Aeon Mall Co Ltd

TSE:8905

Earnings Call Transcript 2023-Q3

[Yasutsugu Iwamura, executive]

I am Iwamura of AEON Mall. I will give you a summary of financial results for the third quarter of FY 2022. As I did in the last fiscal year, I'll explain performance, revenue and other numbers in comparison with results for FY 2019, which were not affected by COVID-19. Please turn to Page 3.

For the 9 months, operating revenue, operating income and ordinary income increased year-on-year. Net income attributable to owners of parent was 63.4% of the previous year, which was a significant decrease. There are 2 main factors. Firstly, extraordinary losses increased JPY 3.9 billion year-on-year. Specifically, due to the resolution to scrap and build some aging facilities, we recorded an impairment loss of JPY 1.7 billion, and the provision for loss on store closings of JPY 2 billion as extraordinary losses. We also recorded a loss on retirement of fixed assets of JPY 2.4 billion due to revitalization work and other initiatives related to domestic and overseas malls. Although income before income taxes decreased, total income taxes increased JPY 3.7 billion year-on-year. It is a reaction to a decrease in income taxes in the previous fiscal year, due to the recording of deferred tax assets in the previous fiscal year in connection with the absorption-type merger of certain OPA locations.

We will disclose specific properties targeted for scrap and build through press releases and others when we are ready for disclosure after arrangements with related parties are completed. Progress of profit at each level to full year plan is slightly less than 60% due to delay in recovery of sales and customer traffic in Japan and smaller cost reduction than usual because of rise in electricity unit cost and other factors. I cannot deny the situation is challenging. However, according to the first report, sales in December in Japan recovered to the level of FY 2019 after adjusting the day of the week. For the remaining 3 months, we will make efforts to increase sales and secure profit to fill in this gap. Page 4, please.

This table indicates results by segment. Profit increased overseas, mainly in China and Vietnam. Operating income increased JPY 2 billion from FY 2019. In Japan, we were freed from prolonged COVID restrictions and consumer spending in traveling and others increased. However, partly due to a decrease in customer traffic associated with decrease in the number of customers during dinner hours, operating income decreased JPY 11.8 billion from FY 2019. Page 5, please.

I will explain revenue performance by country. As fiscal year ends in December overseas, the third quarter is from January to September. In China, existing mall specialty store sales for the 9 months were 91.4% compared to FY 2019. It was due to nationwide spread of the Omicron variant starting in the middle of March, and strict behavioral restrictions imposed based on the government's Zero COVID policy. Our sales activities were restricted by that. However, we saw a gradual recovery trend in July onwards. In particular, area showing high growth potential such as Suzhou and Wuhan recovered to double-digit growth as is pre-COVID era.

In the fourth quarter and beyond, in October, the government's Zero-COVID policy continued, and we closed many of our malls temporality. As a result, specialty store sales dropped to 59.9% in November compared to FY 2019. Behavioral restrictions were eased throughout the country, beginning in December and the number of infections rose significantly. We expected the impact of infections on customer traffic and sales will continue for the foreseeable future due to temporary closure because of infections of employees. However, in the year-end and new year days, customer traffic recovered to the level of last year at many stores. As we expect a shift to with-COVID policy, we will lead to normalization of economic activities and the release of pent-up demand, we will develop effective sales measures to capture growing demand in the expected economic recovery. Page 6, please.

In Vietnam, the government shifted to with-COVID policy to put the economy back on the growth track. Existing mall specialty store sales for the 9 months were 143.6% compared to FY 2019, which was a significant growth. Last year, COVID infections spread nationwide beginning in July and the government implemented social segregation measures, causing our malls to close specialty stores temporarily. However, as the government shifted to with-COVID policy our malls are operating normally across all times.

In Vietnam, along with easing of restrictions on activities, overseas travel also resumed. However, due to high travel cost country associated with significant rise in airfare, demand for domestic consumption is enhancing. In such a situation, our malls are receiving significant support of leisure functions such as shopping, dining and amusement as a result of synergy effects with measures to attract customers such as events. At each mall, customer traffic and sales increased significantly.

In Cambodia, the number of core cases is on the downward trend and restrictions on activities were eased greatly.

In Indonesia, customer traffic continued to decrease due to COVID infections and specialty stores reduced willingness to open stores, leading to increasing vacancy in new malls and continued challenging situation. At present, vacancy rate is improving for sure. We intend to achieve early recovery of sales through sales promotional measures while implementing continued leasing activities, including finding of new specialty stores. Page 7, please.

