CFO Message

In FY2023, which marks the midpoint of our five-year mid-term management plan, we aim to sustain the positive momentum from the preceding year, where we successfully navigated the challenges posed by COVID-19, and expedite our growth.

Management that utilizes economies of scale is essential to implementing the Five Reforms laid out in the Medium-term Management Plan. We have actively pursued M&A activities to achieve economies of scale, and when selecting companies to target, complementing our existing businesses and contributing to our business portfolio are prerequisites. Recently, we have acquired a number of companies and made them into subsidiaries, including the high-growth-potential drug stores and dispensing pharmacies Pupule Himawari Co., Ltd. and Kokumin Co., Ltd., the supermarket chain FUJI CO.,LTD. to provide a base in the Chugoku and Shikoku region where the AEON Group has insufficient market share, and CAN DO CO., LTD., which operates 100-yen shops with excellent merchandising capabilities. In April 2023 we also acquired Inageya Co., Ltd., an operator of supermarkets in the Tokyo metropolitan area, and made it into a subsidiary.

Under the reorganization of the SM business we have been pursuing since 2019, we formed groups of companies with sales of around 500 billion yen in each region and worked on value creation requiring activities to be carried out at a certain scale, including concentrated purchasing, the development of local brands, and investments in DX and logistics. Going forward, we will continue to pursue further economies of scale and seek organic coordination between businesses to maximize Group synergies, thereby realizing a conglomerate premium and meeting shareholder expectations.

Regarding the allocation of cash flow (CF) to improve corporate value in the long term, our policy is to prioritize growth investment while providing stable shareholder returns. While simple operating CF^*1 in fiscal 2022 was around 470 billion yen, simple investing CF^*2 was about -400 billion yen, repayment of lease obligations was approximately 70 billion yen, and payments of dividends amounted to about 55 billion yen (including dividends issued to non-controlling shareholders). The majority of CF acquired by the Group is allocated to growth investments. By shifting the focus of investment allocations from domestic stores to Asia, DX, and logistics, we are aiming to achieve sustainable growth in corporate value. In fiscal 2023, our plan is to generate around 400 to 450 billion yen on average during the span of the Medium-term Management Plan, some 20% of which will be from overseas, and around 30% of which will be from DX and logistics.

Regarding shareholder return, we regard optimizing the balance between enhanced corporate value driven by medium- to long-term growth and the return of profits as a priority measure, and have adopted a policy of stable dividends that maintain the levels of the previous year. By maintaining dividends at or above the previous year, we engage in management that is conscious of providing inventors with stable returns. Moreover, based on our “customer shareholder” approach where we hope that the customers who use our stores will take part in the creation of a “future of smiles” as shareholders, we have introduced a shareholder benefit program that reimburses shareholders a certain percentage (3-7%) of the amount they have spent on purchases based on the number of shares they hold. As a result, the number of shareholders in AEON has grown to 900,000 among the highest for a Japanese company, with many “customer shareholders” throwing their support behind the AEON Group on the business side.

While continuing to prioritize our growth strategy, through stable dividends and the shareholder benefit program we produce a positive spiral of expanded sales and profit, higher share prices, increased number of shareholders, and expanded sales and profit again, thereby realizing continual shareholder return.

*1 Operating profit + depreciation + goodwill write-off – corporate tax, etc.

*2 Capital investment (including guarantee deposits) + acquisition of shares in subsidiaries due to changes to the scope of consolidation

As Executive Officer in charge of Finance and Business Management, I focus on three financial indicators, ROE, ROIC, and the Net-Debt-to-EBITDA Ratio^*3 (excluding finance). We practice financial management based on these financial indicators to achieve medium-to-long-term growth in corporate value.

In the Medium-term Management Plan, we have set a target of 7% for ROE, which stood at 2.2% in fiscal 2022. We will strive to improve profitability in the retail business through products such as Topvalu, expanded gross profit through supply chain reforms, and productivity improvements driven by DX. In addition to increasing the share of retail in the Group portfolio, we will work to raise the level of consolidated profit attributable to owners of the parent and maximize shareholder gains by rearranging into an efficient business portfolio.

I believe that ROIC should be given greater emphasis in the AEON Group, which is highly leveraged. ROIC for fiscal 2022 surpassed our estimated WACC (less than 3%) at 3.4%, and consolidated interest-bearing debt has grown to 3.4831 trillion yen, something we recognize as an issue to be improved upon. In addition to improved profitability, we will revise the allocation of investments and improve the Group’s funding efficiency to streamline and reduce our balance sheet and interest-bearing debt, thereby improving asset efficiency.

