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Edited Transcript of 3382.T earnings conference call or presentation 11-Oct-19 10:59am GMT

Q2 2020 Seven & i Holdings Co Ltd Earnings Presentation

Tokyo Oct 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Seven & i Holdings Co Ltd earnings conference call or presentation Friday, October 11, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph Michael DePinto

7-Eleven, Inc. - CEO and President

* Ryuichi Isaka

Seven & i Holdings Co., Ltd. - President & Representative Director

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Presentation

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Ryuichi Isaka, Seven & i Holdings Co., Ltd. - President & Representative Director [1]

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[Interpreted] Good morning, everyone. Thank you for taking the time off your busy schedules to attend Seven & i Holdings Financial Results Presentation for the second quarter of the fiscal year ending in February 2020. I would also like to thank you for your continued support and understanding of our operations. Thank you for your support.

Without further ado, I would like to start today's financial results presentation. I would like to start with the consolidated financial results for the first half of the fiscal year. Unseasonable weather during the summer months as well as store closures had a negative impact on revenues from operations, which registered a Y-o-Y decline. However, we delivered the best operating income and net income attributable to owners of parent performance in the company's history, exceeding our forecast.

Operating income changes by segment were as follows. As you can see, domestic and overseas convenience store operations drove growth and delivered an operating income expansion of JPY 5.5 billion Y-o-Y. On the other hand, Ito-Yokado and Sogo & Seibu continued to struggle significantly. Additionally, while expenses for adapting credit cards to IC negatively affected the Financial Services segment and led to a Y-o-Y operating income reduction, we were still able to meet our forecast.

When I discussed this issue back in April during the company's financial results presentation for the full fiscal year, which ended in February 2019, I said, I would be giving an overview of future structural reform initiatives in the company's financial results presentation to be held in October 2019. One of the topics is the need for decisive measures related to structural reform at Ito-Yokado and at Sogo & Seibu.

Next, regarding Seven-Eleven Japan, we are in the process of building a strong foundation towards restoring growth, even amidst the very challenging management climate for small domestic 7-Eleven stores. I referred to this as a plateau with a purpose before. I shall be delving a little bit deeper into the details today. Also, the President and CEO of 7-Eleven, Inc., Mr. DePinto, traveled to Japan to join us for this presentation today for the first time. 7-Eleven, Inc. has posted very robust results globally and in the North American market, Mr. DePinto will be giving us an overview of this growth process. Additionally, we would also like to give you an update on the group's growth strategy. We will be announcing the next medium-term management plan during the company's financial results presentation for the full fiscal year to be held in April of next year.

First, I would like to start with Ito-Yokado. Starting in fiscal year 2017, and up until the end of the first half of the current fiscal year, we carried out store structural reforms designed to renovate the store layout and product composition at a total of 54 stores. We have confirmed an operating income improvement of approximately JPY 3 billion and 43 stores that underwent structural reform between fiscal years 2017 and 2019. Throughout this process, we have obtained a clear picture of the measures we need to enact.

However, at the rate up until now, we will not be able to effect change quickly enough. We intend to carry out further structural reform at Ito-Yokado until 2022, with a view towards realizing stable earnings. These are the main 4 points of our restructuring efforts, starting with store initiatives. We intend to identify unprofitable stores and establish an alliance between these stores and external companies. Should this prove impossible, we are also considering the option of closing down unprofitable stores.

Regarding our merchandising initiatives, the apparel and household goods divisions have posted ongoing losses. We reduced and aggregated these 2 into the Lifestyle division. However, even this isn't enough to make it in time. For this reason, we believe there is a need to enact a significant reorganization.

Next, regarding reorganization, the market for food products in the Tokyo Metropolitan area is a very promising market. However, our current organizational structure makes it difficult to approach this market. We intend to carry out the reorganization at the group level and attempt to make a foray into the market for food products in the Tokyo Metropolitan area.

Implementing the 3 reorganization initiatives I just outlined will naturally translate into the need to enact personnel initiatives.

First, I would like to discuss our store initiatives. We currently operate 158 stores. We performed an inventory again, and closely surveyed the profitability and future potential of each individual store. Out of these, we believe we can improve the attractiveness of the building at 103 stores by advancing the adoption of a shopping center format and by strengthening property management.

