Earnings Call: Q4 2021

Apr 30, 2021

I am Fukasawa, President and CEO. Thank you very much for attending our results briefing despite your busy schedule and between consecutive holidays today. On April 28, we announced financial results for the fiscal year ended March 2021 and forecast for the fiscal year ending March 2022. I will talk about business management for the fiscal year ending March 2022 in anticipation of a post COVID-nineteen society. Please go to Page 4 of the presentation material. We made J. R. East Group Management vision move up 2027 in July 2018 and has been implementing the vision. Due to the spread of COVID-nineteen, environment changed dramatically last year. As for the basic direction to raise the speed and level of the targets and direction set to move up 2027. We announced speed up move up 2027 in September last year and new numerical targets for the fiscal year ending March 2026 in January this year. Based on ESG management, we intend to rebuild growth and innovation strategies and strengthen management efficiency fundamentally. Page 5, please. In speed up move of 2027, we set some more directions. Firstly, proposing new lifestyles and taking on the challenge of new fields. In Transportation Services, we tackle fundamental structural reforms. As for operating revenues, we aim at the ratio between Transportation segment and other segments of 60% versus 40% and early realization of 50% versus 50%. In particular, our strategy is to create new services by combining the 3 services, namely transportation services, lifestyle services and IT and cigar services and use them for data marketing. Page 6 shares the overview. We aim to rebuild growth and innovation strategies, propose new lifestyle ideas and take on challenges in new fields. Besides, to strengthen management efficiency fundamentally, we are working to reduce cost, enhance productivity, revise basic services and optimize group management based on practice of ESG Management. Page 7 and following pages show specific initiatives we've been working on since we announced speed up move of 2027 in the autumn last year. We revised timetables for large train and 1st train services in March this year. We improved work style reform for nighttime maintenance in railway construction work and increased the speed of construction work to enhance services provided for customers. That was a first step, a vision for services in anticipation of a post COVID-nineteen society. In the same way, in a timetable revision, we began using ATO devices on the Job Online local services. We are also increasing driver only services and conducting test runs of a large autonomous driving bus specifically designed for BRT. As new JRA point awards, we started off peak point service and repeat point service in March. We position this initiative as a first step to promote off peak use of services in the future. The number of registered users is over 300,000 respectively. We want to increase the number further. To revitalize regions, we began introduction of regional collaboration IC cars in March this year. We introduced the IC Cars in Utsunomiya area and Morioka area in March 2021. Many people already started to use the cars. We will expand this initiative in each area, one after another. Page 8 shows the current situation of new businesses. Station work is a shared office business for new work style. We established a network of 134 locations nationwide. We also established a shared office on a platform. The target for the fiscal year ending March 2026 is 1200 locations in total. We are currently installing shared offices within our stations in affiliated hotels, post offices and others. For expansion at JRE mall, participation in hometown tax payment enabled donations through JRE Point. Besides, we are working on initiatives of OMO, online mergers with offline and implementing initiatives to integrate online and offline. The target GRE mall transactions for the fiscal year ending March 2026 is 130,000,000 yen. As for logistics services that utilize Shinkansen lines, we only used the services for Ekinaka sales inside railway stations. As we got approval, we started direct transportation business also to areas outside railway stations. We already began regular logistics services in April. We want to expand also this business further. As shown on Page 9, we will work hard to return to profitability in the fiscal year ending March 2022. As shown on Page 10, we newly announced Beyond Stations concept. We are promoting ticketless and cashless services at stations. Towards the future, we will implement various initiatives to transform stations where tickets are sold into places to generate businesses. In relation to JRE mall, we will introduce showrooms to railway stations, implement various initiatives such as health care railway stations with the use of telemedicine and others and GRE Station College and expand shared offices and other initiatives. As you see on Page 11, we established a new real estate related company called JR East Real Estate Management Company Limited to establish a capital recycling business model on April 28. We are looking to strengthen the real estate business through the asset management business and provide various services as a group as a whole, including property management. In this business, we are aiming to accelerate the formation of private placement funds and increase the scale to 100,000,000,000 yen within a few years. We also started to consider the formation of a REIT. We will work on real estate business as a growth engine for the group. Page 12 shows revitalization of tourism, including regional revitalization. 