East Japan Railway Company (9020) Earnings Call Transcript & Summary

I am Fukasawa, President and CEO. I will start my presentation. We announced financial results on April 28. In the fourth quarter, operating income was negative JPY 46.3 billion, and profit was negative JPY 53 billion. Financial results were significantly impacted by COVID-19. As we cannot forecast effects of spread of COVID-19, we cannot make a reasonable estimate. And we haven't announced forecast for the fiscal year ending March 2021. Now I will talk based on the material. Page 2 shows contents. Please go to Page 4 showing effect of spread of COVID-19 and near-term management direction. Revenue decreased approximately JPY 94 billion in the fiscal year ended March 2020. By segment, decrease was approximately JPY 71 billion in transportation, approximately JPY 14 billion in retail and services and approximately JPY 9 billion in real estate and hotels. Revenue of JR East in nonconsolidated basis decreased approximately JPY 69 billion. In April, due to a state of emergency declaration and others, the number of passengers decreased further. As for railway revenue trend, the upper row in the table shows percentage changes in revenue generated and stations and others. The lower row shows percentage changes in estimated figure for the usage of the company portion in revenue which is closer to passenger revenue. Grand total was 30% of the same period of the previous year. In particular, revenue from mid- to long distance were 3.8%. As was reported by the media, the drop was significant. Regarding cash management. To secure a certain amount of cash on hand through early abundant long-term funding, we issued commercial paper and bonds in March and April. For group companies, as we control financing through group CMS, a certain amount of cash is secured in the group as a whole. As I said earlier, we decided not to announce forecast for the fiscal year ending March 2021 this time. We will disclose forecast when we have a certain outlook. Besides, we decided not to buy back our shares this time. We will determine dividends based on forecast we will announce going forward. Let me move on to near-term management direction on Page 5. We set 3 key tasks. The first task is accomplishment of social mission. We are currently taking all steps necessary to prevent infection. As a designated public transportation service provider, we intend to secure required transportation and provide services. Besides, as we have hospitals and hotels in our group, we'd like to make social contributions by accepting COVID-19-infected patients at hospitals to prevent collapse of the medical system and accepting mild-case patients at hotels. Secondly, advancement of Move Up will not stop. We intend to accelerate it further. I said we would promote Move Up 2027 on the assumption of impacts of changing society, work-style reform, development of e-commerce and decreasing population and others. As such changes are accelerated further due to COVID-19, we will accelerate advancement of Move Up. We intend to steadily implement investment in growth and innovation required for that. On the other hand, with ensuring safety as premise, we will also reform investment required for the continuous operation of business. Thirdly, seek rapid recovery in transportation demand in aftermath. As extension of the period for state of emergency declaration is reported by the media, we don't know when this situation will subside. To seek recovery as rapid as possible in the aftermath, the government is preparing for go-to campaign and all that. In response to that, we will provide our products and work on tourism and others with local communities. In addition, we will leverage JRE Point in taking lateral measures, spanning railway, lifestyle services and IT Suica services. At any rate, for the time being, we intend to do our work with these 3 key tasks in mind. Next, I will talk about progress of JR East Group management vision, Move Up 2027. Please look at Page 7. We set numerical targets for the fiscal year ending March 2023. We will continue to make efforts to achieve the targets without changing the targets this time. Page 8 shows Transportation. We plan to conduct the Tohoku Destination Campaign in the first half of the fiscal year ending March 2022 and are currently preparing for that. We will accelerate the initiative for success. The Tokyo Olympic and Paralympic Games were postponed to next year. The campaign will coincide with the games. I hope many foreign tourists will visit Tohoku and create a big wave of traffic. We also started Shinkansen e-ticket service this March. As a result, ticketless service usage rate for JR East Shinkansen were 17.1% in March, which was up approximately 10 percentage points. We will evolve e-ticket service to easier-to-use service in an accelerated manner. To reduce face-to-face service as much as possible due to COVID-19, we will promote use of mobile and ticketless service further and realize change of roles to be played by stations. Page 9 shows expenses. Maintenance cost was JPY 302.1 billion in the fiscal year ended March 2020. Expenses for new platform doors, barrier-free facilities, construction supplementary maintenance, labor costs and others are expected to increase. Through progress of new technologies such as CBM and maintenance saving, we will continue keeping costs at around JPY 300 billion. The most advanced track facility monitoring devices or CBM will cover approximately 70% of JR East line by the end of this fiscal year. Other non-personnel expenses were JPY 464.4 billion in the fiscal year ended March 2020. Test expenses for ALFA-X and others are included in the number. As cost increases, such as increases in outsourcing, point expenses and information processing and labor costs are expected, we will promote cost-reduction measures. For CBM, we are accelerating initiatives in fields such as electric power