J. Front Retailing Co., Ltd. (3086) Earnings Call Transcript & Summary

I am Yoshimoto from J. Front Retailing. Thank you very much for participating despite your busy schedule. First of all, we would like to express our heartfelt sympathy for everyone affected by COVID-19 and everyone concerned and express our deepest appreciation to everyone, including health care workers who are committed to preventing the spread of infection. Today, I will talk about sustainability management JFR Group aims at. Please turn to Page 2. As you know, we were established as a pure holding company through management integration of department stores Daimaru and Matsuzakaya in September 2007. Our consolidated subsidiary, Parco, became a wholly owned subsidiary in March this year, which was a big turning point. In promoting sustainability management for the future, the establishment of the structure to deepen cooperation further in the group and maximize synergy brings big advantage to us. Please go to Page 3. In Japan, extreme weather events caused frequent heavy rain disasters and large-scale typhoons. Recently, the infection of COVID-19 has been spreading globally. In this way, the environment surrounding us is becoming more uncertain. In particular, the spreading infection of COVID-19 changed the world completely. This unprecedented global-level shock changed social structure substantially and is about to change consumption structure substantially. We see COVID-19 will be a big turning point in every aspect. Consumer values and consumer behavior are changing. And value consumers seek in retail industry is also changing. Please go to Page 4. As we are living in these uncertain times, I think it is important to promote group management with firm access. The access, in my mind, is corporate credo and group vision. We set the group vision: create and bring to life new happiness. We promised to evolve into the group that serves customers in every scene of life with an eye on both positive and negative aspects of life. As we are living in these times, initiatives to be considerate of anxiety of customers in life and provide support are required of JFR Group as a whole. I'm sure these initiatives will lead to sustainable management. Now that Parco became a wholly owned subsidiary, we will spread the group vision more widely to our organization and promote sustainable management with access. Please go to Page 5. Based on sustainability policy, we set 5 materiality issues. Regarding materiality, we set 5 issues: contribution to a low-carbon society; management of the entire supply chain; coexistence with local communities; promotion of diversity; and realization and work-life balance, from a viewpoint of whether we can address them by utilizing our main business, whether it is meaningful for us to address them and whether we can achieve results. At the same time to clarify initiatives, we set goals for 2030 and 2050 for each materiality issue. Please go to Page 6. Responses to climate change issues are global trends. The Japanese government also set the target of net zero greenhouse gas emissions by 2050. Actions for decarbonization are getting more and more active both at home and abroad. JFR Group positioned responses to climate change as top priority. We are working actively to achieve the GHG emissions reduction target approved as SBT, which is an international initiative. Main building of Daimaru Shinsaibashi store, which opened last year, and Shinsaibashi PARCO, which opened the other day, use 100% renewable energy. Besides to respond to risks and opportunities climate change brings to our group, we analyzed climate-related scenario based on TCFD recommendations and disclosed the results in securities report and sustainability report this year. We also joined RE100 in October 2020. We will continue to make further efforts to procure renewable energy. Please turn to Page 7. Next, let me talk about reform of corporate governance. We have been working on corporate governance reform from early on. In pursuit of our vision to achieve this continuous growth, in 2017, we switched over to a company with 3 committees and have been promoting reform of the Board of Directors, an integral part of governance reform. As one of reform initiatives, we revised officer remuneration policy in April 2020. The purpose of the revision is to reflect the company's initiatives, to promote sustainability management and so forth and to further enhance the details of the policy. In addition, by reexamining the governance structure, the operational rules and others of the entire group for formulation of the next medium-term business plan, we established Governance Committee in October 2020 to rebuild group governance that supports healthy growth of the entire group and contributes to medium to long-term enhancement of corporate value. There is no end to the initiatives of corporate governance. We will continue to make efforts for increased sophistication of corporate governance. Please go to Page 8. In 2019, we established Sustainability Committee to promote sustainability management in all companies in the group in a cross-organizational manner. Presidents of operating companies are members of this committee and working to achieve sustainability-related targets of the entire group. On the other hand, Board of Directors receives reports from Sustainability Committee and discusses and supervises the long-term goals on ESG issues and the progress of actions. Going forward, under the new structure, we would deepen our cooperation further and promote sustainability management simply and honestly as one group to realize sustainable growth of the company and contribute to creation of sustainable society. Lastly, please look at Page 9. As I mentioned in the beginning, COVID-19 is influential enough to change the conventional paradigm completely. We recognize inclusive growth, achieving sustainability and resilience at the same time on top of economic growth will lead to sustainability management. We will contribute to realization of our sustainable society by aiming at the society in which everyone can share the benefits of growth. A role leadership play as a public entity of society or our existence value is to achieve both social value and economic value together with stakeholders. Enhancement of long-term corporate value is not possible without coexistence with society. Going forward, by solving 5 materiality issues, which are social issues, we will aim to realize enhancement of economic value at the same time. JFR Group intends to realize initiatives unique to JFR based on CSV thinking. Details of each materiality issue will be given by Hirano. Today, we will also ask Mr. Uchida, outside director, to discuss Governance and Remuneration Committee. Thank you very much for your attention.

