Earnings Transcript for 3382.T - Q3 Fiscal Year 2024

Yoshimichi Maruyama: Once again, good evening. I am Yoshimichi Maruyama of Seven & i Holdings Co., Ltd. I would like to ask for your cooperation this year. Thank you very much for your understanding and support for our group, and I would like to take this opportunity to thank you all. Also, thank you very much for participating in this presentation briefing out of your busy schedules. I would now like to talk about our third quarter results of 2024. Please turn to page two. This is the executive summary for today. In 2024, it was a year that we were facing a change in the consumption environment that we have never experienced. But each business manager has played central roles in dealing with materialized issues in the first half. And after repeating trials and errors, we are now seeing results reflected in the numbers. Furthermore, we believe that we are starting to have confidence that these initiatives have become effective not only in the short term but in the medium and long term as well. For our group, 2024 was positioned as a very important year to enhance our enterprise value and shareholder value in the medium to long term. And it is a year of culmination of our several years of selection and concentration efforts. Especially the third quarter in 2024, based on our initiatives, we have promoted our strategy to streamline our low-profit business and assets for our future growth based on our action plan announced on April 10th. These initiatives will complete within this fiscal year and should lead to our profit growth in 2025 and onwards. However, even as we strongly promote the survey form, we will be achieving the full-year net profit plans of 2024. Also, we are making steady progress for group structural optimization towards our group's maximization of enterprise value and shareholder value. Secondly, as we have a strategic streamlining of business and assets, we will also have a positive outlook of building a solid management foundation towards strong profit growth in the future. 2024 is a turnaround year for our significant growth for the group, both operation-wise and management-wise, and we believe that we are close to a dawn. And let me elaborate on what we mean. Please turn to page three. This is the agenda for today. First of all, I would like to explain our third quarter results. And then after that, the situation of our major business strategies and the initiatives to improve profit from 2025 and onwards will be explained. And as for our North American CVS business, Seven Eleven Inc, this will be explained by Stan Reynolds, President. And Global CVS business will be explained by Mr. Wakabayashi, CEO of Seven Eleven International. And lastly, I will explain our domestic CVS business as well as optimization initiatives for group structure. Now I would like to explain the third quarter results of 2024. Please turn to page five. This is the highlight of a constantly results of third quarter 2024. Revenues from operations were ¥9 trillion 65.5 billion, which is 105.7% year on year, and 97% of the revised plan. Operating income was ¥315.4 billion, 76.9% year on year, minus ¥94 billion from the previous term, and 102.3% vis a vis the revised plan. Net profit was ¥63.6 billion, 34.9% of the previous term or minus ¥118.5 billion, 101% of the revised plan. Operating income vis a vis the previous year. Although we were in a very difficult situation, both in the United States and America due to the duration of the consumption environment, our measures materialized and so it affects and we are on a recovery track, and we were able to achieve a plan. We were able to achieve our plans for each profit. But the five towards the final year of our medium-term 2025 and 2030, we have been promoting business and asset streamlining for low profitability business. And the net income was ¥63.6 billion. As a result, net profit ended up in ¥63.6 billion, which is a large decline from the previous term. Please turn to page six. These are revenue from operations, operating income, and EBITDA for each segment and the details. The overseas CVS numbers are after amortization of goodwill. As for the domestic and overseas CVS business, which is a major factor of the decline in operating income, while the consumer's behavior is largely changing, and although there were some challenges in terms of trials and errors in terms of speed, we are able to develop strategies both in the United States as well as the US based on the consumption environment. As for domestic CVS, we started pleasant value initiatives from last September, and we are able to also inject over-the-counter products, which is unique to our valued chain and are able to confirm recovery both in terms of customer number and the same store sales. As for overseas CVS business, although impacted by the consumption environment, in the United States, we analyze customers' needs and conducted value offer measures, which is reflected in our strategy. And we are reinforcing our original proprietary product development delivery service, Seven Now, and these measures are showing results, which is improved. Yeah. Showing you results and improvement both in customer number and sales. And we would like to further enhance these strategies. Please turn to page seven. These are the results of each segment comparing with our plan. The operating income and EBITDA in the domestic CVS business, overseas CVS business, and superstores were slightly below plans. However, in our banking business, we were able to achieve our plan in overall achieved our plan. So next on page eight, let me explain a special losses on this page.

