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

I am Fukasawa, President and CEO of JR East. Thank you very much for today. We announced forecast of business results for this fiscal year yesterday. We explained numbers yesterday. Today, I will mainly talk about our future measures. I will give a presentation based on the material. Firstly, speed up the Move Up 2027. We already announced JR East Group management vision, Move Up 2027. Under said vision, we planned various measures based on the outlook of transportation business impacted by changing lifestyles of customers, declining population and others. On the assumption that we will maintain the direction, I will mainly talk about enhancement of the level and the speed today. I will give a presentation under the theme of speed up the Move Up 2027 and aiming at sustainable JR East Group. As for trends envisioned in society during and after the COVID-19 pandemic, the entire society is shifting from a phase of facing the current crisis under the declaration of a state of emergency and others; two, that during COVID-19 pandemic phase, where we aim to conduct infection prevention and socioeconomic activities simultaneously. Going forward, I think the society will shift to the post-COVID pandemic phase with development of vaccines, establishment of medical treatment and others. During the past 6 months in the current crisis, we mainly worked on the 3 measures, including accomplishment of social mission, speed up the Move Up 2027 and creation of transportation demand. With the shift to the during and post-COVID pandemic phases, as is generally accepted, moves from concentration to dispersion, from company-centered to lifestyle-centered, from mass to personal will be accelerated and a new normal will be established. So I think we have to create new businesses through digital transformation. By practicing ESG management, we intend to rebuild growth and innovation strategies and strengthen management efficiency fundamentally. We hope to realize a world of Move Up 2027 as soon as possible by enhancing the level and the speed of our efforts. Our strength is real network we've been building. Through combination of the real network, virtual and digital, we will evolve our business model from railway-centered to people-centered model and aim to be a group that moves forward with local communities. This slide shows the overall picture of growth and innovation strategies and ESG management. To rebuild growth and innovation strategies, we intend to work on these 2 themes of proposing new lifestyle ideas and taking on challenges in new fields. I will explain each item one by one. As there are strong needs for work-style reform, real and digital lifestyles, town development, reassurance and cleanliness in transportation and trips, MaaS and contactless needs, we will respond to such needs. We will also integrate group strategies for customers. In new fields, we already started logistics services that utilize trains. New fields also include business alliances with start-up companies, businesses with the use of new technologies such as 5G, utilization of robots and international businesses. For ESG, we already announced Zero-Carbon Challenge 2050 in railway operation and would like to make group-wide efforts. We will also make sure to realize regional revitalization, including our theme of disaster reconstruction. Regarding proposal of new lifestyle ideas, we think new work styles, such as telecommuting, will be established. In response to that, we are doing businesses to promote workcations and multiple residence lifestyles for customers. We already have 30 STATION WORK locations, including hotels, and aim for 100 locations within 1 year and 1,000 locations nationwide by fiscal year ending March 2026. In consideration of off-peak, future work styles and ways of traveling, we will promote off-peak commuting in railway operation and provide benefits and services for repeat customers. For real and digital lifestyles, we are promoting new people-centered businesses. Going forward, by promoting ticketless services and others, we will change station spaces dramatically. We would also like to create a mechanism to utilize customer movement data. In the initiative, we think e-commerce centered on JRE MALL is a very significant tool and have been rolling out local specialties unique to JR East Group. In particular, as we form a business alliance with Senshukai this time, we will strengthen JRE more further through Belle Maison and reinforce the membership base of JRE POINT. Besides, we intend to develop new businesses with the use of new technologies such as the one you see in Touch de Go! in Takanawa Gateway. Through MaaS, we would like to meet various needs of customers. We are considering town development for our significant business development for the future, among other things. In real estate business, we aim to reconcentrate and remobilize the potential of the group's real estate and maximize the group's asset value and advance new proposal-type rental apartments further. We already launched real estate funds, and we'll accelerate town development also by using such funds. Centering around Tokyo, we are currently advancing town development or large-scale development in and around stations under the name of Tokyo Metropolis Project in Shinagawa, Shibuya and others. We intend to promote specific plans further in areas such as Shinjuku, Yokohama, Omiya and Ikebukuro. Next, reassurance and cleanliness as well as transportation and trips avoiding Cs. As ways of transportation are changing dramatically, we are making efforts for customers to use our services with peace of mind. Congestion information we provide is used by many customers. In addition, through provision of dynamic pricing, travel plans, our group hotels and others, we will propose transportation during quiet periods, off-peak hours and comfortable transportation. After the Bon holiday in August this year, we launched a special ticket offering 50% discount. As it received a great response, we would like to provide various products. As for MaaS, we are expanding urban-type MaaS and tourism-type MaaS. We offer JR East app, Ringo Pass app coordinated with secondary transportation and