Earnings Call: Q2 2021

Oct 7, 2020

Thank you very much for participating in today's briefing on E. ON's financial results. I will open the briefing with a few remarks, after which Kaori Miyake, the Executive Officer in Charge of Investor Relations, will report on the financial results. First of all, I will briefly review the first half and discuss the outlook for the second half. During the Q1, E. ON faced an emergency situation unlike anything we've experienced before because of the COVID-nineteen outbreak and we strove to ensure a stable supply of foodstuffs and other daily necessities to fulfill our role as a form of infrastructure essential to people's lives. In the Q2, during and after June, when the government lifted its request for voluntary restraint in activities, we resumed full scale business activities only after first instituting our protocol for infectious disease control as a means of preventing infection. A rebound in demand and so called revenge consumption occurred after the lifting of the voluntary restraint request and the government provided cash handouts and various tax benefits. Business performance during that period recovered considerably faster than expected and we achieved revenue and profit increases exceeding the prior year level in June July. From the second half of July into August, Japan was hit by a second wave of infection that was larger than the first wave. I believe the number of cases was higher during the second wave. Looking at the results on an operating profit basis, whereas we reported an operating loss of a JPY12,500,000,000 for the Q1, we achieved substantial improvement in the 2nd quarter, recording operating profit of yen46,400,000,000 despite the 2nd wave of infection. Factors contributing to the improvement included a shift by the government from focusing on epidemic control to a policy of balancing epidemic control and the economy from the 1st wave and into the second and the ingraining of good infection prevention habits among customers. As for E. ON, because we have a multi format retail business, I think we were able to achieve more stable results than if we operated a single format business. Although the results suffered for a time because of temporary closures in the shopping center development business, the supermarket business made up for the shortfall. These two businesses are in a mutually complementary relationship. Turning now to the most recent situation in China where COVID-nineteen began to spread from Wuhan about 2 months before it arrived in Japan, October 1 marked the start of the National Day holiday week. Both sales and customer traffic during the 5 day period from October 1st through 5th were higher than last year with sales increasing by 9% year on year. In particular in Wuhan where the outbreak began, our business returned to the pre COVID growth rate with sales increasing 16% year on year. Although this may be limited to the National Day holiday period, we believe that at the very least it shows that customer resistance to visiting shopping malls has diminished substantially. Another factor may be that the inability to travel abroad has spurred domestic demand. We consider this a positive phenomenon that may portend a similar trend at shopping malls in Japan. I think that we must regard the second half as a time when damage to the economy from COVID-nineteen will emerge in the form of an economic downturn. Deterioration in consumer spending and purchasing power due to a worsening employment situation are particular causes for concern. From the perspective of our business, I think the greater customer price sensitivity and budget consciousness will come into play here and there. Accordingly, realizing that we must be price competitive in sales floor development and product provision, we decided to respond to an increase in the liquor tax this October by maintaining the price of Bar Real, a third category beer that is a mainstay product in the top value product line. We intended this as a message to communicate E. ON's commitment to supporting people's daily lives. People are increasingly concerned about possible parallel outbreaks of influenza and COVID-nineteen ahead. I think that health consciousness and the desire to boost our immune systems will become further ingrained in our minds. We believe that the market in the health and wellness business sector will expand and I think that we need to tightly focus on the drugstore business. The Go to campaign is currently being implemented in various forms and movement of people has increased. Customer traffic at malls this weekend returned to last year's level. Although it feels like people's awareness of the need to prevent infection has diminished a little, it is just the opposite at E. ON. We intend to review the protocol for infectious disease control we instituted in June in light of the current situation and do business on the basis of clearly defined communicable disease control guidelines. Facilities that reflect a firm focus on safety earn the trust of customers and I think this will become an important store selection criterion for customers. I will now briefly discuss my perception of the business environment. Even if the direct impact of COVID-nineteen diminishes, I consider it likely that some customer behaviors, attitudes and values brought about by the COVID-nineteen crisis will continue and become ingrained in people and I believe the negative macroeconomic impact will continue as well. Digitization of Japanese society had been identified as a key task since before COVID and the government has come up with a policy for a transition to Society 5.0. I think this initiative is now likely to progress at an accelerated pace and I also think climate change will become a more firmly established trend. The trend toward increased health consciousness will be accelerated because of COVID-nineteen. I believe that companies will have to increase the speed of change. Some think that lifestyle