Aeon Mall Co Ltd

TSE:8905

Earnings Call Transcript 2022-Q1

[Yasutsugu Iwamura, executive]

Hi, I'm Iwamura from AEON Mall. Thank you very much for coming to our financial results briefing despite your busy schedule. Now without further ado, I will explain the summary of financial results for Q1 of FY 2021. As FY 2020 was severely affected by COVID-19, I'll explain the first quarter results in comparison to FY 2019. Please turn to Page 3. Although the situation was different from country-to-country, COVID-19 infections remained uncontained, and we were forced to close some malls temporarily or shorten operating hours. This affected the consolidated results, as shown on the slide. Operating revenue was 94.4%, and operating income was 71.5% of Q1 results of FY 2019, respectively. And the progress rate of operating income was 40.8% over the first half plan we announced. As such, the Q1 results showed a delay in the plan. And in our internal plan for Q1, which is provided on the right for your reference, operating income was about JPY 1.6 billion less than the internal plan. Please turn to Page 4. This table compares operating revenue, gross profit and operating income by segment in Q1 of FY 2021 to the Q1 results of FY 2019. Regarding business in Japan, state of emergency was declared on April 25, and its impact was not just direct ones like temporary closure or shorter operating hours. Consumer confidence dropped nationwide. And as a result, operating income was significantly decreased by JPY 4.8 billion from FY 2019.

On the other hand, in overseas business, while profits declined in Cambodia and Indonesia, where the impact of COVID-19 remained, China and Vietnam increased revenue and profit as they were a little affected by COVID-19, and we could secure increased revenue and profit for the overseas business in total. However, it was not enough to offset the negative results in Japan. And consolidated operating income was JPY 4.3 billion less than FY 2019.

Please turn to Page 5. Now let me explain performance by country. First is China. The line chart at the top indicates specialty store sales at existing malls in FY 2020 and FY 2021 compared to FY 2019. The blue line shows FY 2021, and the gray line is for FY 2020. COVID-19 is almost under control in China, and consumer demand is growing as restrictions on overseas travel are still in place. Under such a circumstance, specialty store sales at existing malls in Q1 from January to March was strong as 111.5% of FY 2019. Until May, it maintained strong performance with double-digit growth as before COVID-19. But according to the preliminary report for June, it declined slightly to 96.6%. This is due to a temporary impact of the spread of COVID-19 in Guangdong. But China took a strict measure to contain the virus, as they have done so far, and the infection is already under control, and the sales trend has returned to double-digit growth. Please turn to Page 6. Next, let me talk about ASEAN. I will specifically explain Vietnam, which has many malls. Just like China, Vietnam had almost no impact of COVID-19 in this Q1, and its specialty store sales at existing malls grew significantly to 123.8% of FY 2019. However, in May, new cases of COVID-19 increased in the south part of the country and the specialty store operations in 3 existing malls around Ho Chi Minh City are temporarily closed now, except for GMS. In Vietnam, as indicated by the comments in the graph, there have been waves of infections so far, but they quickly recovered by applying strict virus containment measures like China. Same measures are implemented this time as well, so we expect an early recovery. Please turn to Page 7. Next, I will explain about sales performance in Japan. On April 25, state of emergency was declared for Tokyo, Osaka, Kyoto and Hyogo prefectures. And 30 malls, including 15 directly managed malls in those areas, were temporarily closed. On May 12, the areas subject to the state of emergency were expanded to 10 prefectures, and it was extended until June 20. But at the same time, restrictions on businesses were relaxed in all areas with some differences. And we resumed operations of malls in those areas, except Osaka, with closure of some specialty stores and shorter business hours. Restrictions were lifted in stages in those areas as well as areas subject to priority measures to prevent the spread of the disease, and resumed operations of all malls on June 21.

