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

My name is Iwamura from AEON Mall. I would like to start by providing an overview of our financial results for the fiscal year 2022 followed by the details of 3-year medium-term management plan. Please refer to Page 3. In the fiscal year 2022, we secured year-on-year increases in both operating revenue, operating income and ordinary income. In contrast, net income attributable to the shareholders of the parent company decreased significantly by 67.4% from the previous year. However, there are 2 main reasons for this. First, extraordinary losses increased by JPY 4.8 billion from the previous year, JPY 4.4 billion in impairment losses and JPY 2 billion provision for loss on store closings were recorded. In addition, a JPY 2.4 billion loss on retirement fixed assets was recorded due to the promotion of revitalization of domestic and overseas malls, et cetera. Another is that although there was a JPY 1.5 billion decrease in income before income taxes, total income taxes increased by JPY 4.5 billion from the previous year. The company had the absorption-type merger of certain OPA locations in the last fiscal year. The increase reverses the decrease in income taxes in the previous fiscal year due to the recognition of deferred tax assets in connection with the merger. Please refer to the next page. The table you see shows the performance by segment compared to fiscal year 2019. In Japan, the number of customers visiting stores declined with the increase in the number of people infected with a new strain of coronas, partly due to changes in customers' consumption behavior and mindset. Operating income decreased by JPY 18.3 billion compared to fiscal 2019. On the other hand, we secured profit overseas, mainly in China and Vietnam and operating income increased by JPY 1.5 billion yearly posting a record high profit. While sales in China trended downward due to continued strict behavioral restrictions caused by the spread of COVID-19 infections, operating income increased by JPY 1 billion due to the shift of fixed cost of JPY 2.9 billion during the temporary closure period to extraordinary losses. In Vietnam, sales were strong as the government transitioned to a policy of returning to economic growth under -- with COVID and operating income increased by JPY 1.8 billion. In the Overseas business, specialty store sales in China have rapidly recovered to 113.3% of the previous year's level in January and February. In addition, we will be able to achieve further profit growth in fiscal year 2023, considering the market trend in Vietnam, where the economy continues to grow at a higher rate. For the figures of fiscal year 2022, please refer to Pages 5 to 13. Pages 5 to 13 show each country's specialty store sales and financial results. Pages 14 to 19 summarize our growth initiatives for 2022. Please refer to Page 21. From here, I would like to explain the contents of our newly formulated 3-year medium-term management plan from 2023 to 2025. First, I'd like to explain the positioning of the 3-year medium-term management plan. To realize our management philosophy and achieve further business growth, we have established a long-term vision of where we want to be in 2025. To realize our long-term vision, we have formulated a new 3-year medium-term management plan starting in fiscal year 2023. Replacing the 3-year medium-term plan that cover the period up to fiscal year 2022, the 3-year medium-term management plan and growth policy for the period from 2023 to 2025 are shown in the slide. We have set 2 policies pursuing regional shift in Japan and overseas and creation of our platform for health and wellness to evolve further ESG management, which we have been promoting as a growth measure. We aim to achieve sustainable growth by realizing true integrated ESG management that creates economic, social and environmental value for our shareholders, specifically will develop 3 growth strategies: discovering and commercializing business opportunities in overseas growth markets, pursuing business model innovation in Japan and creating new business models that break from existing business frameworks. We will promote build strong financial foundations and resilient organizations from the perspectives of sustainability to build a foundation to support our growth. Next, I would like to explain our 2 policies. The first policy is pursuing regional shift in Japan and overseas. Suppose we continue to look at business reforms from a parallel nationwide perspective. In that case, we will fall behind in addressing the essential issues faced by each region, and the expectations of the regions towards us will decline. In the future, we will analyze the characteristics of each region and work to enhance our corporate value in each region by engaging in a variety of businesses that are optimal for the region rather than being confined to the framework of commercial facilities and to raise local expectations and develop sustainable businesses, it is necessary to co-create new solutions with people who share the same awareness of the issues and the same aspirations to solve them in all countries and regions. Co-creation here means breaking down global issues into local issues, and we will work with people who support our efforts to create new values and resolve these issues individually. Our business is to contribute to the community through solidarity with the community and partner companies and to solve local issues with [ V2C ]. Therefore, we have clearly stated regional shift as the action policy of our midterm management plan. We hope to be