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Edited Transcript of 8267.T earnings conference call or presentation 9-Oct-19 10:59am GMT

Q2 2020 Aeon Co Ltd Earnings Presentation

Chiba Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Aeon Co Ltd earnings conference call or presentation Wednesday, October 9, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kaori Miyake

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

* Motohiro Fujita

Aeon Co., Ltd. - Executive VP & Representative Executive Officer

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Presentation

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

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Good afternoon. My name is Kaori Miyake, and I'm in charge of Investor Relations at Aeon. Thank you very much for attending this briefing on Aeon's financial results for the second quarter of the fiscal year ending February 29, 2020.

Without further ado, I'll now provide an overview of the second quarter consolidated financial results. After that, Motohiro Fujita, who's in charge of the Supermarket Business, will report on the Supermarket Business' current situation and progress made with Supermarket reorganization.

In the first quarter of the current fiscal year, Aeon recognized as a lump sum the financial effect of the accounting treatment issue at Kajitaku Co., Ltd., a subsidiary of Aeon Delight Co., Ltd.

The application of IFRS 16 at overseas subsidiaries beginning this fiscal year has also affected earnings.

After subtracting special items occurring this fiscal year that have an effect on the year-on-year difference with the prior fiscal year, first half operating profit increased by JPY 6.3 billion on year to JPY 96.1 billion, and ordinary profit and profit attributable to owners of parent increased as well.

I'll now discuss the results by segment. This slide shows operating revenue by segment. There have been no major changes in the trends I discussed in the first quarter briefing, nor have there been any major changes to trends since last year. Although revenue decreased in the General Merchandise Store Business and Supermarket Business, which were affected by record cold temperatures in July due to a prolonged rainy season and its specialty stores that mainly sell goods, consolidated total revenue increased on higher revenue in the Health and Wellness Business, Financial Services Business, Shopping Center Development Business and International Business.

In the Health and Wellness Business, which operates drugstores, revenue rose by 10% due to new store openings, M&A activities and increases in the number of 24-hour stores and stores offering prescription drugs despite the impact of the weather in July.

Revenue increased in the Financial Services Business as well as a result of increases in transaction volume and the number of cardholders.

In the Shopping Center Development Business, we steadily proceeded with expansion and refurbishment of existing malls in Japan and overseas. Revenue is steadily increasing in the overseas retail business as well.

Next, I'll discuss operating profit by segment. The figures here, again, exclude the impact of the Kajitaku issue and the introduction of IFRS 16 overseas. Although lower sales, due to unfavorable weather, had an effect on profit in the General Merchandise Store Business and Supermarket Business, as I previously mentioned, all other businesses posted profit increases.

Diverse business expansion efforts have borne fruit, compensating for the results from the General Merchandise Store Business and Supermarket Business, and the second quarter profit increase exceeded the first quarter increase.

Although profit from the Financial Services Business declined year-on-year in the first quarter due to sales promotion investment to promote cashless payment, the business returned to profit growth in the second quarter.

The Services and Specialty Store Business posted a substantial profit increase in the second quarter. The increase is attributable to results improvement from sporting goods store operator, Mega Sports, throughout the first half, coupled with the second quarter profitability improvements from cinema business operator, Aeon Entertainment; the domestic operations of amusement business operator, Aeon Fantasy; and other service companies.

The International Business posted a profit increase of JPY 0.6 billion in the first half, of which JPY 0.5 billion came in the second quarter even excluding the impact of application of IFRS 16.

Next, I'll discuss Aeon Retail's results. The graph on the left shows monthly same-store sales and customer traffic from March through September. Excluding April and July, when sales were affected by unfavorable weather, same-store sales exceeded 100% of the prior year level. First half total sales were 99.7% of the prior year level when including the impact of April and July. Aeon Retail's first half total operating profit declined JPY 2.8 billion year-on-year. This is mainly attributable to a decrease in the gross profit margin.

The graph on the right shows quarterly year-on-year changes in the gross profit margin since fiscal 2016. One factor affecting the recent results is gradual downward pressure on the gross profit margin as a result of price adjustments in response to drugstores and discount stores and price increase requests from national brand manufacturers despite recent improvements due to General Merchandise Store reforms undertaken during the past few years. Another factor was the occurrence of higher-than-expected inventory disposal due to the prolonged rainy season in July.