In many cases, the policies of national and local governments were ambiguous during the state of emergency. And it was difficult to make decisions about operations. Last year, we implemented temporary closure and rent reduction to support members of [indiscernible] or our tenant organization as our partner. However, this time, considering anti-infection measures are in place, an active operation based on proper awareness of COVID-19 will support them. We decided to continue operations within the scope of compliance to the request of local government. As indicated in the historical record, sales in Japan is inversely proportional to the number of cases of COVID-19. As vaccination progresses in Japan, we expect the sales trend will make a recovery. From Page 8 to Page 12, specialty store sales by business type, income statement, balance sheet and cash flow statement are described. Please refer to them later. Now let me explain initiatives we are implementing now for sustainable growth in the future as well as new initiatives currently under consideration. My explanation about growth initiatives is based on the 5 major challenges and the ideal future that was set at the full year financial closing in April. Please turn to Page 14. First initiative is achieve profitable growth in the overseas business and accelerate new mall openings. In China, we opened AEON Mall Guangzhou, Xinjiang on May 29 as the fourth mall in Guangdong province. Its features are as described on this page, and it was opened in an unfavorable situation as the resurgence of COVID-19 started in late May in Guangdong province, as I said earlier. So the mall was opened in the middle of the pandemic.

Immediately after the opening, amusement operation was stopped on June 8. And on June 10, indoor dining became prohibited. On June 19, indoor dining resumed to 70%, and the number of visitors is making a recovery. Finding leasing tenants was affected by the pandemic and the occupancy rate was about 60% at the time of opening. We will promote tenant leasing by setting a target for the National Day of China in October to be on the right track with the recovery from COVID-19. Please turn to Page 15. On this page, I will explain about new mall openings plan in China. So far in China, we have conducted area-dominant mall openings, mainly in 4 areas: that is Beijing, Tianjin, Hebei and Shandong; Jiangsu and Zhejiang; Hubei; and Guangdong. This time, we decided 3 mall openings shown here in Hubei, [ Jiangxia ] and Hunan province. Also, we signed an agreement and collaboration in mall openings with the Changsha People's Government in Hunan province in May, where we plan to open AEON Mall Changsha Tiantang.

Our policy for China is to accelerate mall openings in inland area with high growth rate. We added Hunan province to Hubei province as our focus areas for new mall openings, and we will promote securing properties for future mall openings to achieve the goal of 29 malls in 2025. Please turn to Page 16. Vietnam is our most important country for mall openings, and we are strengthening collaboration with local government. In 2021, we signed memorandum of understanding regarding business promotion for shopping mall development with Thua Thien Hue province in February, Bac Ninh province in March and Dong Nai province in May. This most important country for mall openings in ASEAN, we concentrate management resources and secured land for more construction by working in stronger cooperation with local governments, establishing a cooperative system for mutually beneficial mall development. For establishing stronger business foundation in Vietnam, we will extend into regional cities so that we can contribute to sustainable development and urban planning and a remarkable economic growth in Vietnam. Please turn to Page 17. We have increased malls overseas to 32. So going forward, not only new mall openings, but also strengthening earnings capacity of existing malls will be an important growth factor for us. the significance of revitalization of existing malls overseas is growing, just like malls in Japan. And these 3 malls were renovated recently.

Overseas markets are changing more rapidly than Japan, so contract term with specialty stores is set shorter than Japan. We will execute strategic innovation to finish malls in a timely manner. In China, hyper localization project was implemented for the first time this year. This project is carried out in Japan as well. And it is a unique project promoted mainly by our young employees to demonstrate attractiveness of the locality. Various events have been held in malls throughout Japan since 2015. It was implemented this time in 2 malls in Shandong province. And in AEON Mall, Qingdao Xihaian Xinqu, an event was held to publicize blueberries, its specialty product. Please turn to Page 18. The second point is maximize the appeal of brick-and-mortar malls through customer experience. So far, we have established AEON COVID-19 prevention protocol based on scientific ground under the guidance of experts and implemented anti-infection measures based on the protocol in all the countries we operate. We started a joint research project with Waseda University as a new initiative to look into implementing permanent measures against infectious diseases in the future.