hiking from the railway station. We coordinate also with stores with the use of ticketless and smartphone-friendly services. For tourism-type MaaS, we will expand areas. In particular, in April next year, we will hold the Tohoku Destination Campaign for 6 months as 10-year disaster reconstruction period will be over. Through the campaign, we plan to promote tourism-type MaaS and cashless payment in various places. By pursuing ticketless and smartphone-friendly services, the number of mobile Suica members exceeded 10 million in September this year. As you can see in this graph, the number of mobile Suica members has been increasing due to the measures we have been taking. We started ticketless services for Shinkansen, such as Shinkansen e-ticket and Touch de Go! Shinkansen. The penetration rate is about 30% now. By expanding such services further, we will cater to contactless needs of customers, save resources and provide stress-free transportation. As I mentioned earlier, we will create new station spaces and transform stations as places to sell tickets into places to create new businesses. We are currently promoting various smartphone-friendly services, including verification test as you see at the bottom. To integrate group strategies for customers, we intend to use various data through ticketless and smartphone-friendly services. We will analyze data for personalization, provide accurate information for customers and create businesses. We would like to advance comprehensive services that encompass 3 businesses: railway, lifestyle services and IT and Suica businesses. As we have been accumulating lots of data of transportation in particular, we will make appropriate recommendations reflecting customers' transportation or life stage. Next, services that utilize trains. As picked up in the media recently, we are looking to transport local, fresh seafood and vegetable, small amount of valuable parts and others with the use of Shinkansen. So far, we implemented one-off verification tests. As we are planning scheduled transportation, the number of inquiries from various customers is increasing. We intend to grow this initiative as a decent business. In so doing, we will collaborate with external parties, such as JAPAN POST and JA. To take on challenges in new fields, we are currently collaborating with various start-up companies. For regional revitalization, new travel and smart life, we would like to continue to collaborate with various start-up companies and universities for technologies. As for 5G, we will establish 5G communications environment inside railway stations and in railway line-side areas and begin business for renting out to telecommunication carriers. Regarding use of new technologies, such as robots, we are implementing various tests in Takanawa Gateway and other locations, and we'll pursue development and use of robots, including maintenance robots. We are also looking to expand international businesses, including railcar manufacturing operations. In lifestyle services as well, we plan to develop a hotel in Taiwan. We will pursue overseas expansion in railway and lifestyle services. For ESG, as I said earlier, under Zero-Carbon Challenge 2050, we are making group-wide efforts to realize substantially zero CO2 emission by fiscal year ending March 2051. We will advance Shinagawa Development Project, development of trains, introduction of CO2-free power generation to our power station and use of renewable energy. Another big theme of ESG is to contribute to regional revitalization. We've been working on regional revitalization mainly through tourism. In transportation services reform, we will pursue optimal transportation modes in regions and realize BRT autonomous driving. We will launch regionally linked IC cards in Utsunomiya and Iwate in spring next year and promote such link between Suica and regional cards. In addition, a post office opened in unmanned Emi Station on the Uchibo Line at the end of August. We would like to promote further such an initiative of integrating post office and railway station. I talked about JRE MALL earlier. We will integrate real and virtual world, including online. Now I will talk about how to strengthen management efficiency fundamentally. We already announced JPY 150 billion of cost reduction to improve cash flows. We are accumulating efforts to achieve the target in this fiscal year, and we'll reduce fixed cost even further as well as capital expenditures in the next fiscal year onwards. To increase productivity, we will establish efficient sales systems by promoting ticketless and cashless services. Besides, we will increase driver-only services, consider autonomous driving, accelerate smart maintenance and reform business execution systems. We will also review train timetable and fare, which are premises for those initiatives. We will review investments by streamlining equipment and reviewing railcar replacement cycle. Besides, we will seek even greater business profitability in large-scale projects and aim at efficient operational management through reorganization of the entire group. To strengthen management efficiency fundamentally, we will improve tight cash flows in this fiscal year. For that purpose, we will reduce fixed costs and revise investment required for the continuous operation of business. As I said earlier, we also intend to increase productivity, review services which form the basis and railway business, in particular, and streamline equipment. Lastly, let me discuss plan for the use of cash. Planned capital expenditures for this fiscal year is JPY 711 billion. We will advance cost reductions and others. In light of these factors, we plan to pay dividend of JPY 100 per share as shareholder return in this fiscal year. I would appreciate your understanding. As for approach to shareholder returns, as we always discuss, we intend to return profit to shareholders in a stable manner and use cash flows in a well-balanced manner. In the medium to long term, we aim at conventional total return ratio target of 40% and a dividend payout ratio of 30%. There is no change to the direction of our policy. We will make sure to realize these targets. That concludes my presentation based on the material. Thank you very much.