As was reported in the newspapers the other day, consumer confidence in Japan has declined to a record low level, and we think that customers will become even more price-sensitive. Accordingly, we consider the question of how to respond to the consumption tax increase implemented in such an environment and, above all, completing the General Merchandise Stores' structural reforms now underway to be matters of the utmost importance.

From the standpoint of Aeon's response to the consumption tax increase, the preliminary figures for September when there was last-minute demand ahead of the increase, indicated sales rose substantially, approximately 12% year-on-year. I'll now provide a more detailed explanation of this.

This slide shows the sales trends of the main product categories that are subject to the tax increase. In September, immediately before the tax increase, sales of the high-priced housing and recreational product and health and beauty care product categories increased substantially with sales of home renovation products at 238%; sales of cycling products at 174%; sales of appliances at 173%; and sales of beauty products at 150% of the prior year level.

To ensure that we capture this last-minute demand prior to the tax hike and as an earnings expansion measure in preparation for future spin-offs, before the tax increase, Aeon Retail's strengthened its sales structure for order-made curtains, air conditioners and other products requiring in-store customer service, order taking and installation at the delivery site by providing employee education and preparing cooperative frameworks with business partners. These efforts bore fruit, enabling Aeon Retail to achieve these results.

In addition, there's a high priority measure for the first half at HOME COORDY. Area managers and subordinate staff deployed as a key measure to achieve a high degree of store specialization made the rounds of stores and, on the spot, instantly rearranged sales floors to meet customer needs. There are signs that the sales floor rearrangement initiative helped boost store selling power.

In October, we began implementing various measures to support the daily lives of customers such as point campaigns and a campaign involving increasing the volume of Topvalu products. In this way, we'll work steadfastly to meet post-tax-hike customer needs.

Finally, let's examine overseas operating profit by area. As shown in the graph to the left, the proportion of operating profit generated overseas reached 17.5% in the second quarter. Although the overseas profit contribution ratio declined slightly from the prior year second quarter due to operating profit growth in Japan, the medium-term trend toward expansion of the overseas profit contribution ratio is continuing.

A breakdown of the results by area, shown on the right of this slide, indicates that our operations in both the ASEAN region and China are in the black. Operating profit was JPY 15.2 billion in the ASEAN region and JPY 1.6 billion in China. Although first half profit in the ASEAN region declined slightly, this is attributable to the absence this year of factors that affected the prior year results.

Last year, thanks to factors including assistance measures for low-income people implemented by the Malaysian government, the delinquent receivables recovery rate in the Financial Services Business improved, and bad debt expense related to those delinquent receivables was reduced. The business is steadily growing, and we will continue to proceed with cost control and tightening of credit screening.

Although the trade friction between the U.S. and China and the situation in Hong Kong require close monitoring, our operations in China are in the black, and profits are increasing. We'll proceed with business development in China and the ASEAN region, which are growth markets, by meeting the needs of local customers.

There is no change in our full year earnings forecast from the figures announced at the beginning of the term. We intend to further strengthen business management to ensure that group company profit plans are steadily executed and mounting all-out effort to achieve the figures to which we committed at the beginning of the term. At the same time, we'll steadily move ahead with our medium- to long-term strategy for General Merchandise Store Business and Supermarket Business reforms.

This concludes my presentation. Next, Motohiro Fujita will report on the current situation of the Supermarket Business.

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Motohiro Fujita, Aeon Co., Ltd. - Executive VP & Representative Executive Officer [2]

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Good afternoon. I am Motohiro Fujita, and I'm in charge of Aeon Supermarket Business, of which I'll now provide an overview.

I think that the most important factor contributing to the first half results for the Supermarket Business shown here was inability to achieve the anticipated level of operating revenue. In the first quarter, in response to the impact from drugstores and discount stores, store formats in which new store openings are increasing, we implemented pricing countermeasures and other measures including strengthening of delicate testing category sales through priority allocation of personnel. And we're able to, at least, return operating revenue to a recovery trend.

On the other hand, however, the ratio of offers to job seekers remains at a high level. We struggle to secure operating profits because of upward pressure around product purchase prices and distribution costs stemming from persistently high hourly wage levels due to the personnel recruitment environment. Accordingly, we reinforced cost reduction initiatives.