However, for 33 stores out of a total of 158, we believe restructuring efforts on our own to be difficult. We will search for cooperation with group companies and in the form of external alliances. Should this prove difficult to accomplish, as I mentioned earlier, we will then consider and carry out store closures.

Regarding Shokuhinkan, the food specialty store format of Ito-Yokado, we will be taking steps to improve profitability by collaborating within the group with a view to a company split.

Our merchandising initiatives are as follows: The graph on the upper portion of the page contains the representation of operating income trends by division; the line colored red represents operating income associated with the Lifestyle division. This graph shows operating income data going back to fiscal year 2013. However, this trend extends all the way back to the early 2000s, a trend characterized by ongoing operating losses.

However, as I mentioned earlier, we have implemented structural reforms at 54 stores, starting with fiscal year 2017. For stores in prime locations, we did not enact such drastic reforms as the ones we are planning now. However, by reducing self-management and by welcoming attractive specialty stores as tenants, we were able to improve footfall and improve per square meter profitability.

For this reason, we intend to welcome the collaboration of attractive outside brands to revitalize our Ito-Yokado store buildings.

Next, I would like to discuss the topic of reorganization. Regarding the food business, the areas of Tokyo, Chiba, Kanagawa and Saitama are very resilient to depopulation. These areas will also see a significant increase in the senior citizen population in absolute terms. For this reason, we are seeing an increase in demand for smaller stores closer to consumers as opposed to larger faraway stores.

However, York Mart and SHELL GARDEN, which we currently operate, alone are not enough to allow us to capture demand in this market. For this reason, we want to establish new store formats for Ito-Yokado's Shokuhinkan stores.

Finding land in the Tokyo, Chiba, Kanagawa and Saitama areas in which to build these stores is a very trying task, as the areas needed would be between 500 tsubo or approximately 1,652 square meters and 700 tsubo or approximately 2,314 square meters. For this reason, we need to figure out a structure allowing us to provide attractive merchandising through smaller stores between 100 tsubo, approximately 330 square meters and 300 tsubo, approximately 991 square meters. We must also establish new product supply platforms and improve efficiency in manufacturing and logistics.

Additionally, there will also be no need to have multiple administrative divisions after splitting off Shokuhinkan away from Ito-Yokado. As such, we would like to attempt to make inroads into this new market, while carrying out reorganization efforts.

Accompanying this, there is a need to think about personnel initiatives. There is the need to consider the employment optimization of 1,700 employees by the end of fiscal year 2023 compared to fiscal year 2019 numbers. We will fundamentally review staff levels and correct age distortions in staff composition upon labor management consultations.

Regarding our growth strategy, we believe there is a need to strengthen Ito-Yokado's food business, we want to strengthen the development of products to meet market demand from an increasing number of people who don't have the time to prepare meals at home. We have been able to accumulate a variety of operational knowledge through the opening and operation of smaller stores in the Tokyo Metropolitan area. What is the necessary merchandising in order to attract customer footfall? We believe alliances with outside specialty companies is of vital importance to strengthen Ito-Yokado's food products. While carrying out such initiatives, we want to review the profitability of Ito-Yokado's current food business. Additionally, in the Lifestyle division, drastically reducing self-management of the apparel and household goods division opens up store floor space. The key point then becomes figuring out which category of specialty stores to welcome as tenants. We will be shifting priorities at Seven & i Create Link towards restructuring at Ito-Yokado and integrate it with the management of Ito-Yokado. Through this, we want to put in place a structure for the allocation of sales floor space and for speedy structural reform at Ito-Yokado. Additionally, we believe there is significant potential when it comes to the last mile over the next 5 or 10 years. However, we believe there are a number of very challenging issues with the current Net supermarket model with stores as the starting point. We learned a number of valuable lessons from our trial test at IY Fresh carried out in cooperation with ASKUL. This trial involved fulfilling 100% of customer orders. The repeat usage percentage is 80% or 90% after an initial successful delivery. This allowed us to confirm there is great demand for this type of product. We are therefore considering converting IY Net supermarket to a large-scale center format as a new business over the next 3 years.

Next, I would like to discuss our operations at Sogo & Seibu. As shown by the line graph to the left, and while we are not fully satisfied with these results, key stores in the Tokyo Metropolitan area continued to deliver a stable performance.

On the other hand, regional and suburban stores struggled considerably. The red line is a representation of sales growth for key stores in the Tokyo Metropolitan area, while the blue line represents regional and suburban stores. We carried out an evaluation for each individual store based on the performance metrics of profitability and the number of customers. In addition to this, we also looked at the future market growth potential and the real estate value. The results can be found on the next page.

