Aeon Co Ltd

TSE:8267

Earnings Call Transcript 2022-Q3

[Takeshi Miyazaki, executive]

Hello, everyone. I'm Takeshi Miyazaki, Chief Officer for Finance and Accounting. Thank you very much for taking the time to participate in Aeon's earnings briefing today. Without further ado, I'd like to provide a summary of our consolidated financial results for the third quarter.

First, let's take a look at results for the first 9 months of the fiscal year. Operating revenue increased 0.9% year-on-year to JPY 6,450.5 billion. Contributions came from a recovery in businesses that were obliged to temporarily suspend operations extensively last fiscal year as well as growth in the health and wellness business. Operating profit and ordinary profit came to JPY 89.2 billion and JPY 83.8 billion, respectively, representing increases of more than JPY 20 billion at each profit line. Profit attributable to owners of the parent improved considerably by JPY 53.6 billion, mainly due to a decrease in COVID-19-related extraordinary losses.

Even though earnings are currently on a recovery track, they are yet to return to profit levels seen in fiscal 2019 prior to the onset of the pandemic. This is because of the resurgences and infections in Japan and overseas, and because the resulting business restrictions remained in place longer than anticipated. I'll go into more detail about this situation later.

This slide shows operating revenue by segment. First, looking at the column in the middle of the table that shows year-on-year change. We can see that operating revenue in the Health and Wellness business grew 6.2% from fiscal 2020, owing to the opening of more stores than planned and strong prescription drug sales. Operating revenue in the Shopping Center Development and Services and Specialty Store Businesses rebounded from the widespread temporary suspension of operations in fiscal 2020 to increase year-on-year by 14.2% and 7.9%, respectively.

And by looking at the column showing a comparison with 2 years ago, you can see that sales in the Discount Store, Health and Wellness and Supermarket businesses have exceeded pre-pandemic levels, thanks to the capturing of ongoing dine-in demand and successful growth strategies. Sales in the Financial Services business and the 4 other businesses listed below it are currently improving but are yet to return to pre-pandemic levels because, as I just mentioned, operating restrictions continue to be enforced under the states of emergency. The impact of cooling consumer sentiment stemming from prolonged requests for people to stay home also continued to affect sales.

Next, I'll discuss operating profit by segment. In terms of year-on-year change, which is shown in the middle of the table, operating profit in the Financial Services business increased JPY 20.3 billion on the back of progress made with the development of a credit system that is responsive to fluctuating COVID-19 restrictions, which helped drive up the proportion of performing loans. Also, profitability improved in the General Merchandise Store Business, thanks to a large-scale inventory disposal carried out last fiscal year as a way of adapting to the expansion of COVID-19 infections, together with other initiatives for improving gross profit and costs with the use of digital approaches and tools.

Profitability also improved in the Services and Specialty Store business and the Shopping Center development business, the latter of which was affected by the widespread states of emergency last fiscal year. Compared with 2 years ago, operating profit has surpassed pre-pandemic levels in the first 4 businesses shown in the table, the Supermarket business, the Health and Wellness business, the Discount Store business and the Financial Services business.

As for the international business and the other 3 businesses below it, operating profit hasn't reached pre-pandemic levels yet, mainly because the V-shaped recovery in top line growth hasn't been steep enough, but we intend to ramp up initiatives aimed at improving profitability such as structural reforms and measures they cater to new lifestyles emerging amid the pandemic.

Next, I'd like to discuss the circumstances surrounding our business operations over the 3 months of the third quarter. Looking back at the impact of COVID-19 in the third quarters of fiscal 2020 and fiscal 2021, the number of COVID-19 cases in fiscal 2020 during this period was relatively low, and there was no state of emergency in place. Government policies for stimulating demand, such as the Go To campaigns were rolled out and momentum was building towards an economic recovery. AEON's businesses overall were also boosted significantly by People Nationwide, flocking to see a blockbuster movie. These external conditions and a sharp reduction and bad debt expenses owing to the success of measures in the Financial Services business were the reasons why we posted record high operating profit in the third quarter of fiscal 2020.