habits will change due to COVID-nineteen. What I think most probably will happen is that things heretofore considered likely to change will change rapidly. And I believe that the biggest expectation placed on companies will be the expectation that they increase the speed of their own transformation. With the government preparing to establish a digital agency, digital technologies will become commonplace in the social rules and life tools of the future. This means that Rule's premise and digital technologies will become a prerequisite for corporate activities. Besides that, amid the previously mentioned firm establishment of climate change as a trend, I believe that ESG related initiatives will become an inevitable element of corporate evaluation and that we will have to strive for environmental consideration in every aspect of our corporate activities. I want to ensure that this perception of the business environment and sense of crisis are shared throughout the E. ON Group and that we do business with the mindset that, on the contrary, changes like those I have described give rise to business opportunities. I hope to continue to communicate with our stakeholders in various ways in order to provide an understanding of our thinking and initiatives. I will now hand this over to Kaori Miyake, who will explain the financial results. Good afternoon. I'm Kaori Miyake, the Executive Officer in charge of IR. I will now provide an overview of the consolidated operating results. First of all, let's look at the cumulative first half results. Operating revenue was JPY 4,270,500,000,000 and operating profit was JPY 33,900,000,000 Although both revenue and profit declined year on year, we achieved profitability on the operating profit and ordinary profit lines. Operating profit is at the upper end of the full year profit forecast range we presented at the beginning of the year. Looking now at the 2nd quarter results, operating revenue increased 0.9% year on year in the 2nd quarter following a decline in the Q1. We were able to narrow losses at each profit stage from a substantial loss of more than JPY 40,000,000,000 in the Q1 to a loss of about JPY 10,000,000,000 in the 2nd quarter. I will explain the reasons for this in the discussion of results by segment. This slide shows operating revenue by segment. Operating revenue from the Supermarket Business and Health and Wellness Business in the Q2 increased substantially year on year due to higher at home consumption demand resulting from people refraining from outings and continued demand for products to prevent the spread of infection. The general merchandise store business secured 2nd quarter sales at roughly the prior year level. Takemi Ide, President of EON Retail will report on the situation of the general merchandise store business later. Although the shopping center development business, services and specialty store business and financial services business were affected by temporary closures and reduced business hours following the state of emergency declaration, revenue recovered substantially once business operations were restored. In the international business, the COVID-nineteen crisis affected the 2nd quarter sales of companies in the ASEAN region, for which the period from April to June, when the second wave of infection spread corresponds to the Q2 due to the accounting period difference. This slide shows operating profit by segment. The supermarket business and health and wellness business achieved substantial profit increases again in the second quarter connected with the increase in sales. 2nd quarter profit from the general merchandise store business also recovered to nearly the prior year level. Similarly, the shopping center development business, services and specialty store business and financial services business showed a 2nd quarter profit recovery trend coinciding with sales recovery. Profit decline in the services and specialty store business improved in real terms after excluding the impact of a JPY 14,500,000,000 loss in connection with improper accounting at a subsidiary recorded as a lump sum in the Q1 of last year. In the international business, the profit decrease is mainly attributable to companies in the ASEAN region whose figures reflect the impact of the 1st wave of infection. Next, I will discuss the situation by segment in greater detail. As shown in the graph, the supermarket business also achieved year on year sales increases of from 5% to 10% from June onward, attributable to increased opportunities for having meals at home because of the tendency to refrain from outings and spend more time at home, although not to the degree experienced in the Q1 when the first wave of inspections struck. In particular, My Basket stores and other small discount stores and supermarkets in the Tokyo metropolitan area, which are meeting demand from people who want to make quick shopping trips to get what they need at stores located close to home are showing even higher sales growth. Also in August, ordinary everyday food products sold better than food products for special occasions as people were trained from travel and hometown visits during the Obon Festival period. Because there was little movement of people to regional areas for hometown visits or travel, sales at stores in the Tokyo metropolitan area were very strong during the Obon holiday season. Next, let's look at the situation in the shopping center development business. The graph on the screen shows monthly specialty store sales by country. Sales bottomed out in February for China, which was hard hit by the 1st wave of infections and in April for Japan and ASEAN countries. But with shopping centers reopening for business, sales are now recovering. The spread of infections did have an impact on the Beijing area in June, on Japan in July August and on Vietnam in August, but since then sales have returned to a recovery track. In China, which was the 1st country to stage a recovery, sales in August September