Earnings Call: Q2 2021

Oct 29, 2020

I will explain based on the material at hand. We announced speed up move up 2027 on September 16. The outline is shown from Page 4 onwards. The announcement was only 1 month ago, and there is no change to the basic concept. The description continues until Page 9. Page 10 shows strengthening and management efficiency fundamentally. The menu is the same as the one shown in September. As you can see, there are short term, major term and long term targets, including short term numerical targets. As you know, as we are in infrastructure sector, there are measures not leading to immediate effects. For example, reduction in service frequency in transportation timetables does not lead to significant decrease in the number of personnel or railcars immediately. However, these measures will have significant mid- to long term effects through reduction in the number of new railcars and reduction in hiring. We are working on both short term and mid- to long term measures. Page 11 shows a measure we already started to take. We announced revision of timetables for large train services. This page shows what we announced on October 21. As shown here, the major purpose is work style reform of those engaged in nighttime works. As a result of this measure, we can secure nighttime work interval of more than 2 40 minutes, an increase of approximately 30 minutes from the current interval. Consequently, efficiency of maintenance and construction of platform gates and others will increase. The results will be seen next year onwards after the revision of timetables scheduled for the end of the fiscal year. According to our current estimate, annual reduction effect of maintenance expenses and capital expenditures combined will be approximately 4,000,000,000 yen Besides, as a result of revision of timetables for large trains, train service frequency can be reduced, which will have effects in the future. What we announced the other day was revision of timetables for long stream services impacting customers significantly in a sense. As we do every year, we intend to reduce service frequency in line with actual traffic in Tokyo metropolitan area and local areas. We will announce detailed timetables in the near future. As traffic during peak hours is reducing, we will promote peak shift more. Although we may not be able to cut many train services at once, we will make sure to implement the measure in revision of timetables at the end of the fiscal year. We've been talking about fares associated with this measure, although we don't have slides for that today. We had questions at the briefing held in September. Our current idea related to revision of timetables is to provide JRE point for customers who use services during off peak hours to promote peak shift. We are currently working on the system design. As revision is scheduled for the end of the fiscal year, we will announce the details in the near future. By implementing the point system, we will be able to see sensitivity of customers or to what extent we should provide benefits for customers to shift commuting time. Also, based on that, we will take measures for commuter passes for off peak hours. Page 12 shows logistics services that utilize trains, which is mentioned as a pillar for revenue growth in the menu shown earlier. I think you already looked at press releases we made one after another. Also, since September, we have been engaged in logistics services by utilizing not only shinkansen but also conventional lines such as the Jovan line and the Tokaido line. As shown here in October, we started regular transportation of twice a week. At the bottom, there is a description about ESG management related measures or hydrogen powered fuel cell test trains announced the other day. Specifically, we will start demonstration of test trains on the Tulumi line and others at the end of the next fiscal year. That's all for my explanation of speed up, move up 2027. Now let me move on to financial results and others. Page 14 shows highlights of nonconsolidated and consolidated financial results for the fiscal year ending March 2021. On Page 14, comparison with plan is indicated in red. As you can see, on nonconsolidated basis, operating revenues were 8,900,000,000 higher than planned, and operating income was 14,400,000,000 higher. The GAAP is due to a reduction in operating expenses. On consolidated basis, operating revenues were 4,200,000,000 higher than planned. The upside is smaller than that on non consolidated basis. It is partly due to relationship between internal revenues and external revenues. However, basically, it is because operating revenues of some group companies were lower than planned or pushed point to the second half. Operating income exceeded plan by 30,700,000,000 yen which was a significant upside. It is partially because we reduced costs such as cleaning costs at hotels and cost reduction progress further down our plan. Besides, as is the case with operating revenues, expenses also partially post the point to the second half. Therefore, the upside of approximately 30,000,000,000 yen will not necessarily remain in the full year. Page 15, please. On the bottom right, you see the figure, 156,000,000,000 yen we announced the other day as a total cost reduction amount of operating expenses and capital expenditures combined. This page mainly shows progress of operating expenses. Reduction in operating expenses was 53,000,000,000 yen in the first half. As for reduction in capital expenditures, as you know, construction works are time consuming. As we already started some construction works through notification well in advance, cost reduction effects will be seen in the second half. We are working on reduction in capital expenditures steadily to achieve the plan of 64,000,000,000 yen in total. We would like to show final results after the second half is over. From Page 16 onwards, passenger revenues are shown. Page 16 shows main factors. So please have a look. On Page 17, you see the graph shown in the announcement in September. As described in a speech bubble, noncommuter passes revenues from Kanto Area Network of Conventional Lines exceeded plan by 9,100,000,000 yen in the first half. As we announced the outlook in September, the upside is basically the upside for September. Mainly on the 4 day weekend in September, traffic of short distance passengers recovered fortunately, which led to the upside. Shin consent was in line with plan in the first half. As for the current situation, inclusion of Tokyo in a go to campaign target in October has a significantly positive impact. In our first report for October, short distance passenger revenues