Aeon : Q&A Session at Financial Results Briefing for the Fiscal Year 2023(193KB)(new window. for

Q&A Session at Financial Results Briefing for the Fiscal Year 2023

April 10, 2024

Yoshida: President and Representative Executive Officer

Shikata: Executive Officer, Strategy

Egawa: Executive Officer, Finance and Business Management

Q1 Reflecting on the initial phase of the medium-term management plan (MTMP), kindly outline the areas where achievements have been made and where there has been lagging progress. Given unexpected factors like inflation, not initially foreseen during the drafting of the mid-term plan, I anticipate that leveraging economies of scale will be pivotal moving forward. How do you envision future growth unfolding?

A1 Yoshida: Inflation was unforeseen during the development of the MTMP, and increased personnel expenses were not factored into the budget. Without prior experience in operating within an inflationary environment, we are adjusting the plan iteratively. Concerning energy costs, we managed to absorb the rise through the implementation of an electricity policy, informed by research conducted by an internal task team. Additionally, we are actively advancing field-centered DX initiatives. Initially, we piloted self-checkout and Scan&Go systems at AEON Retail stores, and due to positive results, swiftly expanded their deployment. While DX reforms are yielding progress in terms of cost reductions, there remain challenges in the top-line and e-commerce segments that demand further attention. Notably, the most successful aspect of the MTMP revolves around product initiatives: there has been a notable shift in awareness toward private brands (PB), with the entire company earnestly committed to this endeavor.

Q2 What is AEON's position on the merger of Tsuruha and WELCIA?

A2 Yoshida: We recognize the potential for scalability. Without reaching a certain scale, it becomes challenging to make investments in digital infrastructure and logistics facilities. Hence, there is a need to leverage the scale of both companies. Additionally, we envision equipping ourselves with the attributes of a company that addresses societal challenges. As Japan's birthrate declines and its population ages, the tax system in Japan will encounter increasing complexities unless healthy life expectancy is extended. Therefore, we aim to establish a presence as a trusted health center by contributing to the extension of healthy life expectancy. We intend to create an ecosystem where the outlets we establish for this purpose are digitally interconnected. In discussions with President Tsuruha, we are exploring the integration of solutions to societal issues into our business

model, with the aim of fostering positive change in Japan.

Q3 The number of Green Beans members has steadily increased to over 160,000. Are you attracting young families as you originally intended? What kinds of products are selling well?

A3 Shikata: Since July, Green Beans' membership has expanded to include areas in central Tokyo. Initially concentrated in Chiba Prefecture, where our customer fulfillment center (CFC) is situated, we now boast a membership base evenly split between Chiba and the Tokyo metropolitan area. Notably, individuals in their 20s and 30s constitute over 30% of our customer demographic, representing the largest segment. Our "Freshness Plus" fresh products, utilizing innovative technology to prolong shelf life by one week, have garnered significant popularity. Customers who purchase these fresh products exhibit a commendably high rate of repeat purchases, underscoring one of Green Beans' core strengths. Looking ahead, we are committed to expanding not only our fresh produce offerings but also our range of grocery products more broadly.

Q4 Regarding the 2024 logistics issue, what is the investment of 4 billion yen in logistics expenses scheduled to increase in FY2024?

A4 Egawa: Our objective is to mitigate the cost increase from over 10 billion yen to 4 billion yen, rather than investing 4 billion yen. Currently, 70 percent of our logistics operations are managed by our in-house logistics system, which has been undergoing reform since 2000. While we have been implementing cost-saving measures since last year and the year before, the remaining incremental cost stands at 4 billion yen, which we are committed to further reducing in the future.

Q5 With the possibility of real wages finally becoming positive, do you think you can grow your top line without basically changing your PB strategy and pricing strategy from the past?

A5 Yoshida: We must carefully assess the extent to which individuals will benefit from the wage increase, considering that a significant portion, such as primary industry workers and pensioners, may not directly benefit. Furthermore, the impact of price hikes varies between food and non-food items, with food products experiencing a greater impact. There is undoubtedly a polarization of consumption, particularly evident during New Year's and Bon holidays, where high-value items tend to sell well. Certain products, despite experiencing a decrease in their share of consumption due to price factors, are increasing in TOPVALU's share of consumption. These products demonstrate strong sales

when the supply-demand balance is favorable. For stores to garner support from customers, it's imperative to offer a diverse range of products, encompassing both value- added and low-priced options. The DS (Discount Store) business model is anticipated to grow, aligning with evolving customer preferences, a trend we anticipate will persist.

Q6 What factors contribute to the disparity among segments performance in the FY2024 forecast, and how does the cost increase impact performance?

A6 Egawa: In our retail business inclusive of Inageya, we are aiming for a 5% year-on-year increase in sales and plan to raise the gross profit margin by 0.5 percentage points. Additionally, we anticipate growth in operating revenue through tenant income expansion. Looking into FY2024, we foresee a recovery in profitability for the Shopping Center Development Business and the Financial Services Business, which faced underperformance in FY2023 despite being significant profit contributors in the past. On the cost front, we anticipate a rise in labor costs by 65 billion yen due to wage hikes, along with expected increases in electricity costs, real estate-related expenses, and sales promotion costs. Despite these anticipated rises, we aim to achieve an operating income of 270 billion yen through a balanced approach of mitigating increases and capitalizing on potential decreases.

