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

Good morning, everyone. 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 2021. As for performance, revenue and other numbers, I will not give you a year-on-year comparison, but the comparison with FY 2019, which was not affected by COVID-19. Page 3, please. In FY 2021, the Delta variant was replaced by the Omicron variant and COVID-19 continued to spread in Japan, China and ASEAN. As a result, following FY 2020, operation at many malls in Japan and overseas was under various restrictions such as temporary closures and shortened operating hours, and consolidated results for FY 2021 were very severe. As we made a downward revision in our press release on March 22, operating revenue and profit at each level fell short of our annual plan. Page 4, please. The table indicates results by segment. In FY 2021 in China, as the strict containment efforts worked well and the impact of COVID-19 was relatively mild, revenue and profit increased. However, in Japan and ASEAN, as the impact of business restrictions in response to the spread of COVID-19 was significant, revenue and profit decreased. Pages 5 to 7 show revenue trend of China, Vietnam and Japan for FY 2021. Please confirm them. Page 14, please. FY 2022 is the final year for the current 3-year medium-term management plan. We've been promoting various initiatives by serving 4 growth policies, 5 management issues and future vision. FY 2022 is the year to complete the 3-year plan and is positioned as a very important year to complete the period to prepare for policies to be promoted in a new 3-year plan starting in FY 2023. Page 15, please. Let me explain sales assumption for FY 2022 earnings plan of each country. As fiscal year ends in December overseas, 3 months already passed. Also, in light of the impact of the current COVID-19 situation, we made forecast for future sales strength. In China, the first quarter began in a challenging manner with a January spread of the Omicron variant. Different from last year, lockdowns took place frequently and outbreaks occurred simultaneously and the impacts have been still continuing. The government will step up large-scale economic stimulus measures with fiscal and monetary policies such as about CNY 2.5 trillion of tax cuts or tax refunds to recover economy for Chinese Communist Party Congress. Therefore, in the second half, we expect the trend will recover to double-digit growth compared with FY 2019. In Vietnam, the Omicron variant infection is still spreading. However, people trust and support the government with COVID-19 measures, such as resumption of economic activities through planned implementation of booster vaccination. As a trend of economic recovery is clearly seen, the impact of COVID-19 and consumption activity is limited. For the full year, we expect double-digit growth compared with FY 2019. In Japan, the number of COVID-19 cases is on the downward trend. In many major countries, infection risks are declining due to weakening of the Omicron variant, and economic and social activities are being normalized again. Therefore, it is certain that economic recovery will be emphasized and no large-scale economic recovery measures will be taken in Japan. Although from summer to autumn we expect a slight drop in customer traffic due to the 7th wave of COVID-19 infections, we forecast the economy will improve gradually in the first half and our sales will return to FY 2019 levels in the second half with sales measures. Page 16, please. Based on this sales forecast for FY 2022, we plan to achieve operating revenue of JPY 404 billion, operating income of JPY 55.5 billion, ordinary income of JPY 45.5 billion and net income attributable to owners of parent of JPY 23 billion. Although operating income of JPY 68 billion was planned, we revised the plan this time due to the impact of decelerated profit growth during the 2 years of COVID-19 pandemic and the assumption that the COVID-19 impact would remain in the first half of the new fiscal year. For Netherlands, operating revenue is impacted by accounting standard for revenue recognition adopted in FY 2022. Before the adoption of the standard, we expect operating revenue to increase 13.3%. Each profit is not affected by the adopted standard. Page 17, please. This page shows 3-year medium-term management plan and new mall opening plan for Japan and overseas. There is no change from the past. We plan to open 2 malls in Japan and 1 more in Cambodia. Page 19, please. Capital investment plan is JPY 120 billion for FY 2022 and 3-year total will be JPY 300 billion. As preparations for some development projects were delayed, plan was revised down by JPY 50 billion. Page 21, please. Pages 21 to 26 show a summary of management policies and long-term vision. In vision for 2025, we target operating income of JPY 90 billion, and we haven't changed this target level at this time. During the past 2 years, business results were very severe. However, I think we steadily sowed seeds of new measures for future growth. Next, I will explain new growth initiatives based on the 5 major issues and vision. Page 28, please. The first major issue and vision is to achieve profitable growth in our overseas business and accelerate new mall openings. Acceleration of new mall openings in China and ASEAN is still the pillar for our growth strategy. We will steadily open malls to create a 50 mall overseas network by the end of FY 2025. Page 29, please. In China, with area-dominant mall openings in 4 areas, we have 22 malls now. We will secure land for candidate sites mainly in inland areas where economic development is remarkable, to realize a 29-mall network in 2025. Not only with new mall opening, but also proactive revitalization, including renovation with expanded space at existing malls, will enhance freshness of malls strategically and strengthen earning power. Page 30, please. In ASEAN, we position Vietnam, a promising market from the mid- to long-term view, as a