rebounded to prior year levels. This result is a sure indication that the E. ONMall business model is capable of earning the trust and recognition of customers and will be able to continue offering value in the future even if society has no option but to coexist with COVID-nineteen because we have put in place thoroughgoing infection countermeasures. Needless to say, there remains the possibility that the shopping center development business will be affected by the pandemic going forward, but we will make every effort to turn earnings around by creating new events and sales opportunities even with COVID-nineteen still present in society. For example, we intend to implement in Japan the same kind of initiatives carried out in China where infections have now eased such as online sales with live video streaming by tenant employees and social media influencers. Next, let's take a look at the Financial Services business. The profit decline in the Financial Services business has shrunk considerably with profit moving back into positive territory in the 2nd quarter from a loss in the 1st quarter. The improvement largely owes to a substantial decline in bad debt expenses compared to the 1st quarter. The graph on the screen shows a comparison of bad debt expenses in the 1st two quarters at group company, E. ON Financial Service. On the left of the screen, you can see that bad debt expenses decreased by JPY 12,800,000,000 from JPY 32,300,000,000 in the 1st quarter to yen 19,500,000,000 yen in the second quarter. Particularly in overseas markets, we announced repayment moratoriums in line with the policies of local central banks and built up our allowances for doubtful accounts mainly in the Q1. However, bad debt expenses declined sharply in the Q2 after steady progress was made on collecting receivables when COVID-nineteen related restrictions were later eased. In Japan, as a result of it carefully examining future risk, band debt expenses rose by 2,800,000,000 yen in the second quarter from 8,100,000,000 yen in the 1st quarter. But thanks to the decline in expenses overseas, the overall figure has dropped quite considerably. As we've been able to address future risks that at this point in time we anticipate could potentially occur in Japan and overseas, we will continue to make steady progress on collecting receivables and endeavor to turn earnings around even further. Next, the situation in the Services and Specialty Store business. The Apparel Specialty Store, Cox, immediately responded to customer changes and started taking orders for face masks online from early on, which garnered very strong support from customers. Not only did this make up for declining sales at brick and mortar stores, it also greatly boosted Cox's e commerce sales. As a result, both revenue and profit made in about phase from 1st quarter results to move higher in the 2nd quarter. Sporting Goods specialty store operator, Mega Sports also bolstered its lineup of popular outdoor equipment on the back of the government's message to avoid the 3 Cs of closed spaces, crowded places and close contact settings. As a result, 2nd quarter results were up on prior year levels. In contrast, the Amusement business operator, E. ON Fantasy and Cinema business operator, E. ON Entertainment are still recovering. Nevertheless, they are working to boost sales despite the continued presence of the novel coronavirus. For example, E. ON Cinemas are offering whole day tickets that let moviegoers watch as many titles as they like in a single day. Monthly revenue for E. ON Cinema shows that their recovery is progressing month by month. Sales in July were only 30% of last year's level, but rose to 42% in August and then 63% in September. We expect to see more of a recovery up ahead once popular movie titles that have been postponed start hitting the screens and as the drive in theater format is expanded and improved. Here you can see quarterly operating profit by geographical area. Looking at Japan first, we booked an operating loss of 5,000,000,000 yen in the Q1. But as I explained earlier, operating profit rebounded to JPY 37,400,000,000 in the 2nd quarter on brisk sales at supermarkets and drugstores as well as the recovery in earnings in the general merchandise store business and shopping center development business. In ASEAN countries, operating profit increased year on year in the Q2 to JPY7,600,000,000 thanks to a decrease in bad debt expenses in the financial services business. In China as well, operating profit was in the red in the Q1, but moved back into the black in the second quarter driven by the resumption of operations and recovering sales in the shopping center development business. The circumstances surrounding the pandemic differ from country to country, which means we must remain watchful, but we are implementing watertight infection countermeasures and working on achieving a greater earnings turnaround in all regions where we have a business presence. Reforms. I have included this page for reference. It shows the main items we have reached a decision on or acted upon since the start of the fiscal year. Convenience store business operator, MINI Stop, announced the other day that it aims to develop a new business model and will gradually switch to MINI Stop partnership agreements for the purpose of sharing business profits with participating store owners. To conclude my presentation, I will discuss our earnings forecasts for fiscal 2020. At this time, we have made no changes to our earnings forecasts announced at the beginning of the term. The number of new COVID-nineteen infections in Japan continues to decline after the 2nd wave in July August. But with the winter flu season approaching, there is no predicting what might happen up ahead. And in other parts of the world, there is no indication that growth in the number of new cases is slowing. As we have discussed today, our earnings are on a recovery track. But at this juncture, we are leaving our initial