Earnings Call: Q3 2021

Feb 1, 2021

I am Sakai. Firstly, I will explain financial results for the Q3 and revised plan for the fiscal year ending March 2021. Page 4 shows a summary. Results were as we announced the other day. Revised plan is shown on the right. As you know, in December, infection of COVID-nineteen spread farther. In January, due to the declaration of a state of emergency, use mainly of railways was below our expectation. Therefore, we decided to revise plan. Page 5 shows cost reduction results. We are digging deeper for further cost reduction. In September, we planned full year cost reduction of 92,000,000,000 yen at parent and group companies combined. As of the 3rd quarter, we implemented cost reduction of 105,500,000,000 yen which exceeded 92,000,000,000 yen We revised up cost reduction plan to be achieved at parent and group companies by the end of the fiscal year to 131,530,000,000 On a non consolidated basis, we will reduce winter bonus, goods expenses, publicity and advertising expenses, security expenses and others. Group companies will work on cost reduction in the same way. Capital expenditures are as planned. Page 6 shows passenger revenues for the 3rd quarter. As you see, each revenue item was impacted by COVID-nineteen, and the total impact on passenger revenues was 695,000,000,000 yen The graph on Page 7 shows outlook on passenger revenues, which is an assumption for revised plan. For noncommuter passes, dotted lines in black show percentage compared to pre COVID-nineteen level forecasted in September. Solid lines share results and following dotted lines show outlook for January, February March. As you can see, results exceeded the plan up until December. As a result, results for the Q3 exceeded the plan due to the impact of the declaration of a state of emergency and others, we assume low level for January February. Low level continued in January, and the impact will continue in February. Although we expect gradual recovery in March onwards, recovery will be slower than September plan. On the right, on Page 7, difference between September plan and January plan is described. Plan was revised down by 47,500,000,000 yen for conventional lines in Kanto area network and by 6,500,000,000 yen for Shinkansen. For commuter passes, shown at the bottom, plan was revised down by 18,000,000,000 yen Including conventional lines in other network, plan for passenger revenues was revised down by 77,000,000,000 yen in total. Page 8 shows full term plan for passenger revenues by segment in percentage. Although there is no mentioning here, total effect of COVID-nineteen on passenger revenues will be 925,000,000,000 Page 9 shows results of nonconsolidated operating expenses for the 1st 9 months. Page 10 shows full term plan for nonconsolidated operating expenses. As we expect additional cost reduction that I mentioned earlier, we revised down total operating expenses by 34,000,000,000 yen as shown on the first row. Breakdown is shown in the following rows. Page 11 and the following pages show consolidated results and revised plan by segment. For transportation, results are shown on the left. The effect of COVID-nineteen is negative JPY 730,000,000,000 as shown in the middle. That is a total effect, including significant effect on buses and monorails on top of parent company business. Plan is shown on the right. Passenger revenues of JR Ist will be approximately 50% on pre COVID-nineteen level at the end of the fiscal year. This is a total of the numbers shown in the graph on Page 7. In September plan, there was 80%. The plan was revised down. At the bottom of Page 11, you see shinkansen traffic volume by line. Volume of the Sakoku Shinkansen in October November was relatively high due to decreased occurrence of typhoons compared to the last fiscal year. Page 12 shares retail and services. As shown on the top right, plan for operating revenues was revised down by 42,000,000,000 yen from September plan of 375,000,000,000 yen shown in the bracket to 333,000,000,000 yen Plan for operating income was kept unchanged as we are reducing cost. Outlook of operating revenues for Echinaka stores and advertisement business is shown in the major right. We revised down slightly the respective outlook from September plan as retail and services is significantly linked with transportation. Among Ekinaka stores, restaurants or JR East Foods are currently struggling, in particular, as shown in the graph on the bottom. Page 13 shows real estate and hotels. As shown on the top right, we revised down operating revenues by 29,000,000,000 yen On the other hand, we kept unchanged September plan for operating income for the full year. Compared to retail and services, the effect of COVID-nineteen on office buildings and shopping center businesses was smaller. Therefore, we expect this level of recovery at the end of the fiscal year. As you see in the bottom graph, hotels are having a hard time. Operating revenues have been approximately 20% to 30%, a free COVID-nineteen level since January. As we assume, the declaration for state of emergency will continue to the end of February and expect gradual recovery after that. Operating revenues will be approximately 60% at the end of the fiscal year. Page 14 shows others. As shown on the top right, we revised our plan for both operating revenues and operating income by 1,000,000,000 yen It is mainly because we expect an increase in sales of e money terminals at