In Japan, for the 9 months, specialty store sales at existing malls were 88.5% versus FY 2019. According to the press report, specialty store sales in December after adjusting the day of the week, were almost at the same level as FY 2019. After September, customer sentiment changed from self-restrained paying close attention to trends of infections to thinking to live with COVID. As a result, sales from October to December were more than 98% compared to FY 2019. We will implement market analysis thoroughly to see behavioral changes of customers and measures to strengthen customer traffic, such as holding of events proactively. Also in January onwards, we will expand sales through sales promotional measures to capture new demand created from consumption stimulus measures taken by the government such as nationwide travel support. Page 29, please.

Now I'll explain new measures for growth based on 5 management issues and future vision. Firstly, achieve profitable growth in our overseas business and accelerate new mall openings. We will steadily build malls in Vietnam and China in the next 3-year medium-term plan period, aiming for a 52-mall network by the end of FY 2025.

In Vietnam, our most important area, we are pursuing area-dominant mall openings in the south of the country, focused on Ho Chi Minh City and in the North, focused on Hanoi. We already signed cooperation agreements on mall openings with local governments of 8 cities. We signed cooperation agreement on mall openings with Thanh Hoa province in May and with Da Nang major city in the central part in June. We will accelerate area-dominant more openings in the central part in addition to the south and north.

In China, we are securing candidate sites for more openings aiming for a 29-mall network by the end of FY 2025. We identified high economic growth inland areas in China as key areas for opening new malls and decided to open the first mall in Hunan province adjacent to Hubei province. We continue to make sure to capture business opportunities and accelerate more openings overseas. At the same time, we need to think about what value we can add to communities through more openings as a foreign company and what is necessary infrastructure for the country and a community. We need to be rooted in communities, change ourselves flexibly and become a company accepted by communities. Through more openings overseas, we will revitalize economy, create employment and enhance convenience of life in communities. Besides through business activities, we continue to create new value to the local life and build relationship of trust with countries, communities and partners for further improvement of business environment. Page 30, please.

In Cambodia, we are aiming to serve local issues through business diversification beyond the framework of commercial facilities. Since the opening of the first mall in 2014, we've been modernizing the commercial environment with the community. With soft opening of the third mall, AEON Mall Meanchey in December, we are contributing to further economic development of the capital Phnom Penh area in Cambodia. Renovation and expansion is scheduled for 2023 at the first mall AEON mall Phnom Penh.

The mall will evolve into a luxury mall to respond to request offering people by inviting highly sensitive specialty stores and adding a new wing to meet demand. In this way, we differentiate each mall. Besides, we newly established AEON Mall Cambodia Logi Plus serving as a platform, not only for manufacturing industry, but also for general commercial logistics to contribute to modernization in multi-functional logistics of the country.

The express way connecting the capital of Phnom Penh and Sihanoukville Autonomous Port in south opened November has higher efficiency of logistics and revitalization of economy is expected. Construction of logistics center is underway to start operation. Through Logistics business, we will build infrastructure of the country, enhance convenience for customers, provide business opportunities and services for diversified business operators and contribute to further development of Cambodia in new ways. Page 31, please.

Secondly, maximize the appeal of brick-and-mortar malls through customer experience. Due to behavior change caused by COVID, customers not only pursue buying experience at commercial facilities but also experiential value, reasons or motivation for visit. The base for that is sensory value which is experiential value gained through 5 senses of customers. Sensory value, such as atmosphere, cleanliness, special presentation, courteous customer service in stores has a great effect on enhancement of customer experiential value.

What is most important in enhancement of customer experiential value is creating open and comfortable spaces. As customer needs for improvement of spaces in malls in open and comfortable outside zones increase, we will incorporate mechanisms to appeal to the 5 senses for comfort and ease striving to create facility environments that will become a place of relaxation for our customers.

AEON mall Toki opened in Gifu prefecture in October last year features the extraordinary spaces such as an open terrace with lush greenery adjacent to our restaurant zone and food court, a lawn are with lush greenery brings together many people. We want the mall to be a community interaction center. On weekends, we hold various events and create an atmosphere for people to enjoy, relax and spend meaningful time with their friends and families.

AEON mall Kurashiki, which we opened in October, features a completely renovated green park courtyard terrace. In addition to a giant-sized slide for children to play on, the area has 200 terrace seats for grandparents, parents, and children to enjoy a relaxing meal together. In this way, we put in place comfortable facility environment to stimulate customers' new motivation for visit. For customers to spend many hours, we will improve spaces and environments and offer deeper value to create malls visited by local customers casually as a habit and enhance our ability to attract customers. Page 32, please.