Professor Shin-ichi Tanabe is 1 of the 36 scientists who submitted an open matter to WHO regarding the possibility of airborne infection of COVID-19. And he is engaged in advanced research on ventilation, which has become a focus as a measure against COVID-19, as well as research on other infectious diseases from a viewpoint of building environment. With this joint research, we will verify and evaluate current measures against infectious diseases in malls to gain new knowledge about safety and security to build next-generation malls. Please turn to Page 19. Such anti-infection measures are highly evaluated, and we acquired WELL Health-Safety rating in AEON Mall Shinrifu South Wing, opened in March, and AEON Mall Kawaguchi, opened in June. Please turn to Page 20. There is no doubt that growth of e-commerce transactions has been accelerated by the pandemic since last year. And as a company operating physical malls, we recognize it is necessary to accelerate initiatives to merge online and off-line businesses. As more and more customers are enjoying both online and offline shopping, we will develop new tenants and new business models to suit their needs.

We are preparing Pop-Up Area as one of those new initiatives. Pop-Up Area will enable us to invite brands, which are only available in e-commerce to physical malls, and local companies can try short-term store operation in considering store opening at the mall. As such, we can offer various opportunities to address their needs. And we are sure this will contribute to incubator function at the mall. We'll continue active implementation of services and initiatives without being bound by existing frameworks to fit with the times. Please turn to Page 21. During the pandemic, more focus is given to ventilation, and customers express their needs for open and comfortable outdoor zones more than before. So we are promoting new initiatives utilizing properties around malls. The example on the slide is not official yet, so I will touch upon and outline only this time.

We are considering to construct 2 different concept areas in a surrounding property of a mall in Japan. To be more specific, they consist of outdoor zone where people can enjoy high-quality outdoor activities, botanical life zones as well as a zone to accumulate community functions such as a venue for wedding receptions, restaurants and nursery score. We will collaborate with local governments and establish environment that suits a new lifestyle of community residents to promote active exchange among them and provide deeper value, which has not been offered so far in the malls. Please turn to Page 22. The third management issue and the future vision to pursue the growth is to build next-generation malls and pursue the urban shopping center business. At the time of the briefing for fiscal 2020 financial results, we explained that as a direction for the development of next-generation malls, we were planning to create a place for local communities and space together and slow down. As realization of a specific example, we are going to open AEON Mall Hakusan on July 19.

As you can see, we have established a space comfortable for people in the local community by designing both exterior and interior of the building, keenly aware of the harmony with the surrounding local environment. At the center of the mall is a large roof, a landmark of the building, providing a structure to allow for ventilation and letting natural light indoors. I hope we will be able to go into more details at the next earnings briefing. Please turn to Page 23. In the next-generation malls, by diversifying development patterns, depending on the specificity of a particular location, we will facilitate the reform of the business portfolio. One of those directions is the development of office retail commercial facilities. In Japan, AEON Mall Nagoya Noritake Garden is scheduled to open in autumn this year, but those types of facilities are being developed steadily overseas as well.

In Indonesia, development of AEON Mall Tanjung Barat planned to be opened by the end of this fiscal year is being perceived as a mixed-use development project in collaboration with a local partner, Sinarmas. While Sinarmas is engaged in the development of offices and residences in the local area, we are responsible for the development of commercial facilities responding to the needs of the local community. By realizing such an integrated plan, we hope to enhance the value of the area where we have opened a mall. Moreover, in Hanoi, Vietnam, the development of AEON Mall Hoang Mai as an integrated office retail commercial facility is underway, which is a project we run by ourselves.

