Aeon Mall Co Ltd

TSE:8905

Earnings Call Transcript 2020-Q3

[Masahiko Okamoto, executive]

Good morning. I am Okamoto of administration division. Thank you very much for attending our results briefing today despite your busy schedule.

I will explain by using the front screen. I think the same materials were distributed to you.

Please turn to Page 3. Due to strong performance of business in Japan and Overseas Business, both operating revenue and profit for the cumulative consolidated third quarter reached record highs. As we already reported, we started to adopt IFRS 16 in business in China and business in ASEAN in this fiscal year. Even excluding the impact of the adoption, operating income was up 8%, and ordinary income was up 8.5% year-on-year. On the bottom left of the material, financial indicators are described. It looks as if financial indicators deteriorated as a result of the adoption of IFRS 16. However, conventional level is maintained when the impact is excluded.

Let me move on to operating income by segment. For business in Japan, solid growth of Mall Business offset the drop in Urban Shopping Center Business. As a result, operating income in Japan increased in total. In Urban Shopping Center Business, loss increased, but the impact of revitalization of existing stores began to be seen. Like-for-like sales increased 3.7% year-on-year. We expect profit will increase in the fourth quarter when sales index is high. For Overseas Business, in China, operating income was negative in the cumulative third quarter of the last fiscal year. However, in the cumulative third quarter of this fiscal year, operating income was positive JPY 4.1 billion, up JPY 4.5 billion. Excluding the impact of adoption of IFRS 16, operating income was JPY 500 million, up JPY 900 million, showing high level of growth.

For ASEAN, in all of the 3 countries, Cambodia, Vietnam and Indonesia, profit growth increased. Operating income for ASEAN was JPY 2 billion. Excluding the impact of IFRS 16, operating income continued to increase and was JPY 1.6 billion, up JPY 800 million. In Overseas Business, as the number of malls increases, operating cash flows are expanding. As a growth driver for our company, Overseas Business entered into the stage of full-scale profit contribution in fiscal year 2019.

Please go to Page 6. As for sales in Overseas Business, both in China and ASEAN, specialty store sales has been maintaining double-digit growth, normal speed of growth. Both in China and ASEAN, AEON MALL facilities hold promotional sales responding to social events, driving consumer demand, create more environments and implement operation equivalent to those of Japan and increment renovations, focusing on planned replacement of specialty stores. By leveraging operations and expertise developed in Japan, growth is maintained.

Page 7 shows information of new stores and others. In the cumulative third quarter, 5 malls reopened after renovation in China. In China, where consumption continues to increase, changes in the market are fast. To cope for such changes, contract period with specialty stores is set at 3 years. By promoting entry of new and more popular tenants in a short cycle, freshness of malls is continually maintained and evolved to secure growth. As for new mall openings, in June 2019, we opened the first mall in Changshu province, our first mall in Changshu City, AEON MALL Changshu Xinqu.

Page 8, please. In ASEAN, in June 2019, we expanded and reopened AEON MALL Tan Phu Celadon, our first mall in Vietnam. On November 22, we celebrated the grand opening of AEON MALL Binh Tan, our fourth mall in Vietnam. This marked the major revitalization of the mall, renovating about half of specialty store spaces. In Vietnam, markets are growing beyond our expectation. At AEON MALL Tan Phu Celadon, to respond to strong consumer confidence, we increased the number of specialty stores by 80 to 200 in total. We also raised parking lot capacity to 2,000 cars and 10,000 motorcycles to address increase in customer traffic. As a result, sales have been more than doubling.

At AEON MALL Binh Tan, 71 tenant spaces were renovated. The mall now features specialty food and other retailers offering daily necessities, accessories, cosmetics, household goods and other specialty stores proposing lifestyle. Sales are growing by 20% at present. Sales at our malls have been growing at a pace exceeding economic growth rate in each country.

Now let me talk about measures to expand revenue of overseas malls. Firstly, promotional sales to encourage consumer spending. In China, compared to the past, spending tends to increase more in social events such as Christmas and Valentine's Day. On those occasions, we implement sales promotion to drive consumer demand. As you are aware, on Single's Day, so-called Double 11, the busiest online shopping day of the year, we implemented discount sales and held events to attract customers. On the day, Single Day sales resulted second only to January 1. Besides, AEON MALL Black Friday held in Japan is also held in ASEAN countries. As you know, Friday on the fourth week of November, a start of Christmas shopping season in the U.S. is called Black Friday. In relation to that, we started to hold Black Friday sales promotion 4 years ago in Japan. As with Japan, we will also establish Black Friday as a promotional sales unique to AEON MALL overseas.