10 years after the earthquake, we started Tohoku destination campaign with 6 Tohoku Prefectures in April this year. We also started Tohoku Mono Project to promote not only tourism, but also products fresh from farm. As the campaign period is as long as 6 months, we will work hard specifically for reconstruction and revitalization of the Tohoku region. The characteristic of the campaign this time is introduction of tourism type mass in earnest. What we implemented through verification test and others in various locations is provided in 6 prefectures in Tohoku. Various planning services, on demand transportation, electronic tickets and various tickets in combination with various activities are provided for smooth implementation of procedures from reservation to payment. I think it will be a very effective measure for inbound tourists who will come back in the future. Pay 13 shows micro tourism. Even under the current COVID-nineteen pandemic, we are working hard on micro tourism. We released a new hiking from the railway station app and are considering the launch of free passes that can be used through mobile seekers to promote a transformation in purchasing style. We are also making various plans such as visiting temples and shrines and collecting their red ink stamps. We started a verification test of project using unmanned train stations and vacant old houses along the Ome line. So we want to combine these. To acquire new customers with JRE Point as a key, we implement station work linked campaign, encourage railway use that combine specialty planned IC tickets and use of station buildings and implement campaign for green car and others. Page 14 shows renewal of ekinet, a base for these initiatives. New system will be released on June 27. The renewal will lead to more convenient use of railway, lifestyle services and Shinkansen eticket and expansion of payment methods. With JRE Point for saving up and using points, we will enhance accessibility to services. As for travel products, limited time offers are implemented through JRE's dynamic rail pack within promoting vacation with Seibu Group since last autumn. We will plan and launch specific products for companies one after another. In addition, we plan to open a base for our Keishien in Karuizawa with Nomura Real Estate and Seibu Properties. In a joint project with KDDI, flexible space project, we will propose various new offices along with Shinagawa Development. For vacation, we want to combine corporate volunteering, corporate training and others specifically. Page 15 shows structural reform. We reduced operating cost by slightly more than 100,000,000,000 yen including emergency reduction in the fiscal year ending March 2021. Going forward, in promoting cost reductions further, we are planning 100,000,000,000 yen reduction through structural reforms by the fiscal year ending March 2028. We want to achieve more reduction and implement structural reforms for that. Page 16 shows the direction of structural reform. Firstly, we will promote measures to shift peak periods. We already started awarding points for off peak use in March. It has been only 1 month since then. We assume about 3% of customers shifted to off peak use. We will increase the shift further. For seasonal or hourly charge, we are currently discussing systems for flexible fares and surcharges with related parties. Through this, we will reduce the number of trains operating during peak periods to reduce fixed cost. Besides, we will streamline various transportation facilities and railway station facilities to reduce fixed costs. Page 17 shows construction of flexible railway systems by rigorously analyzing railcar replacement cycles, improving the efficiency of railcar usage plans and accelerating the increase in driver only services, we will reduce fixed cost. As for ESG, we will realize reduction of CO2 emissions of 50.0 percent by the fiscal year ending March 2,031 to achieve 0% in 2,050. Besides, by utilizing new technologies and digital technologies, we are currently working on verification test with the use of GNSS and mobile wireless communications, we will reduce facilities along trucks. In addition, by advancing CBM condition based maintenance and by utilizing BIM and point cloud data, we will promote more efficient construction. Pages 18 19 show specific initiatives, medium- and long term targets of structural reform. We will make sure to promote structural reform as a group as a whole. Implementation of ESG management is shown on Page 20. As I mentioned earlier, we aim at 50% reduction of CO2 emissions by the fiscal year ending March 2031 and net zero CO2 emissions by the fiscal year ending March 2051. We are currently driving specific measures for railcars, power plants and initiatives for use of natural energy. We will sell railcars, Hibari, will be completed in autumn this year. We will repeat verification test and start commercial operation. In Shinagawa development project, we intend to introduce new environmental and energy technologies actively. Page 21 shows contribution to regional revitalization. In March this year, we opened 11 hectol JR Fruit Park Sendai, Adahama in front of ruins of the Great Ishapan Earthquake Sendai, Arahama Elementary School in Arahama District destroyed by tsunami. It