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Edited Transcript of 8267.T earnings conference call or presentation 10-Apr-20 10:59am GMT

Full Year 2020 Aeon Co Ltd Earnings Presentation

Chiba Jun 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Aeon Co Ltd earnings conference call or presentation Friday, April 10, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Akio Yoshida

Aeon Co., Ltd. - President, Representative Executive Officer & Director

* Kahori Miyake

Aeon Co., Ltd. - Chief Officer CSR & Communication and Executive Officer

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Presentation

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Kahori Miyake, Aeon Co., Ltd. - Chief Officer CSR & Communication and Executive Officer [1]

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We will now begin our briefing on Aeon Company Limited's financial results for the fiscal year ended February 29, 2020. Representing Aeon at today's briefing, our President and Representative Executive Officer, Akio Yoshida; Executive Vice President and Representative Executive Officer, Akinori Yamashita; Motohiro Fujita, Officer in charge of Strategy; and myself, Kahori Miyake, Executive Officer in charge of Investor Relations.

Now without further ado, President Yoshida will begin the briefing.

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Akio Yoshida, Aeon Co., Ltd. - President, Representative Executive Officer & Director [2]

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Good afternoon. I'm Akio Yoshida. I became President of Aeon on March 1. Thank you for taking time from your busy schedules to participate in today's briefing on Aeon's financial results. To help prevent the spread of the novel coronavirus, we decided not to hold this briefing at a physical venue. In the interest of maintaining the level of communication with participants as much as possible, we opted to hold this briefing online. We've request your understanding in this matter.

As you know, the novel coronavirus is now spreading all over the world and is having an enormous impact on everyday life and economic activity. Aeon too has been feeling the impact of the novel coronavirus in a variety of different ways, starting with Aeon Malls and General Merchandise Stores in the Wuhan area in China. And extending to our businesses in the ASEAN region and Japan. Aeon has an extremely important role to play as a form of social infrastructure in emergencies such as this. We have prioritized providing a stable supply of products and are now devoting maximum effort to ensure this is maintained.

Overseas, as you know, we were requested by the local administration in Wuhan in China to continue to provide a stable supply of products. And we have continued to sell daily necessities while paying close attention to the safety of our employees. We are receiving expressions of gratitude from local communities in Wuhan.

Now with the resumption of local public transportation services, we've been able to resume operations at group malls all over China. Thankfully, with each passing day, the number of customers is returning to normal. By contrast, the ASEAN countries are currently right in the middle of lockdowns, and our stores are continuing operations, limited to the sale of food, daily essentials and medicines. You could say that the situation is the climax of these self-restraint periods on the way to return to normalcy.

In Japan, in areas subject to self-restraint requests, bulk buying by customers is significantly propping up sales in our General Merchandise Store food products, Drugstore and Supermarket businesses. Also, in response to the states of emergency declaration issued on April 7, the following day, we suspended operation of specialty store sections in Tokyo and the 6 other prefectures subject to the declaration. In this way, we are conducting business while responding to the situation in a range of different ways to fulfill our social responsibility with respect to the novel coronavirus.

We are also taking care to rigorously implement safety and security measures at our stores, particularly, with regard to proper ventilation, disinfection, changes in how we provide products and implementation of social distancing. We are also doing our utmost with respect to employee health management. We have provided support to our business partners as well, particularly with the recent review of tenant rents in the interest of being able to overcome this emergency together. Maintaining employment of workers will also be important.

On the assumption of a prolonged emergency situation, we will flexibly transfer personnel among group companies and prioritize provision of workplaces and maintenance of employment. We want to continue to deepen communication with media companies, investors and analysts for the purpose of cultivating deeper understanding of Aeon's initiatives. It is amid such an environment that today, we announced the fiscal 2019 financial results.

To briefly summarize the overall consolidated results our Drugstore, Shopping Center Development and Financial Services businesses maintained their strong performance. Our operating revenue and operating profit reached record highs. And we recorded an increase in profit attributable to owners of the parent, thereby reaching the announced forecast figure. However, many aspects of the potential impact on the fiscal 2020 financial results of the novel coronavirus are very much up in the air. And at this time, it is extremely difficult to assess the situation.

Now Kahori Miyake, Executive Officer in charge of Investor Relations, will report on the details of the financial results.

