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Edited Transcript of 8905.T earnings conference call or presentation 10-Apr-20 10:59am GMT

Chiba Apr 15, 2020 (Thomson StreetEvents) — Edited Transcript of Aeon Mall Co Ltd earnings conference call or presentation Friday, April 10, 2020 at 10:59:00am GMT

AEON Mall Co., Ltd. – President, CEO & Director

Yasutsugu Iwamura, AEON Mall Co., Ltd. – President, CEO & Director [1]

Good morning, ladies and gentlemen. Thank you very much for attending results briefing of AEON MALL today. I am Iwamura. I became President in March. I am supposed to see you in person and greet you, however, given the present circumstances, we are holding a briefing in this way. Let me apologize for that.

After joining the company in 2005, I was involved in development. In May 2016, I became General Director of AEON MALL Vietnam. I was nominated after deliberations held in the AEON MALL Nomination & Compensation Committee, and was officially appointed as President as of March 1 this year.

I will now give you a summary of financial results for fiscal year 2019 and explain new 3-year medium-term management plan starting in fiscal year 2020. Please go to Page 3.

Due to the current spread of COVID-19, our business performance is significantly impacted. I will give you details about this later. First of all, let me briefly discuss financial results for fiscal year 2019.

In fiscal year 2019, overall results were strong. We recorded highs for operating revenue in each profit category. In Japan, Mall Business was flat year-on-year. In Urban Shopping Center Business, loss was reduced, and profit was on an improvement track due to the impact of revitalization efforts of existing locations.

In overseas business, both China and ASEAN maintained approximately double-digit retail sales growth. We started to apply IFRS 16 in fiscal year 2019. Even excluding the impact of IFRS 16, profit increased.

As a result, although operating revenue and operating income were slightly below plan, ordinary income and net income attributable to owners of parent exceeded plan. Ordinary income increased for 10 periods in a row.

Excluding the impact of IFRS 16, operating income was up 4.7% year-on-year. Ordinary income was up 7.5%. Due to application of IFRS 16, financial indicators look as if they deteriorated. However, each indicator, excluding the impact, maintained conventional level.

Now I will talk about new 3-year medium-term management plan starting in fiscal year 2020. Please skip some pages and go to Page 16. As for fiscal year 2020 consolidated plan, I will explain measures to combat the spread of COVID-19 and the impact. We recognize such diseases as business and other risks and coordinate risk response measures with AEON Co., Ltd. based on risk management rules, novel influenza rules and others.

For measures to prevent spread of infection, as you see in the material, we are taking measures both for customers and employees. Specifically in malls, not to mention careful disinfection with alcohol and cleaning within facilities, we improved ventilation by opening doorways to take in outside air.

In areas where risks of spread of infection is considered to be high, we shortened mall hours and closed mall operations despite impacts on business. Besides, we promptly imposed self-restrictions on customer attraction events and sales promotions to avoid congestion.

As all malls are closely related to regional economic activities as social infrastructure, we continued business due to the significance. However, due to recent stronger request for not going out, some malls shortened mall hours or closed mall operations conforming to the request. For employees, we implement daily detailed health check and survey of entry inside reported outbreak cluster areas. We do not only take measures for our employees but also ask for cooperation of employees of tenants.

To prevent spread of infection, we are taking measures with a sense of tension. We are still in middle of an unpredictable situation. We are flexibly responding to situation, changing on a daily basis and taking measures to minimize spread of infection, while considering how to deal with post COVID-19 situation.

Next page, please. I will talk about the impact of COVID-19 on our sales. In China, by capturing Lunar New Year demand in January, in a new fiscal year, sales made a good start, showing the similar trend as that of fiscal year 2019. However, on January 23, we closed specialty store zones of 3 malls in Wuhan due to quarantine of Wuhan City. In the middle of February, 11 malls were closed out of 21 malls in China. Even in malls, which continued operation, sales dropped sharply as moves to refrain from going out enhanced partly due to administrative guidance.

Late in February, we reopened malls in succession. The 3 malls in Wuhan were reopened on April 1. At present, all malls are reopened. Looking at recent numbers. Preoutbreak trends have not come back fully yet.

In China, which was the first to experience an outbreak, infection already peaked out. We expect conditions will return to normal, by and large, around June and expect a recovery to pre-outbreak growth trends within the fiscal year.

In ASEAN, with spread of COVID-19, 4 malls in Vietnam have been closed since March 28, and 2 malls in Indonesia have been closed since March 31.