Fumihiko Nagamatsu: So over the past few years, our group has been selecting and concentrating various business and assets to maximize our group's enterprise value and shareholder value. We have positioned fiscal 2024 as a combination of these efforts and have further accelerated our selection and concentration based on the action plan announced in April of last year. In our first half of the year, we recorded a loss of ¥45.8 billion due to the impairment loss of restructuring in Toyo Gato stores, as well as restructuring of the last mile strategy in the superstore operations. Furthermore, in the third quarter, we recorded a loss of ¥56.7 billion due to the closure of unprofitable stores and the impairment loss associated with the system integration of your holdings in order to improve the profitability of SEI. These one-off special losses account for ¥133.4 billion of the cumulative special losses of ¥178.9 billion for nine months. Please turn to page nine. As shown in the lower part of the figure, all one-off special losses currently foreseeable, including the one-off special losses recorded during the first nine months point earlier, are expected to total ¥149.6 billion for the full year. With approximately 90% of this amount having been recorded by the third quarter. On the other hand, one-off special gains are expected to total ¥114.3 billion, including special gains from the sale and leaseback of SEI. We will record a large amount of special losses this fiscal year as well. But these one-off special gains and losses are intended to complete the liquidation of less profitable businesses and assets by the end of this fiscal year in accordance with our action plan with the aim of maximizing corporate value and shareholder value. Going forward, we'll focus on accelerating our growth strategy based on our strong management foundation. Please turn to page ten. As mentioned above, taking into account the various factors I've explained and the progress being made, we believe that we'll be able to achieve each profit item in the full-year earnings forecast we presented in October 2024 without any changes. The fundamental transformation of the Superstore operations is progressing steadily, but cumulative EBITDA as of Q3 of fiscal 2024 fell short of target. At Ito Yokado, in addition to the deterioration of gross profit margin due to rising raw material costs such as rice and the impact of rising costs, including soaring electricity bills, the continued record high temperatures in Q3 led to a slump in demand for fall-winter clothing and a resulting decline in shopping habits. However, in Q4, which is the peak sales period, we will aim to achieve our full-year target by advancing efforts to improve gross profit. Please turn to page twelve. This slide shows the progress of major KPIs and the fundamental transformation of the Greater Tokyo Superstore operations. Overall progress is proceeding roughly as planned. We'll continue to advance our transformation efforts towards achieving our targets of EBITDA of more than ¥55 billion and an ROIC of more than 4% for fiscal 2025. This concludes our explanation of our third quarter results. And next, let me invite Seven Eleven Inc to explain the major business strategies. And let me pass the floor to President Reynolds.