JR East Mechatronics. Page 15 shows non operating income and expenses and extraordinary gains and losses. As you see in revised plan on the right, no operating income or expenses was revised down by JPY 12.30,000,000 due to expected equity in net loss of affiliated companies. We have kept unchanged plan for extraordinary gains and losses for now. As for capital expenditures shown on Page 16, we kept unchanged the plan for this fiscal year of 711,000,000,000 yen as shown on the bottom right. Results for the 1st 9 months were 393,100,000,000 yen showing steady progress and almost in line with plan. Interest bearing debt balance is shown on Page 17. As shown on the bottom right, interest bearing debt was 3,920,200,000,000 yen at the end of the third quarter. As shown on Page 18, we didn't change fund raising policy either. The balance at the end of December is as shown here. Total of issuance facility and contract value was JPY 1,350,000,000,000. So remaining facility is sufficient. So far, I talked about financial results for the Q3 and revised full year plan. Next, I will explain new numerical targets. As for the reasoning behind setting new targets, as I mentioned, the current situation is quite fluid. On the other hand, our current medium term targets are targets after the fiscal year ending March 2023, announced in July 2018. Since then, management environment has changed dramatically. Therefore, by making certain assumptions for the medium term and based on the forecast, we announced speed up, move up 2027 in September 2020. We are advancing new initiatives gradually in this situation. By incorporating achievements from these initiatives, we announced targets for the fiscal year ending March 2026 this time. The previous targets were 5 year targets after the fiscal year ending March 2023, and the new targets are also 5 year targets. Page 20 shows specific numerical targets in comparison with previous targets. Page 21 shows consolidated operating revenues and operating income by segment. As shown in a note at the bottom, numbers in brackets are reference values excluding an effect of application of accounting standards for revenue recognition and other standards. In the next fiscal year, accounting standards will be changed. For purchase recorded at the time of sale and others, both revenues and expenses were booked so far. Going forward, only the difference will be booked in revenues. As a result, income will be the same, but revenues will decrease. As we have been booking numbers based on the old standards, numbers based on the old standards are shown in brackets for comparison. For reference, the ratio between transportation and non transportation segments is 60% for transportation and 40% for non transportation in a target for the fiscal year ending March 2026. In the last fiscal year, the ratio was 70% versus 30%. We intend to increase ratio of non transportation and aim at 50% versus 50% in the future. Page 22 shows 5 year targets for transportation. I will talk about outlook of passenger revenues on the next page. After forecasting trend of base revenues, we aim at additional revenues through main initiatives going forward, such as introduction of green cars to the true or rapid line, yield management and capturing of demand from visitors to Japan. As for personnel expenses, the mass retirement period will be overseen. If we hire employees at the same level in recent years, personnel expenses will increase. By controlling the number of new hires, we plan to keep the same level of personnel expenses as the level of the fiscal year ending March 2021 in total. I will explain capital expenditures later. For maintenance expenses, necessary installation of automatic platform gates will progress, and volume of equipment will increase. If we don't do anything, maintenance expenses will increase. By streamlining railway equipment, we will control maintenance expenses at approximately 2.85000000000. As shown in red, overall, operating expenses will be curved to only a slight increase compared with our plan for the fiscal year ending March 2021. The graph on Page 23 shows outlook on passenger revenues. I showed you the graph for this fiscal year. The graph on this page shows outlook of passenger revenues for the medium term. As shown on the left, passenger revenues will recover gradually in the fiscal year ending March 2022. On the bottom left, you see basic trend with COVID-nineteen. This is a level we've been talking about. This level will be reached around the Q3 of the fiscal year ending March 2022. After that, COVID-nineteen will subside. Basic trend and post COVID-nineteen is shown on the bottom right. As we have been saying, we don't think basic trend will be back to 100% on free COVID-nineteen level. Basic trend, Bokanto Area Network, Shinkansen and commuter passes is shown. In total, it will be about 90%. Although I repeat myself, this is basic trend we assume. Page 24 shows 5 year plan for Retail and Services. Outlook of revenues is described on the right. As I mentioned earlier, significant portion of revenues are in tandem with flows of customers that use railways. Therefore, degree of recovery will be as shown on the right. For initiatives going forward, as shown on Page 36 of reference materials, we will merge companies involved in businesses in railway stations to operate businesses more strategically and efficiently starting in the next fiscal year. Outlook of advertisement