In contrast, the state of emergency this fiscal year was extended to the end of September and owing to the impact of requests for people to stay home and a mood of self-restraint that continued intermittently from the start of the year, the recovery in consumer sentiment after the state of emergency was lifted, turned out to be slower than expected. In the fourth quarter, the government is implementing an economic stimulus package consisting mainly of a special cash handout to households with children and the issuance of vaccine passports. So we will be looking to fully draw on the positive impacts of these measures.

This slide shows third quarter results. Earnings fell short of our forecast mainly because of the extension to the end of September of the state of emergency in Japan, coupled with a slow recovery thereafter, which I explained on the previous slide as well as lockdowns overseas in response to resurgences in COVID-19 infections.

Looking at this 3-month period, loss operating hours in Japan and overseas caused by suspended operations or shorter opening hours amounted to some 400,000 hours, the majority of which pertain to operations outside of Japan. We think the negative impact on gross operating profit was in the range of JPY 3.5 billion. If we were to add back this amount, gross operating profit would be fairly close to the levels seen prior to the pandemic. As such, results were bleaker than we expected. But by stimulating demand with key measures such as the Black Friday sales in November, sales are improving month by month. I will discuss monthly sales trends in each segment later on.

Moving on to operating revenue by segment compared to the same period 2 years ago prior to the pandemic, results for the Health and Wellness business, Discount Store Business and Supermarket business have remained above pre-pandemic levels. Operating revenue in the Shopping Center Development Business segment returned to positive growth in the third quarter of this fiscal year.

In the Financial Services business and the other segments below it, the lasting impact of operating restrictions dented sales, but on a month-by-month basis, they have been improving. I should also mention that the sharp 15.3% year-on-year decrease in the Financial Services business owes to a decline of some JPY 13.0 billion versus the same period in fiscal 2020. In connection with the booking of policy reserves drawn on for payments due on insurance previously sold by AEON Allianz Life Insurance, which became a consolidated subsidiary in March 2020. However, this has almost no impact on profitability.

Next, I'll discuss operating profit by segment. In terms of year-on-year comparisons, operating profit declined in the Financial Services business after greatly improving in fiscal 2020 and also in the Services and Specialty Store business and Shopping Center Development business, which were impacted by the dropout of positive effects from fiscal 2020's blockbuster movie.

When compared to before the pandemic, operating profit in the Financial Services business and the 3 segments below it continued to increase after a similar trend in the first half. Operating profit in the General Merchandise Store business declined in comparison to the same period in fiscal 2020 and fiscal 2019. But in this segment, we have continued to work on transitioning to a structure that can generate profits when sales do recover.

I'd now like to touch upon the situation in the General Merchandise Store Business. Firstly, regarding sales. As you can see in the graph in the top left corner of this slide, sales grew more moderately than we expected, but they were greatly improved since September when the state of emergency was still in force. The graphs on the right show year-on-year same-store sales by category. Sales in the food category continued to steadily outstrip the prior year. Below that graph is apparel, sales of which surpassed fiscal 2020's results in November, thanks to strong Black Friday sales of winter clothing. Sales in the household and recreational and health and beauty categories are also improving.

The bottom half of this slide shows the breakdown of operating profit compared to the same period 2 years ago after excluding the impact of business restructuring, such as the transfer of the Tohoku business and the group's merchandise procurement function. The decline in gross operating profit of JPY 3.9 billion was partially offset by a $2.8 billion reduction in SG&A costs. Even though sales dipped on the impact of the sluggish results in September, the gross profit margin still exceeded the pre-pandemic level by 0.2 percentage points. The improvement can be attributed mainly to inventory reductions and efforts aimed at minimizing losses and price reductions with the use of digital tools, which I will mention again on the next page.