signals and railcars. Also in business outsourcing, we intend to promote a mechanism not dependent upon manpower by introducing automated reserved seat ticket vending machine that speaks, remote-controlled ticketing system at stations and others as points of contact with customers. As the Tokyo Olympic and Paralympic Games was postponed to the fiscal year ending March 2022, some items planned for this fiscal year were postponed to next year. In any case, we will continue to work on cost reduction. Page 10 shows Retail & Services. This segment is also impacted by COVID-19. For enhancement of existing stores, we've been remodeling ecute and others. Growth in the fiscal years ending March 2018 and 2019 combined was approximately 3%. In addition, operating revenues of JPY 15 billion per year is expected from Gransta Tokyo scheduled to be opened before summer this year associated with development of area in and around North Passage of Tokyo Station. As for progress of e-commerce, we will promote e-commerce activity and aim at 1 million JRE Mall members. Page 11 shows Real Estate & Hotels. Again, for advancement of existing stores, we are implementing JRE Point customer loyalty strategy. Besides from opening of projects in Takeshiba, Yokohama and Kawasaki, we expect operating revenues of JPY 23 billion per year. We will also reinforce real estate strategy through development of residential projects and launch of funds. Page 12 shows others. Operating revenues of IT and Suica were JPY 63 billion in the fiscal year ended March 2020. Operating revenues became approximately 1.3x during the recent 3 years. We will increase operating revenues further. To promote use of mobile Suica, we will increase the number of JRE Point members. In this way, we intend to reinforce IT and Suica in total. Page 13 shows main initiatives in relation to MaaS, Suica and data marketing. For MaaS, firstly, for so-called urban MaaS, we are currently expanding and enhancing the JR East app and increasing alliances with taxi and bicycle sharing services based on Ringo Pass. The Gunma Destination Campaign is faced these difficulties due to COVID-19. But in verification test of tourism-type MaaS, Guguttogun MaaS, a function to make travel plans a function for payment with Suica and other functions were newly added. For the Tohoku Destination Campaign next year, we are planning to expand, develop and reinforce tourism-type MaaS. To make Suica a shared infrastructure, we started Shinkansen e-ticket service. We are expanding linkage between this service and eki-net and others and promoting tie-up with Rakuten Pay. To enhance regional collaboration IC card services, we are preparing to issue regional collaboration IC card with regional bus companies and others in spring next year. To increase JRE Point membership, we started point awards for railways in October last year. By combining transportation services, lifestyle services and payment services further, we will provide new services and more convenient programs for customers. We intend to launch a new structure at the early stage to promote the 3 functions to integrate gathered data and reward customers. We are looking to realize services that cater to needs of each customer and provide new services that integrate JR East Group's services. Major projects going forward are shown on Page 14. For Shinagawa Development Project, we plan to open Block 1, 2, 3 and 4 in the fiscal year ending March 2025. Takanawa Gateway Station was opened in March this year for Block 1, 2, 3 and 4. General design conditions were determined, and project cost is estimated to be approximately JPY 550 billion. Forecast for full year operating revenues is approximately JPY 50 billion. Expected IRR is more than 10%. We'd like to secure project profitability. As you see on the right, for town development, we will provide various services, including mobility, by introducing new technologies. We will also realize town development through creation together with tenants. Through various experimentations by connecting high technologies of start-up companies and high-level craft from Shinagawa and Ota Wards and others, we are looking to create new businesses. For environment, we are utilizing diverse renewable energy. Hydrogen stations will be opened this year, and we will work on realization of hydrogen society. In the fiscal year ending March 2024 and beyond, development of Oimachi Station and terminal stations in Shinjuku and Omiya, et cetera, will progress further. Page 15 is my last page. I think this COVID-19 pandemic will come to an end eventually. However, the pandemic will bring irreversible structural changes to society. That means what we showed as a world in 10 years' time in Move Up 2027 will progress extremely rapidly. We think moves from concentration to dispersion, from commuting-centered to daily life-centered, from real to digital and from mass to personal will be accelerated. In response, we will speed up further to implement various initiatives shown in Move Up 2027. At the same time, I think we need to take new measures. We will rebuild growth strategy to provide new services in response to changes in behavior and the sense of value of customers. We will also strengthen management efficiency fundamentally. As fixed cost ratio in railway operations is high in particular, we will review management efficiency fundamentally. The number of customers is very small now. If remote work or off-peak commuting progress further, we need to review subscription model we currently provide for commuter passes and others. From a cost perspective, I also think we need to change the number of train services and deployment of railcars that assume rush hours. In any case, for provision, our services focusing on people, our policy in Move Up 2027, we will make sure to cope with changes speedily and flexibly and will make group-wide efforts to get over this hardship. That concludes my presentation.