I am Hirano from J. Front Retailing. Thank you very much for a great turnout today. I will talk about progress to targets for 2030 and 2050 regarding 5 materiality issues JFR has set. Firstly, I will explain initiatives for contribution to a low-carbon society. Please turn to Page 5. JFR Group has been strengthening green store initiatives since fiscal year 2019. As President Yoshimoto mentioned earlier, main building and sales wing of Daimaru Shinsaibashi store and Shinsaibashi PARCO, which made its grand opening the other day, switched to renewable energy 100%. As a result, GHG emissions became 0. At new Shibuya PARCO, which opened in November last year, a cogeneration-based highly efficient energy system was built to maximize energy saving. Daimaru Shinsaibashi store and Shibuya PARCO are positioned as ESG model stores of our group. Going forward, we will expand the initiative to other stores as well. Please go to Page 6. As a result of switching to renewable energy at stores and strengthening energy-saving initiatives in the entire group, Scope 1 and 2 GHG emissions were reduced by 11.0% year-on-year in fiscal year 2019. Our group set the year-on-year reduction target for fiscal year 2019 at 3.9%. The result exceeded the target substantially. The reduction were 16.3% from fiscal year 2017 SBT base year. We are progressing steadily towards achievement of SBT for 2030. For reference, GHG emissions of our group obtained third-party assurance for calculation process and accuracy. Please turn to Page 7. We think it is important to take medium to long-term responses based on the recognition that climate change-related risks and opportunities will have a big impact on business strategies. Therefore, in fiscal year 2019, we expressed support for TCFD recommendations, using them as guidelines for evaluating appropriateness of our climate actions. We also conducted climate-related scenario analysis assuming 2030. Based on the result, we considered measures for climate change issues and reflected those in group strategy. We disclosed the content not only in securities report but also in integrated report and sustainability report this year. Please go to Page 8. In light of the situation in which approximately 80% of GHG emissions are from use of electric power at stores, we set the target source 100% renewable energy to power business activities by 2050 to achieve SBT and joined RE100 in October 2020. By joining RE100, we will strengthen renewable energy initiatives of our group, cooperate with member companies and make active efforts for promotion of renewable energy in Japan. Next, I will explain management of the entire supply chain. Please go to Page 10. In supply chain management, reduction of Scope 3 GHG emissions is also one of the important initiatives for achievement of SBT. Our group reviewed calculation process of Scope 3 emissions in fiscal year 2019 and obtained third-party assurance for completeness of scope of calculation and accuracy of results. Based on the result, to achieve SBT, we will examine reduction measures to work on by ourselves and reduction measures to work on in collaboration with suppliers and customers and work on these measures. Please go to Page 11. In order to eliminate environmental and social risks from distribution channels, we formulated Principles of Action for Suppliers in 2019 and sent the content to representatives of suppliers. As a part of dissemination activities, we held briefing sessions for suppliers at Daimaru Matsuzakaya Department Stores. We held the sessions simultaneously in Tokyo and Osaka. 652 people from 530 companies attended. We were able to gain support from more suppliers than we expected. In fiscal year 2021, we will start assessment along with shared Principles of Action, make efforts to establish strong supply chain in strong collaboration with suppliers and carry out our social responsibility. Please turn to Page 12. As a part of supply chain management, we are promoting human rights due diligence efforts. We formulated human rights policy in 2019 and identified human rights risks of JFR Group and expanded human rights policy in 2020. We plan to implement monitoring based on Principles of Action and assessment regarding human rights in 2021. Let me move on to job satisfaction reform. Please go to Page 14. Job satisfaction reform, in our mind, is simultaneous realization of organizational productivity improvement and job satisfaction of individuals. We will achieve that by promoting diversity to create innovation and realizing work-life balance to improve productivity in a comprehensive manner. To promote diversity, we held training on gender bias for managers in 2019. We also worked on initiatives such as Challenge Card to support increased taking on a challenge to create innovation. For realization of work-life balance, we are promoting telework and supporting