In Japan, after the government made a request to voluntarily refrain from holding large-scale events and close elementary and junior high schools late in February, customer traffic and sales started to drop and have been around 60% to 70% of the previous fiscal year.

As we announced in our press release the other day, we decided rent reductions for tenants for March and April. Due to sudden changes in business environment and various restrictions on business activities, business results of tenants are down. Tenants are struggling with financing and continuation of business. In light of their situation, employment in regions and others, we took this measure. Specifically, our contracts with small and medium-sized tenants are on a percentage of sales rent basis. In a contract, a guaranteed minimum rent is set, we decided to remove that. There is no contractual obligation to reduce rents. However, as tenants are important partners for us, we decided to take this measure as a support measure to overcome these difficult conditions together with them.

The impact of COVID-19 is quite significant in terms of reduction in sales and rent reductions.

Next page, please. A state of emergency was declared on April 7 in Tokyo and 6 other prefectures, including Kanagawa, Saitama, Chiba, Osaka, Hyogo and Fukuoka. The declaration will be effective for 1 month until the Golden Week holidays end on May 6. Out of 142 malls in total, there are 52 malls in the target areas, including 31 directly managed malls and 21 malls for which we have contract for property management. Since April 8, specialty stores in those malls have been temporarily closed. GMS and some specialty stores selling daily use items are continuing operations to provide daily necessities for consumers as lifeline to support daily life.

Also in other areas, requests were made to refrain from going out and moving to other areas. I think more request will be made going forward. We will design our business policy in light of situation in regions. Under such circumstances, at the present time, it is difficult to forecast the impact of COVID-19 in numerical terms, and we have not yet done so for fiscal year 2020. We will make an announcement promptly after we have been able to calculate earnings projections.

For reference, forecast for fiscal year 2020 were posted in company information column of Nikkei newspaper today. The forecast are not forecast announced by our company.

The impact of COVID-19 is significant in fiscal year 2020. However, as we judge it is possible to achieve management plan from a long-term perspective, we have no plan to make changes to our medium and long-term plans.

As for dividends for fiscal year 2020. Based on our policy of providing ongoing stable dividends, we plan to pay dividends of JPY 40 per share, kept unchanged from fiscal year 2019.

Please go to Page 20. Next, I will discuss management policies. We introduced new financial indicators, along with new 3-year medium-term management plan. One of the indicators is net interest-bearing debt/EBITDA ratio as a stability indicator. The other one is EPS growth rate as a growth indicator. We have been using net debt equity ratio as a stability indicator. We applied IFRS 16 to overseas subsidiaries in the previous fiscal year. As a result, for operating leases overseas, right-of-use assets are booked in assets on the balance sheet and lease obligations are in liabilities.

Consequently, although net debt equity ratio was impacted superficially, there is no change to actual cash flows. As an indicator, taking into account cash flow generated by leased properties overseas, we set net interest-bearing debt EBITDA ratio as a new stability indicator and aim at raising 4.5x in fiscal year 2025.

For EPS growth rate, overseas business is on a growth path, and in exchange, where profit expansion can be expected. To realize our vision for fiscal year 2025, we aim at annual EPS growth rate of 7% as an indicator for commitment to growth. We changed ROIC target from 6% to 5%. It is because overseas lease liabilities are booked on the balance sheet due to the impact of IFRS 16 and have an impact on superficial numbers. On a pre-IFRS 16 standard, we haven’t changed target.

Next page, please. With a vision for 2025 as a long-term vision in fiscal year 2016, we made a start with JPY 500 billion of operating revenue and JPY 100 billion of operating income as quantitative goals. Fiscal year 2019 was the final year of the first 3 years and results were in line with goals for FY 2025.

Next page, please. This fiscal year is the first year of the new 3-year medium-term management plan highlights of numerical targets for fiscal year 2022, the final year, as shown on this slide. Due to the impact of COVID-19, we started from the very severe situation. However, we expect we will be able to achieve high growth in fiscal year 2022.

Please go to Page 24. Next, I will talk about specific policies to achieve these numerical targets in a 3-year medium-term management plan. In the new 3-year medium-term management plan, we will promote 4 growth policies as pillars. Those are to achieve high profit growth overseas, achieve stable growth in Japan, build financing mix and governance structures supporting growth, and pursue ESG-based management.

Next page, please. The first growth policy is to achieve high profit growth overseas. We will accelerate new mall openings and strengthen earnings capacity of existing malls. We intend to promote these 2 priority measures in overseas business.