a company that stands at the center of regional co-creation, where we can create, deepen and broaden connections among people in the community. Please see the next page. The second policy is creating a platform for health and wellness. Our vision for AEON Mall facilities is to create spaces offering abundant lifestyles, leading to self-actualization based on physical, mental, environmental and social health. As a life design producer, we develop platforms through our businesses to support well-being lifestyles. To achieve this goal, we will provide comfortable and pleasant facility space. In addition, we will deepen the value we provide to residents by discovering wellness-related businesses, forming new editorial zones and creating new wellness-related businesses. However, it is difficult to maintain a constant state of well-being due to changes in the environment and other factors. Therefore, we are conscious of removing pain points and increasing gain point value proposals, and we would like to create a cycle like the 1 shown in the slide by deepening cooperation with partner companies. Please see the next page. From here, I would like to explain our 3 growth policies. The first growth policy is discovering and commercializing business opportunities in overseas growth markets. We will continue to search for and secure properties in areas with high growth potential, and we will accelerate the opening of new malls to achieve a 50-mall network by the end of fiscal 2025. In the overseas business, we'll grow further by steadily opening new stores in priority areas over the next 3 years. In addition, we'll move away from a single mall format to a new design. We'll continue to develop our business by identifying the issues faced by each country and region in depth and will also reform the way malls to operate and search for new business opportunities without being bound by conventional business development methods. Through these initiatives, we'll develop our business in a value-creating model tailored to the characteristics of each region and deepen our business in each region. Please see the next page. The second growth policy is pursuing business model innovation in Japan. In Japan, the external environment, a declining population and a falling birth rate are having a significant impact not only on labor shortages, but also on the macro economy. In addition, the response to soaring energy prices and global environmental issues have become pressing issues. These issues which have already begun to emerge, affect the sustainability of our corporate partners business operations. However, we see these drastic environmental changes as an opportunity for business reform in response to changing local issues, customer values, potential needs and our partners management issues. We are diversifying our value offerings to meet the market's needs, effectively utilizing existing assets and working to resolve the problems through digital technologies. In addition, we'll pursue business model innovations by implementing fundamental business structural reforms that are not bound by conventional approaches. By doing this, we'll pursue business model innovations to create new customers and improve profitability in our domestic business. Please see the next page. After the prolonged corona pandemic, customers' values and lifestyles have changed drastically in their daily lives. Amid these changes, customers are no longer simply looking for a shopping experience at a commercial facility. They're now looking for an experience of value that motivates them to go there. The basis for this change is sensory value. The value of experiences customers obtain through their 5 senses. For example, the sensory value of our stores atmosphere, cleanliness, [ special ] presentations with background music, courteous customer service, lighting, planning and beautiful interior design can significantly impact the value of the customer experience. We believe that creating experienced value that customers feel comfortable with through their 5 senses is an important mission required for developers today. We have been striving to enhance customer experience value by proposing sensory value, mainly for new facilities. As we advance, we will also speedily incorporate this into our existing stores. Please see the next page. We will use technology to thoroughly investigate customers' needs in the areas where we open new stores. And by taking a different approach from existing properties, we aim to create new customers in the community by providing a place where people can gather and connect to foster the well-being of customers and the community. Please see the next page. In reviewing our business model based on existing malls, we will focus on the traditional rental income and diversify our revenue model in light of the changing role of actual stores. To effectively use existing assets to provide the new value needed by the community, we will develop new business sites based on occupancy rates, including sites that have yet to be falling utilized parking lots in malls and their actual usage. What is important here is to analyze the issues for each region and each property. The key here is to take a precise approach based on a clear understanding of what purpose and value are to be provided. For example, we can create pleasant outdoor parks or attract companies and government facilities to the existing mall interior and parking area space. We will create new value that will motivate customers to visit our stores, strengthening our ability to attract customers and enhance profitability. Please see the