employees working while raising children or engaging in family care to improve productivity. Next, I will talk about realization of work-life balance. Please go to Page 16. First of all, for efforts to prevent COVID-19, we expanded telework. Approximately 70% of employees do telework. At J. Front Retailing head office, we removed restriction in the number of days and started to provide telework allowance. As a result of conducting a questionnaire, we found out that work-life balance of employees enhanced, and usual operational level was maintained despite state of emergency. To prevent infection, we ensure health management of employees. Besides, information and online interviews are provided by industrial doctors. Please turn to Page 17. To promote child care leave for male employees, in FY 2019, we established paid child care leave system for up to 2 weeks, and 18 male employees took the leave. Also, in order to prevent employee turnover due to child care and nursing care, in FY 2019, we started reality check about reasons for resignation. And from FY 2020, we work on creating a working environment where employees can balance child or nursing care and their career by flexible work style, freely combining child and nursing care leave system, working system like flexible working hours and remote work. Next is about promotion of diversity. Please turn to Page 19. First point is promotion of women's empowerment. In JFR Group, ratio of women in management positions in FY 2019 was 16.6%. It increased by 1.9% from the previous fiscal year, and it is steadily progressing toward the long-term goal. The ratio is 24.9% in Daimaru Matsuzakaya Department Stores to show they are more advanced. In order to promote women's empowerment, we started JFR Women's School in 2018 as a career training for female employees raising children. Please turn to Page 20. Next topic is about promotion of senior empowerment. In FY 2020, 5 operating companies in JFR Group extended retirement age to 65 years old. Regarding employment of disabled people, in FY 2019, the employment ratio was 2.21% for the total of 11 group companies, including Daimaru Matsuzakaya Department Stores, to achieve the mandatory employment rate. JFR Create, a special subsidiary company, has realized diversified working style considering individual degree of disabilities. Our group will create innovation through realizing a company that respects diversity together with people of different gender, age and disability. Next, I will talk about coexistence with local communities. Please turn to Page 22. We have been promoting urban dominant strategy for coexistence with local communities. This is a business model to promote attractiveness of the whole area with our store as a core and to grow with local communities, and this will increase attractiveness of local communities as well as contribute to them. In 2019, we opened Daimaru Shinsaibashi and Shibuya PARCO. And in November 2020, we opened BINO Sakae in Nagoya and Shinsaibashi PARCO, and they have become commercial facilities to contribute to the bustle of these towns and enhancement of their power to draw customers. Going forward, we will deploy our stores to realize sustainable urban development and revitalization of local communities so that we can improve both economic and social values. Lastly, I'll explain about next 3-year targets starting from 2021. Please turn to Page 24. During Scope 1 and 2, about global warming gas reduction, we'll mainly work on switching to renewable energy in stages. And in FY 2023, we aim to achieve 30% reduction from FY 2017, the reference year of SBT. Scope 3 is currently under consideration. Next, regarding penetration of JFR Principles of Action for Suppliers, we will start self-assessment in 2021 to monitor the progress at customers' end. And through dialogues, we aim to achieve 25% penetration in FY 2023. Coexistence with local communities is currently under consideration to be linked with the medium-term business plan. Please turn to Page 25. As for ratio of women in management positions, our target is to achieve 26% by 2023 by promoting development of leader candidates as well as flexible work style such as remote work. In extension of retirement age, we start from introducing retirement at 65 years old in stages in the group. Regarding employment ratio of disabled people, we aim to achieve 2.4% by promoting recruitment and supporting them to settle down in the working environment. For ratio of male employees taking child care leave, we will aim at 100% for all male employees with newborn babies. Lastly, we target to achieve 0% for turnover rate due to child care or nursing care by promoting flexible working system. In the next 3 years, we will not slow down our efforts for sustainability management in the entire JFR Group to achieve long-term goals in 2030 and 2050. That is all from me. Thank you.

