Aeon Co., Ltd. (8267) Earnings Call Transcript & Summary

Good afternoon. I'm [ Shimpei Kira ] from the IRSR department at Aeon. Thank you very much for participating in this telephone conference on Aeon's Financial Results for the First 9 Months of the Fiscal Year ending February 29, 2020. Without further ado, I will now report on the results for the third quarter. Page 1 shows the consolidated results for the 3-month period from September to November. From the left, the table shows consolidated results, while the 2 gray columns in the middle show the impact of the lump-sum correction for inappropriate accounting treatment at a subsidiary as well as the impact of the application of IFRS 16 overseas, which were both special factors with an impact on this period's results. The amount of the impact of the inappropriate accounting indicated here is the amount related to the inappropriate accounting treatment by Aeon Credit Service, Philippines, Inc., which we disclosed this past November. The figures shown in the columns on the right, enclosed and bold, are the effective results if you take away these onetime impacts. Despite the consumption tax rate hike, multiple typhoons and other challenges, operating revenue increased 1.2% year-on-year. I will discuss the factors behind the decline at the operating profit level, when I talk about each segment. Page 2 shows the results by segment for the 3-month period. These figures do not include the special factors I just discussed. The General Merchandise Store Business posted a decline in operating profit through the fiscal first half, but it turned around and posted a JPY 2.3 billion increase during the September through November period. This was mainly due to the improvement in results at core company, Aeon Retail. I will discuss this in detail later on. The Supermarket Business improved from a large decline in profit in the fiscal first half to a level almost on par with the third quarter period of the previous year. Ministop, which is a part of the Supermarket Business, saw a JPY 3.8 billion decline in profit in the first half. But on top of reducing fixed costs by closing stores, efforts were made to cut head office costs, while store sales were driven by JPY 100 rice bowls, and new hit products with increased recognition levels through aggressive advertising. As a result, Ministop's 3-month operating profit increased approximately JPY 200 million year-on-year after having declined in the first 6 months of the fiscal year. And this contributed to the recovery in results in the Supermarket Business. In addition, Daiei continues to see an improvement in performance. Profit increases were achieved, once again this quarter, in the Health and Wellness Business, the Shopping Center Development Business and other businesses. The Financial Services Business posted a JPY 7.8 billion decline in operating profit, and I will explain the situation with this business from the following page. The following 3 factors are the main reasons for the decline in profit in the Financial Services Business. The first factor is the gains from the liquidation of receivables were lower than in the third quarter of the previous year. The second factor was the increase in costs associated with the promotion of cashless payments. In the financial results for Aeon Financial Service, the majority of cash back costs were posted in the fiscal first half. But because Aeon Financial Service and Aeon's fiscal periods are 1 month apart, roughly half of the costs were booked in Aeon's third quarter. The third factor was the increase in bad debt expenses associated with the application of IFRS 9 overseas. It is impossible to make a simple comparison because the fiscal periods do not match up. But looking at the cumulative period, there is no significant difference between Aeon Financial Services performance up until the end of the first half and Aeon's results for the cumulative 9-month period. I will refrain from discussing the details of individual impacts because Aeon Financial Services third quarter financial results have not yet been disclosed. Next, I will discuss the situation in the General Merchandise Store Business. Core company, Aeon Retail, improved its profitability by JPY 1.8 billion during the 3-month period. This was mainly the result of the increase in sales. The line graph on this slide shows weekly changes in same-store sales. The red line indicates this year's figures, and the gray line shows what happened in 2014, when the consumption tax rate was increased. Sales temporarily declined sharply after the last minute surge in demand before the tax hike. But thanks to the success of Black Friday, which we took the lead in introducing to Japanese consumers, sales bounced back again in late November more than in 2014. It is difficult to make a judgment at this time because the assumptions are different, including the timing and magnitude of the tax increase and the fact that food was excluded from the tax hike this time around. It is thus impossible to make a simple comparison. But at least in the third quarter when a latest tax increase was implemented, we were able to post solid sales, which led to an improvement in profitability. However, consumer sentiment has not yet improved. So going forward towards the end of the fiscal year, we will continue our efforts to