forecasts unchanged given that full year earnings can fluctuate substantially depending on the Q4, which is when we usually generate the highest profit levels for the entire year. We will continue to prioritize the safety and security of our customers and employees and work on sustaining and improving earnings by rolling out new initiatives designed to meet the changing needs of customers. The E. ON Group will continue to put into practice its customer first philosophy as a corporate group with an everlasting innovative spirit. This concludes my presentation. Next, Takemi Ide, President and Representative Director of E. ON Retail will report on E. ON Retail's first half results and progress on reforms. Hello, everyone. I'm Takemi Ide. I would now like to review the first half at E. ON Retail and talk about the progress made with general merchandise store reforms. Firstly though, I'd like to explain what E. ON Retail aims to achieve by the year 2025. Last year, we formulated our medium term strategy, a plan for growing the company by developing comprehensive strength or in other words, new value that combines our strength in brick and mortar stores with digital technologies. And digital transformation will be the key to this plan. There are 3 approaches we are taking with these initiatives. The first is creating earnings opportunities. We will look to tap new growth opportunities in the online supermarket and e commerce domains. The second approach is improving productivity. We will utilize digitization to conserve labor, power and space and at the same time seek to boost customer and employee satisfaction. The third approach is enhancing organizational agility. In this age of future uncertainty, it is vital that we make business decisions with a sense of urgency. I believe it is important that we engage in a process of observation, analysis, judgment and action at our stores, our contact points with customers. To that end, we must also push ahead with digitally driven management reforms. Accordingly, fiscal 2020 2021 will be a period in which we ramp up our revival plan by squarely solving fundamental issues and building a foundation for new growth. For our earnings structure in particular, we have decided to first take steps to tackle and solve issues relating to sales per square meter, gross profit margin ratio and cost structure. First, I'd like to review E. ON Retail's operations in the first half. Revenue in the first half dropped 3.1% from the previous fiscal year. In the Q1, which coincided with the first wave of COVID-nineteen infections, revenue declined 5.6% year on year due to people refraining from outings and the suspension of operations of specialty store zones. But as we found ways to respond to the so called new normal, revenue improved from June onwards and came in at minus 0.7% year on year in the Q2, nearly on par with the same period last year. We were also permitted to keep our stores open even during the declared state of emergency because our business operations are considered a lifeline for customers. As a result, we achieved our initial first half revenue target for Food Products. The gross profit margin ratio deteriorated 1.2% year on year in the first half. It declined 2.7% year on year in the Q1, particularly because of a slump in sales of clothing and household and recreational merchandise as a result of the restrictions placed on shopping and non essential, non urgent outings. However, the gross profit margin ratio improved to 0.1% year on year in the Q2 due to improved sales and inventory optimization from the Q1. I believe we have a foundation in place from which we can work to improve the gross profit margin ratio. As for expenses, we achieved a 4.6% year on year reduction because our revival plan progressed as planned from the start of the year. As a result of these factors, operating profit in the first half declined year on year, but in the second quarter, it recovered to be only JPY 3,100,000,000 short of last year's figure. One factor behind the recovery, I believe, was the entire E. ON Group taking swift action to create an environment in which customers can shop with peace of mind. We did this by establishing the E. ON COVID-nineteen protocol for infectious disease control and implementing concrete measures to prevent the spread of infection. We set up transparent acrylic boards as a measure against infection via respiratory droplets and place markers on the floor near checkouts and on escalators to ensure the customers practice social distancing. We also implemented similar measures in employee break rooms and other backroom facilities. We additionally distributed flyers to give our customers a better understanding of the initiatives being implemented. We believe the benefits of these measures led to a recovery in customer traffic and sales from the Q2. And recent figures for October indicate that we are certainly on course for a recovery. In the second half, we will maintain the initiatives implemented in the first half and step up our response to the new normal so that we can continue to be a lifeline for our customers and communities. I will now discuss a number of specific initiatives we implemented in the first half. Demand in the online supermarket business surged because of COVID-nineteen. To accelerate growth of the business and make it more convenient for users, in June, we established the online supermarket division, which reports directly to me. We are working swiftly to increase the number of stores and pickup points. The number of stores offering online supermarket services is currently at 185 and scheduled to reach 197 by December. We are also rapidly increasing the number of pickup points. Use of the pickup service has grown because it shortens shopping time, means no waiting at checkouts and limits instances of close contact. The service is currently available at 178 stores. On September 10, 2020, we formally launched a drive through pickup service at the