Next page, please. As for acceleration of new mall openings, the first priority measure, we aim at 70 malls overseas in fiscal year 2025. We plan to open 9 malls in total, including 1 mall in China and 8 malls in ASEAN during the 3-year period. The number of malls will be 39 in fiscal year 2022. We will, of course, open malls in accordance with the plan. To realize a target of 70 malls, how we can prepare new properties for the future will be a quite important point.

Next page, please. As for site selection areas, we will promote area-dominant store openings in areas where we already have presence. In addition, we will promote store openings in new areas. In China, we will focus on new development in inland areas, where market growth is high, in particular, compared to coastal areas.

In ASEAN, we will continue to accelerate store openings in Vietnam as the highest priority area. We aim at achieving 35 malls in ASEAN in fiscal year 2025. Out of 35, 20 malls are planned in Vietnam. In Vietnam, for the past few years, we worked on building of AEON MALL brand, deepened understanding of AEON MALL’s business attitude and significance of store openings among administrative bodies and regions and deepened relations with central and local governments.

We also reformed development organization and sold partner companies. As a result, at present, our facilities are attracted by regions or major developers. In Myanmar, a new candidate for mall openings, we are advancing feasibility study. We deployed a person in charge of leasing in March. In view of risks, we want to formulate and closely examine plans for specific business expansion. Page 28 shows the plan for new mall openings overseas. Please confirm it.

Please go to Page 29. To accelerate mall openings overseas, not only preparation for properties, but also building of a structure for realization is necessary. I think there are 3 points: firstly, organization; secondly, alliance with community; and thirdly, financing.

As for the first point, establishment of an organization. We think cultivation of human resources capable of global work is an important point in particular. We have global human resources course as human resources development program. Besides, we are also encouraging localized mall management by local staff. In China, 6 local staff became general managers. Mall Business is basically a domestic demand-oriented industry. We can say management by local staff is the most efficient in development, leasing and mall management and operation.

In China, after a person in charge of malls changed from a Japanese to local staff, rent revision and tenant turnover progressed more than before and profit grew further. There are such cases in China.

As for the second point, alliances with community. In China and ASEAN, economic policies are promoted, centering around social infrastructure building. From this point of view, we are developing properties in areas where urbanization is progressing and town development is advanced. Therefore, alliances with local governments and businesses are keys for mall openings.

We signed an agreement to promote mall openings with Tianjin, Wuhan and Jinqiao cities in China and Hanoi City in Vietnam. If the number of malls increases through area-dominant mall openings, our presence in the areas will enhance and relations with local governments and leading developers will be built. And then it will be possible to secure pipeline continually.

Regarding the third point, financing. To open a large mall like ours requires tens of billion yen of investment. Recovery of investment depends on mall operation. Therefore, efficient financing is also an important factor for multi-mall development.

So far, we opened mainly master lease malls in China and opened mainly AEON MALL-owned malls in ASEAN. As I discussed earlier, we will accelerate mall openings in ASEAN during the periods of the new 3-year plan in the next 3-year plan. If we own all properties, investment burden will be heavy. So as we do in China, we will also open master lease malls. AEON MALL Sentul City, scheduled to open in this fiscal year in Indonesia, will be the first master lease mall in ASEAN. The mall will be opened based on a contract with Sentul City, which is a local real estate developer.

Going forward, we will pursue alliances with local conglomerates and general real estate developers. We will also consider establishment of a global cash management structure and liquidation of overseas properties.

Next page, please. The second priority measure to achieve high profit growth overseas is to strengthen earnings capacity of existing malls. Our overseas malls maintained double-digit level growth rate, both in China and ASEAN, and are growing at a higher pace, the macro trend of respective country as a whole. One of the factors is mall openings in geographical locations with high potential growth rate. Our own initiatives are also leading to high growth. One of our own initiatives is floor space expansion and renovation. Overseas business consist of 30 malls. It is necessary to ensure profit accumulation through top line growth at the existing malls. Tenant lease agreements expire in 3 years overseas. When agreements expire, we replace tenants dramatically and enhance freshness of malls. By doing so, it is possible to grow sales continually overseas, where changes are more drastic than Japan.

In addition, penetration of social events, such as Valentine’s Day or Black Friday is not so high overseas. Therefore, by holding promotions timed to social events ahead of others, sales will be stimulated dramatically.

People in Japan are not familiar with international days, such as International Women’s Day and World Teachers’ Day. There are customs specific to regions, in addition to international customs and country-specific customs, so we are involved in such social events actively.