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Kahori Miyake, Aeon Co., Ltd. - Chief Officer CSR & Communication and Executive Officer [3]

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I will now provide a summary of the consolidated operating results. In fiscal 2019, the year ended February 29, 2020, consolidated operating revenue increased by 1% year-on-year to JPY 8,604.2 billion. Operating profit increased by JPY 3.2 billion to JPY 215.5 billion. Ordinary profit decreased by JPY 9.2 billion to JPY 205.8 billion. Profit attributable to owners of the parent increased by JPY 3.2 billion year-on-year to JPY 26.8 billion, reaching the target announced at the beginning of the fiscal year.

Operating revenue and operating profit reached record highs. The decrease in ordinary profit is attributable to higher interest expenses, accompanying application of IFRS 16. The main reasons for the increase in profit attributable to owners of the parent were an increase in extraordinary gains due to the recording of a gain on the sale of shares in PARCO CO., LTD. and a decrease in impairment loss.

The information on this slide is provided for reference purposes. The table shows the impact of the adjustment due to inappropriate accounting at a subsidiary discovered in fiscal 2019. The financial impact of IFRS 16, which was applied in fiscal 2019 and the operating results after deducting these amounts. As the slide shows, profit at each profit stage increased.

The next slide shows operating revenue and operating profit by segment. These are figures after deducting the financial impact of inappropriate accounting and IFRS 16. Operating profitability was achieved in all business segments and total consolidated profit in real terms increased by JPY 8.8 billion. On a year-on-year basis, although profit from the General Merchandise Store and Supermarket business decreased, profit from the Health and Wellness business and the 3 segments below it increased.

Next, I will discuss the situation in each business segment. In the General Merchandise Store business, Aeon Kyushu, which implemented expense efficiency improvement, and 2 operating companies that took over management of General Merchandise Stores from Daiei improved their profitability. On the other hand, although Aeon Retail earned operating profit of JPY 5.6 billion profit decreased by JPY 6.1 billion year-on-year. Several negative factors affected the operating results. Despite managing to reduce expenses year-on-year, sales in the high-margin clothing category decreased due to factors, including the effects of climate change in the form of a long rainy season and mild winter, the impact of the consumption tax increase and the impact of the spread of the novel coronavirus. And inventory disposal in response to these factors resulted in deterioration of the gross profit margin.

In the Supermarket business, Daiei achieved profitability improvement of JPY 3.0 billion, the highest among supermarket operators. Thanks to improved sales floor management and gross profit margin improvement, resulting in part from the establishment of an ordering system based on demand forecasting, coupled with further improvement in expense efficiency. Daiei's business performance has recovered to the point where the company is close to returning to the black. Although full year operating profit declined year-on-year at Maxvalu Nishinihon, USMH and Ministop, these companies improved their operating results in the second half. For example, Ministop is showing an improvement trend as a result of factors, including the closure of more than 200 stores in the first half and the introduction of JPY 100 rice balls in July, cheese corn dogs in September and tapioca drinks in October, which all drove sales growth, including sales of related products.

The Health and Wellness business achieved an operating profit increase of JPY 8.7 billion, the highest of any segment. Although Welcia's merchandise sales declined year-on-year in July during the long rainy season, and in October, following the consumption tax increase, strong sales of prescription drugs throughout the year and special demand from the second half of January onward boosted sales.

The Financial Services business achieved a full year profit increase if the impact of inappropriate accounting at an overseas subsidiary is excluded as a result of a number of factors. Namely continuing business expansion in Japan and overseas, the bringing forward of securitization of receivables in Japan, an increase in gain on bad debt sold overseas and a review of standards for allowances and provisions.

In the Shopping Center Development business, specialty store sales continued to show double-digit growth year-on-year in both China and the ASEAN region. In Vietnam, in particular, sales grew substantially following refurbishment and floor space expansion in June at AEON Mall Tan Phu Celadon, which was the first Aeon Mall in Vietnam. And large-scale refurbishment of AEON Mall Binh Duong, the fourth mall in Vietnam in November.

Looking now at the results by region. The overseas profit composition was nearly the same as in the previous year, with overseas operations accounting for about 16% of operating profit. Although profit from the overseas financial services and other services businesses declined, profit from the Shopping Center Development and Retail businesses increased. Profit in the ASEAN region decreased slightly, while profit in China increased.