is a tourist farm. Products from the park are transported by distribution services via shinkansen lines and sold in the Tokyo metropolitan area. As various fruit trees are planted, we want to promote the park for agritourism. In the regional brand, Tohoku Mono Project, we are engaged in various initiatives, including markets direct from farm with local people in Tohoku. As for development of regional core cities, we've been working on development centering around Akuta Station and are also promoting projects for Aomori and Iwaki stations. In Maimashi City, we provide services for elderly people linking my number card with Sika. As for involvement in agriculture, we are promoting GRE agriculture stations and initiative in which farmers bring agricultural products to stations for sale. Page 22 shows numerical targets for the fiscal year ending March 2026 and results for the fiscal year ended March 2021. Please refer to that. Forecasts for the fiscal year ending March 2022 are shown on Page 23. We intend to achieve non consolidated profit of 25,000,000,000 yen and consolidated profit attributable to owners of parent of 36,000,000,000 yen Page 24 shows use of cash and amount of capital expenditures. As for shareholder returns, dividend is expected to be 100 yen per share, flat year on year. That concludes my presentation. Next, I will explain. Page 26 shows financial results and plan. As shown in plan on the right, non consolidated ordinary income will be 0 and profit will be 25,000,000,000 yen. As Fukasawa explained, we will book extraordinary gains due to liquidation of assets in real estate fund business and others. In plan for consolidated operating revenues, the number in the bracket is JPY 2,475,000,000,000. It is a reference value excluding impact of application of accounting standards for revenue recognition. Reference values are also shown on other pages for easiness of year on year comparison. Non consolidated numbers are also impacted. However, as the impact is not so significant, reference values are only shown for consolidated numbers. Page 27 shows passenger revenues for the last fiscal year. We announced revised plan in January this year. Passenger revenues exceeded the plan by JPY 11,200,000,000. Commuter passes were below plan, but noncommuter passes were above plan. In total, passenger revenues exceeded plan by 11,200,000,000. Page 28 shows a graph for outlook. The graph shows a trend of noncommuter passes revenues from the last fiscal year. Please take a look for comparison with pre COVID-nineteen revenues. As a state of emergency has been declared, the current level in the fiscal year ending March 2022 is lower than January outlook. Assuming release of the declaration in May, we expect recovery towards August in the fiscal year ending March 2022. The curve looks very sharp. However, as you see in the curve of the last fiscal year, I think we can expect sufficient recovery if momentum rises. Komito Passes revenues are described at the bottom. Although it says here reach approximately 80%, about 85% was assumed in the previous briefing. In light of the current situation, we revised down outlook from 85% to 80%. Due to progress of Telework and others, we assume there are customers shifting from commuter passes to purchase of ordinary tickets for commuting a few times a week. We estimate the shift from commuter passes to non commuter passes in conventional lines will amount to about 20,000,000,000 yen in the fiscal year ending March 2022. Page 29 shares plan for passenger revenues for this fiscal year on the assumption of the graph on Page 28. The shift from commuter passage to non commuter passage that I mentioned earlier will boost revenues for convention lines in Kanto area network by about 20,000,000 yen. Pay strategy shares operating expenses for the last fiscal year. Operating expenses were 17,300,000 yen lower than January planned as a result of further cost reduction, mainly of maintenance expenses and publicity and advertising expenses. Page 31 shows cost reduction plan for the fiscal year ending March 2022. We plan to observe increase in measures and natural increase and dig deeper for year on year cost reduction of 58,700,000,000 yen as indicated in red. The breakdown of the cost reduction of 58,700,000,000 yen is described on the bottom right. So please take a look. Page 32 shows plan for operating expenses, including the cost reduction plan. Basically, we will reduce expenses. However, as you see at the bottom, taxes and depreciation will increase along with increase in capital expenditures. Taxes will also increase due to increase in business tax due to recovery of income. Once again, Pay30 3 shares cost reduction results for the fiscal year ended March 2021 and plan for March 2022. Non consolidated plan of 59,000,000,000 yen for March 2022 shown on the far right is equal to 58,700,000,000 yen shown on Page 31. Group companies will also dig deeper for further cost reduction, and we plan to reduce cost by JPY 70,000,000,000 in total. Page 34 and following pages show consolidated results and plan by segment. Results for operating revenues and operating income are shown on the left. In Transportation segment, both revenues and income exceeded January plan. Passenger revenues increased and cost reduction progressed. On the right, plan for this fiscal year and outlook for passenger revenues are described. As shown with an asterisk, advertising and publicity included in the Transportation