AEON Mall Co., Ltd. (8905) Earnings Call Transcript & Summary

I am Iwamura of AEON MALL. Thank you very much for attending our results briefing despite your busy schedule today. Without further ado, let me give you a summary of financial results for fiscal year 2020. Please go to Page 3. As you see in the press release made on March 30 about revision of forecast, operating revenue and profit at all levels exceeded full year plan in fiscal year 2020. In Japan, specialty store sales dropped temporarily due to spreading infection of COVID-19 and redeclared state of emergency in some regions. However, specialty store sales, both in Japan and abroad, were on an improvement trend throughout the year. Operating revenue was in line with the previous forecast. Operating expenses decreased company-wide due to more efficient sales promotion through improved usability of AEON MALL app totally renewed on June 15, 2020 and improved operational efficiencies driven by web conferencing and telework. Please turn to Page 4. As for dividend, under the policy to maintain stable dividend for our shareholders, we kept dividend unchanged from fiscal year 2019. We decided to pay year-end dividend of JPY 20 per share as originally planned; an annual dividend of JPY 40, including an interim dividend of JPY 20 per share. We currently plan to increase annual dividend by JPY 10 to JPY 50 per share for the next fiscal year and increase consolidated payout ratio to 30% or more. Overseas business has entered a profit-generating phase, while domestic business has overcome a temporary decline in earnings due to the impact of COVID-19 during fiscal year 2020. We expect to achieve our sustainable growth plan in the future, so we aim at long-term and continuous dividend increase. Please go to Page 5. Pages 5 to 7 show revenue performance by country. I will omit the details. In China and Vietnam, sales increased year-on-year recently and are gradually recovering to pre-COVID-19 levels. Please look at Page 14. Next, I will talk about our initiatives for the with COVID-19 era in fiscal year 2020. In fiscal year 2020, we were busy dealing with measures for COVID-19. However, we were able to identify our challenges not only in negative aspects, but also in various aspects and achieve transformation and evolution from medium- to long-term perspectives. One of the initiatives is building our system for permanent infection prevention measures. AEON Group established the AEON COVID-19 Prevention Protocol based on scientific grounds under the guidance of experts in June 2020. Our malls also took measures thoroughly based on the protocol. To prevent infection, I analyzed infection routes and risks of infection spreading in facilities with employees until midnight. In the process, I felt certain that direct droplets and airborne infection through aerosol are the main infection routes. And we affirm the importance of ventilation measures. In the protocol revision in November, with the use of these experiences, measures were added for introduction of equipment for effective ventilation and air purification in facilities besides system to eradicate infection from employees in facilities and items related to measures to prevent second reinfection were added. Please go to Page 15. I think the big reason why we were able to take infection prevention measures promptly was because we have been operating malls in Wuhan, China, where COVID-19 spread for the first time in the world. We evolved the infection prevention measures taken in Wuhan and are currently taking the evolved measures. We are improving the measures further so that they will be permanent measures. This slide shows some infection prevention measures taken at AEON MALL Shinrifu South Wing, which opened on March 5 following AEON MALL Ageo, which opened in December. AEON MALL Shinrifu also acquired WELL Health-Safety Rating international third-party verification as our infection prevention measures were highly evaluated. This rating is a third-party evaluation to show various measures are taken for COVID-19 and other emergencies. I think you can understand our latest infection prevention measures are highly evaluated by external parties. I myself confirm the situation of AEON MALL Shinrifu and created an environment for clean mall with our employees. In the process, I confirmed the measures were taken for COVID-19 such as keeping distance in a natural way and antibacterial measures. I think that is a result of our response with conviction, although with hesitance for 1 year starting in Wuhan. I feel we were able to show our resilience. At present, we are continuing verification of effects with experts. Our measures are highly appreciated. We also plan to take new measures we are currently considering. In addition to enforcement of infection prevention measures, we are also providing comfortable space. In this way, we will continue to work on safety, security and value creation for all customers and employees. Please go to Page 16. In June last year, under the COVID-19 pandemic, we changed the design of AEON MALL app dramatically; enhanced the usability and added new functions; reinforced sales promotion plans with the use of the app, which are different from conventional methods. As a result, we transitioned from conventional mass marketing, focusing on flyers and TV commercials, to sales promotions that target each individual. In the new sales promotions, each mall distributes coupons and implement random drawing promotions and others in consideration of characteristics of regions and customers. The number of