top priority area. In Vietnam, to realize the government's policies, we deepened relationship of mutual collaboration with the government in cooperation with AEON Group. With collaboration with the related government organizations and local governments, we've been contributing to realization of urban development and economic development through our mall openings. Such initiatives are recognized, and recently, we've been receiving many approaches from local governments for more openings. Aiming at a 60-mall network for FY 2025, we are developing clear strategies by area and steadily securing land for projects in 3 areas: Northern, Central and Southern areas. Page 32 please. We've been promoting development and management of malls as a business model overseas. Through business activities so far, as we begin to see social issues in each country and region and expectations for our company, we will utilize our accumulated know-how and develop new businesses beyond the framework of commercial facilities. As I introduced last time, in Cambodia, a shortage of bonded warehouses and customs clearance sites has been an issue. By opening and operating a multifunction logistics center equipped with bonded and customs clearance function in a new port area, we will deepen value provided in our business, solve issues of the region and contribute to economic development of Cambodia. Besides, in and around the Phnom Penh area, leisure functions entertaining local people and provided value are homogeneous. So in AEON Mall Meanchey, scheduled to open in FY 2022, we will introduce the latest entertainment, further developed vision of the second mall and diversify and deepen customer experiential value. Page 34 please. The second major issue and vision is to maximize the appeal of brick-and-mortar malls through customer experience. By adding new functions to malls and diversifying customer experiential value, we aim to create incentives to better stores and enhance the ability to attract customers continuously. Page 35 please. After the experience of the COVID-19 pandemic, there are enhanced needs from customers for open and comfortable outdoor zones. Therefore, we are reinforcing proposals for experience and creating places for relaxation, not only inside the malls but also by leveraging malls grounds. For example, not by expanding malls, but by using more grounds and land in the surrounding areas, we establish and attract outdoor buildings to deepen value provided for customers. Besides, by improving locations around malls, we are diversifying customer experiential value. Also at existing malls, we are promoting use of space inside the mall grounds. AEON Mall Kyoto Katsuragawa installed a housebuilder showroom in an idle space of the mall ground. This showroom offers an additional function, establishing customers to experience a model house after negotiations in the mall shop. AEON Mall Hanyu installed a space for kitchen cars to set up stores in the outdoor area near the mall entrance so that customers can enjoy eating by avoiding the 3Cs. Page 36, please. We are also developing new business models in collaboration with partners. As an example, in March this year we opened a pop-up store specializing in Femtech in collaboration with Sojitz Infinity at AEON Lake Town Kaze. Femtech aims to solve women's body and health problems through technology. The market size is expected to expand and the opening of this specialty store attracted lots of media coverage. As a new attempt, we are working on proof-of-concept test by utilizing digital technology and data without identifying individuals to create sales floors and improve customer service. Through this proof-of-concept test, we combine customer behavior with market and other data we own and leverage the data as effective marketing data to provide solutions catered to the life stage of each individual customer. Page 37, please. As digital technology initiatives for improved customer convenience, we are implementing autonomous robot delivery service proof-of-concept test at AEON Mall Tokoname. This is to offer contactless delivery services. Using this service, customers can order products from restaurants via app, which will be delivered by an autonomous robot for pickup at the remote location. In China, our digitalization initiatives, such as introduction of signage or digital technology inside the malls, are highly evaluated by Chinese experts. We received digital Intelligence Pioneer award as a company promoting digital intelligence. Page 38 please. To propose experiential value that only brick-and-mortar malls can provide by adding new functions mainly to entertainment, food and dining and service industries, we create motivations to visit malls and enhance the ability of malls to attract customers. This slide shares initiatives at recently opened and renovated malls at AEON Lake Town Kaze. Experience-based store b8ta is scheduled to open in April. Customers can find and experience products just launched by start-up companies of products and services that cannot be seen at other stores. Here in particular, at the live kitchen, customers can actually use cooking appliances for cooking and enjoy tasting over the counter. Page 39, please. At work experience theme park Kandu, [ we welcomed ] Immersive Firefighter was introduced as a new content. It is a collaboration with placeholder operating Little Planet, the next-generation theme park, and is a new content that combines the latest digital technologies such as AR with a type of immersive experience for children's work experience. Page 40, please. The third major issue and vision is to build next-generation malls and pursue the urban shopping center business. As a direction of developing next-generation malls, we conduct market analysis from various perspectives. According to location characteristics, we diversify development patterns, propose a new lifestyle to the community, diversify value to be provided for community issues, provide solutions for life