Message from the CFO

Yoshimichi Maruyama: Director, Managing Executive Officer Chief Financial Officer (CFO)

We will proceed with steady and swift reforms to achieve the goals of our updated Medium-Term Management Plan.

Yoshimichi MaruyamaDirector, Managing Executive Officer Chief Financial Officer (CFO)

Drive reforms and bolster global communication skills

The Seven & i Group has been committed to earnest and constructive dialogue with our shareholders and a wide range of stakeholders with the goal of fostering sustainable growth for the Group and enhancing medium- to long-term corporate value. Based on the input and observations received from these dialogues and the evolving business landscape, the Group has been consistently discussing the progress of the Medium-Term Management Plan 2021–2025 (MTMP) during Board of Directors’ meetings, where outside directors now make up the majority, since June 2022. The outcomes of these discussions have been compiled into the “Update to the Medium-Term Management Plan and the Results of the Group Strategy Reevaluation,” which was presented to both internal and external stakeholders in March 2023.

This included a partial revision to the “Ideal Group Image for 2030” developed when we formulated the MTMP, with a greater emphasis on our goal to become a world-class retail group with a focus on food. This transformation is driven by a global growth strategy rooted in our 7-Eleven business and the active utilization of technology to foster innovation in logistics. We have gained a tangible sense of progress towards this ideal image through initiatives such as the acquisition of U.S.-based Speedway LLC and additional investments in our Vietnam business. At the same time, we have also made steady progress in our business portfolio reforms. As a result, despite the cost pressures of inflation driven by factors such as rising energy costs and a weaker yen in FY2022, our consolidated performance surpassed our expectations in terms of both revenues from operations and each profit indicator, leading to record-breaking earnings.

The Group strategy update takes into account the outcomes of these reforms. Nevertheless, there remains a regrettable disparity between the intrinsic value of the Group and the shareholder value reflected by market capitalization, with some expressing concerns about the perceived sluggishness of the pace of the reforms. As our stakeholders know, this aspect has been strongly pointed out, particularly by international investors, and we must genuinely acknowledge and address this matter. Against this backdrop, the Group is striving to bolster its communication skills while pursuing more thoughtful IR and SR activities, in conjunction with the globalization of our business. For instance, we aim to foster dialogue that considers the nuances of communication culture, going beyond mere post-reporting of executed plans by swiftly sharing our reform direction, plans, and timelines, as we focus on ongoing reforms.

A year to strengthen foundations toward goal achievement

Yoshimichi Maruyama: Director, Managing Executive Officer Chief Financial Officer (CFO)

Regarding the progress of our MTMP, our approach involves accomplishing structural reforms during the first three years of the five-year period, concentrating management resources in growth strategy areas. In the latter two years, we will look to enhance strategic investments for new growth as well as shareholder returns.

FY2023, the third year of the MTMP, is considered a foundational period for achieving the targets set in the plan, as the infrastructure invested in starts to come into operation gradually. We acknowledge that this is a critical phase where the true potential for enhancing corporate value will be put to the test, particularly in anticipation of the following two years.

Specifically, as part of our core 7-Eleven business, in North America we are enhancing fresh food offerings through the launch of a production facility for daily items in Virginia, with plans for additional factories to follow. In domestic 7-Eleven operations, the launch of the 7NOW delivery app will make it easier for customers to purchase store products. Additionally, we are advancing the integration of the Group’s “7iD” customer information platform with various operational systems. Going forward, we aim to achieve cross-promotion between the 7-Eleven app and the Ito-Yokado online supermarket, leveraging the membership data of approximately 28 million individuals across the Group to create synergies and new business opportunities.

In SST operations, where structural reforms have been a focal point, a significant endeavor toward drastic transformation involves strategic investment in large-scale process centers and central kitchens to bolster our food offerings, including pre-cooked meals and frozen foods. These facilities are gradually being brought into operation, marking a substantial stride forward for our SST strategy in the Tokyo metropolitan area, and are expected to contribute to improved profitability.

Planning the optimal financial strategy from three focal points

In connection with these growth investments, we also revised our capital reallocation policy in the MTMP update.