We have decided on the closure of 5 stores. On the other hand, regarding regional stores, we believe that through the reduction of sales areas space in SEIBU Akita and SEIBU Fukui and by strengthening property management, these 2 stores can still contribute to each regional economy as the only department stores in each prefecture. Of course, this number of store closures leads to the need for staff composition optimization. We expect this to translate into the employment optimization of approximately 1,300 people.

Regarding the remaining stores, and unlike our previous approach of a static sales area space allocation and static floor layout, we will be introducing a property management perspective and take an agile stands towards changing the sales areas space composition. We believe there is a need to carry out these measures even at key stores.

Additionally, we will be strengthening service to preferred customers, a defining characteristic of department stores. Through this, we want to be in a position of competitive superiority even amongst other department stores.

Regarding suburban stores, we want to consider SEIBU Tokorozawa and SEIBU Higashi-Totsuka as satellite stores. We will be introducing a new corner for our preferred customers. In the case of SEIBU Tokorozawa, we view it as a satellite store of SEIBU Ikebukuro, flagship store of Seibu. While we view SEIBU Higashi-Totsuka as a satellite of Sogo Yokohama, flagship store of Sogo. While maintaining the attractiveness of the department store, we want to adopt a shopping center format and strengthen property management even more so than at key stores.

This concludes my overview of our structural reform efforts for Ito-Yokado and Sogo & Seibu. For the stores continuing operations, if they continue operating the same way they have here before, we believe we will have to carry out further store closures 5 or 10 years down the line. How to change the content at these stores is therefore of the utmost importance.

We therefore believe there is a need for store managers and employees to internalize the need to improve the key performance indicators of sales per square meter and gross profit. It is necessary for them to track progress in conjunction with management at each operating company and with us at the holdings company, and take an agile approach to changing the sales floor space.

Next, I would like to discuss our operations at Seven-Eleven Japan. The outline of structural reforms at Seven-Eleven Japan can be broken down into the following 3 points.

The first is a system that enables franchise stores to concentrate on store management with peace of mind. We are considering a change to the franchising system. Second, we believe that increasing earnings distribution exclusively to franchise stores would result in a loss of support from our stakeholders who we value greatly. I talked about an alligator mouth pattern during our financial results briefing back in April. By this, I mean a pattern characterized by increasing SG&A expenses associated with the head office. We believe there is a need to enact head office cost structural reforms.

In order to achieve this, we will be accelerating the closure of unprofitable stores. To use a metaphor, tooth cavities don't simply go away. We are therefore prepared to treat or remove these tooth cavities. By focusing too much on store openings, there is a possibility we ended up with a looser approach to rent expenses. We would therefore like to optimize rent expenses. Additionally, optimization through the use of IT shouldn't apply exclusively to store operations, but also in order to achieve work optimization for our head office staff.

We believe this to be a necessity. Most important of all, in order to continue delivering in growth, and although this strategy focuses primarily on existing stores, we want to take concrete measures to accelerate the introduction of new store layouts and products in order to meet the needs of new customers.

We believe there is a need to enact these initiatives to grow the top line, while keeping SG&A expenses under control and increase stakeholder returns.

We discussed this graph back in April, the orange line represents the profit for our franchise stores with fiscal year 2010 as the baseline. The gray line represents personnel expenses of franchise stores on an individual store basis, again with fiscal year 2010 as a baseline. We carried out a variety of support initiatives for our franchise stores, including a 15% disposal products surcharge at head office. Starting in September of fiscal year 2018, we reduced royalties by 1%.

In addition to these, we carried out a variety of initiatives designed to grow the top line. However, the minimum wage will go up again by 3%, starting in the current month of October. Also, in February of this year, we garnered media and popular attention over the company's 24-hour operating policy. We devised a new system in order to raise motivation levels at franchise stores so they can work alongside the Seven-Eleven Japan head office as a unified unit to meet customers' needs.

The graph on Page 19 shows franchise store profit separated by years in operation. The horizontal axis shows the number of years in operation, while the vertical access to the left shows franchise store profit.