Amid this trend, in the second quarter, we were unable to adequately respond to demand changes that differed significantly from the assumptions in our original merchandise plan because of unfavorable weather in July and a downturn in operating revenue occurred. Recognizing that unfavorable weather occurs cyclically and that it is necessary to respond with flexible business operations based on data, we are going to implement countermeasures. Although the overall first half results did not reach the point of exceeding the prior year level, we feel that we have identified courses of action and measures to achieve improvements in the second half.

Next, let's consider the overall consumption environment. It was announced the other day that consumer confidence declined in September for a 12th consecutive month, reaching a record low level. Also, we think the perception of the burden from the October consumption tax hike will gradually intensify despite the exemption of food stamps from the new higher tax rate. We feel that this, coupled with people's anxiety about their futures as exemplified by the pension problem has clouded consumer sentiment.

We think that our working assumption about the business environment must be that the current trend of rising labor costs due to chronic labor shortages and ever-increasing hourly wages of rising electricity charges and other energy costs and of increases in distribution costs and purchase prices connected to these rising costs will not change. Accordingly, we recognize that there's no time to waste in creating products with value propositions that will be properly appreciated by customers including in terms of price and implementing cost structure reforms to achieve this. In light of this assessment of the business environment, we believe that in the second half, we must not only improve the short-term financials, but also simultaneously transform our current business.

As an immediate measure, we have decided to verify within a short time the results of the operating measures we initially planned in anticipation of the impact of the tax increase. Since not all of the measures will turn out as expected, we'll undertake a rigorous process of verifying the results and making prompt corrections, engaging in discussion on the basis of actual figures without being tied to past successes. We'll conduct a zero-based review of existing costs. We plan to determine the order of implementation and implement the review using degree of urgency in order of priority as criteria, making no exceptions.

In view of the future competitive environment, consumption environment and cost environment, we believe that it would not be very realistic to prepare plans for the coming fiscal year and beyond premised on the existing business structure. We recognize that fundamental transformation is required in the second half and intend to proceed with regional supermarket integration, which will serve as a catalyst for that transformation.

We believe there are 3 key points for successfully completing supermarket integration. The first point is the generation of synergies to ensure the continuity of each company. The question is how to go about creating synergistic benefits in both margins and costs through integration. We believe that this should be accomplished in a comparatively short period of time, and moreover, that it is vital to ensure that these benefits accumulate each year.

The second key point is generation of efficiency synergies. We believe that in an environment in which all manner of costs will increase, it'll become necessary to utilize IT to implement business process efficiency improvements, data analysis and sales floor and work transformation.

The third point is generation of synergies to create new markets. We'll utilize the high regional market share gain through integration to rebuild our supply chains from product planning and manufacturing to sales and to develop store formats that enable customers in the regions we serve to enjoy unprecedented new shopping experiences. We are proceeding with deliberations, viewing the expected increasingly adverse business environment as an opportunity.

I'll now briefly discuss progress made so far with regional integration of supermarkets. Marunaka and Sanyo Marunaka became subsidiaries of Maxvalu Nishinihon in March, marking the start of an integrated management structure in the Chugoku and Shikoku regions. Also in the interest of promoting community-rooted management, the 2 companies transferred their stores in the Kinki region to group companies Daiei and KOHYO. The 3 companies in the Chugoku and Shikoku regions plan to merge in fiscal 2021 to take the next step toward management integration, and they're currently implementing a concrete action plan.

In the Tokai and Chubu regions, Maxvalu Tokai and Maxvalu Chubu merged in September after transferring their discount stores to AEON BIG, the Aeon Group's discount store operating company in June and July. After relocating and merging their headquarters in November, the companies will at last work together in earnest to generate integration benefits.

In Hokkaido, Aeon Hokkaido and Maxvalu Hokkaido have already announced the conclusion of a formal agreement for a merger in March 2020. Ahead of the merger, they are proceeding with initiatives that can be implemented beforehand, such as starting joint purchasing of farm products and moving ahead with deliberations in preparation for a 2021 start-up of a distribution and processing center.

Group companies in the Kyushu, Kinki and Tohoku regions have also reached the final phase in preparation for conclusion of formal agreements, and we'll promptly announce formal agreements once preparations are in place.

To recap, in the short term, we'll implement measures to stimulate demand following the consumption tax increase, proceed with reduction of product costs and other costs and work to achieve our performance targets for the current fiscal year. And by simultaneously implementing structural reforms, we'll rapidly establish a business structure that will make possible long-term growth.

This concludes my report. Thank you.

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