In terms of broad direction, we aim to increase operating cash flow and focus strategic investments in the domestic and international CVS businesses while improving shareholder returns and maintaining financial health.

These three focal points—quantitative expansion, qualitative improvement, and financial soundness—remain unchanged in our financial strategy.

From the perspective of quantitative expansion, we prioritize the growth rate of EPS to better understand earnings growth and have also positioned the expansion of free cash flow as a key indicator. Due to the smooth progress made in building synergies from the integration with Speedway and the enhanced cash generation capacity of our domestic and international CVS businesses, both operating cash flow and free cash flow for FY2022 significantly exceeded our initial projections.

In terms of qualitative improvement, we emphasize return on invested capital (ROIC) spread, which is the difference between ROIC and weighted average cost of capital (WACC), as a key indicator that underpins each company within the Group. Based on current favorable business performance and reevaluation of the Group strategy, we have raised the target values for metrics such as ROE and ROIC in the MTMP.

Financial soundness was temporarily eroded due to the procurement of interest-bearing debt to cover the entire cost of the Speedway acquisition. We therefore set the debt/EBITDA ratio as an indicator to demonstrate to both internal and external stakeholders our commitment to restore financial soundness as quickly as possible. In this regard, we revised our FY2025 target within the MTMP update from lower than 2.0 times to less than 1.8 times.

In this way, our overall financial strategy is advancing towards enhanced capital efficiency and a healthier balance sheet. However, we recognize that we still have room for improvement, especially in terms of qualitative aspects and investment efficiency, to align with global standards.

The successful completion of the significant investment in acquiring Speedway was facilitated by our robust financial foundation at the time (FY2019), characterized by a debt/EBITDA ratio of approximately 1.5 times and a predominant AA credit rating. Recognizing that the smooth and advantageous funding execution was a major contributing factor, it becomes apparent that restoring financial health is crucial not only to expand future strategic options but also to ensure substantial shareholder returns moving forward.

At the same time, considering management’s emphasis on capital efficiency, including metrics such as ROE, we are now entering a phase where we will delve into discussions at a higher level, exploring whether maintaining a debt/EBITDA ratio below 1.8 times strikes the right balance.

Consolidated financial numerical targets Note: Excludes impact of sale/leaseback transactions
Consolidated financial numerical targets
Qualitative improvement of finance・Ensuring of financial soundness

Focusing on nurturing talent in support of global management

It is becoming increasingly important to share these financial perspectives with our operating companies. Since our transition to a holding company in 2005, we have played a pivotal role in strengthening collaboration among Group companies and actively fostering synergies. However, in terms of finance, while the emphasis on operating income at the local level is crucial and valued, there remains a challenge in fully embedding the concept of cost of capital. In the context of our ongoing SST business transformation, we have announced a commitment to fund growth investments for the next three years through cash inflows by reducing assets in SST operations and strengthening food infrastructure. This underscores the importance of disciplined capital allocation, taking into account the Group’s overall financial position.

This also presents a challenge in terms of cultivating the human resources responsible for driving Group management. In conversations with shareholders and investors, they acknowledge that we have nurtured talent with strong product development and operational capabilities to support our retail operations. However, they also note that we lack the required personnel to handle the capital policy and investment planning for the Group, where overseas operations contribute to the majority of sales, underscoring this as an important area for strategic investment.

In consideration of both corporate value and shareholder value

Amid the global rise in prices driven by soaring energy costs and raw material expenses, compounded by the expansion of geopolitical risks, consumer confidence remains clouded by uncertainty.

Against this backdrop, the Group pledges to enhance both corporate value and shareholder value through further growth driven by creating Group synergies centered around food.

To fulfill this commitment and instill confidence in our ability to do so, the Group will diligently pursue businesses that address the needs and wants of local communities, which are the essence of our retail origins. Additionally, as mentioned earlier, we will create anticipation around the Group by globally showcasing the synergies, strategies, progress, and achievements in food, manifested not only in Japan but across the world. The Seven & i Group will continue striving to generate value that meets and exceeds expectations.