The orange line shows the number of franchise store owners. Franchise stores that have been in operation for less than 5 years do not benefit from the incentive discount, and are therefore in a very challenging management environment, with annual profits below JPY 10 million. On the other hand, in terms of the number of franchise store owners, there are over 2,000 owners for our franchise stores that have been in operation for less than 5 years.

In light of this situation, we have carried out a review of the incentive discount. Currently, we offer a 2% 24-hour operations incentive and a special discount of 1%. These incentives apply to all stores.

Under the new system, different incentives will be offered to franchise stores with a monthly gross profit of over JPY 5.5 million and to franchise stores with JPY 5.5 million or below. For franchise stores with a monthly gross profit of over JPY 5.5 million, we will be offering the same 24-hour operations incentive of 2% and a special discount of 1%. In addition to this, we will be offering a fixed monthly incentive of JPY 35,000. For our franchises with a gross profit of JPY 5.5 million or below, fixed expenses in the form of personnel expenses become a very heavy burden, so we will be offering a fixed monthly incentive of JPY 200,000.

We therefore want to utilize a new system to place more emphasis and distribute incentives to franchise stores that have been in operation for a short number of years or to franchise stores with low sales.

As a result of this, while the numbers presented here are an average, annual average profits for stores will increase by JPY 500,000. However, this translates into an annual cost overhead for the head office of JPY 10 billion.

However, if this policy translates into an increase in the motivation level of franchise stores, leading to a renewed resolve to meet customers' needs, we believe this annual cost of JPY 10 billion will have a positive effect on sales.

A 1% improvement in existing store sales translates into an annual operating income increase of JPY 8.5 billion for Seven-Eleven Japan. We don't believe this initiative alone will lead to such an increase in sales, but rather, we want to combine various initiatives.

The changes in franchise store profit after the introduction of the new system can be seen on the graph on Page 21. The horizontal axis represents daily sales, while the orange line shows the amount of improved store profits per year for each daily sales category.

Furthest to the left are stores with daily sales of less than JPY 450,000. We do not intend to abandon stores with this level of daily sales. However, we do recognize the need to reduce the number of such stores. For stores with daily sales of less than JPY 450,000, the system leads to an annual profit improvement of JPY 940,000. For stores with daily sales of JPY 500,000 and JPY 550,000, this translates into an improvement of JPY 740,000 and JPY 570,000, respectively. Stores with daily sales of JPY 600,000 or above see an improvement of JPY 420,000.

Please turn to the next page.

Regarding the closure of unprofitable stores, we will be closing or implementing scrap and build on approximately 1,000 stores from the second half of fiscal year 2020 to fiscal year 2021. As a result of this, we expect an annual income and expenditure improvement of JPY 5 billion for fiscal year 2022.

Additionally, we will enact stricter standards for store openings and optimize rent expenses, which account for close to 1/3 of SG&A expenses for the company. We will, of course, be keeping an eye on real estate market prices, but there is a possibility we will be negotiating with existing store owners. Additionally, we want to optimize head office staff by utilizing various forms of information technologies. We want to deploy firm measures towards staff level optimization in this business, which we believe will continue to grow in the future, while at the same time improving the work environment.

In light of the current climate, we optimized personnel allegation for store development this spring from 820 employees to 520 employees. We also want to carry out a review of staff composition in non-operating divisions.

Most importantly, we have to increase the top line. I have discussed the issue of the new store layout several times in the past, we have termed this layout F2. Inspection and measurement at 855 stores that introduced the new store layout during fiscal year 2019 reveal an APSD improvement of JPY 15,300. We were able to observe this data in August. The categories that saw an improvement are as shown on Page 23.

The introduction of 3 refrigerated cases allows for the wider display of chilled products and for daily products, a product category for which we want to differentiate ourselves. We also displayed chilled beverages and adjacent to that soft drinks and alcoholic beverages. A defining characteristic of this layout change is the fact it uses a wider display, allowing customers to see these products at a glance. We have registered higher sales of frozen foods, chilled noodles, rice products and sandwiches, which have more sales area space. This is to be expected, but I would like to focus on soft drinks, milk and milk beverages, sales for which have also gone up.

Additionally, sales of alcoholic beverages also went up. We didn't include this information on the slide, but there are 3 categories of alcoholic beverages. These are beer, Japanese Rice Wine and Western Wines & Spirits. We've registered an APSD increase of just over JPY 1,000 for these 3 categories combined. This data indicates a shift in the way customers use Seven-Eleven stores.