next page. As an initiative to effectively use assets, we plan to use the former AEON Kyobashi site to open a temporary facility until we can move forward with future development projects. The interim facility will promote future development projects by fostering a sense of anticipation among customers and making the area well known, providing a new place of activity for the community. and proposing the value of the potential Kyobashi location. In addition, we also intend to diversify the value we offer by not limiting ourselves to rental income from tenant store openings, but also by identifying revenue sources that leverage all of our assets. Please see the next page. We have been working to deepen our existing businesses in an accelerating pace of change in the external environment and customer values. However, some of our facilities have not been able to respond sufficiently to these changes. Their capacity to generate cash flow has declined due to weak customer traffic and profitability. In addition to increasing competitiveness within a given market area and improving operational efficiencies, including investments and revitalization, we will promote initiatives with a view to drastic structural reforms from a real estate and financial approach. By fiscal 2025, we will implement fundamental structural reforms at multiple modes. To this end, we will record an extraordinary loss of approximately JPY 6 billion as a structural reform loss in fiscal year 2023 to implement reforms. This will take the form of a temporary extraordinary loss. However, these losses will increase profits in subsequent years and lead to future structural reforms. This will also lead to future structural reforms, such as directing human resources to high growth and strategic businesses we currently pursue. Please see the next page. The third growth policy is creating new business models that break from existing business frameworks. In an era of rapid and uncertain change, we will develop our existing businesses and focus on creating businesses that offer new value. We will also promote initiatives to expand into new business domains, including complex development functions. Please see the next page. Regarding expanding the mixed-use development function, we will achieve regional co-creation by strengthening collaboration with partner companies through capital and business alliances and other mergers and acquisitions to expand the business into a social business to solve social issues. Regional co-creation involves factorizing global issues into local issues and working with people who can empathize with them. We believe that we will solve these issues one by one by creating new value. In March 2023, we established a capital and business alliance with Marimo Company Limited, which is actively engaged in social business in addition to the pillar of condominiums for sale and income-producing real estate business and with which we share the same philosophy and aspirations. Together, we'll promote redevelopment and mixed-use development projects in urban areas and create a future of living in local communities. The project is based on the idea of rebuilding a sustainable urban structure, which is the goal of the government's location optimization plan. The purpose of the partnership is also based on the idea that it can contribute to the realization of compact in network cities by guiding various urban functions such as residential, medical care, welfare, commerce, and public transportation to urban centers. Please see the next page. Towards creating new businesses, we have been starting the commercialization of new businesses based on broadcast thinking from the perspective of what we want to be in the future, such as organizational mindset reform, co-creation activities with other companies through accelerated programs and so on. We are establishing a new CVC, corporate venture capital this month. This is not for future capital gained through investment in start-up companies. It is an initiative to realize growth strategies by forming alliances with companies that share the same aspirations. The objective is to maximize the value provided to the market by bringing together cutting-edge technologies and innovative ideas of startups and creating synergies with our company's assets. We also have many employees who have good ideas within the company, leading to the establishment of an internal venture system. With such employees, we will also take on the challenge of creating new business value by solving local issues and advancing store operations. Please see the next page. I'm sure you're all aware of this. The logistics industry has faced a problem of long working hours due to the increase in the number of [ partial ] deliveries handled by the rapid growth of e-commerce amid labor shortages due to the lack of young workers and aging of them. However, with the revision of the Workplace Reform Bill, this issue will take on a new dimension from April 1, 2024. Even if costs are simply increased, problems will arise such as many cargoes and routes that cannot be transported. This will be a significant business continuity issue for local customers and our partner companies. To contribute to solving these problems, we have started our joint delivery service from the Kinki and Tokai regions to the Nagoya area. The joint delivery service collects goods from production plants, warehouses, et cetera, of each company in the Kinki and Tokai areas. It delivers them to AEON Mall and other companies' commercial facilities in the same area. This service is designed to improve the efficiency. The goal