Higashi Kurume store with a dedicated lane and intercom facility. We also expanded the online supermarket product range with particular focus on fresh produce for which demand is growing among customers. Products like assortments of fish, fresh off the fishing boats and pre ordered fruit and vegetables from Toyosu market have proven popular. As a result of such initiatives, online supermarket sales were up 20% year on year with sales of fresh produce actually growing as much as 50% year on year. Online shopping is also growing. Elementary school backpacks have proven popular with customers including the 24 color range of top value school backpacks launched in 2,001 and the Karusupo school backpack range that went on sale in 2012. This year, we expanded the number of products sold online because many customers were unable to go shopping with their children due to people were framing from outings to prevent the spread of COVID-nineteen. In the first half of the current fiscal year, elementary school backpack sales were up 8% year on year with online sales up 74% year on year, thanks partly to additional TV commercials. We have also strengthened product offerings to meet demand for gift items. In the current fiscal year, online sales of Mother's Day gifts overtook retail store sales and overall sales of Mother's Day gifts exceeded sales in the previous fiscal year. Next, I would like to talk about RegiGo, which we launched last year. RegiGo is a customer self scanning and self checkout service using special checkout kiosks and dedicated smartphones that we provide to customers to scan product barcodes. We are accelerating the expansion of Regigo because it shortens waiting times at checkouts and reduces instances of close contact. The RegiGo service is currently available at 14 stores. At Eonstyle Ariake Garden, which opened in spring this year, 30% of customers are using RegiGo. There has been a marked increase in the number of family groups using Regi Go with the service proving popular with children. We have succeeded in reducing the number of checkout operators with a 30% reduction in working hours at checkout at one store helping to enhance productivity. Customers can shop without worrying about waiting in line at the checkout and are less likely to forget to buy something on their shopping list because they can easily check everything they have scanned on their smartphones. Customers who use Regigot buy up to 20% more items than those who don't. We will continue to refine the features of RegiGo while rolling it out at all stores to make shopping more enjoyable and convenient for our customers. New demand for masks emerged amid the COVID-nineteen pandemic to complement the non woven cloth masks sold in the health and beauty care category for preventing colds and seasonal pollen allergies, we developed a diverse range of masks as fashion items such as the top value Peace Fit Gokusala mask and lace mask. Handicraft specialty store Pandora House also sold handmade masks. Having prepared masks in a variety of different categories, we set up mask sales corners at 3 40 stores. Mask sales in the first half grew to 10,000,000,000 yen overall. We are planning to launch masks suitable for the fall winter season in the second half, so keep watching this space. We have also developed products that meet stay at home demand. On your screen, you can see examples of newly developed Home Cordy products. The 2 color pod allows users to cook 2 kinds of soup at home in a single pod and the tall Kotatsu heated table with a USB port, which is convenient for those working from home. The Tall Kotatsu in particular caused a buzz online and trended on Twitter. Products such as these that have been developed to meet stay at home demand are selling well and have been extremely well received. We have also expanded sales floor space for health and wellness products. Sports related demand in particular has increased among our customers due to the desire to boost immunity and stay healthy amid the COVID-nineteen pandemic. We're helping customers improve their health through 3 activities walking, running and general fitness enhancement by accelerating the expansion of sporgium specialty sales corners selling not only sportswear, but also providing general wellness information and products such as yoga mats, shoes and so on. Spurgeon sales corners have already been opened at all stores and sales were up 54% year on year in August. In addition to expanding the sales floor space, we are also developing individual products in pursuit of enhanced functional performance. Top values Body Switch is performance innerwear that can be used for everyday activities or sports. Developed to provide excellent ease of movement, user friendliness and a flattering silhouette, it is highly absorbent and dries quickly while also offering excellent heat retention performance. Top Value Select CELIENT range of clothing helps the wearer to recover from fatigue. Registered as a general medical device, Class 1, it is the 1st private brand product range made from CELIENT, a fabric that incorporates 13 minuteerals, including titanium and aluminum. Wearing CELIENT Innerwear at night and during the day over long periods of time helps with fatigue recovery and improves blood circulation. Sales of CELIENT were up 130% year on year in August. We will continue our work on developing high performance products like this. We are also taking action in response to growing public interest in sustainability. Self-service is an apparel brand developed around the concept of ethical consumption. Its objective is to enable consumers to contribute to environmental conservation and communities in their daily life through the development of products based on natural materials like organic cotton. The brand is currently sold at 2 70 stores. Yves Rocher is a French botanical beauty care brand with 6 1,700 stores in 90 countries. In August 2019, EON Group became the exclusive distributor of Yves