Please turn to the next page. In order to confirm this, we are carrying out scaling tests of the sales area space for our beverages as well as in terms of product variety by location. For stores located near offices and workplaces, we can expect increasing the variety of chilled beverages to translate into a positive sales effect.

On the other hand, there isn't much demand for alcoholic beverages, so we've reduced these products. For stores located near residences or in the suburbs, displaying chilled ready-to-drink alcoholic beverages alongside delicatessen and snacks in open display cases leads to an unprecedented increase.

In addition to layout changes for food products, we believe product development and the product assortment of new beverages, including alcoholic beverages and nonalcoholic beverages will become more and more important going forward. Merely changing sales floors does not resonate with customers, as we believe there is a need to change the products as well.

Amidst the backdrop of an aging society and of an increase in 1-person households, the number of health-conscious consumers continues to increase. Currently, approximately 20 million people or 1/6 of the population either have or are at risk of developing diabetes.

30 million people or 1/4 of the population are suspected to be suffering from hypertension, that is 30 million people have blood pressure readings of 140 or above. This affects all age groups, including children. However, since people don't have the time to prepare meals at home, it's difficult to lead a healthy lifestyle without knowing the salt equivalent content of the food we buy and eat outside or how much in carbohydrates it contains, et cetera.

For this reason, we began dietary labeling for 7-Eleven original daily products from September 2019 onwards, showing the amount of salt equivalents, carbohydrates and dietary fiber.

Additionally, we began dietary labeling for 7 PREMIUM, the group's private brand, from March 2019 onward, showing the amount of salt equivalents, carbohydrates and dietary fibers. In addition to these, we also show the amount of saturated fat, trans fat, cholesterol and the presence of 27 allergen items. This isn't what we would call a one-hit home run product, but we want to continue to carry out this type of product development, addressing the root of our customers' needs.

I would now like to discuss the progress on the action plan we announced back in April. I would also like to address the result of a survey of franchise stores we recently carried out. Regarding a trial of non-24-hour operations, as the end of August 2019, approximately 300 stores are willing to participate in this trial. Of these, 200 stores have already started the trial, we carried out a survey in July and August, with a view towards incorporating on-site feedback into our management decision-making process. Approximately 18,000 franchise stores responded to the survey. The survey consisted of approximately 50 questions, the answers to which provided meaningful information to be used in our management decision-making process. Out of these questions, approximately 15% of stores indicated an interest, including possible future interest, in investigating non 24-hour operations. Additionally, in terms of promoting dialog with franchise stores, we decided to devise a new way to dialog with franchise store owners. To this end, we have carried out to the implementation of owners meetings starting in the current month of October. A total of 15 to 20 directors and executive officers of the head office will go to the location and exchange opinions with the district owner representative chosen by random draw. Since it is by random draw, we will be talking not just to franchise store owners telling us what we want to hear, but also owners offering constructive opinions or even owners who strongly disagree with our company.

In addition to this, we will be carrying out labor-saving investments and carrying out the Ethical Project. Through the Ethical Project, we will offer customers incentives to purchase products nearing expiration that are at risk of being discarded. We started a trial in the Hokkaido and Shikoku areas starting from October. Nationwide development of the Ethical Project is planned for next year.

Next I would like to discuss our operations at 7-Eleven, Inc. Mr. DePinto has been President of 7-Eleven, Inc. since the company became a wholly-owned subsidiary of Seven & i Holdings in 2005. During his 14 years as President and as you can see from the graph, merchandise sales, represented by the green vertical bars, operating income, represented by the orange vertical bars, and the number of stores as of the end of each fiscal year, represented by the red line, have been on a very robust upward trajectory. Mr. DePinto is not just President and CEO of 7-Eleven, Inc., but also a director at Seven & i Holdings. Going forward, I am looking forward to hearing a variety of further constructive opinions and proposals regarding Seven & i Holdings from Mr. DePinto. Joe will talk about 7-Eleven, Inc.'s 6-point plan in detail during his presentation, but in broad strokes, these 6 initiatives are considered priority measures for the company.

Please turn to the next page.