In operations, we will adopt leading-edge digital technologies to create mall environment which is better than that of Japan. To enhance services and increase efficiency, we will introduce operations of Japanese quality. In this way, we will gain more support to our malls. We aim at profit increase by responding to changes in markets and customers in a flexible manner and evolving malls constantly.

Next page, please. The graph on the top indicates profit growth model of overseas malls, while costs remain fixed. Revenue growth in proportion to sales growth and growth of revenue directly leads to growth of profit. When overseas malls are opened, profit level is low in the beginning. However, in 6 or 7 years, they generate approximately JPY 1 billion of profit, which is standard profit of malls in Japan. Growth of existing overseas malls is shown as a record. The table on the bottom shows gross profit of 24 existing overseas malls for fiscal year 2019. Profit per mall increased by about JPY 300 million. Excluding impact of IFRS 16 adoption, profit per mall increased by about JPY 150 million.

In absolute amount, about JPY 500 million of profit was already generated.

In overseas business, I think we will be able to sufficiently achieve numerical targets for fiscal year 2025 through profit growth at the existing malls and additional profit from new malls.

Next page, please. Let me move on to the second growth policy, achievement of stable growth in Japan. We are looking to promote 3 priority measures: strengthen earnings capacity of existing mall in Japan, open new malls and improve urban shopping center business income.

Next page, please. To strengthen earnings capacity of existing malls, which is the first measure, we will continue to focus on especially effective revitalization. The purposes of revitalization are capturing new customer segments and stimulation of potential demand. In Japan, agreements with tenants expire in 6 years. When agreements expire, we take advantage of opportunities and maintain and enhance freshness and attractiveness of malls by replacing existing tenants with specialty stores in bulk or specialty stores desired by regional customers. In particular in mall expansion, we can enhance position of a mall to the overwhelmingly dominant mall by reinforcing the dominant mall in each region.

It is also possible to smoothly attract specialty store companies selecting destinations for store openings. We are planning expansions of 8 malls during the 3-year period. We plan to renovate around 10 malls per year.

Next page, please. Not only through revitalization but also from the viewpoint of adding functions to create new incentives for customer visits, we will expand mall functions. Although I explained this point in the past, let me explain it once again as it is an important point in environment surrounding our business. Due to decreasing population and aging, society with robust rate, our main target, family segment is shrinking. We need to change ourselves in response to changes such as progress of e-commerce and diversified consumption behavior.

For our new target, senior market. We sponsor very small events for health and wellness, expand public function offerings to establish facilities as basis for local communities and create smart malls to enhance easy-to-shop environment for customers with the use of digital technologies. In this way, through factors that create new incentives for customer visits and improvement of convenience, we will enhance mall functions and improve profit by reinforcing ability of malls to attract customers and growing sales.

Next page, please. Let me move on to the second, major new malls openings. In Japan, construction costs are still maintained at high level. In new mall openings, in light of efficiency, we opened malls in areas with no malls and developed malls based on innovative concepts with the use of assets of the AEON Group. Specifically, we plan to open malls and new formats, perform mall renovations, leveraging existing assets and offer attractions only available in person.

I will introduce cases of new mall development. In Yahata Higashida project, the second THE OUTLETS will be opened on the ruins of Kitakyushu Space World. There is also a plan to relocate new Science Museum of Kitakyushu City to the site.

The second THE OUTLETS will be completed as evolved version of the OUTLETS HIROSHIMA, the first, THE OUTLETS. An existing mall, AEON MALL Yahata Higashi is adjacent to this property. We will reinforce daily functions of AEON MALL Yahata Higashi to create synergy effects with THE OUTLETS, which will offer extraordinary experiences. This property and AEON MALL Yahata Higashi will be connected through a pedestrian deck for integrated operation.

In AEON MALL Rifu, a new building adjacent to the existing building will be opened under the concept of entertainment in the winter of 2020.

In Sen Sok City in Cambodia and other malls overseas, highly entertaining merchandising, which went significantly beyond local expectation level, surprised people and gained high support. By reimporting this concept and gathering our latest know-how, we will open AEON MALL Rifu as one of the largest malls in Tohoku, as is the case with Yahata Higashida, by reinforcing daily functions of the adjacent existent building. At the time of opening, we will offer both daily and extraordinary experiences at the same time and build an overwhelming position in the area.

Page 36 shows the already released plan for mall openings. So please confirm the plan.

Please go to Page 37. The third priority measure in domestic business is to improve urban shopping center business income. We will discontinue new opening and aim to improve profits through fundamental reform of existing locations.