I am Kise, Executive Director. I will explain financial results for the fiscal year ended March 2020. Please look at Page 17. On nonconsolidated basis, both revenues and income decreased. Passenger revenues decreased due to COVID-19, Hagibis and other factors. Operating revenues were down for the first time in 8 fiscal years. In nonconsolidated results, COVID-19 pushed down passenger revenues by approximately JPY 67 billion and others by approximately JPY 2 billion. In addition, income at all levels decreased due to an increase in non-personnel expenses, recording of extraordinary losses pertaining to Hagibis and other factors. The outlook for revenue trends is extremely uncertain. As President said earlier, as we cannot make a reasonable estimate at this time, we decided not to announce forecast for the fiscal year ending March 2021. Page 18 shows results and main positive and negative factors of passenger revenues. Passenger revenues were down JPY 63.9 billion year-on-year. Out of that, effect of COVID-19 was negative JPY 67 billion, and effect of Hagibis was negative JPY 14 billion. Page 19 shows nonconsolidated operating expenses. Operating expenses were up JPY 45.5 billion year-on-year. Personnel expenses continued to be down due to a decrease in the number of employees resulting from the balance between mass retirement of Japan National Railway generation and new recruits or a rejuvenation effect. As for other non-personnel expenses, as we discussed in the past, outsourcing expenses include security expenses and outsourcing expenses of railway station operations. In addition, due to switch of train attendant services and onboard sales of goods to outsourcing, outsourcing expenses of those services were booked in the last fiscal year. There were also other factors pushing up expenses, such as those for test runs of next-generation Shinkansen test railcar, ALFA-X, nonlife insurance premiums and JRE Point measures. Maintenance expenses were up slightly due to some compensated construction works in the fourth quarter, which were not expected in January. For the fiscal year ending March 2021, we haven't announced forecast for operating expenses. However, major points are indicated on the far right. So please have a look. Page 20 shows consolidated financial results. In the fiscal year ended March 2020, revenues and income decreased also in consolidated results by segment. Although revenues and income decreased in Transportation, Retail & Services and Real Estate & Hotels, revenues and income increased in others. As was the case with nonconsolidated forecast, we haven't announced consolidated forecast for the fiscal year ending March 2021. Next, I will talk about results by segment, starting with Transportation on Page 21. In Transportation, revenues and income were down mainly due to a decrease in nonconsolidated passenger revenues, in particular, non-commuter passes revenues, caused by COVID-19 and Hagibis. Page 22 shows results for Retail & Services. There are many group companies of which revenues were down due to COVID-19. As a result, revenues and income decreased. Page 23 shows results for Real Estate & Hotels. Also in this segment, there are many group companies of which rent revenues decreased due to effect of COVID-19. As a result, revenues and income decreased. In particular, a drop in hotels was significant in March as effect of COVID-19 was quite significant both on accommodations and banquets. Page 24 shows results for others. Effects of COVID-19 was relatively small on this segment. Revenues and income increased due to increases in sales of IC-related equipment, Suica, electronic money revenue and others. Page 25 shows a summary of nonoperating income and expenses and extraordinary gains and losses. Disaster-related factors included in extraordinary losses are resulting from Hagibis. In the process of construction for urban development, the Block 3 of Shinagawa Development Project, soil improvement became necessary. Therefore, we booked soil improvement expenses in environmental conservation costs. Page 26 shows a summary of cash flows. Cash flows from operating activities decreased. On the other hand, as we made steady capital expenditures focusing on growth investment also in the last fiscal year, free cash flow turned negative. Page 27 shows change in capital expenditures. Capital expenditures were JPY 740.6 billion, up JPY 110.7 billion year-on-year in the fiscal year ended March 2020. As I said earlier, growth investment increased significantly year-on-year in particular. Lastly, change in interest-bearing debt balance is as you see here. Reference materials are shown on the following pages. I would appreciate if you could have a look at various data. That concludes my brief presentation on financial results for the fiscal year ended March 2020.