cumulative downloads of the AEON MALL app exceeded 3.3 million. Many users are using the app. The app won the App of the Year Award for Excellence in the App Ape Award 2020, one of app awards to honor app developers who gained the biggest popularity and attracted the biggest attention. Please turn to Page 17. To leverage strength of our brick-and-mortar malls, I think it is very important to create online interactions with customers by being cautious of digital influence. The first initiative is live shopping or so-called live commerce. Employees of specialty stores introduced a few of products live. Customers can purchase products online. Besides by introducing atmosphere of brick-and-mortar stores and characters of employees working there, customers are encouraged to visit our brick-and-mortar malls. In fiscal year 2020, we implemented verification test in multiple malls, including Makuhari Shintoshin and established a system for rollout to other malls. In this fiscal year, we plan to roll it out to about 80 malls. The next initiative is food delivery. Under the COVID-19 pandemic, demand for food delivery grew and will become more common going forward. In consideration of safety of delivery, in collaboration with DEMAE-CAN, we are capturing further demand. We are also promoting installation of a new delivery system called Papatto Station. In addition to general functions such as delivery and cloakroom services, functions such as shipping material sales for flea market app shipments were added. Frankly speaking, it is still on a stage of experimentation. We would like to improve functions through continued verification. We also introduced mechanism for mobile ordering called Putmenu. It is an order system that allows customers to order and pay for items from multiple stores, including specialty stores and GMS at once using their smartphone app, both from inside and outside malls. Customers can also select method for receipt and receive products at in-store store counter or drive-thru. We will gradually introduce this system to our malls. Please go to Page 18. As a measure to enhance tenant employee satisfaction through rollout of AEON MALL Works was realized in March 2020. As a result, tenant employees can take procedures with mall office staff from their stores. On top of higher operational efficiency, it was very useful for prompt communication of information and reduction of person-to-person contact during the COVID-19 pandemic. In April 2020, we switched from paper form submission to contactless operation with the use of tablets for health check. In June, we switched store manager meetings to video streaming. In this way, we are gradually expanding functions. Please turn to Page 19. Initiatives for work style reform and enhancement of operational efficiency progressed at our head office and offices in each site. We are continuing telework. The target rate of employees working in the office is 30%. All the internal meetings were shifted to online meetings. Business meetings with business partners are also mainly online meetings. As a result, travel and transportation expenses decreased by approximately JPY 700 million in fiscal year 2020. Due to telework, the ratio of employees working in the office decreased. To reconsider value of the current office space and to increase exchange among employees, we are preparing to introduce our system where employees are free to change desks. We will reduce office floor occupancy in May 2021 and expect to enjoy cost advantage. Please go to Page 21. Let me move on to our management policies. Once again, I will talk to you about what kind of society we want to realize and what we would like to be. This page shows a summary of our philosophy and principle. Basic principle is the customer comes first, which is basic principle of AEON. Management philosophy is AEON MALL is a life design developer, creating the future of community living. Our vision is to grow beyond working in a conventional commercial context and provide solutions to regional and social issues, establishing a position through social infrastructure functions to be a central facility for the local community. Our philosophy and principle reflect our intention shown in the vision. Please go to Page 22. We set vision for 2025 as long-term vision. As shown in the slide, in light of the loss of 1 year of profit growth due to the impact of the spread of COVID-19 in fiscal year 2020 as well as delays in negotiations for new property sites and city planning, particularly overseas, we have revised profit target and overseas business mall opening plan for 2025. We aim at consolidated operating income of JPY 90 billion, an expansion of overseas business to 50 malls in 2025. In fiscal year 2026, we will aim at operating income of JPY 100 billion. For overseas mall opening, we are promoting a plan to secure a pipeline for reaching 70 malls as of fiscal year 2025. Please go to Page 27. In 3-year medium-term management plan, which started in fiscal year 2020, we set 4 growth policies shown in this slide. To pursue the growth policies, we have newly defined the following 5 management issues and future vision. I will explain our future initiatives in line with the 5 items. Please go to Page 28. The first management issue and future vision is to achieve profit growth in our overseas business and accelerate new mall openings. The total number of malls in China and ASEAN was 32 at the end of fiscal year 2020. We aim at 52 malls in operation in fiscal year 2025: 29 malls in China and 23 malls in ASEAN. In China, we will accelerate mall openings in inland areas, mainly in Hubei Province. In ASEAN, we consider Vietnam, with population of more than 100 million and many middle-income people, as a key store offering area and accelerate store openings in Vietnam. In particular, we will concentrate management resources in Vietnam and aim at 20 malls in operation at an early stage. Now we will show you a video of AEON MALL Hai Phong Le Chan, the sixth mall in Vietnam, which opened on December 14 last year. [Presentation]