More specifically, first of all, revitalization. We have been focusing on revitalization of existing locations since fiscal year 2019, and we’ll continue to promote revitalization.

Secondly, we will improve profit by changing ownership and management and operating models. We turned Yokohama Importmart Inc. into our subsidiary. Yokohama Importmart is a developer of Yokohama World Porters, in which OPA operated a store. We will increase profit through integrated operation of the entire facility.

We are also working on scrap and build of Tenjin Vivre through participation in Tenjin Big Bang Project, a large-scale redevelopment in Tenjin/Hakata District in Fukuoka City.

Thirdly, utilization of assets, leveraging the characteristics of land near public transportation stations. From the standpoint of utilizing assets, for example, by introducing work space sharing, we will improve profit.

Through those initiatives, we will improve profit further from the level of fiscal year 2019.

Next page, please. The third growth policy is to build a financing mix and governance structure supporting growth. In particular, we intend to focus on 3 measures to establish a global management structure in response to expanding scale of overseas business.

Firstly, we will realize global financing mix. We covered funds for investment by investment from Japan, and we will start first scale examination of schemes of local financing or financing from markets in ASEAN.

Secondly, we will optimize cash management. Business in China is advancing, and cash flows are expanding. As excess cash is increasing, we are looking to realize schemes to maximize efficiency of cash.

Thirdly, we will engage in more advanced risk management. In Japan, we identify risks in management activities and grasp occurrence probability and impact of each risk at risk committee.

Also in China and ASEAN. We are working on enhancement of our risk management structure. In response to compliance risks, we established internal audit department locally. Persons in charge of internal orders from Japan conduct internal audits and are working to build a J-SOX-level internal control system. Besides, we established Risk Management Committee in China and ASEAN to evaluate risk management results of the previous year and confirm response status in accordance with PDCA. In this way, we are trying to enhance level of the management structure.

Please look at Page 39. The fourth growth policy is to pursue ESG-based management. We are working on ESG-based management to realize sustainable growth in response to needs of customers and society.

In recent years, climate change is happening on a global scale. As a result, all over the world, natural environments and people’s lives are impacted and damaged in various ways, as you know.

Also in Japan, wide areas were hit by large-scale natural disasters last year. Under such circumstances, many of our malls participated in disaster-prevention activities and served as temporary evacuation shelters and recovery centers for citizens.

As for global scale marine plastic issues, we are involved in plastic-elimination initiatives, including elimination of plastic straws in Japan and Vietnam. In any day and age, I think it is our mission as a life design developer to capture these changes of social environments; consider value to be provided by us with business partners; provide safety, security and comfort for lives of customers and local citizens in all the countries where we have malls; and add color to people’s lifestyles.

For that, we will leverage diversity of our employees and create an environment in which each and every employee can demonstrate his or her ability. At the same time, we intend to deepen trusting relationship with stakeholders such as customers, local communities, business partners, both home and abroad, and pursue further value improvement of AEON MALL.

Through initiatives that link growth strategies to ESG, we will maximize economic value and social value we create.

In addition, we identified materiality in fiscal year 2019 and published integrated report for the first time. On Pages 40 and 41, our materiality-related ESG policy and specific initiatives are summarized. So please confirm the pages. Going forward, we will set KPIs related to materiality and promote specific initiatives for sustainable growth.

Please go to Page 42. Next, I will talk about numerical targets. In fiscal year 2022, the final year of the plan, we aim at JPY 390 billion in operating revenue. Targeted annual growth rate for the 3 years is 6.4%. Operating income target is JPY 74 billion. Targeted annual growth rate for the 3 years is 6.8%. Annual EPS growth rate target for the 3 years after fiscal year 2022 is 5.3%. We aim at annual EPS growth rate of 7% after fiscal year 2025 through accelerated growth.

Next page, please. Capital investment plan in a 3-year medium-term management plan, starting in fiscal year 2020, is JPY 400 billion. Funds acquisition plan is as shown on this slide. Along with profit growth overseas, operating cash flow will be accumulated. We expect positive free cash flow in fiscal year 2022.

Next page, please. Lastly, I will explain shareholder returns. Firstly, increased dividends through profit growth. We aim at annual EPS growth rate of 7% after fiscal year 2025. Increased profit from that will be returned to shareholders.

Secondly, increased dividend payout ratio in the future. As I mentioned earlier, we expect positive free cash flow in fiscal year 2022. We are also considering increasing dividend payout ratio to a higher level.

That concludes my presentation. Thank you very much for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

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