Pursuing localization initiatives actively in cooperation with the local community, the mall aims to become a community space rooted in and relied upon by the local community. AEON mall Toki focuses on highlighting the appeal of Toki Mino Ware, a traditional ceramic craft of the Tono region of Gifu prefecture. Mino Ware store, often in collaboration with local community, is receiving favorable reviews from customers, business operators and producers. Many people take commemorative photos in front of art installations created with Mino Ware collected from local residents.

In addition, Toki City opened the TOKI MEKKU, a childcare support and interchange facility outsourced to a nonprofit organization for operations. The facility is used widely by customers with small children as a place to interact and discuss childcare concerns and worries. The program was operated at the welfare center and used by about 3,000 people annually before the facility opened in AEON Mall. After moving to AEON Mall Toki, I hear the number of users increased to almost 10 times and it became successful. I heard AEON mall is a place for people to gather and encounter local culture and a place to provide wellness to customers in which community is created as a community interaction center by creating facilities visited by customers as a habit in their lifestyle, we will make more funds and create new customers. Page 33, please. Along with new mall openings, we renovate highly profitable existing malls regularly to enhance ability to attract customers, secure competitive advantages and promote share increase within the marketing area. AEON mall Ota in Gunma prefecture is planning expansion and renovation in the spring of 2024. The new wing will feature expansive food card. Large-scale renovation is scheduled for the existing building as well. At the time of Westside parking lot renovation work implemented for expansion and renovation as an initiative to aim at circular sustainable mall creation, removed existing asphalt paving material was crushed and reused as new paving material. In this way, we try to minimize waste and reuse waste material for environmental conscious work.

This initiative was featured in Nike architecture General Construction Information magazine and received good reviews from the outside. We firmly adhere to principles of environmental management in all business processes and give essential environmental consideration in mall operations. I'm sure such essential initiatives will be judgment criteria for customers and store operators to choose facilities. Therefore, in all the business processes in new malls and renovation of existing malls, we will establish mechanism to avoid disposal of resources to the extent possible, aiming at resource recycling. Page 34, please. Thirdly, build next-generation malls and pursue the urban shopping center business at Hiratsuka project under construction, in Hiratsuka City Kanagawa Prefecture is located in Shonan area, a transportation hub with good access visited by many tourists, both from home and abroad, it was decided to be opened as a regional innovative commercial facility, the third facility in the outlet model. Acting as a designated by the administrator for newly established park in Hiratsuka City will provide a price local customers to have a comfortable time by creating a space that integrates the facility with the park. Besides, we plan to sign a contract with a local pro soccer team, Shonan Bellmare as an official club partner and set up futsal courts in the club house. On top of outlet shopping experience, we will create community interactions through a space built on the concept of sports and health. Page 35, please.

Our subsidiary OPA implemented reorganization in 2021 and is promoting initiatives to improve profit at each property duty-free sales of Canal City, OPA in Hakata, Fukuoka prefecture accounted for about 20% to the total in 2019, and the situation continued to be challenging after COVID started to spread in 2020. As a result of the easing of entry restrictions and return of inbound travelers in October duty-free sales in November recovered to 73.8% versus FY 2019. In response to change in social conditions, we are trying to attract more inbound demand by implementing sales promotions for inbound travelers from late November. When they present their passports, they can receive special offers at participating specialty stores. OPA produced and managed anime and character content shop, OPA Studio opened in December. We intend to retain foreign tourists by regularly changing multiple contents, mainly Japanese anime and character contents, which are very popular overseas, a new station, near Canal city, Kushida Jinja-mae station is decided to open with the extended opening of the Nanakuma line of subway in Fukuoka City in March 2023, expecting to attract more customers. Page 36, please.

Fourthly, pursue digital transformation. In the area, when social issues are becoming more complex and consumption environments are changing dramatically, it is important to diversify and deepen value to be offered through co-creation with external partners. To search for co-creation with external partner companies, we took various approaches continuously such as Open Innovation Programs and Business Idea-Thon as well as joint proof-of-concept. We will shift these partially to implementation by combining our management resources with external technologies and networks, we will create new business model for co-creation with communities and parties with the use of digital technologies and data and continue to work on initiatives to establish operations system for the next generation. Page 37, please.

Fifthly, pursue medium- and long-term strategies, accelerate reforms based on ESG perspectives. To solve environmental issues, we set directions of achievement of decarbonized society, realization of circular malls and protection of biodiversity and working towards the 3 directions. To achieve a decarbonized society, we formulated AEON mall decarbonization vision and set a target of reducing total CO2 and other emissions from our businesses in Japan to 0 by 2040. To achieve the target set in decarbonization vision, we will not only buy CO2 credits but also generate renewable energy locally for local consumption and transform ourselves from CO2 credit purchase company to generating company.