Stan Reynolds: Thank you. My name is Stan Reynolds, and I'm the president of Seven Eleven Inc. I want to spend a few minutes discussing Seven Eleven Inc's Q3 results and highlight some of the short and intermediate-term tactics we are leveraging to drive traffic, sales, and margin. I'll then conclude with an overview of our key priorities for 2025. Next slide. Seven Eleven's Q3 results were below prior year expectations. The inflationary environment persists, and the consumer continues to be under pressure. And we were impacted by CrowdStrike in the third quarter. As the CrowdStrike outage resulted in a disruption to the point of sales systems in the majority of our Speedway stores. However, we are now seeing directional improvement in sales and traffic. In the following slides, I want to highlight the short and intermediate-term tactics we have taken, which are producing results. Our management team at Seven Eleven has a track record of growing operating income at a 13% CAGR over the last 18 years. We're disappointed in 2024 results. We're seeing improvement, and we're continuing committed to returning to growth. Next slide. Since the CrowdStrike disruption in July, we've accelerated our efforts to drive traffic and sales while balancing margin. And we're seeing improved trends with November same-store sales slightly positive. We do project negative December same-store sales, however, driven by the calendarization of December versus the prior year. We lost one Friday, which is our high sales day, and expect that to have approximately 1.1% negative impact for the month. However, excluding this impact, we project our December sales, excluding cigarettes, to be positive. While the decline in cigarette sales negatively impacted our sales, our proprietary products, including fresh foods, proprietary beverages, and private brands, are driving improvements in overall sales and customer traffic. The proprietary products category delivers a margin of 40.5%, outperforming the overall system margin of 33.3%. We believe continued focus on executing our short and intermediate-term tactics will continue this positive sales growth. Next slide. I'll now take you through our short and intermediate-term tactics, which have four key areas. First, value and traffic driving. Second, growing proprietary products, which have a much higher margin than national brands while providing value to the customer. Third, growing Seven Now delivery to drive traffic and sales. And fourth, our cost leadership initiatives. Let's start by diving into how we are driving sales through value offers and traffic driving initiatives. Next slide. We know that delivering quality products at a compelling price is key to increasing traffic. Our food offerings provide outsized value and are resonating with customers. For example, our buy five, get five free bone-in chicken wings offer saw a 24.7% increase in APSD sales in September and a 25.2% increase in October. Additionally, our $3 large coffee and ring donut offer drove sustained increases in APSD sales across the month of October since its launch. We are also quickly adapting to changes in customer preferences to meet evolving one-a-need. For example, we have made strategic investments in expanding our tobacco back bar offering of new modern nicotine products. As 53% of adult smokers are looking to switch from cigarettes to noncombustible products. As a result, we've seen sales and trips increase in the category and are benefiting from higher margin on these products as well. And these modern nicotine sales are making up 50% of our loss in sales from the decline in cigarettes. Next slide. Next, growing our proprietary products continued to be a top priority for Seven Eleven. To accelerate our growth, we've strategically invested in store enhancements. This includes our food and beverage modernization program that offers customers a wider assortment of bacon store, hot food items, and specialty coffee. We are expanding this program, which is currently in almost 5,000 stores, to an additional 2,500 locations by Q1 2025. And early results have shown an APSD sales lift of $145 per day versus prior year in just the first three months. Additionally, to help meet customer demand for innovative high-quality food products, we have partnered with Woravea and Tech and Virginia to support over 2,000 stores. We've seen significant increase in APSD dollar sales for Hawaii-wide categories and continue to expand the assortment with innovative new items launched in Q3 and Q4. Next slide. Our restaurant and private brand offerings also continue to drive results and serve as a key differentiator. With more than 1,000 restaurant locations across three brands, we're able to meet the ever-changing taste of our customers. The benefits of this are meaningful as stores with restaurants drive 54% more traffic, 34% more APS sales, and carry an additional 60 basis points of margin compared to our non-restaurant location. We're able to further drive differentiation and value to customers through our portfolio of 900 plus private brand items. In 2024, we launched 215 new items across high-growth categories that resonated with customers and delivered over $70 million in incremental sales. In addition to driving traffic and sales to our store, our private brands have a 51% margin, approximately 18% higher than national brands. We will continue and invest in our private brand portfolio and launch high-quality, high-value products that customers are seeking. Next slide. We're also excited about the continued progress of our industry-leading delivery network, Seven Now, which is growing at a 24% rate on a same-store basis and delivers our popular products in the industry-leading delivery time of 28 minutes or less. The Seven Now delivery program offers value and quality products to our customers and helps grow our proprietary products as 25% of Seven Now's top-selling items are our fresh food and proprietary beverage items. Since 2022, we've experienced consistent growth in the delivery business, and our goal was to hit $1 billion in sales through this channel by 2025. Next slide. Additionally, we're focused on our cost leadership efforts. We've continued our disciplined and rigorous approach to taking costs out of the business, and we've stepped up our efforts and are targeting a $500 million cost reduction by the end of 2024. We also expect total 2024 OSG and A expenses to be down versus prior year, excluding expenses associated with the West Texas acquisition and 2023 one-time items. Looking ahead to 2025, we've identified new initiatives to reduce cost and improve efficiencies. We are targeting a 90 basis point reduction on OSG and A as a percentage of sales in 2025. Next slide. Lastly, I want to touch on our plans for 2025. As we previously communicated, we are targeting same-store sales of 1.5%, merchandise gross margin of 34.1%, and a ratio of OSG and A to sales of 16.4%. To achieve these goals and drive long-term value creation, we are launching a company-wide program aimed at improving profitability and focus on three primary areas