business is also as shown here. For other main initiatives, in line with speed up, move up 2027, we want to grow shared offices, lifestyle delivery services and JRE mall or e Commerce as major business pillars. As for specific sense of scale and numerical targets, Page 31 shows numerical targets for specific actions for the fiscal year ending March 2026. For example, we will increase the number of shared offices from 64 locations to 1200 locations in total by the fiscal year ending March 2026. For JRE Mall, we aim at transaction amount of JPY 130,000,000,000 in the fiscal year ending March 2026. As transaction amount will be 130,000,000,000 yen consolidated operating revenues from that will be approximately 35,000,000,000 yen We want to grow this as a major business pillar. For lifestyle delivery services or logistics services that utilize shinkansen and others, specific numerical targets are not shown. As we have logistic and trading subsidiaries, we provide services in total. We are currently using shinkansen to transport products to be sold in railway stations. So we want to grow lifestyle delivery services also as a major business pillar. Page 25 shows real estate and hotels. As shown on the right, we will, of course, blur existing stores. As we have plans, including Shinagawa development project, the biggest project and plans for shopping center and office businesses, we will increase revenues and income through steady growth investment. Let me mention one thing about real estate and hotels. Compared to the previous targets, for the fiscal year ending March 2023, profitability is down. That is because projects to be opened going forward include projects in rural areas. Although they meet investment criteria sufficiently, profitability is relatively lower. As is the case with station space, we aim at efficient operation through company reorganization and others and make efforts to increase profitability through cost reduction. Page 26 shows others. As shown on the top right, progress of cashlessness in post COVID-nineteen will be a tailwind for our businesses in a sense. So we want to grow credit card business, Sika E Money Business and business of JR East Mecatronics that I mentioned earlier. For SECO E Money Business, we aim at doubling operating revenue from this fiscal year in the fiscal year ending March 2026. Page 27 shows 5 year financing and money usage. Regarding money usage shown on the right, capital expenditures and shareholder returns will be described on the following pages. As for financing shown on the left, consolidated accumulated operating cash flow will be 3,693,000,000,000 yen compared to money usage shown on the right. The shortage will be covered by corporate bonds, loans, asset liquidation and settler shown on the top left. Currently, we expect corporate bonds, loans and asset liquidation will be about 400,000,000,000 yen in total, of which financing through interest bearing debts, including corporate bonds and loans, will be limited to around 200,000,000,000 yen The remaining will be from asset liquidation. We want to liquidate assets of more than 100,000,000,000 yen by using real estate funds and others. We will also consider divesting Crosshair Holding stocks by assessing the necessity of holding. Free cash flows are mentioned at the bottom of the slide. We expect to achieve positive free cash flows in the fiscal year ending March 2024 in the middle of the 5 year plan. Page 28 shows 5 year total amount of capital expenditures in comparison with the previous plan. As we have been saying, we make growth investments steadily. For investment needed for the continuous operation of business, while ensuring safety, we reduce other investment. We will also continue to invest in innovation steadily. We are implementing investment policy we have been discussing. As you see on the right, growth investment in Shinagawa Development Project is significant. The investment will peak from the fiscal year ending March 2023 to March 2025, the total investment will be about 550,000,000,000. Investment needed for the continuous operation of business and investment in innovation is shown on the right. Page 29 shows debt management policy. I discussed scale of debt financing earlier. We have been seeking net interest bearing debt divided by EBITDA of about 3.5x. As shown in the graph, also in the next fiscal year, we assume the level will be quite high. However, after that, we will steadily reduce the ratio and improve the ratio to 5x or less by the end of the fiscal year ending March 2026 and aim at 3.5x over the medium- to long term. As for approach to shareholder returns on Page 30, we will maintain a total return ratio target of 40% and a dividend payout ratio of 30%. Lastly, Page 31, please. As I mentioned earlier, we set these KPIs or numerical targets to arrange schedule to promote initiatives in each segment. This time, we sophisticated targets further and set stretch targets for the same items. We also set new targets. We intend to aim at targets for the fiscal year ending March 2026, shown on the right. On the 2 bottom rows in safety, ESG related targets, mainly environment related targets, including targets for CO2 emissions and development of renewable energy power sources, are described. Those are targets for the fiscal year ending March 2,031. We will also work on these initiatives steadily. Please refer to reference materials later. That concludes my presentation.