Please turn to Page 10. The second revenue growth measure for overseas malls is collaboration with and support for tenants. Both in China and ASEAN, by leveraging operations and expertise developed in Japan, we are creating the same type of mall environments and implementing operations found in Japanese malls. In Japan, we hold customer service role-playing contest to improve customer service levels and mall tenant employee skills. As one of the measures, we also conduct a contest overseas. In China, in August 2019, AEON MALL Guangzhou Panyu Square hosted the fourth annual AEON MALL national customer service role-play contest. The number of participants is growing every year. This time, about 55,000 employees, specialty store staff participated, representing about 3,700 specialty stores and 19 malls across China.

In ASEAN, in Cambodia, we held the fourth annual AEON MALL Cambodia customer service role-play contest in November. This contest was also held in Vietnam in October and in Indonesia in November. We think these initiatives in intangible aspects are also driving double-digit growth in specialty store sales. Besides, in China, we've been holding AEON MALL tenant meet-and-greet every year since 2017. Tenant meet-and-greet held last year was the third one. Tenant meet-and-greet is held to deepen cooperation with local tenant companies further for growth in business in China and a stronger business foundation of our Overseas Business. We talk about our business strategy and specific plans to tenant companies. We also invite outside lecturers and hold seminars useful for future business expansion of tenant companies.

Please turn to Page 11. I will discuss business in Japan. As you see in the table, specialty store sales at existing 79 malls were up 2.3% year-on-year, showing positive trend. As the media discussed in September, partly due to last-minute demand before consumption tax hike, sales increased 10.4% year-on-year. In October and November, there were aftereffects of September demand growth. However, for the 3 months of the third quarter, sales were up 2.1% year-on-year. In particular, October performance was impacted by a reactionary drop after the consumption tax hike. In addition, in October 2019, due to typhoon #19, which caused big damages in various places, we had to suspend operation at some malls. We think that was also a reason for October performance.

Page 12 shows our business performance and comparison with shopping center sector and others. In consumer market in Japan, closure or withdrawal plans of department stores and specialty stores are announced one after another, and consolidation of retail facilities is progressing. We are promoting measures to expand in deeper markets by enhancing attractiveness of malls and reinforcing capability to attract customers with various functions added to shopping functions.

As we mentioned several times before, growth rate of specialty store sales at our existing malls has been higher than that of SC sector and other store formats as shown in the graph due to effects of floor space expansion and renovation we've been reinforcing since the last fiscal year and entrenchment of Happiness Mall Initiatives in each mall. The drop after consumption tax hike was small. In November, sales already recovered to the level of the same period of the last fiscal year.

Page 13 shows floor space expansion and others in Japan. During the 3 quarters, we expanded floor space at 4 malls. 3 malls, AEON MALL Higashiura, AEON MALL Natori and AEON MALL Okinawa Rycom, expanded and reopened before Golden Week consecutive holidays in May 2019 and AEON MALL Takaoka in September. AEON MALL Takaoka, which underwent a floor expansion in September, added 70 tenant spaces and raised a total number of specialty stores to 200. The total leasable area was expanded by 19,000 square meters to 82,000 square meters. Nearly 50% of specialty stores was renovated. As a result, the mall transformed into one of the largest shopping malls in the Hokuriku region. In the expanded space, a collection of major fashion retailers and the latest experiential amusement facilities were introduced. Besides, a new nearly 900-seat food court was established. As a result, the food court has about 1,400 seats, including those of existing food court, and is operated as one of the largest in the Hokuriku region. During the 3 quarters, specialty store sales were up 6.6% at 22 existing malls which underwent floor space expansion and major renovations. We think effects are shown prominently.

Next, I will talk about sales planning. On Page 14, I will introduce to you AEON MALL Black Friday. Again, we held AEON MALL Black Friday for 5 days from November 22 to November 26 at all AEON MALL locations. Also this time, we offered limited availability pricing for popular fashion and food items as well as original novelty items and a 5x point reward when using the AEON Card for payments to attract more customers. As with the previous campaigns, results were favorable as customer traffic adjusted for equivalent days was up 8.5% year-on-year during the promotional period, while specialty store sales were up 6.9%.

Page 15 shows status of promotion of Happiness Mall initiatives we are focusing on. As Happiness Mall initiatives from the viewpoint of localization, we are promoting characteristic measures and plans for each area and each mall. To be more specific, we are encouraged in ultimate localization activities as ultimate initiatives to highlight the attractions of local communities. Each mall plans and implements initiatives in cooperation with local entities concerned.

AEON MALL shopping malls are collaborating with local people across 6 sales of industry, academia, government, private organizations, culture and history and products. This year marks the fifth year of these initiatives. In addition, in October, Kasukabe City, Saitama Prefecture, and AEON MALL Co., Ltd. agreed on comprehensive alliance. Malls in other regions have similar agreements. In Kasukabe, agreement was signed to have close collaboration and contribute to development of vital and characteristic local community with 8 measures described in the material as pillars.