We also kept expenses to below pre-pandemic levels, except for facility expenses, which increased as a result of higher repair costs associated with store refurbishments. I will also discuss progress with these measures on the next page, but we believe the various digital technology-driven initiatives implemented at stores and the head office have proven successful.

Despite the sluggish recovery in consumer sentiment, we were able to generate strong sales growth by leveraging measures to stimulate demand around the Black Friday promotion period. Sales during the period were 7.1% higher than last time. Apparel sales in particular, rose a sharp 18.2% over last time, chiefly because we stepped up efforts to tap demand for outings after restrictions had been lifted. Also for Black Friday this time, we worked on strengthening how we use digital tools and bolstered online sales, mainly with online shopping specials, which resulted in a considerable 32.1% increase in online sales compared to last time. In particular, sales during the period via Aeon Style Online, which offers a wide range of goods, such as cosmetics, lifestyle products, fashion items and baby and children's products rose an impressive 138% compared to last time.

In the bottom half of the screen, you can see the progress we are making on some of the initiatives we are bolstering this fiscal year. Online supermarket sales have continued to increase, growing 20% year-on-year in the third quarter. In particular, for online preorders for Christmas cakes and traditional New Year's food, we made use of our promotional campaign harnessing Aeon's integrated point system, which helped boost sales by around 50% year-on-year. We are seeing more customers take advantage of Aeon's online supermarket service for not only day-to-day shopping, but also during these kinds of events.

We are continuing to overhaul store checkout operations and greatly reduce checkout waiting times, which we know is something our customers feel frustrated about. We are also promoting contactless shopping, and we have had the number of operational labor hours used when employees stop what they're doing on sales floors to provide assistance at checkouts when stores are busy. We curtailed head office expenses by 13.7% year-on-year by streamlining operations with the use of robotic process automation, reassigning operations to stores and shifting to operations with high added value. We have also curbed losses on price reductions by utilizing digital tools. Furthermore, we are steadily pushing ahead with inventory reductions.

Now I'd like to talk about the supermarket business and discount store business. Results in the third quarter came in higher than the same period 2 years ago. Sales are brisk in the delicatessen and liquor categories, 2 areas that we have focused on strengthening so that customers can more easily enjoy delicious meals at home. Also so that we can continue to generate profit up ahead as demand for dining out makes a recovery, it is imperative that we improve productivity. So for that reason, we advanced the productivity improvement initiatives shown in the bottom left of the screen.

As for the health and wellness business, sales in the prescription drugs category continue to increase. You can see in the bottom right of the screen that there are now 1,792 drug stores capable of processing prescriptions up by 154. That's 33 more stores than initially planned. The percentage of stores with the dispensing pharmacies is also tracking ahead of plan.

At the second quarter results briefing, we unveiled a new Welcia concept store for AEON Town Makuharinishi, which seeks to facilitate collaboration with local medical services, provide a health consultation service with registered nutritionists and offer an expanded lineup of food products. It hasn't been open for very long, but sales are more or less on target.

Compared to stores of similar size and type, this one has a high sales weighting of food and liquor, and it has already generated a high proportion of sales from pharmaceuticals because the registered nutritionist is always stationed in the drug section, close to the health measuring devices. As such, we think this new concept is garnering support from local customers. We also intend to raise the level of services offered based on feedback from customers.

Next, let's look at the situation in the Financial Services business. The graph at the top left of the screen shows monthly year-on-year Aeon Card transaction volume related to outings. Transactions for the leisure category, the line for which extends to the top of the graph, have increased sharply, owing to a recovery in customer traffic at amusement parks. Spending on leisure grew 31% year-on-year in November and by 7% compared to November 2020, demonstrating an improvement to levels higher than those seen before the pandemic.