I am Uchida, independent outside director. Today, I will talk about current status of JFR governance and expectations for the future. Please turn to Page 2 for agenda. First, let me briefly introduce myself. I joined Toray in 1975. And in the first 9 years, I was involved in planning and management in new businesses such as carbon fiber, pharmaceuticals, et cetera. Then after that, I was involved in accounting and plastic business management. Then I worked in the U.S. And after returning to Japan, I worked for management planning office and, in 2005, assumed a role of a Director of Finance and Accounting division. And in 2012, I took responsibility to supervise areas of CSR, general affairs, legal, IR, PR, advertisement. And I retired from the position in 2016. Major external activities are I was a member of Ito Report (sic) [ Ito Review ], a member of government's expert panel for Corporate Governance Code development and also a member of its 15 follow-up meetings until 2018. And with that experience, I could have an opportunity to assume a role of independent outside director of J. Front Retailing. My presentation will follow the agenda on this page. First, let me review the corporate governance reform efforts in JFR. Please turn to Page 3. As you know, Corporate Governance Code was published in 2015. Before I assumed the current role, I had an interview with former President Yamamoto. And he said, he was glad to have this code as this code would provide a guideline to reform JFR by strengthening its governance, and he wanted to implement every principle of this code. And I had an impression that he was quite positive about corporate governance reform, and I'm certain that my impression was right based on my 1.5 year experience as an independent outside director, overall, assumed the governance of JFR is well structured and its level is high. As shown on the table, in 2015, third-party evaluation of Board of Directors started, and prior explanation of items at Board meetings to outside directors also started in this year. We gather to receive the explanation that takes about 3 hours each time. In 2016, criteria for proposals to Board of Directors were reviewed for partial delegation of authority. In 2017, as you heard from President Yoshimoto earlier, organizational structure was changed to become a company with 3 committees. With that, criteria for proposals to Board of Directors were reviewed again to delegate more authority to the execution side. At the same time, matters to be consulted were added to Board agenda so that Board members can discuss items which are not completely ready for resolution before they make a final decision. In 2018, it was decided to develop an annual agenda plan so that we can adequately run PDCA cycle. In 2019, the number of outside directors was increased to 6. With these efforts, highly effective discussions have become possible at Board meetings, and 6 outside directors provide various opinions and raise questions from different perspectives. And they are sincerely addressed by executive members, and this has made Board meetings quite active. With prior explanation to outside directors, we can minimize explanation and allocate more time for questions and answers. And average duration of the meeting is about 2.5 hours. And sometimes, it lasts about 4 hours. Please turn to the next page. This slide shows 3 items with top priority for the agenda in this fiscal year. At first, we started from the idea to establish medium to long-term plans by reviewing medium-term business plan and clarify the ideal status of the group 10 years from now. However, with the COVID-19 pandemic, now we focus on business structure reform as an urgent agenda, and this will be followed by medium to long-term strategy. Therefore, priority of this year is given to have sufficient discussion on urgent issues as well as management direction and strategic issues. Please turn to the next page for the composition of the Board of Directors and statutory committees. I think you all know about it as it is described in the integrated report. There are 6 outside directors and 7 inside directors. But as a chairperson and 2 auditors are non-executive members, there are 4 inside directors who are executive members. As described here, outside directors hold executive sessions as necessary. That is outside directors' meeting to share information and exchange opinions. Three committees are indicated at the bottom, and majority of their members is outside directors. And all committee chairs are also outside directors. Last year, I was a member of Audit Committee for 1 year and participated in Nomination and Remuneration Committees as an observer. This year, I am a member of Nomination Committee and Committee Chair of Remuneration Committee. Please turn to Page 6. Let me explain about recent activities of Remuneration Committee. In April this year, we revised officer remuneration policy, which is briefly mentioned by President Yoshimoto. They are following 3 major points in this revision. First one is to clarify our approach to sustainability management. And corporate credo, the group vision and materiality policy are now explicitly stated in the policy. Second, in the process to determine officer bonuses, it is explicitly stated that important tasks of individual officers are connected to materiality issues. Third, statement concerning forfeiture of remuneration