Next, I will talk about Urban Shopping Center Business on Page 16. In Urban Shopping Center Business, we are working on 2 key measures. The first measure is revitalization as we do so for shopping malls. Overall numbers are in the process of improvement. We are promoting renovation to transition away from apparel-heavy sales, working to attract 20 specialty stores. As shown in the material, driven by revitalized stores, like-for-like sales rose 3.7% year-on-year.

The second measure is to improve profits by changing ownership, management and operating schemes and through strategic scrap and build. We turned Yokohama Importmart Inc. into our subsidiary. Yokohama Importmart is a developer of Yokohama World Porters in which OPA operates a store.

As we reported in results briefing of the previous fiscal year, we partially operated the property. OPA operated certain sections of World Porters Vivre in Yokohama World Porters. Going forward, OPA will centrally manage and operate the entire facility. We will conduct renovations of the entire facility to attract traffic more effectively, operate more efficiently through integration of operation and grow profits.

As shown in the bottom right of the material, we plan to close Tenjin Vivre temporarily beginning February 11, 2020, in conjunction with the Tenjin Big Bang Project: redevelopment of the Tenjin/Hakata district in Fukuoka City. Tenjin Vivre is adjacent to Fukuoka Building, a commercial complex; and Tenjin Core, a fashion building. Tenjin Vivre has been operated in the district consisting of the 3 buildings. Along with promotion of Tenjin Big Bang Project, we will welcome redevelopment of this district in cooperation with Nishi-Nippon Railroad Co., Ltd. Opening is scheduled for 2024.

Next, I will deviate the topics and business performance and talk about some of our ESG initiatives. As we disclosed in CSR report and integrated report, we are actively promoting CO2 reduction through introduction of solar power generation and LED and introduction of leading-edge technologies to minimize environmental burden, including installation of EV battery chargers at parking lots of our malls. Besides aiming at building a recycling-oriented society, we are working on initiatives actively with 0 emission to recycle all the waste discharged from malls.

In addition to these initiatives, we are promoting initiatives to cope with issues such as CO2 emission caused by resource wasting and incineration disposal. Also for marine plastic waste, which is becoming a significant global issue, we will promote initiatives under the keyword of plastic elimination. The first plastic elimination initiative we are working on is plastic straw elimination. Since the autumn last year, we've been promoting switch to paper straws in food courts and restaurants in AEON Lake Town and AEON MALL Makuhari Shintoshin. With the cooperation of specialty stores, we plan to roll the initiative out to all malls in Japan sequentially. We are actively promoting environmental conservation initiatives, not only in Japan, but also overseas. Earlier than Japan, in Vietnam, straws used at food courts are switched to rice straws made of rice-derived ingredients or paper straws in stages.

At AEON MALL Sen Sok City, the second mall in Cambodia, approximately 1-megawatt photovoltaic facilities and highly efficient sheeters were installed on the roof to reduce CO2 emission by about 1,564 tons a year. These initiatives were highly recognized, and the mall received prestigious certificate of appreciation from the Cambodian Minister of Environment in November. The mall has been working on environmental conservation initiatives, natural resources management and biodiversity preservation and sustainable lifestyles as a shopping mall in Cambodia. The mall was recognized as a model practice of environmental initiatives for shopping malls in Cambodia. We will continue to reinforce environmental conservation initiatives.

From Page 18 to Page 20, detailed financial statements are described. The impact of IFRS 16 adoption is shown, so please confirm that.

Please go to Page 22. Now I will talk about our future initiatives, starting with Overseas Business. As a new mall in Overseas Business, on November 28, we opened our second mall in Shangdong Province, the first mall in Qingdao City, AEON MALL Qingdao Xihaian Xinqu. This mall is located in the ninth Chinese new national district established in the international resort city of Qingdao City. Outstanding features include convenient, leading-edge electronic-based services such as face recognition cash registers at specialty retailers. Face-recognition cash registers are systems for accounting and settlement through face recognition.

In ASEAN, on December 5, we opened AEON MALL Ha Dong, our fifth mall in Vietnam, the second mall in Hanoi City. Nearly 40% of the 220 tenants and brands are firsts for Vietnam, Hanoi or any shopping mall. The mall includes global fashion brands and a zone featuring the latest experimental brands produced by local young fashion designers. The zone was named Binh Minh in Vietnamese meaning dawn. In the zone, at the start, for ladies, brands opened their stores. In this way, we are also helping foster domestic brands in Vietnam.

As a result, the number of malls in Overseas Business at the end of fiscal year 2019 will be 30 in total, including 21 malls in China and 9 malls in ASEAN.