As a result, as you can see from the graph, existing store sales and gross profit margin for 7-Eleven in the United States has been on a positive trend. Gross profit margin declined last year, causing some concern for investors. However, an improvement in the gross profit margin associated with 7Rewards, a point loyalty rewards program, has led to a recovery. Both fresh food products and 7-Select private brand products made a contribution, allowing the company to deliver a recovery in terms of both merchandise sales and merchandise gross profit margins for existing stores. Additionally, 7-Eleven, Inc. decided to carry out an initiative to explore new customer needs without being restricted by past experience. To this effect, it opened a new test store in Dallas in March of this year. This initiative involves a certain element of adventure, but 7-Eleven, Inc. decided to discard all stereotypes and once again learned about customers' needs.

This test store has delivered approximately 3x the average APSD for our U.S. stores. Fresh food as a percentage of total sales also showed numbers comparable to those found in 7-Eleven stores in Japan. Prop beverages as a percentage of total sales also showed some interesting results. For example, this store offers beer in this category, which is something we wouldn't be able to do in Japan. The figure of $3,084 shown here is the APSD associated with Laredo Taco, which is a Mexican restaurant brand 7-Eleven, Inc. took over after the acquisition of Sunoco. Laredo Taco offers in store Mexican fast food and has been very well received by customers. It isn't possible to carry out the horizontal expansion of every idea, but for those categories that show promise and might allow for horizontal expansion, we want to develop these using test stores. Another aspect is 7-Eleven, Inc.'s global strategy.

The following graph represents an evolution of franchise royalties from area licensees with fiscal year 2009 as a baseline. Royalties from existing licensees have been on an upward trend due to the enhanced licensee support program coordinated between 7-Eleven, Inc. and Seven-Eleven Japan. We then offered this program to existing licensees who can receive enhanced support by paying a special fee. This program was started in 2012 and has been growing at a healthy clip with a proactive expansion to new regions. This amount has doubled compared to 2009. We have plans to open stores in India, which is a new regional market, in the first quarter of next year. We are also looking for the opportunity to open stores in new regions in addition to India. I would now like to use this opportunity to yield the floor to Mr. DePinto, who will tell us about the initiatives he is trying in the U.S. as well as his thoughts on a global scale.

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Joseph Michael DePinto, 7-Eleven, Inc. - CEO and President [2]

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(foreign language)

My name is Joe DePinto, and I'm the President and CEO of 7-Eleven, Inc. So as Mr. Isaka mentioned, the heart of the 7-Eleven, Inc. strategy is our 6-point plan, and the 6-point plan, since it was introduced in 2014, is doing extremely well. Since 2014, SEI's op income has grown a compound annual growth rate of 15%. So we continue to plan aggressively to execute and improve the 6-point plan. The key elements to the plan start with a food and beverage focus. And so I'd like to talk briefly about those. So customers in the U.S. seek high-quality on-the-go foods. And as many of you know, we partnered with WARABEYA to help provide higher quality foods for our customers. That partnership at our commissary in Dallas is progressing very well. In fact, our Dallas commissary in the Dallas region is now our #1 performing food area in the U.S., outpacing all other markets in the U.S.

From a beverage perspective, customers are shifting to both hot and cold specialty drinks, cappuccinos, espressos, coal-pressed beverages. SEI is the #4 seller of hot coffee in the U.S., we sell over 1 million cups. We plan to roll out bean-to-cup and specialty equipment to 2,200 of our stores in 2020. We will start with our top markets because they sell the most coffee. And in pilots where we have already done this, we are seeing significant lifts in not only customer count but also total store sales.

Customers appreciate our private brands. And since 2014, our private brand business has been tripled. It is nearly a $1 billion business. It provides very high-quality products to our customers at great value and provide our franchisees and SEI a great margin, well ahead of the national brand margin. So we continue to expand this program, and it's doing very well for us.

Okay, I'd like to shift now to Digital. And we are aggressively moving on the Digital front. Today, customers are seeking more simplicity and more convenience. They want personalized connections. They want to receive immediate consumable products when and where they want them, and they want frictionless payment and checkout. And so to meet their needs, 7-Eleven, Inc. has introduced our 7Rewards program, which is our loyalty program. Today, it has 23 million members in just 18 months and a scan rate of 25%. It's providing us a wealth of very rich data about the consumer, which we will utilize to drive them back to the store and also to work with our vendor partners to provide better products for our customers.

The second area is 7NOW delivery. The customer wants products delivered where -- to them when and where they want it, not just in our stores. And so we will do that with 7NOW delivery. It's currently in 850 stores. We're currently doing 4 deliveries per day in those stores at about a $16 basket. And most importantly, we deliver at an industry-leading 28 minutes per delivery per our 2 delivery partners.