Rocher products in Japan. The products are high quality and made from select natural ingredients yet reasonably priced for everyday use. They are currently on sale at 193 stores and we plan to sell them at more stores going forward. We also plan to expand the product range this autumn. We were also one of the first retailers to move to reduce the use of disposable plastic shopping bags. On July 1, 2020, free plastic bags were banned by law, but E. ON Retail stopped providing free shopping bags at all retail stores from April 1, 2020 and promoted the use of reusable bags made from recycled plastic. With the cooperation of many customers, the percentage of customers who declined plastic shopping bags at checkout reached 88.8% in August 2020. We intend to continue responding rapidly to customer lifestyle changes in the new normal. That's all for me on the situation in E. ON Retail in the first half and some of the initiatives we have been implementing. I will now discuss the progress we have made with our revival plan. As I mentioned earlier, we consider fiscal 2020 to be a year for squarely solving fundamental issues and building a foundation for new growth. I will discuss the main initiatives we're implementing in relation to this. We are trying to solve 2 issues. The first relates to gross profit margin ratios primarily in the apparel and household and recreational lines and the second relates to cost structure. First, to solve the gross profit margin ratio issue, we optimize purchasing and store inventory for the apparel and household and recreational lines. Optimizing purchasing entailed steady patient efforts to reduce SKUs and improve the sales ratio of each and every product item. Optimizing store inventory meant upfront disposal of slow moving stock that accumulated due to the COVID-nineteen crisis. As a result of these efforts, E. ON Retail's overall inventory, which had increased temporarily due in part to the impact of COVID-nineteen began a sustained decline and by the end of August 2020, it was down 21.8% from the beginning of the fiscal year. Inventory turnover improved by 10.2 days, thereby already exceeding our initial target for fiscal 2022. Gross profit margin ratios also began to improve from July in proportion with a reduction of inventory and faster turnover. These achievements have had a number of positive knock on effects such as increased work efficiency, enhanced product freshness and reduced storage costs. With regard to Food Products, sales and gross profits have been growing amid the COVID-nineteen pandemic, which we think is due to our response to newly emerging demand centered on top value. As consumers stayed home to help prevent the spread of COVID-nineteen, we absorbed demand for eating out by offering gourmet foods like Atlantic salmon and Tasmanian beef as well as expanding the range of easy to prepare time saving frozen meals like gyoza dumplings and fried rice. As a result, top value share of sales was 20% of all food products, up from the first half of the previous fiscal year. We intend to continue developing topvalue products with the functions and purposes that customers require in order to further increase the brand's share of sales and pursue gross profit margin ratio enhancement and greater differentiation. We also implemented 3 initiatives to tackle cost structure issues. First, we revised our organizational structure. 2nd, we promoted digital transformation. And 3rd, we worked toward reducing operational costs. We revised our organizational structure by redeploying key employees from headquarters to stores to strengthen on-site power. We also reduced costs at headquarters by 21% year on year by streamlining meetings, seminars and recruitment activities and shifting these online and conducting reviews of necessary expenses. With regard to digital transformation, we use RPA and AI to replace some manual tasks and installed semi automatic self checkout registers and unmanned checkouts to cut expenses. With regard to operational costs, we cut working hours by standardizing work tasks and also reduced sales promotion costs. Another major contributing factor behind reduction of operational costs was secondary effects of the inventory reduction that I mentioned earlier, such as reduced work time and lower equipment rental and product storage costs. As a result of these initiatives, we lowered store costs by 5% year on year. We will continue to advance these initiatives in the second half and firmly establish them as standard operating procedures. Finally, I would like to discuss a growth model that we are currently piloting with a verification test that started this month at EON style Ariake Garden. We have positioned Ariake as a pilot store that combines the existing E. ON style model with digital technologies. We have launched a new combination model that merges analog and digital approaches such as promoting cashless, contactless shopping with the Regi Go service, displaying product descriptions and menu suggestions with digital signage, using digital sales promotion based on shelf edge video displays and preventing the 3 Cs, closed spaces, crowded places and close contact settings with a system that monitors the number of customers in the store using cameras and AI. We will be working to identify customer lifestyle changes that have been highlighted by the COVID-nineteen crisis and harness our product development and sales floor development capabilities together with digital transformation to hone our competitive advantage of comprehensive strength to further accelerate growth. This concludes my presentation on E. ON Retail. Thank you. You mentioned that the speed of reforms is important. Looking at the Q2 results, I'm amazed at how quickly you were able to implement reforms given your company's scale and the extent of the reforms. From a management viewpoint, what do you need to do to further increase management speed and what areas do you need to focus on with this? The