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Edited Transcript of 8905.T earnings conference call or presentation 9-Oct-19 10:59am GMT

Q2 2020 Aeon Mall Co Ltd Earnings Presentation

Chiba Oct 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Aeon Mall 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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* Akio Yoshida

AEON Mall Co., Ltd. - President, CEO & Director

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Presentation

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Akio Yoshida, AEON Mall Co., Ltd. - President, CEO & Director [1]

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Good morning. I am Yoshida of AEON Mall. Thank you very much for attending our results briefing today despite your busy schedule.

In the first half of fiscal year 2019, due to strong performance of business in Japan and overseas business, operating revenue and profit at each level outperformed plan. Both revenue and profit reached record highs for the first half. We started to adopt IFRS 16 in businesses in China and ASEAN in this fiscal year. Even excluding the impact, operating income was up 7.7%, and ordinary income was up 8.1% year-on-year. On the bottom left, financial indicators are shown. Due to adoption of IFRS 16, it seems financial indicators deteriorated. However, excluding the impact, conventional level was maintained.

Let me move on to operating income by segment. For business in Japan, operating income increased in total. Mall business was solid and more than offset the drop in operating income of urban shopping centers. Operating loss of urban shopping centers increased year-on-year. It was mainly due to sales opportunity losses of revitalized stores. Sales of existing malls increased year-on-year. We expect an improvement through major renovations in the second half.

As for overseas business, both businesses in China and ASEAN were strong and exceeded plan, respectively. China booked negative operating income in the first half of fiscal year 2018 but recorded JPY 3 billion of positive operating income in the first half of fiscal year 2019. Even excluding the impact of adoption of IFRS 16, operating income showed a high growth of JPY 800 million to JPY 600 million. In ASEAN, in all the 3 countries, including Cambodia, Vietnam and Indonesia, profit growth increased. Operating income was JPY 1.3 billion. In overseas business, along with increase in a number of malls, operating cash flows have been increasing. As a growth driver for our company, overseas business entered into a stage of rescaled profit contribution in this fiscal year.

I will talk about sales trends in overseas business. Both in China and ASEAN, specialty store sales continued normal double-digit growth. Factors for growth include store openings in geographical areas with high growth potential. Besides, by utilizing operational know-how we accumulated in Japan, we implement promotional sales for social events to drive consumer demand. We create more environment and implement operation which is comparable to Japan. Also, by conducting renovations timed to changeover of tenants, we maintain growth.

In the first half of the current fiscal year, we reopened 4 newly renovated malls in China. In rapidly developing China, markets are changing rapidly. To cope with that, we set a contract period with specialty stores at 3 years. In a short cycle, we promote switch to tenants involved, enhance and evolve freshness of malls.

In June, we opened AEON MALL Changshu Xinqu, our first mall in Changshu City, the first mall in Jiangsu province. The theme of the mall is to provide a brand-new shopping experience for customers through the latest digital technology. As digitalization continues to progress in China, these convenient, digitally enhanced services and functions have become very popular among customers, and sales have been higher than plan.

In ASEAN, we expanded and reopened AEON Mall Tan Phu Celadon, our first mall in Vietnam, in June. The mall opened in January 2014. As the market grew more than our expectation, we expanded floor space 5 years after opening. As you see in the pictures, spending is active, and needs for entertainment are high. To meet such needs, we provided content and increased the number of specialty stores by 80 to 200. We also raised parking lot capacity to 2,000 cars and 10,000 motorcycles to support growing customer traffic. Fortunately, sales have been more than doubling.

Next, I will talk about business in Japan. Consumer markets are changing dramatically due to aging society with low birth rate, expansion in VC markets, changing consumers' behavior and others. As a result, consolidation of retail facilities is progressing. By adding various functions to shopping functions, we are enhancing attractiveness of malls and reinforcing capability to attract customers.

These initiatives are linked with measures to expand in deeper markets. Due to effects of floor space expansions and renovations we've been reinforcing since the last fiscal year as well as established Happiness Mall initiative, specialty store sales was up 2.5% year-on-year, showing a positive trend.

As shown in this graph, growth rate of specialty store sales of our existing malls has been higher than that of SC sector and stores of other formats. In particular, during long holidays such as Golden Week and Obon holiday, as our facilities have not only merchandising but also leisure functions such as eating, drinking and amusement, ensured stable power to attract customers, which is unique to our company, growth stood out from competitors.