were 74%, and mid- to long distance revenues were 48% of pre COVID-nineteen level, excluding special factors such as reaction to typhoons. I think we can say both short distance and mid- to long distance passenger revenues continue to be on a recovery trend. As COVID-nineteen infections are spreading in Europe and others again, there are still risk factors, but our recovery is faster than planned. As shown at the bottom of Page 17, commuter passes revenues were in line with plan in the first half. As you see on Page 18, plan for commuter passes for the first half was 75.2%, and the result was 75.1%, in line with the plan. We are not seeing much recovery currently, almost flat in commuter passes in October. Although I repeat myself, Kanto area network of conventional lines and Shinkansen network are performing well, but commuter passes are slightly weak. I guess customers who work remotely or go to work twice a week, for example, shifted to ordinary tickets or multiple trip tickets. So we will continue to analyze the trend. Page 19 shares operating expenses. You can see year on year comparison of results. As I said earlier, expenses were 5,500,000,000 yen lower than planned. Maintenance expenses increased 800,000,000 yen year on year in the first half. Maintenance expenses increased in the first half due to an increase in construction supplementary maintenance associated with completion of station improvement construction works and renovation to improve the barrier free accessibility. For the full year, we expect maintenance expenses will decrease. Page 20 shows full year plan for operating expenses with no change. As I mentioned earlier, deep digging into cost reduction progressed at our group, including some group companies. For quick effects, we would reduce publicity and advertising expenses and outsourcing expenses, such as security and cleaning expenses in the second half. Besides, we are considering digging deeper for further cost reduction. That's all for non consolidated results and plan. From Page 21 onwards, consolidated results and plan of each segment are shown. In transportation, shown on Page 21, as you see in the upper middle of the slide, operating revenues decreased 546,000,000,000 yen in the first half. Out of that, we assumed a decrease due to COVID-nineteen was 537,000,000,000 yen The gap was due to manufacturing of railcars by Jtrack for other private railway companies and others. On the bottom, shinkansen traffic volume by line is indicated. So please refer to that. Page 22 shows retail and services. Operating revenues decreased 118,800,000,000 yen year on year in the first half. The negative effect of COVID-nineteen was 108,000,000,000 yen The difference was from a drop in revenues due to originally planned construction works, renovation works and others. In the middle, year on year comparison of J Retail, Tetsudou Kaikan and East Japan Marketing and Communications, which account for big share in retail and services, is described in outlook of operating revenues shown on the right. How a kinaka stores and advertisement business will recover towards the end of the fiscal year is described. There is no change to the outlook from what we announced in September basically. Page 23 shows Real Estate and Hotels. Operating revenues decreased 56,000,000,000 yen The negative effect of COVID-nineteen was 65,000,000,000 yen Positive factors include an increase due to opening and others. The remaining is as shown on the slide. The line graph on the bottom indicates monthly sales trend of Atre, Lumine, Hotels and others. For us, hotels were hit hardest. As shown by the yellow line in the graph at the bottom, hotels are recovering steadily. Although I repeat myself, hotels are also recovering steadily due to the go to travel campaign and others in October. Page 24 shows others. Operating revenues decreased 10,600,000,000 yen We suppose the negative effect of COVID-nineteen was 6,000,000,000 yen Other factors for the decrease include a decrease in systems contract revenues received from outside customers for system replacement by JR East, information systems and others. The structure of the table is the same. The number of e money transactions per month is shown on the bottom. Street recovery is shown. In October, the number of transactions is more than 90% of October of previous year. Page 25 shares non operating income and expenses and extraordinary gains and losses. I will comment only on major factors for increase and decrease in the first half shown in the middle. In non operating expenses, equity in net losses of affiliated companies increased 14,300,000,000. It is a reflection of our equity method companies heavily damaged by COVID-nineteen. I will not go into the details as some companies haven't announced results yet. In extraordinary gains, gains on sales of fixed assets increased 10,600,000,000 yen mainly due to gains on sales of the former company housing site. In extraordinary losses, environmental conservation cost increased 24,000,000,000 yen mainly due to countermeasures for soil contamination in Shinagawa. We started provision for the allowance last year. With allowance this time, we completed provisioning for allowance for countermeasures for soil contamination associated with the first phase of Shinagawa development project for Block I to IV we plan to open in the fiscal year ending March 2025. That's all for non operating income and expenses and extraordinary gains and losses. Page 26 shows a summary of cash flows. Cash and cash equivalents at the end of September stood at 338,500,000,000 We secured a relatively high level of cash and cash equivalents. There is no change to capital expenditures from the announcement in September as shown on Page 27. Page 28 shows interest bearing debt. As you see in the bottom right, net interest bearing debt increased to 3,796,500,000,000 yen at the end of September. There is no change to plan for the use of cash as shown on Page 29. We currently plan to pay interim dividend of per share and year end dividend of per share. Lastly, regarding fund raising policy on Page 30, we haven't changed the policy from the explanation in September basically. Balance of short term fund raising at the end of September was 680,000,000,000 yen in total, as shown in the middle. As we repaid CP in October, the balance of short term fund raising is 445,000,000,000. Issuance facility and contract value is 1,350,000,000,000. That means the amount after deducting the current balance of 445,000,000,000 yen from the total facility of 1,350,000,000,000 yen or 9 0 5,000,000,000 yen is the remaining facility, which is a sufficient level. That concludes my slide presentation.