segment will be recognized as being included in the Retail and Services segment from the fiscal year ending March 2022. As our advertisements were associated with stations and railcars, advertising and publicity was included in the transportation segment. However, as Fukasawa explained in Beyond Station's concept, we intend to shift to advertisements generating new value in total and changed segmentation. As a result, JPY 18.30 of income will be transferred from the transportation to the retail and services in the fiscal year ending March 2022. Page 35 shows results and plan for Retail and Services. Results for both revenues and income were below January plan due to the bigger effect of COVID-nineteen at the end of the fiscal year than the fact expected in January Prime. On the right, outlook for this fiscal year and expected recovery for echinaka stores and advertisement business are described. Page 36 shows real estate and hotels. As shown on the left, both revenues and income were below January plan, mainly due to the effect of COVID-nineteen. Outlook for shopping center, office buildings and hotel businesses for this fiscal year is described on the right. Page 37 shows results for hotels, which is a part of Real Estate and Hotels. Dropping occupancy rate at Metropolitan Hotels or so called urban hotels was sharp in the last fiscal year. Due to significant decrease of inbound tourists, occupancy rate of Metropolitan Hotels with high ratio of foreign guests dropped sharply, which was a characteristic. On the top right, future measures for hotels such as linkage with micro tourism and linkage with station work are indicated. Once again, Page 38 shows a list of openings and measures for the last fiscal year and the fiscal year ending March 2022 for the 3 segments I explained. As you know, although big development projects opened in the last fiscal year, sales will be our plan due to the effect of COVID-nineteen in the last fiscal year. Going forward, along with recovery, we expect revenues also from the projects which opened in the last fiscal year shown on the left. Page 39 shows others. As for results, operating revenues were slightly below January plan, but operating income was above the plan due to progress of cost reduction. Outlook of operating revenues is shown on the right. The number of e Money transactions per month is shown on the bottom as usual. E Money transactions are recovering smoothly. In the last fiscal year, the number was 82% of the previous year. For this fiscal year, we expect a smooth recovery of e money revenues. The number of stores accepting Sika is growing around town. Supermarkets such as Marietsu and cafes such as Starbucks also accept Zika. Value per usage is also increasing. Page 40 shows a summary of non operating income and expenses and extraordinary gains and losses. As for major items, JPY 13,400,000,000 was booked as equity in net losses of affiliated companies in non operating expenses and results for the fiscal year ended March 2021. It is mainly because an equity method company was significantly impacted by COVID-nineteen. JPY 80,000,000,000 of impairment losses was booked and extraordinary losses. Impairment losses on fixed assets were booked as group companies such as Tokyo Monorail and Nippon Hotel were impacted by COVID-nineteen. The amount was very big. However, there is the effect of lower depreciation in the fiscal year ending March 2022 onwards. Environmental conservation costs of JPY 36,900,000,000 include allowance for countermeasures for soil contamination associated with land of Shinagawa development project and costs associated with investigation of the Takanawa embankment in Shinagawa project. Positive 38,000,000,000 yen planned in extraordinary gains or losses shown on the right is mainly due to asset liquidation mentioned in the beginning. Page 41 shows cash flows. Basically, we forecast a negative free cash flow again in this fiscal year. We haven't changed plan to generate a positive free cash flow in the fiscal year ending March 2024. Page 42 shows change in capital expenditures. Plan for the fiscal year ending March 2022 is described on the far right. As shown in total, gross investment will decrease slightly year on year. It is because gross investment expanded due to big projects such as JR Yokohama Tower and Waters Takeshiba in the last fiscal year. Investment needed for the continuous operation of business will increase slightly. The breakdown between transportation services and lifestyle services is also shown. Investment needed for the continuous operation of business will decrease slightly in transportation services. Although we are making efforts for cost reduction, as we expect significant amount for railcar restoration for the Hokuriku Shinkansen in this fiscal year, the investment will be almost flat. An increasing investment needed for the continuous operation of business in lifestyle services is due to replacement of air conditioning for aging station buildings. Page 43 shows interest bearing debt balance. As shown in the bottom right, net interest bearing debt increased about 1,000,000,000,000 yen year on year. Page 44 shows fund raising. Balance of short term fund raising at the end of March was 715,000,000,000 yen in total as shown in the middle. As we issued CPE of 100,000,000,000 yen in April, The balance is 815,000,000,000 yen now. Issuance facility and contract value is 1,580,000,000,000 yen That means we have sufficient