In the mall, various digital initiatives are implemented for collection of marketing data and transmission of information. More than 100 units of digital signage, including big and small ones with various functions and remote cameras, are installed. With the use of AI, we can capture data such as age, gender and [ where they come from by car ]. By analyzing captured marketing data, we can plan sales promotions more effectively. Beside as part of initiatives to reinforce actions of the mobile app, we introduced lockers for which the mobile app is used as a key. As Hai Phong City is located in the Northern area, there are 4 seasons. In winter, people will have thick coats as people in Vietnam ride a motorbike in their everyday lives, they often wear jackets. So many people will use lockers during shopping. This service is used by many people, mainly young people and highly appreciate it. AEON MALL Hai Phong Le Chan was visited by about 1.5 million customers during 1 month after opening. Please go to Page 29. To promote new mall openings overseas, reinforcement of collaboration with governments is an important factor. In Vietnam, we signed comprehensive memorandum of understanding with local governments regarding investment and business development for shopping mall development. That means our company and local governments will reinforce mutual cooperation, promote development of shopping malls and contribute to enhancement of quality of products and services provided for local residents. We signed comprehensive memorandum of understanding with the 2 major cities, Hanoi and Ho Chi Minh. We signed a similar MOU with Hai Phong City in October 2017 with Thua Thien Hue Province in the central area, which will be a city under central government control in 2025 in February 2021 and with Bac Ninh Province adjacent to the northern part of Hanoi City In March 2021. Please go to Page 30. I will explain status of pipeline for mall openings in Vietnam. The table on the bottom shows schedule of the opening by site. As for steps, after internal business promotion meetings, MOU is concluded, land use right contract is concluded, and mall opens. We already selected properties up to mall #20. We are pursuing negotiations aiming at completion of the land use right contract by the end of this fiscal year. To avoid delay in schedule, we will strengthen support system from the head office and manage mall opening plans thoroughly. Please turn to Page 32. In overseas business, existing malls are also big growth drivers. The graph on the bottom shows profit growth model of overseas malls. Operating costs do not fluctuate a lot in proportion to sales less revenue expense. The increase in revenue leads to increase in profit. In 6 or 7 years, overseas malls generate operating income of about JPY 1 billion, the same level of income of standard malls in Japan. We will achieve high profit growth overseas through 2 pillars: acceleration of new mall openings and growth of existing malls. Please go to Page 33. The second management issue and future vision is to maximize the appeal of brick-and-mortar malls through customer experience. As one of the measures, we would deepen localization initiatives in Japan. We understand characteristics of each community and conduct truly alternate localized businesses. By doing so, we will enhance existing value of AEON MALL in each community. As a recent example of collaboration with municipalities, we actively provide vaccination sites in response to request from governments and municipalities nationwide. AEON Group has formed agreements with approximately 30 local governments to provide vaccination centers within our facilities. As we are receiving requests for cooperation from many local governments, we will expand this initiative constantly. Please go to Page 34. To support our customers in achieving a healthy lifestyle, we hold AEON MALL walking events at our malls nationwide. With registration of AEON MALL app linked with WAON card offers opportunities to get on WAON points data such as national user ranking. The number of steps, calorie and distance can be seen at a glance. We will continue to expand menu for customers to be healthy and enjoy walking. Please go to Page 35. For leasing, we will provide added value by creating new businesses through enforcement of relationships with tenant companies and co-creation as needs of customers are diversifying. We will plan and introduce entertainment models supported by unprecedented original content such as all-weather attraction and entertainment theater. The third management issue and future vision is to build next-generation malls and pursue the urban shopping center business. Firstly, please watch the video of AEON MALL Shinrifu, which opened in March this year. [Presentation]