Q7 Please tell us your evaluation of our performance in FY2023 and why you set an operating revenue target of 10 trillion yen for FY2024, and your thoughts on this target.

A7 Yoshida: We view the FY2023 results as commendable, surpassing the upwardly revised forecast set in January. We extend our sincere appreciation to our frontline employees for their dedication and contributions. Looking ahead, we regard the 10 trillion yen operating revenue target for FY2024 not merely as a goal but as a stepping stone, aiming to surpass it in FY2025 and pursue further growth thereafter. We recognize the necessity of a certain scale to enhance the efficiency of our business structure. Concurrently, as we expand our scale, we are also undertaking efforts to integrate and restructure our operations to enhance efficiency. It is imperative to adopt a comprehensive approach, considering all factors, rather than focusing solely on expansion.

Q8 The current balance of interest-bearing debt is large compared to the target of 2.5 times or less Debt/EBITDA for FY2025. How do you intend to reduce the debt?

A8 Egawa: There exists a notable disparity between the mid-term plan's target of achieving a Debt/EBITDA ratio of 2.5 times and the present circumstances. The capital investment outlined in the initial three years of the MTMP faced delays primarily due to the impact

of COVID-19, resulting in a deviation from the planned trajectory. Furthermore, progress in overseas investments has fallen short of expectations. The postponement of investments, despite the anticipated returns in the latter stages of the MTMP, has led to a substantial increase in the investment plan for the current fiscal year. Consequently, the prospects for a significant reduction in interest-bearing debt in FY2024, which saw an increase in FY2023, appear limited. Given the substantial investment plan currently underway, achieving the 2.5x target poses a considerable challenge. Personally, I advocate for advancing the target while ensuring the preservation of financial soundness.

Q9 What is the background for a +0.5 percentage point gross profit margin improvement in the retail business in FY2024? How will the increase in profit be achieved?

A9 Yoshida: In terms of the top line, we are exploring the possibility of elevating the proportion of private label (PB) products. In terms of pricing strategy, it's imperative to cater to customer demands through both cost-effective and value-added offerings. Achieving this balance necessitates the expansion of our PB line, requiring a scaling-up approach. Conversely, regarding the bottom line, efforts to enhance productivity are ongoing and must persist. Our objective is to glean insights from benchmarking against other high-performing companies within the group, subsequently deploying these strategies horizontally to drive results.

Q10 I have the impression that there are large differences in the performance of listed subsidiaries. I feel that horizontal cooperation is progressing within the group at GMS. Then, how will the holding company (HD) take the leadership and transverse its policy in subsidiaries?

A10 Yoshida: We prioritize decentralizing authority among our operating companies, opting for strategies tailored to the diverse trade areas and competitive landscapes of each. Rather than enforcing uniform policies from the headquarters (HD), we advocate for developing nuanced strategies that accommodate the unique characteristics of each operating company's domain. Embracing a community-oriented approach, we aim to devise strategies that can effectively compete in their strongholds. Our strategy involves leveraging the Group's economies of scale to produce high-quality products on a nationwide scale, allowing local subsidiaries to market them. In addressing the underperformance of the Shopping Center Development Business and the Financial Services Business in FY2023, we perceive it as untapped growth potential for FY2024. Shopping centers necessitate redesigning to attract customers and encourage them to visit. Hence, we are focusing on digitalization initiatives and renovations tailored to the

preferences of younger demographics. A bolstered investment plan for this fiscal year aims to rejuvenate our facilities. Given the inflationary environment, we prioritize investing in properties whose value overwhelms book value located in profitable areas while considering the escalating real estate costs.

Q11 Regarding the new FUJI, I think it is a touchstone for AEON, which values rural areas. Different from the Tokyo metropolitan area, for example, it will require know-how in mobile supermarkets, and it will also be necessary to revitalize local production for local consumption. What do you think of FUJI's role in the region?

A11 Yoshida: The revamped FUJI commenced operations on March 1 following the merger with Maxvalu Nishinihon and Fuji Retailing. In March, the merged company achieved its planned targets. We maintain strong community ties and possess a comprehensive understanding of our customers' needs. Moving forward, we will continue to develop our business within the community while leveraging AEON's expertise. We anticipate cost reductions through logistics redesign, and the introduction of nationally available TOPVALU products alongside local offerings is expected to enhance profitability. I foresee that the integration of AEON and FUJI cultures will stimulate innovative ideas. Having attended FUJI's rally, I observed its ability to evolve into a well-established organizational entity.

Q12 Regional reorganization is redrawing the industry map, and reorganization is occurring across business categories. How will this external environment affect consumer life?

A12 Yoshida: To emphasize, we anticipate increased collaboration and integration within the industry, driven by the recognition that lack of scale could impede progress. Consolidation efforts in regions like Hokkaido, Tohoku, FUJI(Chugoku and Shikoku), and Kyushu are already yielding results. Scale is pivotal for expanding our footprint in these regions, necessitating a range of initiatives including DX, PB development, digitalization, and collaborative logistics design with other companies. Proper business design tailored to these objectives is imperative.

END