Final area is mobile checkout, that's basically scan and pay, checking out with your smartphone, seamless checkout. We're currently in 55 stores and averaging about 50 scan and pays per store, and that will continue to grow as we market the program.

So SEI is committed to seamlessly linking our physical stores with digital products and services that our customers want. And we will continue to aggressively expand the digital space at SEI.

I'd like to now move onto stores. In the U.S. market, for those of you who are not aware, the U.S. market is very fragmented. There are 153,000 convenience stores in the U.S. 95,000 of them are chains of 1 to 10 stores. So very fragmented. Unlike Japan where you have 56,000 stores and 90% of those stores have 3 chains. 7-Eleven Inc. is the leader in the U.S. with a 6% share. And in the U.S., the industry is actively consolidating. We have the brand that's synonymous with convenience, an iconic brand, and we are going to take advantage of that opportunity.

To that point, since 2014, we have organically opened or acquired more than 3,000 stores, and there is big opportunity going forward. And so SEI will be actively building organically and taking part in M&A in a disciplined way to continue to grow our store base.

And finally, International. International is a significant opportunity. We have a network of nearly 70,000 stores. We are the leader globally and the brand recognized for convenience, but we're only in 17 countries. And so as Isaka-san mentioned, in February, we partnered with the Future Group, they will be opening the first store in Mumbai, India, in Q1, with plans to open many more after that.

We are strongly collaborating with SEJ on where to continue to grow our international presence. And we are actively doing feasibility studies around the globe to begin to expand, in a bigger way, our global network.

So to close, the 6-point plan is working. We will stay the course and accelerate. I am very excited about the opportunity in the U.S. market and the opportunity internationally. And so this is a great opportunity for Seven & i and all of 7-Eleven.

I want to thank you for the time today. I know it's a bit painful with the translation, but thanks for sticking with me. Thank you.

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Ryuichi Isaka, Seven & i Holdings Co., Ltd. - President & Representative Director [3]

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Thank you very much. Mr. Joe DePinto. Thank you.

[Interpreted] Lastly, I would like to discuss the Seven & i Group's strategy. The Seven & i Group's basic policy is to expand lifetime value with further pursuit of Group strategy. We want to realize growth while getting close to customers' life stages and styles.

In order to achieve this, we must show our full commitment to the 3 structural reform initiatives I discussed earlier in this presentation.

In addition to this, we have to outline a growth strategy. I feel a great sense of possibility also for Japan, in a development strategy for North America and globally, as outlined by Mr. DePinto. For this reason, we want to work closely with SEI to realize this growth vision.

Additionally, we have the following plans for a common Group strategy. Mr. DePinto mentioned how the use of Digital technologies is so prevalent in the U.S. We would like to make another attempt at establishing a Digital foundation in Japan and get close to our customers' life stages and styles.

I discussed structural reform for large-scale stores. Financial services are a very important strategy, also in the sense of rebuilding these large-scale stores. Additionally, food products account for 60% of group sales, and we sense further great potential in this market.

Procurement, logistics and merchandise strategies are important aspects, also in the sense of taking further firm steps into this market.

In addition to this, the concept of future generations as new stakeholders has recently made it into the public discourse. We therefore believe there is a need to strengthen measures towards environmental protection, also in the sense of making a firm commitment towards the future generations.

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We will be further strengthening our Digital strategy. We caused a great deal of worry and inconvenience to all stakeholders with the 7pay unauthorized access case. We believe there is a need to implement an organizational restructuring at Seven & i Holdings, also with the sense of rebuilding this component. Osamu Yonetani will be leading the newly created group IT Strategy Development division. Mr. Yonetani graduated the School of Engineering Science at Osaka University in 1988. He then went to work for Recruit Corporation Limited as a new graduate. He started at the associate company office, where he was involved in the development of an accounting system. He later advanced through the Information Systems department. One of the most significant digital transformations carried out by Recruit was a shift from paper media to the Internet. At that time, Mr. Yonetani built a Common Group System Foundation, aggregating over 200 websites into a common foundation.