engineer an improvement in business performance, which will include controlling the expenses. Page 5 shows the trend in sales for each product category. At our presentation for the second quarter results, we explained that there was a last-minute surge in demand for high-priced products, shown in the top part of this slide, including home renovation products and appliances. Sales then dipped for a time after the tax hike, but categories such as beauty care products and liquor recovered to levels almost on par with those of the previous fiscal year by November, only 2 months after the tax hike. The bottom part of this slide shows the performance in product categories that had good Black Friday sales. Strategic Black Friday sales attracted shoppers to stores. And despite the fact that it was in the wake of the tax hike, sales grew in November, especially for highly seasoned specific apparel. As a result, as the figures for the 3-month period on the right show, the total of sales before and after the consumption tax hike exceeded sales in the same period of the previous year. Next, I will discuss the consolidated results for the cumulative 9-month period. Like the previous table, the figures enclosed in bold on the right side of this slide exclude special factors. Operating revenue was JPY 6,402.8 billion, and operating profit was JPY 112.2 billion. Both operating revenue and operating profit effectively increased year-on-year. This slide shows segment results for the cumulative 9-month period. The General Merchandise Store Business posted a JPY 600 million improvement in cumulative operating profit, thanks to stronger performance in the third quarter. Both the Health and Wellness Business and the Shopping Center Development Business posted steady increases in operating profit as pillars of income, with operating profit increasing by JPY 4.9 billion and JPY 3.6 billion, respectively. The Services and Specialty Store Business posted a JPY 4.1 billion increase, excluding the impact of the lump-sum treatment of the Kajitaku case. In the Financial Services Business, despite associated costs, the cashless payment promotion campaign carried out in the first half led to an increase in membership, particularly among young people. We will continue our initiatives to encourage more customers to use Aeon Credit Cards as their main card. Next, on Page 8, I will discuss profits by region. These figures do not include the special factors for this fiscal year. On the left side, you can see that 20% of profits were from overseas. This ratio is slightly lower than in the same period of the previous fiscal year. But as I mentioned before, the main reason for this is the fact that the Financial Services Business overseas saw an increase in bad debt expenses due to the application of IFRS 9. Meanwhile, if you disregard the impact of the application of IFRS 16, operating profit effectively increased in the overseas business of the Shopping Center Development Business as well as in the International Business, which operates the General Merchandise Store Business and the Supermarket Business overseas. Looking at the results by region. Both the ASEAN region and China were profitable. The graph in the upper right shows that operating profit in the ASEAN region was JPY 21.0 billion, while the graph on the lower right shows that operating profit in China was JPY 1.4 billion. Next, I will discuss progress made on our key strategies. The information on this slide includes projects that have already been announced from the third quarter onward. With regard to supermarket reforms, we have made the decision to carry out a business integration in the Tohoku region this March. In terms of the digital shift, we have entered into an exclusive partnership agreement in Japan with U.K. online supermarket, Ocado. With respect to shutting down unprofitable businesses, we made the decision to shut down the Talbots Japan business. Next I would like to briefly discuss our ESG-related initiatives. We recently issued the 2019 addition of the Aeon Report, Aeon's Integrated Report. This fiscal year, details on our ESG initiatives will be published separately as the sustainability data book, while the Aeon report will provide an overall view of these activities. Also in December, we held our third sustainable management briefing. This year, we studied and analyzed scenarios based on TCFD guidance and these form the core of our report. Both the Aeon Report and the sustainable management briefing materials and videos are posted on our website, so please take a look at them when you have a chance. We are still going through a trial-and-error process to determine what type of ESG-related information to disclose and how to disclose it. We would appreciate any opinions you can share with us during individual meetings or other occasions. Finally, no changes have been made to the full year earnings forecasts we announced at the beginning of the fiscal year. Our aim is for the profit plans of each company to be steadily executed. And to this end, we will further reinforce our business management and make every effort to achieve the figures we promised at the beginning of the fiscal year, while at the same time, steadily advancing our medium- to long-term strategies. This concludes my presentation. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]