results suggest that the reforms implemented in the quarter may enable you to continue generating favorable results without worrying too much about fluctuations in business conditions or a renewed outbreak of the coronavirus. Please share with us your thoughts on the current status of the speed of reforms and future challenges you face. It's been a half year since the start of the novel coronavirus pandemic and we have seen many changes occur at a rather incredible pace. At first, store managers were at a loss as to how to respond, but I believe the extent to which store managers are allowed to make their own decisions is a crucial factor in the speed of our response. For example, we were able to create mask sales areas with an ample supply of masks in about half a month because purchasing managers and sales floor managers acted quickly with a shared understanding of the situation. Customers responded favorably and as President Ide reported earlier, we were able to generate JPY 10,000,000,000 in mask sales. When store managers see customers respond positively to their decisions and actions, they begin to sense the joy of working. I think it is extremely important to provide our store managers with opportunities to have successful experiences like this. We are seeing this beginning to flourish at E. ON Retail. I think the fact that actions are now being initiated at the store level is an important factor. However, it is also important for top management to prepare for the worst and provide proper guidance. Of course, there are things that store managers can accomplish and things they cannot, but they should take action while clearly stating that this is the best response for this situation and be ready to analyze the results later if things do not go as planned. I think that the lesson our employees learned from this pandemic is that they must first take action and respond in an agile manner. The same can also be said for infection countermeasures. When we decided to install protective panels at cash registers, the first thought was how long will these be needed. However, at a certain point, we decided that that is something we will continue with and we invested 100 of 1,000,000 of yen in installing acrylic panels, which has created checkout spaces that customers feel are hygienic. The decision was made by President Ide as the Head of Management at E. ON Retail. He gave sound instructions to staff and that let each store implement measures in a flexible manner. I think creating this type of corporate culture is extremely important and I think we are seeing the emergence of a more agile E. ON Retail as a result. So can we expect further increases in speed with digital transformation? Absolutely. I believe digital technologies will have the biggest impact on the speed of change. The new SUGA administration has clearly indicated it intends to push forward with digitalization, including the creation of a new digital agency. Those who don't catch this wave will not be able to compete. In the case of the omni channel model experiment that we're conducting at EON style Ariake Garden, which was mentioned earlier, We placed orders for the necessary equipment and systems immediately after the decision to conduct the experiment was made. As for digitalization as well, we are going to move forward in an agile manner by trying various things out at first and then working on fine tuning. I get the impression that the recovery in earnings is very clear at the operating profit in ordinary profit stages, but I wonder what caused the apparent sharp rise in the cost of sales. Also, although second quarter profits are up sharply through the ordinary profit level, you were not able to return to the black at the net profit level, but instead posted a small loss. I imagine that impairment losses in the coronavirus related extraordinary loss were significant, but can you explain the reason for the slight loss at the bottom line? As President Ide mentioned earlier, we are focusing on increasing sales and generating gross profit. So the point is how we view inventory after linking it to sales and purchasing. Considering E. ON Retail only, loss on valuation of products reduced gross profit by JPY 10,000,000,000. Of this amount, yen 7,000,000,000 was written off in May. This inventory was then sold off completely during the June sale, enabling the inventory to be converted to cash. That cash was then used to purchase new merchandise. We work to steadily manage sales and gross profits while considering the amount of cash generated by this inventory turnover and the inventory turnover period. In short, our actions were based on consideration of the balance between sales, purchasing and inventories. As a result, we successfully reduced our inventories. We also reduced back room inventories and inventories at distribution warehouses. This led to a virtuous circle that enabled us to devote more staff time to preparing sales floors. In the second quarter, inventory disposal amounted to 3,000,000,000 yen which is being linked to sales in October. So the answer to your question is that our response reduced gross profit by 10,000,000,000 yen in the first half. Essentially, the first half saw us adeptly manage cash flow and gross profit by using the difference in cash generated by inventory turnover sales and cash needed for new purchases. This challenge is also being taken up by other group companies as well as specialty stores. We will use the same approach in the second half, thus continuing this practice for the full year. As for net profit, I think you will remember that in the Q1, we posted about a JPY 30,000,000,000 extraordinary loss related to expenses generated during the period when businesses were being requested to suspend operations or shorten business hours. About JPY 3,000,000,000 was pushed into the 2nd quarter because an audit could not be completed in time. As for store impairment losses, future annual cash flows are hard to assess until