The Net-Debt-to-EBITDA Ratio is the most important indicator in ensuring sustainable fund procurement, and we have set a target of 2.5x in the Medium-term Management Plan. In fiscal 2022 we only got this figure down to 3.7x, but it marked an improvement from the fiscal 2021 level of 4.1x, and our S&P outlook (direction of rating) returned to “stable” for the first time in three years^*4, reflecting progress in financial improvements. We will continue to base our efforts around improvements through EBITDA growth, control the level of interest-bearing debt, and enhance our financial health.

*3 Adjusted in consideration of the capital of hybrid corporate bonds and hybrid loans. Set off with cash

*4 AEON shares are rated A by Japan Credit Rating Agency (JCR), A- by Rating and Investment Information (R&I), and BBB by S&P

Embracing its mission to contribute to local communities, the AEON Group collaborates with around 200 financial institutions in Japan and overseas in areas such as regional development and the creation of AEON Living Zone, while striving to diversify its sources of funding. The AEON Group has been at the forefront of introducing various funding methods to date. For example, we were the first in Japan to introduce the development-oriented securitization of real estate utilizing SPC (2000), the first in the retail sector to issue long-term bonds (2005), and the first operating company to issue hybrid bonds (2006).

From an ESG perspective, the AEON Group has been focusing on environmental issues since the 1960s, leading the way in environmental initiatives such as tree planting and the development of environmentally friendly products while promoting resource conservation and recycling to realize a sustainable society. On the financial side, we have incorporated green and sustainable management ideas. In November 2021 AEON Mall Co., Ltd. was the first in the Group to issue institutional and private investors with Sustainability-linked Bonds, whose terms fluctuate based on the degree to which sustainability targets have been achieved. When AEON CO., LTD. was the first retailer to issue these bonds in August 2023, we set three ambitious targets by combining the general “reduction of CO₂ emissions” with a “reduction in the amount of disposal plastic used” and “reduction in the amount of food waste generated.” Going forward, I believe these targets will demonstrate the AEON Group’s commitment to realizing a sustainable society. We have been able to confirm the potential of these approaches as a means of securing funding, with 84 investors having made investment declarations based on a broad understanding of and support for AEON’s initiatives. Looking ahead, we will continue to promote sustainability and ESG-oriented management from a financial perspective.

I believe the challenge I must prioritize as Group CFO is to establish a more solid financial base by steadily achieving profit growth and reshuffling the business portfolio in light of current environmental changes and the status or outlook for each business and Group company while strengthening cash generation and the control of interest-bearing debt. To that end, I will work on recommendations for Group management, financial risk control, and greater sophistication in IR activities.

In the AEON Group, the pursuit of Group synergy while promoting the autonomous management of each Group company has been a driver of growth to date. However, amid a rapidly changing environment, optimization at the individual company level alone can lead to issues that produce inefficiencies, and there is a risk that those inefficiencies could impede Groupwide growth. I, therefore, believe it is important to respect the autonomy of each Group company while advocating Group management from the perspective of overall optimization.

In terms of the control of financial risks, while the Group’s ability to generate cash flow has steadily expanded since conditions under the COVID-19 pandemic, we recognize the need to further strengthen our financial position. We will monitor the business results, balance sheets, and cash flow situation at each Group company and enhance financial discipline to improve indicators of efficiency and financial health. In addition, to prevent risks from increasing, we will take appropriate measures to ensure the safety of finance and funding.

With regard to capital markets, we will deepen understanding on the part of markets and investors to secure sustainable funding and engage in flexible messaging regarding the growth potential and safety of the AEON Group’s business and finance activities. As the AEON Group is itself a publicly listed company while also having many publicly listed subsidiaries, I believe there is a greater need to pursue appropriate engagement with shareholders and investors. To promote understanding of AEON’s policies, strategies, governance, and other matters, we will further enhance our IR activities and work to increase share value.

As Group CFO, going forward I will continue to respect AEON’s DNA of autonomous management while allocating resources to growth markets, establishing a financial base to support the strategies and reforms of each business, and aiming to improve the Group’s corporate value in the long term.

Hiroaki Egawa

Executive Officer

CFO, Business Management