and deepen relationship between customers and us. At AEON Mall Nagoya Noritake Garden, which opened as an initiative for complex development in October, we opened BIZrium in the office and retail commercial facility. Also, overseas, AEON Mall Hoang Mai scheduled to open in Hanoi, Vietnam, in FY 2023 onwards, will open as an office and retail commercial facility. Going forward, we will promote overseas rollout of BIZrium. Page 41, please. The outlet Kitakyushu is scheduled to open on April 28, 2022, as a second mall under the concept of a regional innovative commercial facility. In addition to providing the outlet style of shopping experience, the mall will establish a position as a center for learning through co-creation with local companies and revitalize local economy as a facility capable of attracting visitors from a wide area by communicating local cultures and appeal. Page 42, please. As a new multiuse facility format, we will promote development of a multiuse commercial facility at Hachioji Interchange North. In this facility, a customer fulfillment center and a next-generation supermarket offering unprecedented services with the latest AI technologies and others are integrated to provide new value. Broadly, for communities in the specialty store area, there will be stores pursuing deep customer experiential value. In development of a multiuse facility like this, the starting point of the plan is to solve community issues through thorough market analysis. When it is optimal to add noncommercial functions, we implement multiuse development beyond the framework of commercial facilities to enhance value of real estate in an optimal way for us and communities. Page 43, please. We pursue revitalization businesses to enhance attractiveness of towns by acquiring properties held by third parties, redeveloping them through scrap-and-build and adding value to improve lifestyle convenience. We already started to work on the projects shown on this slide. They will contribute to enhancement of the attractiveness and value of towns. Page 44, please. Now I will talk about progress of reforming the OPA business. From the viewpoint of new business creation, OPA implemented accelerator program to collaborate with start-up companies. In this program, there were 3 themes: pursuit of the challenge of new business with OPA resources; proposal of new lifestyle responding to the diversifying times; maximization of appeal of brick-and-motor stores to provide new experiential value to customers. Based on them, we looked for start-up companies to create business together and selected 2 companies as partner companies. We will report on the progress shortly. Page 45, please. The fourth major issue and vision is to pursue digital transformation. For solution of social issues, we believe in the importance of human sensibilities and individual personalities. Our vision for DX is to achieve digital transformation centered on human sensibilities. In this vision, not technology-first but humanity-first approach is important. The starting point is not to think about what to do with existent digital technologies. We should begin with human sensitivities and a question: what is value to be provided to communities, partners, customers and employees? After that, by considering what kinds of technologies to leverage to achieve the vision, I think we can provide essential value to all the stakeholders. We also obtained certification as a DX-certified business operator in January this year for our promotion of digital transformation based on the vision. As an initiative based on co-creation with external partners, we implemented AEON Mall co-creation program last year to create innovative businesses and services in collaboration with a variety of companies. We started proof-of-concept test to create new businesses by building partnerships with external partners. Page 47, please. The fifth major issue and vision is to pursue medium- to long-term strategies and accelerate reforms based on ESG perspectives. I'll introduce our initiatives based on ESG perspectives. Page 48, please. To solve environmental issues, we are focusing on initiatives from 3 directions: achieving a decarbonized society, creating circular malls and protecting biodiversity. Page 49, please. To achieve decarbonized societies, we formulated AEON Mall decarbonization vision and set the target to reduce total domestic CO2 emissions to zero by 2040. Prior to the 2040 target, we aim to realize operation in Japan with effectively CO2-free electricity by FY 2025. In 2020, we declared our support for TCFD, a task force for information disclosure on business risks and opportunities posted by climate change. We will enhance disclosure on progress of initiatives through integrated report and others. Besides, we submitted a letter of commitment to the SBT initiative defining our science-based targets for the reduction of greenhouse gas emissions consistent with the targets set forth in the Paris Agreement. Against the Paris Agreement target of keeping global warming to within 2 degrees Celsius above preindustrial levels, we set our Scope 1 and 2 reductions for the 1.5 degree Celsius and Scope 3 for well below 2 degrees Celsius level, aiming for SBT certification. Page 50, please. To achieve the targets of decarbonization vision, we will not only buy CO2 credit but also create locally produced, locally consumed renewable energy to transform ourselves from a CO2 credit buyer to a company creating energy. As for the reasons to why [ become a ] power generation business, firstly, there is always a potential risk of rise in base rate of electricity caused by rise in crude oil price. Secondly, non-fossil certificates are expected to be procured at virtually 0 cost. However, introduction of carbon pricing such as expensive carbon tax is forecasted in the future. There is also a risk of rise in procurement unit price due to future increase in demand for non-fossil certificates. In light of risks such as increasing