Please turn to Page 36. As a direction for development of next-generation malls, we will create a place for local communities and a place of gathering and relaxation for citizens. Not only in extraordinary things, but also scenes of daily life, we provide scenes with a sense of liberty for customers to ramble with their friends and family while feeling the greenery and the wind. And AEON MALL Hakusan is scheduled to open in Ishikawa Prefecture in this fiscal year, we will prepare streetscape in the atrium in a facility and propose indoor space where you can relax in greenery. Please go to Page 37. We will not only develop uniform malls, but also diversify development patterns depending on geographical characteristics and promote business portfolio reform. In Noritake no Mori Project is scheduled to open and corporate development project in this fiscal year, we will provide new lifestyle and added value for office workers through integrated development of office and retail facilities. Opening of a university was decided on 1 floor in this office building. We will promote development of the office brand, BIZrium. The [ sole ] theme of the brand is to bring together working and living as one. We will expand this plan globally and also to AEON MALL Hoang Mai, the third mall in Hanoi. In addition to office development in new malls, we will also conduct market analysis of existing malls and consider introduction of shared office and office buildings to maximize real estate value. One example of business model development is outlet business development. We are planning the second THE OUTLETS in a property in Yahata Higashi, scheduled to open in the next fiscal year. In addition to suburban-type outlet, Hiroshima and Yahata Higashi, we would develop urban-type outlets such as Lake Town Outlet. We will continue to develop 2 location channels. As for development of urban channel, we have been advancing reform of OPA involved in urban shopping center business. As of March 1, 2021, we reorganized OPA to promote initiatives suitable for geographical characteristics and improve profit and efficiency of the facilities. Newly established OPA will specialize in management and operation of urban facilities mainly located in transportation terminals, creating new value through concentration of management resources. AEON MALL integrated certain community-based facilities and urban shopping centers. We will transform these facilities into facilities that meet daily needs and increase property value. Besides, AEON Group has many aging properties in good locations near stations. So we intend to work on lease development of existing properties actively, although we cannot disclose the information yet. Please go to Page 38. The fourth management issue and future vision is to pursue digital transformation. I touched upon specific initiatives earlier. They are still in immature state. Therefore, for early realization of digital transformation unique to our company, we have been making efforts from the following 3 viewpoints since last year. Firstly, putting our management philosophy and vision into practice. Initiatives should not be limited to digitalization of existing operation or introduction of new services. Therefore, it is necessary to clearly define vision to be realized with the use of digital technologies. Next, responding to our digitalized society. One of the factors causing delay in digital transformation is delay in promotion due to confusion of digitization and digitalization and complexity and shortage of [ Link ], an internal system operated for many years. When we build a new system, we need to think about vision first and then set milestones and establish operation system which can respond to long-term changes of the times. Lastly, the most important initiative is mindset reform. If mindset of employees is fixed, digital transformation cannot be realized. We will create an agile organization in which we ask why, think logically, act and try, learn from obtained results, improve and try new things. As convenience increases with digitalization and feelings of people and characteristics of each individual will be important. Therefore, we will realize digital transformation centering around people or feelings of people, we will not only create value for customers but also enhance value for employees working in AEON MALL. Please go to Page 39. The fifth management issue and future vision is to formulate and pursue medium-term strategies and accelerate reforms based on ESG perspectives. We reorganized the system to increase efficiency of management and speed up decision-making on April 1, 2021. As a result, division overseen by individual boards and members was reduced from 7 to 5. In this fiscal year, directors with concurrent position, a general manager delegate authority of business execution to executive managers. Also by reinforcing management audit functions, we will speed up business decision-making and develop successors. Board of Directors will be a place to deepen discussion on direction of corporate strategy and engage in more effective supervision. Subject to approval at the Ordinary General Meeting of Shareholders scheduled for May 20, 2021, we will elect 3 new independent outside directors. We have 3 outside directors currently. They give us very meaningful opinions at Board of Directors meeting and management meetings based on their experience and knowledge in their respective specialized fields such as overseas experience, digital and accounting. The 3 people who will be elected as outside directors also have considerable expertise and experience in fields where we recognize we have management themes such as overseas corporate management, promotion of diversity and building of corporate branding. We hope our internal discussions will be more active. Please go to Page 40. For financing, we will promote global financing mix, combining