of this project is not to implement joint delivery, but to contribute to the realization of environmental management by the partners through the common use of parking materials and hangers. We also aim to realize economic and ecological values by preparing transfer centers and pickup points with stores. Please see the next page. In this rapidly changing business environment, we're working to promote our policies of promoting our regional shift in Japan and overseas and creating a health and wellness platform to realize our truly integrated ESG management goal. We will strengthen our management base to enable sustainable growth by supporting our financial base and organizational structure from a sustainable perspective. Please see the next page. We're actively undertaking to contribute to community development. In Koshigaya Lake Town, we are promoting the use of the adjacent waterfront area in cooperation with the local government. This waterfront area is a valuable local resource that enriches the community's life. To make it a space with the potential to be utilized for further regional development and revitalization, we will work with Koshigaya City and our local residents of the area to share ideas and discuss ways to improve the attractiveness of the waterfront area further. We will create opportunities for new business start-ups and the development of existing businesses in Koshigaya so that we will create a place for diverse generations to participate and interact and a place for learning and cultural provision. In addition, as we announced in our news release in March, we're working with a Graduate School of Engineering, the University of Tokyo, to create a model case for the Lake Town project to evaluate the community-wide energy transition to carbon neutrality and the relationship with local residents behavior and lifestyles. Through such effective social implementation research, including concrete planning, evaluation and analysis, we have begun efforts to realize a decarbonized society in which local communities can emphasize with and actively participate. Please see the following page. We have formulated the AEON Mall decarbonization vision to realize a decarbonized society and CO2 emissions in Japan to 0 by 2040. As one of the various initiatives we are pursuing to achieve this goal, last year, we began operating AEON Mall, Machi no Hatsudensho, a low voltage distributed solar power generation facility based on the self-transmission method. Currently, renewable energy with low environmental impact generated at approximately 740 low-voltage solar power plants in each region is being used to generate electricity at about 30 AEON Mall facilities nationwide. The electricity generated by solar power is equivalent to the power consumption of 4 AEON Malls. In addition, we will create locally produced, locally consumed renewable energy with local communities and customers by promoting The Vehicle to AEON Mall initiative, which is an evolution from the conventional V2H or vehicle-to-home concept. V2 AEON Mall allows customers with solar panels to home to discharge surplus electricity generated at home into the mall via EVs. Customers receive points and other rewards according to the amount of power discharged. This program is designed to help customers feel a sense of enrichment in their lives and minds by contributing to realizing a decarbonized society by connecting the awareness of each customer who plays a leading role in the community through action to contribute to the environment, we'll work together to build a decarbonized society in the region. V2 AEON Mall is scheduled to start operation at some facilities in the [ Kashihara ] in May of this year. Please refer to the following page. Toward promoting growth policies and achieving [ compliance ] numerical targets in order to clarify the organization's roles and responsibilities, increase the speed of business execution and monitor effectively, the executive offer system will be introduced in May 2023. This will not only strengthen the supervisory function by separating management supervision and execution, but also clarify our responsibility for business execution and accelerate decision-making. Also, the company will develop an organizational structure that includes the development of the next generation of management personnel. In addition to introducing the executive offer system, we have shifted from a headquarter system to a business unit system. From now on, we will shift away from our vertical organizational structure in which each headquarters operates to achieve business objectives to a business unit system in, which each unit has the expertise and contribute to optimizing the entire company. I've just explained the promotion of the regional shift to break down regional issues and opportunities into the local characteristics of each country and region and properly execute business operations from a regional perspective. In Japan, we have established 3 branches within the CX unit to operate domestic malls. The other organizations are divided into 2 categories: An organization that creates business opportunities that can be seen from the current location and the customer's perspective, and an organization that sees and imagine customers from a future perspective by transplanting changing the future from an out-of-the-box to an in-the-box perspective. As a global company, we'll work to address issues and create opportunities in each country and region. I will now explain the numerical targets of our medium-term management plan. In our long-term vision, we have set numerical targets for