Page 23 shows a list of scheduled openings of overseas malls which were announced so far. Through new mall openings, we will promote area-dominant strategy further. In fiscal year 2020, we plan to open 2 malls in Indonesia and 1 mall in Vietnam. In business in China, there will be no new mall opening in fiscal year 2020. However, as there are 21 existing malls, we will secure growth by promoting revitalization and others. In addition, on December 6, we signed a memorandum for strategic alliance with the Qingdao City municipal government. We consider Qingdao City to be an important market and area for investment. With the support of the government, we aim at opening at least 3 more major shopping malls over the next 5 years.

Let me discuss mid- to long-term initiatives for new mall development in Overseas Business. Please look at Page 24. In business in China, we will mainly open malls in inland areas, such as Hubei Province, where economic growth rate is higher than that of coastal areas. In business in ASEAN, we will develop malls in anticipation of future markets. In particular, in Vietnam, where high market growth is expected going forward, we will promote new mall development. We will talk about the detailed plan in medium-term management plan, starting in fiscal year 2020, which will be announced in April this year.

The table on the bottom right on Page 24 was already explained in the results briefing for the second quarter. It shows reasoning for growth of existing overseas malls or operating revenue and gross profit of existing malls for fiscal year 2018. Average operating revenue per mall increased JPY 135 million and average gross profit by JPY 139 million. In revenue structure of overseas malls, operating revenue grows through sales-linked trend and rent revision at the time of contract renewal. On the other hand, the majority of operating costs are real estate costs, so costs remain almost constant over time. Further profit improvement can be expected through revitalization in the third year when specialty store contract expires and onwards. The same level of profit as that of malls in Japan can be generated in the seventh or eighth year after opening. I think you can see from this table the growth of operating revenue of existing malls directly leads to operating income.

On Page 25, I will talk about our future initiatives for business in Japan. For existing malls, we will promote floor space expansion and revitalization, responding to needs of mall opening areas. In fiscal year 2020, we plan floor space expansion at 2 malls and revitalization at 8 malls. For new malls, we plan to open AEON MALL Ageo in Saitama Prefecture and AEON MALL Rifu New Building in Miyagi Prefecture. With the opening of new building, AEON MALL Rifu will be one of the largest shopping malls in the Tohoku region. We are developing the mall by mobilizing our latest expertise.

Page 26, please. As for business environment in Japan, as you know, the consumer market is shrinking. We recognize that consolidation of retail facilities will take place on a free scale. Under such circumstances, each and every mall has to implement specific measures to enhance market share in each area that is a key to win competition. AEON Group will strengthen health and wellness initiatives further that contribute to rich and varied lifestyles for customers through physical and mental health. AEON MALL aspires to be a space for customers to find happiness. We are rolling out Happiness Mall Initiatives from 4 perspectives: health, wellness, community and opportunity. We want to create opportunities for customers to meet new sense of value and lifestyle. We will realize stable growth by capturing new customer segments through a variety of projects that include weather-independent, comfortable AEON MALL Walking and Opera de AEON MALL concerts held in collaboration with the Japan Opera Foundation.

Besides, in response to changes in the consumer environment and the transition toward digitalization, we have started initiatives towards creating Smart Malls to create traffic among a wide range of customer segments and improving the shopping environment. Page 27 shows an overview. We are enjoying synergy between Overseas Business and business in Japan. In China and ASEAN, we are developing and testing digital equipment with domestic and international partner companies who have unique technologies, reflecting test of advanced digital technologies and the opinions of our customers.

Page 28 shows some initiatives. Using AEON MALL Makuhari Shintoshin as a pilot mall, we introduced digital measures that will enable customers to do stress-free shopping and enable specialty store staff to more focus on sales activities. In introducing digital measures, we are conducting proof-of-concept tests related to 5 topics, including stress-free, convenience, information and communications, inbound tourism, and labor and energy savings. We will roll out these initiatives across other malls throughout Japan after verifying results.

In addition to these initiatives, we will continue to enhance entertainment functions as administrative and community functions. We will also expand establishment of Aeon Yumemirai Nursery School in-mall childcare facilities. Besides, we will further promote environmental conservation initiatives such as installation of more EV battery chargers and plastic-elimination initiatives that I discussed earlier. We are also playing a role as regional disaster relief facility to cope with recently increasing natural disasters and continue to develop malls beyond the framework of retail facilities. Through these initiatives, we intend to evolve our malls as regional infrastructure that contributes to problem-solving in each region and maintain and enhance study of malls based on ESG perspectives.

Lastly, please turn to Page 31. There are no changes to consolidated earnings forecast for fiscal year 2019 from the forecast we announced on April 9, 2019.

On the following pages, we attached materials regarding impact of adopting IFRS 16 and others. I would appreciate if you confirm them.

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

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