We launched AEON mall Machi no Hatsudensho (community power plant) based on low-voltage distributed solar power generation systems via self-directed transmission in September. We generate electricity used at malls ourselves. The first step of generating renewable energy locally for local consumption is the initiative toward Machi no Hatsudensho. Renewable energy with low environmental impact generated a 740 low voltage solar power generation system in each area will be used at about 30 AEON mall facilities nationwide, electric energy generated by solar power generation systems is equivalent to power consumed at 4 AEON mall facilities. AEON mall Toki installed solar panels on its rooftop under the PPA model. The facility was the largest power generation capacity among commercial facilities in Japan. The panels generate approximately 20% of the electricity used in the mall. By using the generated electricity, we are promoting use of renewable energy. Compared to conventional costs to procure from power companies, it brings a certain level of cost reduction effect, as costs are expected to increase due to a rising unit price for electricity in the next fiscal year and after. We will expand the use of renewable energy with a sense of speed.

In GX500, a ranking of the top 500 leading companies involved in decarbonization efforts published by the Nihon Keizai Shimbun, we were placed 74. We have been evaluated highly for our efforts in specific greenhouse gas emissions reduction efforts such as circular economy and decarbonization activities, employee education and collaboration with environmental organizations. Page 38, please.

To address the issues of waste in resource, we incorporated the concept of circular economy into more operations. In this way, we move away from the idea of reducing waste towards the idea of eliminating waste and recycling all waste as we work to create circular economic sense in our local communities. The Outlets Kitakyushu introduced Doggie Bags to reduce food loss and reduce environmental impact. After eating in a food court, customers can put food to be eaten later in Doggie Bags and take home. We also installed leftover food collectors. After collection, we use a bio composter to convert the left of our food into compost. Compost made from leftover and food waste of restaurant is spread as fertilizer at Tree-Planting activities in more premises, we conduct with local customers at the time of mall openings. In this way, we reuse resources and will encourage farmers to use compost. By recycling waste and building a circular economy zone in every region, we aim at sustainable mall operation. Page 39, please.

As climate change is progressing, to secure environment where creatures can continue to live is a global issue. We also identify the impact of our business activities on ecosystems and engage in activities to preserve nature in cooperation with our customers, government and other stakeholders. One of our materialities is to protect biodiversity and natural resources.

We set a quantitative target to increase the number of malls that are ABINC certified by FY 2030. As of the end of December, 15 malls received ABINC certification. AEON Mall Shinrifu North Wing in Miyagi prefecture held a birdhouse workshop to preserve wild birds in November. Participating customers obtained knowledge about wild birds, made bird houses with thinned wood from Minamisanriku and installed birdhouses by themselves on the mall premises under the guidance of experts. We provided opportunities to feel nature in [ different term ] and Minamisanriku into varied natural environments and received very good reviews from participants.

The birdhouses installed this time will be monitored continuously. We continue to engage in activities to conserve biodiversity through local customers. As always TCFD, Task Force on Climate-related Financial Disclosures, initiatives of TNFD, Task Force on Nature-related Financial Disclosures are attracting attention. Therefore, regarding initiatives related to protection of natural environments and biodiversity, we consider expansion of information disclosure, including initiatives implemented with AEON Group. Page 40 please.

Various activities to protect the global environment are evaluated also by external organizations, CDP, an international environmental nonprofit organization evaluated our strategy and response to climate change, awarding us an A- score, 1 level higher than our score last year. The Eco Kentei Award 2022 recognizes companies that utilize knowledge acquired through the Eco Kentei exam to engage in environmental activities, we received the award of Outstanding in the Eco Unit Division. We encourage all employees to take the Eco Kentei examination as a means to raise awareness of and promote environmental protection initiatives. In Japan, 1,496 employees or about 85% of eligible employees have obtained this certification.

We continue to aim at creation of malls in consideration of people and the environment and promote environmental activities. As I mentioned in the beginning, we are behind the plan. But due to recovery of the fellow people in Japan, specialty store sales show improvement trend to the level of FY 2019. Also in China where COVID was spreading, many malls are back to normal operation in January. We have a better chance of continuing operation without being affected by infection in the next fiscal year. I think our performance will be positively impacted as well. In a process to live with COVID, we will carefully watch consumption trend in each country, analyze market [ priority ] and adequately catch needs and wants in store opening areas to implement proactive sales measures and maximize profit.

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