The light green line at the bottom is travel-related spending. In September, it was below 60% of the previous year, but recovered quickly to positive year-on-year territory in November versus 2 years ago, it was still down 41%, but we expect to see more of a recovery going forward. The right side of the screen shows the balance of operating receivables. The balance for both Japan and overseas is certainly recovering when compared to the end of August.

In overseas markets, we took steps to invigorate demand mainly by promoting a travel campaign in conjunction with the easing of lockdown restrictions. And accordingly, credit card shopping transaction volume turned to positive growth compared to the start of the year.

The bottom left of this green shows bad debt expenses through the end of the third quarter. Expenses in Japan increased slightly in the third quarter, but this is directly related to the increase in transaction volume. Bad debt expenses have decreased considerably compared to fiscal 2020 and fiscal 2019, thanks to government assistance measures, progress made with establishing a credit system that is responsive to restrictions and a higher proportion of performing loans. Also, we are beginning to gradually see some benefits at the loyalty point integration and the comprehensive smartphone app iAeon, that we launched in September.

When we ran a campaign with AEON Pay at the start of November, on paid transactions were 560% higher and total transaction volume was 690% higher. This campaign certainly boosted recognition and usage of AEON Pay. Also, the number of log-ins to the existing app known as AEON Wallet, has increased by 500,000 compared to the start of the fiscal year. We think this owes to its integration with the iAeon app and the enhanced convenience brought about by the integration of our loyalty points. Going forward, we intend to engage in cross-selling in a bid to improve our share of wallet.

In the Shopping Center Development business, too, sales are on a recovery track. The top left part of the screen shows trends in specialty store sales, which are currently improving. The top right of the screen paints a picture of the situation in China. Even though the absolute number of people, in fact, it is low, sales in some regions where the virus was spreading have been impacted by strict lockdowns. But in the absence of those circumstances, sales have been increasing. In Vietnam, city lockdowns were enforced from July onwards for the entirety of the third quarter there, and our business was heavily impacted by having to temporarily suspend operations, but restrictions were eased in October, which corresponds to the start of the fourth quarter, and operations resumed and headed for a recovery thereafter.

Also during this period, we steadily implemented measures for stimulating demand, such as renovating existing malls, opening new stores in Japan and overseas and promoting the use of the AEON Mall app.

Earnings in the Services and Specialty Store business, too, was on a recovery track if we exclude the cinema business, which was heavily impacted by the dropout of positive effects from the blockbuster title in fiscal 2020. The graph on the left of the screen shows sales for the key subsidiaries in the Services and Specialty Store business, excluding Aeon Entertainment, which operates the cinema business and Aeon Delight, which mainly logs contract-based sales. The solid line in the graph represents year-on-year sales, while the dotted line is a comparison with the same period 2 years ago. Sales have rebounded to nearly surpassed results from the same period in fiscal 2020 and also fiscal 2019.

At Aeon Entertainment, 7 movie titles originally scheduled for release during the period of the third quarter were put on hold, which obviously had a negative effect on sales, but ticket sales resumed on October 29. The ASEAN business of Aeon Fantasy was hardly able to operate at all as of the end of the second quarter. But by the end of the third quarter, it had restarted nearly 80% of its operations.

As for specialty shoe store operator, G Foot, Aeon decided to subscribe to a capital increase through a third-party allotment of classified shares. G Foot will continue to refurbish stores, open new ones and invest in systems and IT. Aeon will also throw its support behind the formulation and execution of a restructuring plan, so that G Foot can rebuild its business as quickly as possible.

With regard to the international business, which operates general merchandise stores and supermarkets in overseas markets, sales started recovering in the fourth quarter, but we will continue to strengthen the online supermarket business and look to pursue a number of other measures, whilst keeping abreast to people's rapidly changing lifestyles.