Next I will discuss the fiscal 2020 forecast. With regard to the impact of the novel coronavirus, as you know, the virus has been detected worldwide since January. A variety of restrictions were first implemented in Hubei province, including Wuhan and were extended to other areas of China in the second half of January. However, the accounting period for many of our businesses in China ends in December, meaning the financial impact of the virus in fiscal 2019 was limited. Our General Merchandise Stores in China gradually resumed operations from March and Aeon Malls resumed operations from April. Aeon Fantasy and Aeon Mall have been forced to suspend operations for nearly 3 months, however. And although consumption is gradually returning to the prior level, we believe it will take a little more time to completely recover. In Japan, amusement-related operations, sports and fitness centers and other similar service businesses operated by Aeon Mall and Aeon Fantasy, et cetera, began to implement self-restraint measures such as reduction of business hours in March.

As you will be aware, however, although the states of emergency declaration issued on April 7 will have a positive impact on food and drugstore sales to a certain extent, the direct below 2 Aeon Malls and our Specialty Store and Financial Services businesses is certain to last for at least 1 month. And even if infection rates begin to drop off, we consider it impossible at this time to estimate the impact the op rate will have on consumer sentiment. In ASEAN countries as well, a series of activity restrictions have been issued by national and local government.

On March 18 in Malaysia, on March 26 in Thailand and in late March in Indonesia and Vietnam. These measures have also affected the Aeon Group's business activities. Although it is difficult to predict at this time how long this state of affairs will continue. We think that approximately 3 months will be required for things to settle down even in China, where the virus first appeared. In light of the circumstances in each ASEAN country, we think it is necessary to expect a certain level of impact for even longer than that. We have deliberated on our fiscal 2020 forecast based on circumstances such as I have been discussing. The resulting forecasts are, as a result, predicated on the expectation that the impact of the novel coronavirus on Aeon's businesses will continue until the end of fiscal 2020, the fiscal year ending February 28, 2021. Although infections in Japan are expected to peak during the first half, we look for the impact on consumer sentiment to bottom out in the third quarter and continue until the fiscal year-end. We anticipated generally similar time line in the overseas areas, where Aeon does business as well.

On the basis of this assumption, taking into account possible extensions of the duration or geographical extent of restrictions under state of emergency declarations, we have expressed our operating revenue and operating profit forecast as ranges instead of specific figures. Also, although the regulatory authorities may announce a flexible policy on accounting standards in response to the impact of the novel coronavirus, no such decisions have yet been made. With more rational projections become possible as the situation returns to normal, we will move rapidly to also provide forecasts for ordinary profit and profit attributable to owners of the parent. Despite the current circumstances, we plan to pay an annual dividend of JPY 36 per share, the same as last year.

To end, I will now discuss the situation in March, including preliminary figures. Looking first at China, although business hours were reduced from January into February, our General Merchandise Stores and Supermarkets continue to operate as lifelines, and food sales in February and March were strong. On the other hand, at Aeon Malls in China, although tenant sales fell to below 10% of the prior year level in February as a result of the government request that people would refrain from leaving their homes and temporary closings, sales recovered to about 40% of the prior year level in March, and it became possible to resume operations at all malls from April. The situation in Japan was similar. Sales were strong at Supermarkets and Drugstores, which handle food, sanitary goods and other daily necessities. Although credit card shopping transaction volume and sales of high ticket home appliances, travel, tickets, gasoline and other products declined, overall sales were at the prior year level, thanks to support from strong group food sales.

Sales of clothing at General Merchandise Stores and Aeon Mall sales fell to about 70% of the prior year level in March and the amusement-related sales of Aeon Fantasy and Aeon Cinema fell to about 30%. Furthermore, in response to the states of emergency declaration issued on April 7, we decided to suspend operations at our shopping malls in the 7 prefectures covered by the declaration for the time being. Aeon Fantasy and Aeon Cinema have responded similarly, and the outlook for business recovery in Japan will remain uncertain for some time.

In the ASEAN region as in Japan, although food sales are strong, clothing sales have declined. At our Shopping Malls, temporary closings and reduction of business hours began in late March. The impact is expected to further expand, and it is difficult at this time to predict when business will recover. In the Financial Services business, which accounts for about 40% of overseas profit, many overseas branches have been forced to suspend operations beginning in late March. And it is also difficult to predict when operations at these branches will resume.

Amid these uncertain circumstances, the Aeon Group will work as a team to overcome this difficult challenge by putting into practice our customer-first philosophy as a corporate group that unceasingly pursues innovation.