Yoshimichi Maruyama: Then I would like to talk about the global convenience store and the recent situation of our business. Next slide, please. First of all, Seven Eleven International consolidated performance. The year-to-date third quarter results. Revenues from operations compared to the fiscal 2023 largely grew. I think you can confirm that. And needless to say, from last April, Australia has been included in a consolidation. That is a major factor. However, we were also able to exceed our plan. As for operating income compared to last year, it appears to be a decrease of $21 million. However, this is a one-time expense related to the acquisition. And if you exclude this factor, it would have been an increase in profit. This year, 2025, Australia's performance will be fully reflected in the one full year of Seven & i Holdings Co., Ltd. consolidated results. And so it will mark contribute to EBITDA as well as operating income. As for Australia, we have explained in the RDA last October that our growth strategy is the pillar that the pillar of our growth strategy is the development of our merchandise opening of new stores, and store improvement, and we are in progress as planned. As seen on the graph below, merchandise sales are steadily growing and fresh food excluding tobacco as well as original proprietary beverages. These strategic categories product assortment has been enriched and is leading to results. Going forward, we will conduct a verification for initiatives through concept stores, pilot stores, and wherever we see results, we would like to horizontally deploy those initiatives to other stores as well. This shows our role that we have shown you in the past on the left-hand side. We will fully utilize the capability of SCJ and SEI. And would like to thoroughly execute strengthening support for existing areas and accelerating expansion into new regions. And, we would like to enhance our global brand value of Seven Eleven. That is our role. What I would like to emphasize is both for existing regions and new areas, we would like to actively consider strategic investments and financing for growing markets. And it says equity model penetration on the right-hand side, but in 2022, Seven Eleven International started. And after that, in 2023, we have executed strategic investment in Vietnam and in 2024 in Australia. However, we have just started, and the full-fledged initiative and growth is to be expected going forward in 2025. By 2030, we would like it says that we are aiming at doubling our profit. But, seen considerably, we will be able to achieve this target both by Australian and Vietnam alone, which has already been invested into. And by 2030, we will also be making new investments. So we believe that we can more than double our ordinary income. In this slide, we are showing the results in Australia through our two initiatives. One is enhancing the product assortment of fresh food, and the other is increasing the number of items in the store. As for fresh food, we enhanced our product assortment in 21 stores from April right after completion of acquisition through September and increased fresh foods SKUs to 80 items. And if we compare March before acquisition and September after acquisition, to improve both APS as well as the fresh food mix. And this initiative as shown on the upper right, we have expanded this initiative to 60 stores by the end of December. And by the end of this year, we would like to expand this to 150. And the original fresh food items will be expanded to 100 items. In the lower half, you see that we have introduced new shelves and fixtures in 153 stores and these are showing results already. The number of items per store was 1,500 before acquisition, but now it is 2,200. And in 500 stores. And by the end of December this year, we will have 2,500 items in all stores. Last October in our day, we talked about the initiatives in our concept store in Brisbane. That we opened, that has 280 square meters. We would like to expand this. And today, I would like to talk about the ePilot store that we have conducted renovation in our 100 square meter stores in Maryland. This store is called Attorney North store, and at the same time, we conducted a renovation. We also enhanced fresh food as well as increased the number of product items. Not only are we increasing the number of items, but we would like to respond to the customer's needs and conduct a meticulous adjustment of product assortment. Specifically, in this store, major customers are immigrants from South Asia. Therefore, we are not only simply increasing the number of items, or increasing fixtures, but we would like to increase product assortments, which will be favored by Indian customers. To lead to an increase in sales. As you can see on the right-hand side in the dotted line, after renovation for one week, sales declined slightly. This is because we increased the number of items significantly, and there were some items that ran out of stock at the vendor's side. But after that, as you can see in the graph, sales increased significantly and we are starting to feel confident in this approach. This is a pilot store, so we would like to deploy this kind of store in other cities including Perth, Sydney, and Brisbane. To show what kind of convenience stores we would like to achieve to customers. Not only that, the Seven Eleven Australia team members who are working on the frontline will be learning and experiencing this pilot's

Fumihiko Nagamatsu: store.

Yoshimichi Maruyama: For a better understanding, and we will be introducing retailers' initiatives or other merchandise management methods so that we'll be able to respond to the customer's needs. And this will be the major initiatives for this year's operation. Next page, please. This year's target for Australian business APST. We aim at $7,000. You may feel that this is very aggressive. However, if you look at the growth of our daily merchandise sales, we believe that this is a KPI that is realistic. Merchandise gross margin we expect to aim at an improvement of 20 basis points through focusing on fresh food and coffee or other proprietary beverages. As for the number of stores, we will also close some stores as we open new stores. And in order to secure high-quality new stores, we will have to take time in examining best locations as well as dealing with regulations. Therefore, this year, we believe, it will be a seeding year for a significant acceleration of opening new stores in the future. That is all from myself. I would like to hand over to Maruyama-san. Thank you.