This slide shows sales trends over the year-end and New Year period. Ever since COVID-19 infection started to spread, Aeon has consistently reinforced and strictly implemented infection prevention measures. During the recent year-end and New Year period, too, we took every precaution to make sure that customers could do their shopping with full peace of mind. This year, the 3rd of January, fell on a Monday. So the 2 days of January 1 and January 2 are calculated as the 2-day New Year period. But even still, total same-store sales for our mainstay general merchandise stores were up 11% year-on-year.

With people returning to their hometowns during this period and domestic travel demand picking up again, sales were especially brisk in areas that an influx of people, particularly the Chugoku, Shikoku Tohoku and Hokuriku regions. Sales figures were boosted by efforts to offer an even better range of gourmet food products, including horsehair crab, sushi and beef as well as gifts for people to take when visiting their hometowns.

So the people could effectively use their special cash handout, we also expanded our lineup of goods to help students get ready for the new school term as well as baby and children's products and the success of these initiatives was reflected in solid sales figures. Our shopping malls during the year-end and New Year period were the liveliest they had been in quite some time, especially because we ran raffles and other such events, so the customers could enjoy themselves while shopping in their hometown.

Each group of company in the Services and Specialty Store Business segment kicked off the new year with sales surpassing year-earlier levels and the Supermarket business to capture demand for nears food in areas where there was an influx of people.

Now I'll briefly cover the progress we're making with our growth strategies. In September, we announced a price freeze on Topvalu food products until the end of the year as a way of helping customers out. This initiative soon gained favor with our customers were reflected in a 35% year-on-year increase in sales of mainstay products and a 14% increase from major categories, such as cooking oil, coffee, mayonnaise and pasta.

As a result, the sales weighting of Topvalu rose 2.5 percentage points for the mainstay categories combined as the switch from national brands continued to gain traction. This also led to an improvement in the market mix and the markup ratio when combined with the national brand products improved by 0.5 percentage points. In addition, we just recently announced a price freeze until the end of March on approximately 5,000 product items in total by adding daily consumables to the scope of this campaign.

With household expenditures under pressure owing to rising prices in numerous categories, including food and gasoline, Aeon is making every effort in its corporate activities to lower the cost of distribution, among other areas, and pursue its mission as a purchasing agent for its customers. In this way, we will continue to provide the product quality and low prices that our customers have come to expect.

Furthermore, we are also focusing our resources on developing and expanding sales of top-value products that are not just reasonably priced, but also offer new value that caters to customer needs. One example of this is our protein-related products. We have expanded our lineup of these products to meet customer health and beauty needs for protein supplements in various situations in their daily lives. Accordingly, sales of protein-related products rose 80% year-on-year.

Last month, AEON Mall announced plans to develop in partnership with Ocado, a new lifestyle facility in Hachioji that combines the second customer fulfillment center with commercial facilities. For our next-generation online supermarket business in collaboration with Ocado, the first customer fulfillment center located in Chiba City is scheduled to come on stream in 2023. So when the second one in Hachioji commences operations in 2026, it means a framework will be in place, allowing us to cover the entire Tokyo Metropolitan area from east to west.

Hachioji is where we have plans to develop as a new initiative, a next-generation supermarket housing both a customer fulfillment center and a brick-and-mortar store. We hope to provide local customers with a lifestyle platform that fuses together online and off-line services in a bid to help further enrich their everyday lives.

Also, AEON Mall announced yesterday a new business development in Cambodia that combines a shopping mall with a distribution center. Given that AEON Mall is a commercial developer, it will look to tap into new growth opportunities by reaching beyond that framework to address societal issues and meet demand in other countries and regions.

On the 5th of this month, Can Do was welcomed into the AEON Group as a consolidated subsidiary. We think the acquisition will enhance the appeal of our commercial facilities, and we intend to contribute to Can Do's growth acceleration. We have a joint press conference on this topic scheduled for the 14th the day after tomorrow.