our vision for 2025. In Japan, we have already achieved a high level of energy saving facilities from an early stage. Also, we are already procuring electricity at a lower price than the market through off-site power generation using a self-consignment system and on-site power generation using PPA. The company has decided to change the forecast to the one stated in the slide. Taking into consideration such factors as the difficulty of absorbing all cost increases such as soaring unit prices of electricity. The consolidated operating income target for 2025 has been lowered from JPY 90 billion to JPY 85 billion. However, since these figures incorporate cost increases in Japan, our overseas business target of 50 malls and operating income of JPY 27 billion remains the same. In addition, we will continue to work on diversifying energy procurement methods and further energy-saving measures on the software side. We will continue to strive to increase earnings with a clear view of the target figures for 2025, which were set before the revision. The next page shows our business plan figures for 2025 and 2023, as well as forecast of management indexes. Please refer to Page 42. The earnings plan for fiscal year 2023 is shown on the slide. Operating income is planned at JPY 58.5 billion, with JPY 43.5 billion in Japan and JPY 15 billion overseas by segment. The breakdown by region is JPY 9 billion for China and JPY 6 billion for ASEAN countries. In each country, the impact of the increased infection of COVID on customers' consumption behavior is limited and sales are currently on a recovery trend. So, we forecast operating income will grow by 33% year-on-year. Please see the next page. In setting the performance plan, the assumptions for specialty store sales estimated by region are shown in the slide. First, regarding China, since December, the zero-corona policy has been eased and economic activity has resumed stimulating consumption. As a result, sales of specialty stores in existing malls in January and February properly recovered to 113.3% of the previous year's level. In March, sales grew by more than 50% as the infection had spread throughout China last year. Considering these circumstances, we can assume sales will recover significantly from the previous year's results. We're assuming sales at 130% of the previous year's level. This would be a double-digit sales growth compared to 2019 before corona. Next, let me turn to ASEAN. In Vietnam, the government has been steering a shift to with corona since last year. Sales at specialty stores in existing malls for the cumulative period of January and February were also strong, up 27.8% year-on-year. Sales in March also grew by approximately 20%. We believe that the high economic growth trend will continue this year, especially in Vietnam. So we have set our sales plan at 110% of the previous year's level. Lastly, Japan. In Japan, consumption behavior is normalizing as the country transitions to our full-fledged post-corona era with wearing or not wearing face masks becoming a personal choice from March 2023 onwards. And we have set our sales assumption at 110% of the previous year's level. This would be the same level of sales as in pre-corona 2019. In Japan, sales have been recovering rapidly since the beginning of April and preliminary figures through April 10 show that sales have exceeded 100% of the pre-corona 2019 level. We expect that the need to go out will further increase as we enter Golden Week and summer vacation seasons and the increase in human flow will accelerate at the same time. Therefore, we'll actively hold large-scale customer attracting events at each facility to increase the number of customers. In addition, we will actively promote the renewal of existing malls and maximize the value provided by existing assets and new malls to increase revenues. In the fiscal year 2022, Japan and China posted challenging results, mainly due to the impact of COVID. In the new fiscal year, however, overseas sales have returned to double-digit growth, the pre-corona level and existing malls in each country. We're now able to generate high profits by achieving high growth in existing malls and accumulating profits by accelerating new store openings. In Japan, sales have exceeded the pre-corona level due to the arrival of the full-fledged post-corona era. This year, as we begin new 3-year medium-term plan, we have introduced an executive officer system as part of our organizational structure to strengthen the supervisory function in terms of governance and to speed up the execution of business operations. In addition, the company will also establish a 3 brand system in Japan to expand earnings by responding to issues from a local perspective and creating opportunities in the domestic business. We will work to improve profits by billions of yen over the next 4 to 5 years by implementing fundamental structural reforms for properties that have lost their ability to generate cash flow. In an era of rapid and uncertain change, a company can achieve sustainable growth simply by continuing to do things the way it has always done and expecting customers to return. We're moving from the demonstration phase to the implementation phase of new initiatives we have been preparing for some time now. We'll continue to make them more profitable. By establishing a system to promote new businesses, we will continue to implement our medium-term management plan by speedily and flexibly making changes in response to changing customers in the world. That concludes my presentation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]