This system supported this shift from paper media to the Internet. At the same time, he also made advances towards in-sourcing system development within Recruit, which had up until then relied upon external partners. Recruit Technologies Corporation Limited was founded in October 2012 as a system aggregation company comprising the Recruit Group with Mr. Yonetani as Executive Officer and CTO. After that, he worked on the creation of cybersecurity measures and security features designed to thoroughly protect customer private data as head of both Recruit Holdings' security and simultaneously as head of IT security. Such has been Mr. Yonetani's career path. Mr. Yonetani joined Seven & i Holdings in February of this year and became Senior Officer at the System Planning department after undergoing in-house training. As of yesterday, Mr. Yonetani was appointed Executive Officer and Head of the Group IT Strategy Development division. He will be overseeing the departments colored light blue on the diagram, namely the IT Management department, the IT Solution department, the IT Strategy and Planning department and the Security Infrastructure department. I would like to entrust him with the task of thoroughly rebuilding our IT foundation. Additionally, we consider the cross-sectional failure of the system development security policy and guidelines that have been put in place to be the greatest issue associated with the 7pay unauthorized access case. For this reason, we established the Security Management office directly under the President of Seven & i Holdings, apart from the team led by Mr. Yonetani. Director and Executive Officer Yamaguchi, Head of Corporate Communications, became Head of the Security Management office. We have assigned a number of employees with highly advanced technical skills to work under Mr. Yamaguchi. I expect Mr. Yamaguchi to express his opinions freely and directly to the President.

Finally, we want to raise security awareness within the Seven & i Group. We caused you a great deal of worry. However, IT and Digital technologies are an indispensable part of the group's growth going forward. GAFA, Google, Apple, Facebook, Amazon, BAT, Baidu, Alibaba, Tencent and other platform providers use many avenues to connect with customers. For example, Amazon started through the e-commerce of books and then developed a number of devices, video and streaming services. More recently, Amazon acquired Whole Foods and launched Amazon Go, both brick-and-mortar stores, in order to further connect with customers. The same trend can also be seen from platform providers in China.

Turning the focus on the Seven & i Group, we have a presence in a diverse number of industries. Customers are aware of our brand through our brick-and-mortar stores. However, a service through which we acquire and centrally manage customer information, which we then utilize to better serve each individual customer isn't yet in place.

In order to provide such a service, we want to make a firm foray into a digital platform with 7iD as the central axis. By doing so, we will gain a number of insights into the development of new products and services.

We believe that utilizing this database in cooperation with external partners will give birth to ways through which to benefit society at large. We believe this leads to solving social issues and to the creation of new businesses.

Lastly, on May 8 of this year, we released Seven & i Group's environmental declaration termed GREEN CHALLENGE 2050. We established key performance indicators as goals across 4 different categories. Towards this goal, we created a cross-sectional organization encompassing all group companies. We appointed and announced a team leader for each category, chose members from each company comprising the Seven & i Group and are in the process of strengthening our efforts. For example, we set a CO2 reduction target of 80% by 2050, with 2013 emission levels as a baseline for comparison.

Just last month, we opened a 7-Eleven store in Kanagawa Prefecture that runs on 100% renewable energy. I had the opportunity of carrying out the opening ceremony, and I believe this is a type of model with a high degree of feasibility.

We are currently considering a number of measures towards the procurement of equipment and of a power source.

Additionally, we will be taking measures against plastic waste by completely eliminating the use of plastic made shopping bags by 2030.

By 2050, we will be shifting completely to the use of environmentally friendly materials and the containers used in our original products.

In terms of measures against food loss, the Ethical Project will be implemented at 7-Eleven stores nationwide next year. We intend to utilize a variety of innovations in technology and reduce food loss by 75%, by 2050.

We also want to raise the food recycling rate to 100%. Additionally, in terms of sustainable procurement, we want to reach 100% usage of certified products used as raw materials for our original products by 2050.

Lastly, I would like to discuss our dividend policy, we will be maintaining a consolidated dividend payout ratio of 40%. There are no changes from the original annual dividend forecast of JPY 95 per share. In light of the recent management environment, we introduced a new incentive system at Seven-Eleven Japan. This constituted an unforeseen change. In terms of shareholder returns, I ask for your understanding of our efforts in maintaining the consolidated dividend payout ratio. As I mentioned earlier, maintaining a high level of motivation at each individual franchise store is indispensable as a growth driver. A sales improvement of 1% for existing stores translates into an operating income improvement of JPY 8.5 billion for Seven-Eleven Japan. For this reason, I ask for your understanding as well as for your continued support and encouragement going forward. This concludes my presentation. Thank you for listening.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]