is added. This is originally stipulated in the internal rule, but now it is clearly stated in the policy as well for disclosure. Below that, it is described that we disclosed individual amounts of remuneration of all officers in May this year. Please turn to Page 7. This slide shows major agenda items of Remuneration Committee in FY 2020. As Parco has become our 100% subsidiary, we want to have more active human resource exchange with them. Based on this idea, we are currently reviewing officer remuneration system of JFR, Daimaru Matsuzakaya Department Stores and Parco for integration. Second agenda item is about new remuneration policy linked to the next medium-term management plan to be developed this year and start next year. Third one is examination of remuneration system that is required every year. This includes the ratio of fixed portion and performance-linked portion as well as the ratio of basic remuneration and bonus which are paid by cash and stock-based remuneration. We will examine this with a third party if these ratios are reasonable in terms of maintaining competitiveness. We are in serious discussions on new remuneration policy and revision of officer remuneration system scheduled to be announced in April 2021. Please turn to Page 8. This page is about roles of independent outside directors. They are described in details in the Corporate Governance Code and practical guideline published by METI. But here, I listed only 3 points I focus most. First role is to provide guidance and advice from a high and broad medium to long-term perspective in formulating management strategies and making important management decisions. Needless to say, medium to long-term perspective is always required based on the viewpoint of sustainable growth and medium to long-term value improvement stated in the Corporate Governance Code. Supervision is needed to prevent the company from falling into short-term-oriented management. I said high perspective, and this means to examine and judge if strategy or business JFR is trying to execute are relevant to realizing management philosophy. In other words, if they lead to improvement of social values, all I can say, if society really requires JFR to do this, what I mean is such a perspective from above is necessary. And I suppose no explanation is needed for a broad perspective. In the current complex competitive environment, we need to examine if our plans and ideas are reasonable from various perspectives of globalization, ESG, SDGs, et cetera, and multidimensional perspectives are necessary. This is why we need diversity in the Board of Directors. Second role is to make judgment on the ideal business portfolio in 10 years from now or further down in the future and what should be done right now to realize it. And this judgment is made without being constrained by the past. I believe this is an essential task for outside directors. It is often said you should not read the situation, and this is applicable to the second point. Third role is about appointment of Representative Executive Officer or CEO. For corporate growth and business value improvement, CEO plays a major role, and some people say this is most important. So appointment of competent CEO and involvement in succession planning are another important role for outside directors. Lastly, please turn to Page 9 for future expectations and challenges. Regarding expectations for people who execute business, first point is about business structure reform. I think it was explained by President Yoshimoto at the business results briefing. Business structure reform is now under serious consideration, and the first point is finalizing this reform. And its execution has to be done in the short term. Business structure reform is a painful process, therefore, it should be completed in a short term, if possible, within 1 year from the perspective of outside directors, but maybe it would take at the maximum of about 2 years, as many people suggest. Anyway, we expect this will be done in a short term. Regarding major challenges for Board of Directors, a lot of various challenges were pointed out in the third-party evaluation of Board of Directors in FY 2020. But here, I take up only 2 points. First point is about roles of JFR Board of Directors. Considering they have become a company with 3 committees and they are a pure holding company, execution and supervision can be completely separated. But the company has not achieved that stage yet. And part of important business execution and decision-making are done by Board of Directors, and it is one of the major subjects to review this idea for redefining. Second point is overlapped with the earlier mentioned point about FY 2020. Business structure reform is critical, and this has to be completed in a short term. But at the same time, we have to have a vision about how the company should be after the business structure reform is finished. We should set this vision for the company 10 years from now and milestones every 3 years by the medium-term business plan, and this will be divided into the budget for each year, such a stable management system is required. And the Board of Directors is required to discuss and develop a strategy which can seamlessly connect these milestones and the vision for the company 10 years from now after the business structure reform. That is all from me. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]