Development projects like this being integrated with offices will not just provide comfortable and highly convenient environment for office workers, but also offer solutions to the local community by addressing social issues, such as the shortage of parking space as it is located in the center of Hanoi City. Thus, we will work to depart from the rigidly uniform manner of mall development and continue to take on challenges to undertake new initiatives to respond to the needs of the community and strengthen the function as part of the local infrastructure. Please turn to Page 24. With regard to urban shopping center business, we made a press announcement in December last year on the reorganization of OPA via the company split and absorption-type merger. The new business structure started to function in March this year. The newly organized OPA will specialize in the management and operations of 8 urban facilities mainly located in transportation terminals, such as Canal City OPA in Fukuoka Prefecture; and Kanazawa Forest in Ishikawa Prefecture, creating new value through concentration of management resources.

In the former OPA, we have merged the absorption. We will work with AEON Malls located in the area and leverage our leasing capabilities to transform these locations into facilities that meet the daily needs of their local communities. At the same time, we intend to improve profitability and operational efficiencies of area sales departments through sales support system.

What is a major common challenge for both approaches is the improvement of the vacant floor ratios. Compared to malls located in suburban areas, OPA, being located close to railroad stations, ended up being more severely affected by COVID-19. We will first seek to improve the vacant floor ratios as a priority issue, while at the same time promoting the initiative to strengthen the profitability with a sense of urgency. Please move to Page 25. The fourth management issue and future vision is to pursue digital transformation. This slide shows what we have implemented so far as initiatives to connect offline malls with the online environment. We will enhance our efforts in these initiatives towards early realization of a comfortable and highly convenient shopping environment where whether you're in the mall, at home or on the road, you can stay connected with AEON Malls. Please turn to Page 26. What you are looking at is examples of using digital technologies planned at AEON Mall Hakusan, scheduled to open in July. One of those, mobile ordering service has been introduced in AEON Mall Kawaguchi, which was opened in June. It is a service that will allow customers through AEON Mall smartphone app to order menu items from any restaurant in the mall, pay via mobile phone and receive the items without waiting at the restaurant. We plan to expand the service, especially in newly opened malls going forward. Please go to Page 27. Let me now discuss AEON Mall app. The cumulative number of downloads is still on the steady increase and reached about 3.9 million as of the end of May. The number of active users totaled approximately 1.2 million as of the end of May, the highest ever. One of our most important assets is a huge amount of information about customers whose cumulative number of visits to our stores count approximately 1 billion per year. It is positioned as an extremely important tool not just to connect our customers with our malls, but for us to make use of the information accumulated via the app going forward. First, we will enhance the functions of the app itself to increase the membership, and we'll use historical information on their purchases and behavior in our future development of businesses. Please move to Page 28. The fifth management issue and future vision is to formulate and pursue medium-term strategies and accelerate reforms based on ESG perspectives. Let me explain about our initiatives based on the perspectives of ESG.

First, in terms of the initiatives to achieve a decarbonized society, which is increasingly becoming a socially demanded issue, AEON Group is aiming to achieve a decarbonized society by the year 2050 through measures, including energy conservation and the use of renewable energy. AEON Mall is engaged in various initiatives, with its goal set up having all malls operating entirely on renewable energy by 2025.

AEON Mall Kawaguchi, opened in June, has been running more operations with effectively 0 electricity and gas CO2 emissions. This is being achieved by procuring electricity generating effectively 0 CO2 emissions through the use of a scheme called non-FIT, non-fossil certificate electricity menu offered by TEPCO Energy Partner, Inc. For city gas, we use carbon natural city gas supplied by Tokyo Gas Co. Ltd. Thus, specialty store operators can accelerate their efforts to achieve the status of being carbon neutral, required for each of their stores by opening one in our malls. Please turn to Page 30. This slide summarizes our measures to address social issues. As the vaccination drive is getting underway on a full-scale basis in Japan, we provide vaccination centers. And as of the end of May, about 30 of our malls were used at such centers. Furthermore, in Vietnam, it has been decided that AEON Malls would be used as vaccination centers. Those malls are places that local residents use on a day-to-day basis, highly accessible and completely barrier-free and, therefore, are popular centers for vaccination that tend to become fully booked quickly in many local communities. Those initiatives in places people often visit as their usual shopping sites are expected to see their demand increase more than ever.

