because nonoperating profits and expenses decreased JPY 500 million due to booking of retail bond issuance costs and others in the first quarter.

Income before income taxes was JPY 34.3 billion, up 14.0% year-on-year. It is due to booking of JPY 1.5 billion of gains on sale of a part of site for a property plant in the TOHO area sold as land for residential properties and a hospital. It is also due to booking as extraordinary loss of JPY 948 million of loss on cancellation of lease agreements in the 9-month period of the previous fiscal year associated with purchase of land and building for AEON MALL Hiroshima Fuchu. As a result, net amount of extraordinary gains and losses improved JPY 2.5 billion.

Consequently, net income attributable to owners of parent was JPY 22.6 billion, up 14.9% year-on-year.

Page 22 shows year-on-year change of operating revenues, operating gross profit and operating profit by segment. Operating profit is also described on Page 6.

Page 23 shows a summary of balance sheet.

Page 24 shows a summary of cash flows. Main items with change are as described in consolidated financial results and the material.

Lastly, please move on to Page 26 for fiscal year 2018 guidance. Full year guidance has been kept unchanged from the numbers announced on April 11.

Following pages include Medium-Term Management Plan, so I hope you will refer to that when you have time.

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