Yoshimichi Maruyama: So this is Yoshimichi Maruyama, and let me explain about Seven Eleven Japan. Please turn to page thirty. First, let me cover the status of sales and the number of customers. Despite a recovery from COVID-19, the domestic economy has experienced its first inflation in about forty years, which has led to a major change in consumer sentiment. With customers becoming more defensive about their livelihoods. In addition, the impression that Seven Eleven prices are high has spread to a certain extent among customers. And our inability to adequately meet customer needs has led to a struggle in a number of customers, particularly in the first half of the year. In response to this issue, we have strengthened our efforts setting the recovery in the number of customers as a top priority. As a result, the pleasant valid declaration launched in September has been effective with customer numbers steadily improving and increasing even more strongly in December. Driving the growth of same-store sales. Please turn to page thirty-one. The pleasant value products which draw the increase in customer numbers consisted of 65 original products and 205 SKUs for Seven Premium, accounting for approximately 10% of the total. We wanted to raise awareness among customers so we strengthened the appeal through apps and TV commercials. And these measures have been successful, and the customer purchase rate of pleasant value products has increased. Furthermore, as shown in the right table, in addition to an increase in the frequency of store visits and purchase amounts by customers, a breakdown of the increase in store frequency shows that the frequency of store visits by younger generations, both male and female, has increased. And a pleasant value declaration is resonating with price-sensitive younger generations. Sales remained steady in December. And we plan to continue this pricing strategy while closely monitoring the consumer environment. Please turn to page thirty-two. We are also strengthening our efforts to reduce the impact of our pricing strategy on gross profit margins and further improve them. Let me share an example of our efforts to strengthen our freshly baked counter products. First, in addition to our curry bread, which has been well received and has achieved the Guinness World Record, we are promoting the rollout of Seven Cafe doughnuts, utilizing our supply chain including its manufacturing infrastructure. As of November 2024, we have rolled out these products in approximately 12,000 stores, and we plan to our nationwide expansion by the end of this fiscal year. In addition, we'll accelerate the rollout of Seven Cafe Bakery, our new freshly baked counter products. We plan to expand this to approximately 10,000 stores by the end of next fiscal year. In this way, the expansion of high-quality counter products that only Seven Eleven, with its unique value chain, can provide will contribute to profits in increasing customer numbers and gross profits. Going forward, Seven Eleven will continue to grow by increasing the frequency of store visits by existing customers through productive development and product lineup adjustments in order to respond to various changes in the customer environment as well as by developing products and services that will attract new customers.

Yoshimichi Maruyama: Lastly, I would like to talk about our initiatives to enhance both enterprise value and shareholder value. Please turn to page thirty-four. The upper half shown in the greens shows our strategic investment in our convenience business and the lower half shown in the light blue shows our actions for group optimization. And we have been continuing with these two initiatives. In this process, we have steadily implemented initiatives to maximize corporate value and shareholder values such as reforming governance to ensure that outside directors make up the majority and reevaluating the group strategy through the reform board of directors as well as establishing a strategy committee composed only of directors in March 2023 and announcing an action plan based on the committee's recommendations. With regard to the superstore business, in April 2024, we announced that we will begin considering realizing an IPO of this superstore business as soon as practically possible as one of the leading options for the sustainable growth of the superstore business. As part of the action plan, we have also announced that we will establish an intermediate holding company, York Holdings, in preparation for an IPO of the superstore business in October 2024, and we'll begin considering inviting a strategic partner to make the business an equity method affiliate in order to accelerate our growth strategy. We are currently in the midst of the process of moving forward with this process. Please turn to page thirty-five. For more details, please refer to the separate press release that we are disclosing.

Fumihiko Nagamatsu: York Holdings

Yoshimichi Maruyama: will acquire shares in the Superstore business group companies in late February 2025. In this way, we are slowly moving forward with our optimal group structure realization, including CVS business, SSD business, superstore business, and financial business. So that each of the businesses will be financially and strategically be in the for our growth and increase in value.