In countries outside of Japan, we donated a total JPY 60 million to the 3 countries, Vietnam, Cambodia and Indonesia, to encourage vaccinations promoted by the governments of each country to help fight the pandemic and to aid in economic recovery. In addition, we donated to the Red Cross in Cambodia and also distributed masks and solicit donations at the 2 existing malls of ours in the country.

In Japan, as we promote our initiatives for industry-academia collaboration we signed a memorandum of understanding on Industry-Academia Collaboration with local schools in relation to AEON Mall Hakusan scheduled to open in July, and AEON Mall Nagoya Noritake Garden scheduled to open in fall this year, respectively.

Through these collaborations, we are working to create new customer values. And as the impact of COVID-19 has limited the opportunities and locations for students to conduct and present the results of their academic and cultural activities, we have been providing our malls as spaces for these activities. Going forward, we will continue to make it one of our missions to have our malls used as community platforms so that we can strengthen our mutual collaborations with local governments.

In the 500 companies representative of Japan in SDGs announced by Weekly Toyo Keizai, a business magazine, our company ranked 142 in all sectors and 2nd in the real estate sector. But in the evaluation, we have realized that many of our initiatives have yet to be recognized sufficiently in society. We will continue to proactively run ESG-focused business management moving forward and enhance our efforts to disclose information on nonfinancial indices. Please move to Page 31. In terms of addressing social issues, work style reform is one of the important elements, and our company is also promoting measures to realize work style reforms and enhanced efficiency in the operations in our offices. The practice of work-from-home is being continued at present with the goal of 30% of employees working at our offices. As the ratio of employees at offices has decreased with the promotion of working from home, we have conducted a review of the value of having an office, and as a result, introduced free addressing system in May.

The pictures on the slide show current status of the office of Makuhari headquarters. In order to be able to respond to the needs of diversified ways of working in line with the times, the layout of our offices has been changed and communication areas for casual meetings and solar booth for keeping rental concentration on work have been introduced. These measures are proving popular among employees. And therefore, we will continue to provide opportunities for communications among employees with the aim of improving productivity and work engagement. Please turn to Page 32. Last but not least, I would like to discuss a bit about studio LIFE DESIGN, a new internal working group launched recently. In studio LIFE DESIGN, with our mind set at what society will look like in 2040 and 2050, from the perspectives of how not just AEON Mall as a facility, but as a company should be positioned and what kind of presence it should be having in the local communities and society in 2030. We will discuss how to create futures of our customers and of society and come up with to be status for AEON Mall in the future.

Going forward, we will anticipate potential changes in society and weigh business risks and opportunities and take a back-casting framework with more forward-looking additives so that we can embody what we call a solution company that can address the issues of communities and society by transcending the framework of commercial facilities as allocated in our management philosophy.

Currently, we are soliciting members for this working group from among our employees, so that it will consist of people from across all kinds of barriers, including departments, lengths of services in the company and job types to implement the project. We started the fiscal year with the operating income, JPY 1.6 billion behind the plan in the first quarter. As we set out in the second quarter, due to the impacts from expansion of COVID-19 in and outside of Japan, the gap between the plan and the actual result has been widening.

On the other hand, however, vaccination drive is making progress domestically and overseas, and it is expected that in September, vaccination rate in Japan will reach around 40%. In cases of overseas, at the time when vaccination rate exceeded 40% of the total population, a marked decline in the number of new cases of infection was seen due to the effect of herd immunity. If this can be used as a reference, we can expect the cases of infection to decline toward the end of this year in Japan as well.

Since the household spending, which has remained sluggish so far, is expected to pick up after mid-September, we will work to recover from the current sales of being behind the plan in the second half of the fiscal year by capturing wants and needs of customers who have been forced to practice self-restraint and perseverance and by implementing event plans, put together not just by coming forward with just another sales promotion plan, but by thinking hard about what value our company should offer. That concludes my presentation. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]