We have left our earnings forecast for this fiscal year unchanged. As I've already explained, results so far have fallen short of our original expectations, partly because of the impact of the states of emergency that lingered intermittently through to the end of September. However, a recovery trend has continued since the second half of the third quarter. Even though there is no predicting what kinds of impacts a sudden surge in new variant infections might have on earnings, we must recognize that COVID-19 is now part of everyday life as we work to turn earnings around by leveraging all of Aeon's strengths in various business operations so that businesses can mutually complement each other.

We will continue to set our sights on achieving our full year earnings forecast by stepping up sales and cost-cutting measures through to the end of the fiscal year and also by advancing the growth strategy set forth in our medium-term management plan.

That's all for me today. Thank you very much.

[Unknown Analyst]

I have 2 questions. First, could you please explain the increase in the weighting of Topvalu brand sales? According to the supplementary data, Topvalu's cumulative sales were down 0.7% year-on-year as there was a 1.4% decline in the first half, I assume third quarter sales must have increased somewhat. However, the PowerPoint slide that we were shown earlier on showed that sales of major items were up by 35%. That's quite a big gap between those numbers. Could you please explain the difference?

My second question is related to the Financial Services business. It was mentioned that the business is performing strongly with transaction volume up thanks to a wide range of initiatives. However, third quarter operating profit is down sharply year-on-year. Please tell us the factors behind that large decline. Is it due to increased sales promotion expenses or were there some other one-off factors?

[Unknown Executive]

Regarding your first question, the increase in the weighting of Topvalu sales involve changes in the sales volume of each product category. Food sales are strong, but sales of apparel and household and recreational products have been relatively weak. Topvalu's third quarter results were significantly better than last year, owing to the strong dine-in demand for food consumed at home. Meanwhile, sales of apparel and the household and recreational products fell below the previous year's levels owing to people staying home during the state of emergency. Apparel and household and recreational products were down by more than 10 percentage points from their year-earlier levels.

The difference between what was explained earlier and the information in the supplementary materials can be explained by changes in the relative weightings of apparel, food and household products.

[Unknown Analyst]

Regarding your explanation of the pricing of private brand and national brand products, would it be correct to assume that food products that are performing extremely strongly due to price freezes have been excluded from those figures?

[Unknown Executive]

That is correct. Regarding your second question about the Financial Services business, the main reason is that the provision for points expenses has been deferred while being allocated from the second half of the fiscal year.

[Unknown Analyst]

My first question, you explained that conditions were difficult in the first 3 quarters of the year, but how much did the results for each segment differ from targets? Please tell us as much as you're able to.

Next, rising costs and supply chain disruptions are recurring in markets everywhere. While Aeon does business through much of Asia and handles a vast array of merchandise, it appears that you have not been all that affected by this challenging environment. That said, is it possible that your gross profit margin and SG&A expenses might show some impact from rising costs and supply chain disruptions in the next fiscal year or perhaps somewhat later? I think Aeon's scale may potentially be working to your advantage, but could you share with us your thoughts on rising costs and supply chain and logistics disruptions?

[Unknown Executive]

Regarding your first question, third quarter results for the Supermarket and Discount Store businesses were largely in line with projections. Both businesses benefited from strong demand for food and beverage products to be consumed at home, including simple and convenient, ready-to-eat meals, alcoholic beverages and delicatessen items. The Health and Wellness business also performed largely in line with projections, thanks to strong prescription drug section sales. The results of the Financial Services business were also broadly in line with projections as progress with work and credit screening systems has reduced bad debt expenses.

On the other hand, results fell short of targets in the General Merchandise Store, Services and Specialty Store and Shopping Store Development businesses, all of which were affected by the extension of the state of emergency until the end of September and the slow recovery in consumer sentiment.

The International Business segment where many group companies have December fiscal year-ends also fell short of targets. As results in July, August and September in the third quarter were negatively affected by lockdowns and activity restrictions imposed in many countries in response to resurgences of COVID-19 infections.