financing in Japan and overseas local financing. For bank borrowings, we will try to find local banks in anticipation of local borrowing overseas in the future. For corporate bonds, we will issue domestic retail bonds on a regular basis and issue corporate bonds in diverse forms such as sustainability bonds we issued in September 2020. We will also reinforce approach from finance to realize ESG management. As overseas business entered a profit-generating phase, we will build cash management system to circulate surplus funds, mainly in China to ASEAN, where demand for funds will enhance going forward. Please go to Page 41. To establish a position as a sustainable company as core facilities and social infrastructure facilities in communities as our vision, promotion of ESG management is indispensable. Therefore, we will work more on ESG management strategically. Please go to Page 42. When I think about for what purpose a company exists, I think it is to create value for customers and people in communities and please them. I think the company gains profit and continues its business by providing value for society through its own business. In equipment industries, as we are involved in, it is necessary to make investments not only by looking at the current situation, but also in anticipation of balance between now and future. In this, decision-making to keep balance between financial information and nonfinancial information is quite important. Please go to Page 43. From various social tasks, we selected items which are particularly significant for our company and stakeholders and closely related to our daily corporate activities as important tasks' materiality. And we are working on improvement and solutions of social issues. Please turn to Page 44. Let me introduce examples of our initiatives. In particular, countermeasures against climate change on a global level and marine plastic waste are urgent issues in a global society. The government approved the bill on plastic resource circulation promotion at the cabinet meeting to reduce plastic waste and promote recycling on March 9. To be more specific, the government is asking restaurants and others to reduce plastic products such as spoons and forks. Ahead of the enforcement scheduled for 2022, we are working on reduction of the use of plastic products and promoting environmental activities with the cooperation of tenant companies. Besides, as the society is aging further, the number of dementia patients is increasing as a social issue. AEON is making group-wide efforts to increase the number of dementia support staff for realization of comprehensive strategy to accelerate dementia measures, new Orange Plan formulated by Ministry of Health, Labor and Welfare. Our employees are taking dementia support training courses. In this way, we are training dementia support staff. We provide dementia support training courses not only to employees, but also to customers at malls in each region. They acquire accurate knowledge about dementia, learn important points for communicating with dementia patients and experience exercise to stimulate and activate brain. Please turn to Page 45. This slide shows 3-year financial targets and new medical plan for this fiscal year. Business targets for fiscal year 2022 are JPY 360 billion in operating revenue and JPY 68 billion in operating income. As we lost 1 year of profit growth in fiscal year 2020, profit growth was slowed down compared to the previous 3-year plan. However, towards fiscal year 2025, we will accelerate speed of growth and aim at annual EPS growth rate of 7%. Please go to Page 46. This slide shows 3-year capital investment and financing plans. We will make growth investments actively to accelerate mall opening overseas, which will drive our future growth, in particular in Vietnam. For funds for mall opening, we will control finance through finance mix, including liquidation and development-type leasing. Please go to Page 47. Earnings plan for fiscal year 2021 is shown in the top table in this slide. Activities are still restricted in Indonesia. However, sales trend is gradually recovering to pre-COVID-19 level in China and Vietnam. Although there is a sense of uncertainty about the future in Japan, we forecast the impacts on customer traffic and sales will be limited on the assumption that sufficient infection prevention measures are taken, awareness of customers about infection prevention measures will enhance and our sales capabilities will enhance. Please go to Page 48. New mall opening plan, capital investment and financing plans are as shown here. We revised plans due to partial delay in mall opening due to COVID-19. However, there is no change to medium- to long-term mall opening policy. Please go to Page 49. Lastly, the COVID-19 crisis dominated the world in last fiscal year in the era when our normal daily life, until yesterday, completely changed. We are doing business. The society surrounding us is in chaos as people and goods are connected in multiple ways and integrated globally. I'm sure our business environment will continue to change at an accelerated pace. In this era of uncertainty, it is required of organizations not to follow social changes, but become sensitive to social changes, develop measures and take actions promptly or respond to changes proactively. We will continue to make efforts to create a structure to aim at becoming such an organization by promoting mindset reform. For participants today, I would appreciate your continued guidance and support. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]