the Q4. If you look at our portfolio of companies, you will notice that our group companies can be divided into 3 different groups: those benefiting from tailwinds, those encountering headwinds and those that have paused to revise their business models. Accordingly, in the 3rd and 4th quarters, we will steadily respond to each of those groups while examining their respective circumstances. As a result, our decision to close some stores as planned will generate an extraordinary loss. So would it be correct to say that if those extraordinary losses had not slipped into the next quarter, net profit would be close to being in the black? That is correct. My question is about the composition of group operating profit. Until recently, operating profit was driven by the shopping center development and financial services businesses, but this has changed greatly due to the impact of the novel coronavirus pandemic. Do you expect this situation to continue for the medium to long term? How long do you think it will be until the contributions from the shopping center development and financial services businesses return to their pre pandemic levels? Also, while I think it may not be easy for you to say given the wide range of businesses the E. ON Group is engaged in, when do you expect digitalization to contribute to operating profit? Last year earnings were supported by the shopping center development, financial services and drugstore businesses, which compensated for the damage to retail earnings. As I mentioned earlier, this year a complementary relationship has developed, but the shopping center development businesses profit decline was clearly due to temporary store closures. Meanwhile, the financial services businesses earnings decline was clearly due to the need for provisions for bad debt. As I said when discussing China, our business model is not broken. Based on consideration of circumstances in China and the current number of E. ONMall customers, we expect a gradual recovery. The segment that currently requires the most careful handling is the supermarket business. After seeing its profitability decline in recent years, the supermarket business suddenly became a top earner in the first half of this year. The question now, however, is how long the business can hold on to its top earner position. Since its earnings were buoyed by special demand, some fallback is to be expected. Another important question is if it can retain newly won customers and get customers whose purchases increased during the pandemic to continue shopping at similar levels. I think that if we can limit the decline, it will be an added plus when earnings at the shopping center development and financial services businesses rebound and we will be in good shape. I regard this as a major point going forward. As for our drugstores, my sense is that they should continue to do well benefiting from the tailwind provided by the heightened awareness of hygiene that has become more firmly entrenched among consumers. If we make the right moves, I feel that our business portfolio could become even better balanced than before. However, the outlook remains unpredictable. And as I mentioned at the start of this presentation, business sentiment in the second half looks quite negative. I expect price competition will intensify, lowering our profitability as the intense competition is reflected in our product prices. While there is some uncertainty, I'm not pessimistic about the outlook for our shopping center development and financial services businesses. Regarding digitalization, President Ide mentioned earlier that online supermarket sales increased 20% year on year during the novel coronavirus crisis, but there were periods in which even greater leaps were seen. Several stores are now achieving profitability through their online supermarket services. In 1 month, our online supermarket business generated a total profit of 400,000,000 yen We now know that we can exceed the breakeven point if we can increase customer numbers to a certain level. We believe this can be a viable business if we can expand customer purchase sizes, including through the use of various channels and pickup methods. Is it difficult to accelerate your project with Ocado? Our project with Ocado has a set schedule and it will take some time to construct the buildings and get all the equipment installed. As much as we'd like to shorten the preparation period as much as possible, shortening the construction period is difficult. However, with the demand for online supermarkets rising considerably, E. ON Retail has responded by establishing a separate organization that has increased its agility remarkably and its efforts to meet the rising demand are centered on this new organization. I believe this new organization will enable E. ON Retail to increase its capacity for meeting this demand. You have not revised your full year earnings forecasts. Can you tell us what aspects of the operating environment in the second half and beyond might have the biggest impact on earnings? The impact from a 3rd wave of infection. The government has considerably relaxed its infection prevention measures as it seeks to buoy the economy through such measures as the Go to campaign, while also preventing the spread of the coronavirus. Europe and other areas have suffered considerably from 2nd and third waves of this pandemic. I hope that Japan does not find itself in the same predicament. We are already seeing an increase in domestic travel, but I think things can go well if everybody wears masks and observes the rules and etiquette that can prevent the spread of this virus. It will not do, however, if people let their guard down and the situation begins to resemble today's Europe. I see that as a potential risk. I think the biggest risk for us is the risk of such a situation arising during our peak sales season. However, during my visits to stores, I've gained the impression that customers are really being quite cautious.