I am Sakai. I will explain on Page 22 and following pages. Page 23 shows nonconsolidated and consolidated revenues and income. The graph on Page 24 shows our current outlook for passenger revenues. Results up to August and expected recovery after August are shown. In Kanto area network of conventional lines, recovery trend already started. Non-commuter passes will recover gradually and reach approximately 80% at the end of this fiscal year and approximately 85% in the next fiscal year as a steady state. Shinkansen is still very sluggish at approximately 30%. We place hopes on Go To campaign as Tokyo will be included in the campaign targets from October. On the other hand, by factoring in risks of spreading infection of influenza and COVID in the autumn and winter, we currently forecast Shinkansen will recover early in the new year and after when vaccines are available and reach 55% at the end of the fiscal year and 80% in the next fiscal year as a steady state. I hope you understand this is just our current fundamental view. As Fukasawa mentioned, in railway operation, we will control yield and boost demand for tourism by taking an opportunity of the Tohoku Destination Campaign held for 6 months in the next fiscal year. Page 25 shows breakdown of revenues and breakdown of the first half and the second half. Page 26 shows the current cost reduction plan for this fiscal year. We totaled cost reduction amount of group companies simply. At this time, total cash cost reduction of JPY 156 billion is planned, including investments. Nonconsolidated cost reduction plan is shown in detail on Page 27. By offsetting cost increase caused by additional measures in this fiscal year, we plan to reduce cost by JPY 62.4 billion as shown in the middle. Cost reduction plan we announced after the first quarter was JPY 50 billion. We revised up the plan by slightly higher than JPY 12 billion to JPY 62.4 billion. Of course, this is not the end. As shown on the top right, we plan to dig deeper into cost reduction in this fiscal year. As Fukasawa mentioned, to strengthen management efficiency fundamentally, the entire group will review profit and loss and conduct a zero-based review of investments. We will ensure safety. However, we will prioritize other investments and take one step further to downsize or cancel investments of low priority. Page 28 shows plan for nonconsolidated operating expenses after incorporating the initiatives that I just mentioned. Page 29 shows consolidated plan by segment. As you can see, we plan to secure positive income in Real Estate & hotels and Others. On the next few pages, a brief summary by segment is described. In Transportation, as you see, as the share of railway operation is high, the plan is as shown here. In Retail & Services, monthly trends are shown on the bottom right. As you know, J-Retail and JR Foods (sic) [ JR East Food ] have quite a number of stores in station spaces. So we think the trends will be quite close to trends of short distance passenger revenues of Kanto area network you saw earlier. However, we think trends of Tokyo Station and other terminal stations will be impacted by Shinkansen as the share of souvenirs and lunchboxes is also high. In light of such factors, we made a plan by segment. The next page shows Real Estate & Hotels. Again, monthly trends are shown at the bottom. Trends of station buildings recovered significantly. Recovery of suburban stores is much faster than that of urban stores. Sales of [ foods ] and atré and others dropped only slightly, which was uncharacteristic. We forecast monthly trends will recover to 80% or 90% of pre-COVID level at the end of the fiscal year. For hotels, as you see here, monthly trend of August was 39%, showing a recovery compared to previous months. However, hotels are significantly impacted by sluggish inbound demand and others. At present, as measures such as discount services provided for Tokyo residents by hotels in Tokyo are received well, we will make sure to attract customers in nearby prices. There are no impacts on offices, basically, except decrease of conferences. In Others, shown on the right, our electronic money business has been relatively firm. External revenue [ vCARD ] was impacted by declining consumption. However, due to progress of cashless payment, we expect [ vCARD ] will recover to pre-COVID level around the end of the fiscal year. Page 32 shows plan for consolidated capital expenditures. I will explain the factors for year-on-year decrease of growth investment and others on the next page. Change in capital expenditure for 3 categories is described on Page 33. Growth investment will decrease year-on-year due to high level of investment made in Shinagawa development in the last fiscal year and Takeshiba construction, which peaked in the last fiscal year. However, basically, we intend to make growth investment as planned. There are also factors boosting investment needed for the continuous operation of business, such as automatic platform gates and seismic reinforcement. However, as I said earlier, we made a review. We will make steady investment in seismic reinforcement and others but review the amount and reduce cost. Also, by slightly postponing replacement of old railcars, we will reduce cost by JPY 50 billion from the plan. We will continue to make investment in innovation to source these for the future. Lastly, for direction of funding shown on Page 34, we intend to firmly maintain these 3 policies we explained in the past. As you see in short-term funding and issuance facility, we secured JPY 1.350 trillion in total as issuance facility and contract value. There is remaining facility of approximately JPY 670 billion compared to the current balance. We recognize this is a sufficient level, and we'll continue fundraising based on the policies. Please refer to reference materials shown on the following pages. That concludes my presentation.