Before the long Golden Week holiday, we expanded sales floor space of 3 malls, including AEON MALL Higashiura, AEON MALL Natori and AEON MALL Okinawa Rycom. All of the 3 malls have been performing well. In particular, it has been about 20 years since AEON MALL Higashiura opened. Customer needs have changed dramatically since then. This time, we stimulated demand in newly established and expanded restaurant and food merchandising zone in a totally different location. These measures made a big contribution to increase in customer traffic. Sales of the mall have been almost doubling.

As for revitalization measures, we conducted large-scale renovations at 9 malls. Specialty store sales of 19 malls, including 8 malls expanded and renovated in last fiscal year, were up 6.7% year-on-year. The effect is positive 5.8% compared to malls which didn't undergo expansion or major renovation.

Next, I will talk about Urban Shopping Center Business. We are working on 2 key measures: Firstly, we are focusing on major renovations. We've been heavily working on the measure since last year. I have to say overall number is still in the process of improvement. Effects of revitalization measures are gradually shown. Sales of existing facilities were up 3.9% year-on-year. We've been promoting move away from fashion-heavy merchandising and transformation into lifestyle-oriented stores. In the first half of this fiscal year, we introduced specialty stores such as restaurants, drugstores, sundry stores and others at Shonan Fujisawa OPA, Yokohama Vivre and others. We changed store mix and conducted renovations.

The second key measure is to improve profit by changing ownership, management and operating schemes and through strategic swap and build. As we made a press release, we turned Yokohama Importmart into our subsidiary on August 29. Yokohama Importmart is a developer of Yokohama World Porters in which OPA is a tenant. The largest shareholder, Yokohama City, held a public tender for the purpose of shifting to private enterprise-centered management. We were successful in the tender and acquired stocks also from other shareholders. So far, we operated certain sections. As a result of stock acquisition, central management and operation of Yokohama World Porters will be possible. Therefore, we will plan major renovations of the entire facilities to increase profit.

As for operation of Happiness Mall initiative from the viewpoint of localization, each mall is promoting characteristic activities in each area. Each mall is collaborating with local residents in various fields of corporate, educational institutions, government, local organizations, culture, history and local products. This year marks the fifth year. As you see in the pictures, we support a new project of Japan Sports Agency called Sport in Life and hold our sport event, Mall de Sports, at AEON MALLs throughout Japan.

There is one more important viewpoint. That is to say it is becoming an important mission of our malls to bear the infrastructure function as disaster-prevention bases. In collaboration with local administration, we also play a role as bases for temporary shelter, disaster-recovery assistance and reconstruction. Typhoon #19 is approaching now. Typhoon #15, which occurred in September, caused massive damage to Kanto region. In Chiba Prefecture, blackout prolonged. In the disaster area, we have AEON MALL Kisarazu and AEON MALL Futtsu.

As we introduced in a video in the beginning, to support Tokyo Electric Power, recovery vehicles came from various places, including Chubu Electric Power and Electric Power and Kyushu Electric Power. We provided parking spaces for about 700 vehicles. Our parking spaces served as places to stand by. Our meeting room was used for a task force. Besides, we opened our emergency water equipment after the public and served water to customers and communities. Roles in local infrastructure, in particular in response to disasters, are becoming important roles of our facilities.

As one more initiative which can only be implemented by real malls, we are collaborating with medical corporations with the purpose of promoting health of customers and communities. We offer polling places for nationwide local elections and national elections. In this way, we also play a role as local infrastructure for life and health.

The initiatives I explained so far are initiatives of ESG social initiatives. As you see in the slide, our initiatives in environment are also highly recognized by the third parties. Beyond the framework of retail facilities, we would like to evolve our malls as infrastructure for communities equipped with combined functions, including administration, community, disaster prevention base and enjoyable entertainment. We will also work on initiatives for environmental conservation and educational activities. Besides, we will promote initiatives for growth centering around ESG.

Detailed financial statements are described on pages from 17 to 19. The impact of adoption of IFRS 16 is shown, so please confirm.

Please skip to Page 21. Now I will discuss future initiatives. In overseas business, the total number of malls at the end of fiscal year 2019 were 30, including 21 malls in China and 9 malls in ASEAN. In the areas where we opened malls, income level and consumption level increased dramatically due to population growth and organization. So far, there were upfront investment costs for expanding headquarter functions and for property development. As the number of malls increased significantly, overseas business as a whole generated positive profit in the last fiscal year. As I said in the beginning, overseas business entered into the stage to drive growth of our company. In China, the number of malls that have passed the 3- to 4-year mark after opening increased. As I said earlier, rents are to be renewed after 3 years. The number of malls reaching the point of rent renewals and tenant replacement is increasing. By promoting planned renovations, we will maintain growth exceeding GDP growth at each mall.