Cumulative results for the first 9 months of our fiscal year show the Financial Services business continue to do well with its core unit, Aeon Financial Service, upwardly revising the full year forecast released in October. The supermarket discount store and health and wellness business remained close to projected levels.

Results in other businesses have fallen below targets, owing to restrictions on business activities in Japan and other countries, lasting longer than had been projected at the start of the fiscal year as well, the continued deterioration of consumer sentiment amid prolongation of the need to stay home and refrain from outings. Regarding your second question, as you noted, the prices of raw materials, such as wheat and crude oil are soaring and the shortage of shipping containers due to the impact of the pandemic is pushing up shipping costs. We recently announced a price freeze on many of our Topvalu brand products.

We believe that through our proactive actions to control product costs and other aspects, we have demonstrated our competitive edge. The switch from national brands to our Topvalu private brand is also progressing smoothly as a result. We believe we've been able to create opportunities for more customers to experience our Topvalu products for the first time. There has been pressure from national brand manufacturers seeking price increases, but we established Aeon Global Merchandising Company Limited to enable us to respond at scale.

By aggregating the demand for products from each group company making necessary adjustments with manufacturers and distributing products through Aeon's dedicated global supply chain, we have been able to hold down cost increases. We see cost increases as an opportunity to thoroughly revisit product pricing and offer merchandise at prices demanded by our customers. It's not that we see the pinch from higher cost as an opportunity in itself, but we do see it as an opportunity for us to win more Aeon fans.

[Unknown Analyst]

Would it be correct to say that the robust measures we've implemented translated into the recent New Year's holiday sales performance and increased support from consumers?

[Unknown Executive]

Yes, that is correct.

[Unknown Analyst]

Would it also be correct to assume that you plan to continue with those measures next fiscal year and beyond?

[Unknown Executive]

Our product strategy is one of the key aspects of our medium-term management plan. The development of products in all categories with a special focus on private brands and the fast-growing delicatessen product area and optimization of our supply chain are all key components in the crucially important product strategy in our medium-term management plan. We will steadfastly pursue the current measures as part of our efforts to meet the expectations of our customers.

[Unknown Analyst]

I also want to confirm something about private brands. First, I believe the cost of producing products even for private brands must be rising. If product prices are left unchanged, it would be reasonable to assume that the markup ratio for private brand products is deteriorating. However, you said that the product mix has improved while prices remain unchanged. I would therefore like to confirm the situation with the margins on your private brands.

Secondly, you initially said prices were being frozen until the end of 2021, but the freeze now has been extended to the end of March. Meanwhile, it looks increasingly likely that national brand makers will continue to raise prices after March. If they expand the range of products that are subject to price rises, is there a possibility that you might further extend the price freeze on your private brand products?

[Unknown Executive]

Regarding your first point, it is true that the cost of raw materials used in our private brand products is rising, but pricing is not based solely on the cost of raw materials. Logistics expenses and packaging materials also affect pricing, and we are receiving the cost of all inputs, for example, product deliveries. We consider delivery costs on a group-wide basis. So our review of costs in this area involves considering not only cost of materials, but also the potential for increasing the efficiency of our delivery operations. Based on our principle of commitment to our customers, we are reviewing all costs to keep sales prices unchanged while still securing firm margins on our private brand products.

As for national brands, we are responding to the upward pressure on costs by taking advantage of our economies of scale, optimizing our supply chain and offsetting the impact of any price increases on customers' lifestyles by awarding WAON POINT and introducing other measures such as limited time-only sales, offering products at special low prices.

As for your second point, we announced that the price freeze has been extended until the end of March. We'll make a further announcement about what we'll be doing from the end of March onward once a decision has been made.

[Unknown Analyst]

So despite the rise in the cost of raw materials used in your private brand products, would it be correct to say that Aeon's own efforts have made it possible to maintain the markup ratio and profit margin on private brand products unchanged?

[Unknown Executive]

It depends on the product. We are working to maintain a favorable overall gross profit margin mix.

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