cost burden by promoting power generation business, I think electricity supply at stable cost can contribute to local economic circulation. As companies opening stores are facing requests for CO2 reduction from the society and customers, we can contribute to solution of the issue. We will also pursue Vehicle to AEON Mall, which is an evolution of vehicle-to-home, whereby electric power stored in electric vehicles is used as household electricity. Storage batteries for electric vehicles can store larger capacity electricity than household batteries and are attracting attention as moving storage batteries. Through V2 AEON Mall, we will work with local communities and customers to create renewable energy locally for local consumption. Page 51, please. For issues of [ waste ] and resources, we embrace the concept of circular economy in mall operation, shifting from reduction of waste to assumptions of reducing to zero and recycling everything. We will build recycling-oriented community economic zone. To achieve recycling-based societies, we will create circular malls with stakeholders, including customers, AEON Store Association members and local communities, through initiatives such as plastic-free initiatives, food recycling and clothing collections. Page 52, please. The Plastic Resource Circulation Act, which went into effect on April 1 this year, requires no use of plastic products rather than conventional initiatives to reduce plastic products. Here, I will explain progress of our efforts for plastic elimination. Firstly, installation of plastic container washing machines. Used plastic cups and containers were not recyclable when they were disposed of, and most of them were family recycled. By installing container washing machine for customers and employees of specialty stores and getting their cooperation for washing, plastic becomes clean and waste plastic can be used as a renewable resource. Proof-of-concept test of container washing machines for employees of specialty stores already started, and washing machines for customers will be introduced gradually. Page 53, please. As climate change is progressing, to secure environment for living things to live is a global challenge. I think we need to work on protection of biodiversity as a community [ platform ]. AEON Mall Hanyu planted 90,000 native trees, and in cooperation with local governance, the mall provided opportunities for people to experience the natural environment through exhibits of plants, agricultural experiences and others. These initiatives were highly evaluated, and 15 malls acquired ABINC certification from Association for Business Innovation in Harmony with Nature and Community, which independently evaluate biodiversity conscious efforts to create green spaces. We continue to pursue business activities with consideration for the impact on ecosystems. Page 54, please. I'll explain our human rights initiatives. To prevent human rights violations and build a sustainable value chain, we established our own guidelines for sustainable trade based on the AEON human rights policy and the AEON supplier transaction code of conduct. To share our values and continue business activities with business partners, we held an online information session about our guidelines for construction-related business partners. By [ fulfilling ] social responsibility throughout the supply chain, we contribute to creation of sustainable societies. Page 56, please. Our mall is a center for local community interaction and a place where new connections are made. Therefore, I think we should provide opportunities for customers visiting our malls to make new discoveries and rediscover local appeal. So we provide various experiences to customers through events held at our facilities. Official table tennis T-League matches, professional sporting events were held at AEON Mall Okayama. Customers were able to see professional players playing in the matches up close and know their local sport team. Players also appreciated the event. AEON Mall Makuhari Shintoshin provided the venue for the National Calligraphy Performance Competition for high school students and created an opportunity for students to show results of their activities to many customers. Here, it is important to continue to hold such events to remain as a center for local community interaction. We want to have customers feel like visiting our malls. Page 58 please. Next, regarding governance, in response to the issues recognized through the evaluation of the effectiveness of the Board of Directors and others, we increased the number of independent outside directors to 5 in FY 2021 to shift the Board of Directors to the structure of more effective supervision. In addition, we have 3 committees, including Nomination and Compensation Committee, Management Strategy Advisory Committee and Governance Committee. In Nomination and Compensation Committee and Governance Committee, outside director is elected as committee chair in light of the objective. Overview of each committee is described on Page 59. Please confirm the page. Page 60, please. Lastly, let me briefly explain the business structure for this fiscal year, as we implemented organizational reforms on April 1. As I already mentioned, we recognize this fiscal year is an extremely important year as the final year of the 3-year plan and the year to complete preparations for the next medium-term plan. COVID-19 hasn't come to an end globally. Uncertainties are enhancing further globally. For corporate management in an optimal structure in this important phase, we implemented organizational reforms this time to strengthen system to promote overseas business, sustainability and compliance. In particular, as for building of a governance structure, I don't think we have reached the required level yet. We will strengthen governance structure further, establish a structure to pursue priority measures and enhance corporate value. That concludes my presentation. Thank you very much for your attention.