Also in ASEAN, profit growth exceeding GDP growth rate is continuing at each mall. In ASEAN, economic growth is progressing at a remarkable pace. Average age is low. ASEAN will enter into a stage where population bonus can be enjoyed. In Vietnam and Cambodia, modern retail facilities and competitors are still to grow, so we position this area as an area we should secure market share for the future.

Let me briefly talk about profit structure of overseas malls. Operating revenue grows with sales-based rent and rent revision. On the other hand, the majority of operating costs are real estate costs and are almost flat. As I mentioned earlier, contract with specialty stores expire in 3 years. In the third year onwards, further profit improvement can be expected through revitalization. In the seventh or the eighth year, profit on the same level as that of malls in Japan can be expected.

On the bottom of the slide, operating revenue and gross profit at existing overseas malls for fiscal year 2018 are indicated. Average growth of operating revenue per mall was JPY 135 million, and average growth of gross profit was JPY 139 million. As you can see, growth of operating revenue of existing malls directly lead to operating income.

Let me move on to business in Japan. In September, before consumption tax hike, we expanded and reopened AEON MALL Takaoka. This mall became one of the biggest in Hokuriku. The mall opened in 2002. After reopening with floor space expansion, in addition to conventional trade area, the mall is attracting customers from broad area including the entire area of Toyama Prefecture and adjacent Ishikawa Prefecture. As the numbers are the numbers in early period after reopening with floor space expansion effects of opening are included, leased area increased by 30%. In comparison to that, specialty store sales almost doubled year-on-year. I think floor space expansion is a very effective initiative.

Consumption tax rate was raised on October 1. I will talk about our response to that. Before tax hike, AEON Group works on initiatives to promote cashless payment, including point rewards with the use of AEON Card and WAON, which are also infrastructure of AEON Group. In addition, we did sales for each industry in which last-minute demand was expected.

As for measures after tax hike, based on experiences in 2014, we are implementing a campaign by targeting restaurants and food courts in which quick recovery is expected. The campaign is WAON POINT 5x Campaign. Point return ratio is 2.5%. Increased tax is returned as WAON POINT. We are implementing this campaign for 1 month at restaurants and food courts. The purpose of this campaign is to maintain customer traffic to entire malls.

Temperature finally started to drop. The period in and after October is a period of switch of products to autumn and winter items. By implementing sales to stimulate demand, we will achieve quick recovery. We are working on measures to target the turn of merchandising.

As our name recognition increased in China and ASEAN, we designate AEON MALLs close to airports or sightseeing areas as malls providing stronger functions for inbound tourists. For example, AEON MALL Narita is a designated mall. It is designated as a model mall. Functions are added and researched for inbound tourists to stay without stress. From our initiatives, initiatives suitable for environment of customers will be rolled out to nationwide malls to enforce functions for inbound tourists. We will also welcome collaboration with administration, tying up with travel agencies and reinforcement of PR.

Next, I will talk about promotion of digitalization. We think about how 3 parties, including customers, specialty stores and AEON Mall, will be linked through digitalization. We want to promote shift to smart malls. I will give you one example. In mall movement, we provide stress-free in-mall movement with senior customers. That means they don't need to walk when big movement is necessary. We already held test ride events at AEON MALL Makuhari Shintoshin and entered into a step to spread introduction.

As you see in the material, smart malls will provide highly convenient shopping environment for customers. We will use digital from the viewpoint of how to increase fun time, including time for shopping and events within the same duration of stay. In a video shown in the beginning, you saw face recognition locker and others at AEON MALL Changshu Xinqu.

I will also talk about contacts with specialty stores from the viewpoint of work style reform. This initiative is promoted for digitalization of operations. For example, we built application platform for business. We have communication with specialty stores by going back and forth between our office and stores, and we will have communication in a pad. Provision of materials, exchange and various application forms, communication and announcement for trainings and sales and urgent communication will be completed in the pad.

Without leaving sales force, operation can be advanced, and communication with AEON Mall is possible. In this way, we will promote labor saving and go paperless. Verification and introduction was almost completed at 10 malls. We entered into a stage of rolling it out to all the malls.

Please go to Page 30. Consolidated earnings plan for fiscal year 2019 has kept unchanged from the plan announced on April 9, 2019. On the following pages, materials related to adoption of IFRS 16 and others are added. Medium- and long-term initiatives, including updated information on specific measures and ESG initiatives, are posted on our IR site, so please refer to that.

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

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