J. Front Retailing Co., Ltd. (3086) Earnings Call Transcript & Summary

Thank you all for joining us despite your busy schedules. I'm Inagami, and today, we'll have 3 speakers presenting various topics. For this IR Day, we aim to share insights into the future vision of our group as we work toward becoming a value co-creation retailer. Specifically, we will introduce our initiatives around business, human resources and group synergies, which aim to foster a one team approach. Additionally, we will address key investor concerns, including the current state and the challenges of our company from the perspective of external directors. First, we will begin with the growth strategy tied to the integration of our businesses for interior design and facility services. Allow me to welcome Mr. Yoshimura, the current President of J. Front Design & Construction, who is also slated to head the new integrated company. Mr. Yoshimura, the floor is yours.

Hello, everyone. I'm Yoshimura from J. Front Design & Construction. Thank you for joining us today. As was just mentioned, we will launch a new company called J. Front Prime Space in March. I would like to take this opportunity to provide an overview of the company and explain its future direction. This is the agenda. I'll proceed with an overview of our company and explain its strategic direction. This is the company overview. The new company's name will be J. Front Prime Space or JFPS, and I will lead it myself. The company was established last September, but the business will launch this March. JFPS will be a wholly owned subsidiary of J. Front Retailing, placing it within a holding company framework. The total number of employees will be just over 1,200. For reference, I lead J. Front Design & Construction, which has approximately 300 employees. Meanwhile, PARCO Space Systems has around 900 employees. So combined, we have just over 1,200 employees. We will locate our headquarters in Shiodome, Tokyo, supported by roughly 50 regional facilities. These facilities span major locations at Daimaru Matsuzakaya Department Stores and PARCO stores. In addition, within the current PARCO Space Systems, we handle various businesses, including hotel cleaning. While these are smaller sites, their presence in each hotel brings our total to 50 sites. Next is our history. As many of you know, our business originated as department stores, the top red and green sections represent the lineage of Matsuzakaya Department Store and Daimaru Department Store, which together have a history of about 100 years from their founding. Starting from here, each department store had a building and interior design department formerly called Furniture Decoration, such departments existed at both Matsuzakaya and Daimaru. Taking advantage of the department store merger, we established J. Front Design & Construction in 2008. Meanwhile, within the PARCO Group, formerly Seibu, there was a company called Nishida-Denko, which had been in business for nearly 60 years. In 2000, they founded Parco Space Systems. Now the interior design companies operating within these diverse department stores and shopping centers will merge to form JFPS. Next slide, please. This page outlines our business operations. J. Front Design & Construction specializes in interior construction and design, while PARCO operates under the name Space Systems, both focused on interior work and related fields. While our core business is interior projects, the upcoming merger will allow us to operate with 2 major pillars, interior design and facility services is shown on the right-hand side of this slide. Regarding interior design, we handle both prime contracting and subcontracting. For prime contracting, we receive work directly from developers and hotel operators. Subcontracting comes from general contractors, often involving electrical and telecommunication installations. Later, I will provide specific examples of our work, but to summarize, we handle everything from design and planning to construction and implementation, covering the entire end-to-end process. Additionally, J. Front Design & Construction operates a furniture manufacturing factory in Niyagawa, Osaka. This furniture factory specializes in custom fixtures for high-end luxury brands, and we are recognized as a designated factory for premium goods. Another segment of interior design is our Refex business, primarily catering to B2C customers. Refex specializes in shatterproof mirrors, which are lightweight, durable and versatile for disaster preparedness. These mirrors can also be used in ceilings and other installations. Some of you may remember this product from the old TV show, the Best 10, where the mirror gate seen in the background was this type of mirror. The facility services, which are currently managed by PARCO Space Systems focus on facility, building and property management. This encompasses facility operations, maintenance and enhancing asset value. Currently, this division oversees operations for Daimaru Matsuzakaya Department Stores and PARCO properties. To summarize, following the merger, we will operate with 2 major business areas, interior design and facilities services. Please turn to the next page. For your reference, we have included clear examples. J. Front Design & Construction currently deals with many luxury hotels. We also work in hotel interior design and have experience with department stores like Matsuzakaya and Daimaru, PARCO locations and various commercial facilities. Additionally, we work on unique projects such as vehicle interiors. Those of you in the Kansai region may be familiar with the interior design of the luxury train Twilight Express Mizukaze. We also have experience with the Diamond Princess Cruise ship, which gained attention during the COVID-19 pandemic. These diverse projects are distinctive strengths that sets us apart from competitors. Recently, we've seen a significant increase in projects for luxury brands driven in part by the growth of inbound tourism. We've undertaken numerous new construction and renovation projects, including the interior design of the Tiffany Tower in Ginza. Please turn to the next page. This covers the performance trend. As shown on the slide, our business has been steadily growing year-by-year. We have broken down the figures for J. Front Design & Construction and PARCO Space Systems while also including the combined total. Our performance is currently benefiting from the inbound tourism trend, which has driven significant construction activity for luxury hotels. Additionally, as I mentioned earlier, luxury brands are experiencing strong growth, which has created favorable momentum, further boosting our performance. One note of explanation is that the slight increase in FY 2024 was primarily due to major renovation work at the Nagoya Department Store under the Daimaru Matsuzakaya Group. Excluding this factor, the trend is a steady upward trajectory. Please turn to the next page. This shows our position within the industry. As you can see, the far left column list figures for J. Front Design & Construction, PARCO Space Systems and J. Front Prime Space, the new integrated company launching in March. In brief, the sales are approximately JPY 73 billion with a business profit of JPY 4.3 billion and an operating profit of JPY 4.3 billion. Within the industry, as you know, Nomura ranks first, followed by Tanseisha in second place. Currently, the third ranked company is Space, which also specializes in interior design. While this is a simple aggregation, we believe we hold a position around third place within the industry. Please turn to the next page. Since we operate under the J. Front Retailing Group, we categorize our work as internal and external. Internal work refers to projects commissioned by Daimaru Matsuzakaya Department Stores and PARCO, while external work involves projects from various clients, including hotels, luxury brands and other entities outside the group. In the current J. Front Design & Construction operations, approximately 70% to 80% of our orders come from external clients. Similarly, at PARCO Space Systems, about 80% of the interior-related construction projects are sourced externally, while the remaining work comes from internal clients. Although we do handle a significant portion of internal projects, our revenue is primarily driven by external work contributing to consistent growth and profitability. For your reference, we've included ROIC figures on the next page as they've been discussed recently. For both J. Front Design & Construction and PARCO Space, people represent the largest investment component. Consequently, their ROIC figures are higher compared to other companies. And even within the group, J. Front Design & Construction shows 27%, while PARCO Space shows 14%. So far in my presentation, I've explained our company overview. Next, I'll outline our strategic direction. This page details our mission and vision. Our mission: Bringing passion to life. Together, toward the future embodies our commitment to craftsmanship and facility management. These areas are significant as they create spaces where people live, work and stay. This includes our customers, partner companies and of course, ourselves. Our commitment is to bring these passions to life and carry them forward into the future. Our vision, specialists at the intersection of spatial value and sustainable value, focuses on 2 core aspects. Regarding the spatial value we've been discussing, this refers to how we continuously enhance and elevate the quality of the spaces we create. In terms of sustainability, it means maintaining and managing facilities and ensuring their ongoing value and continuity. Our guiding principles listed on the slide highlight our principles and approach. I'd like to highlight the point at the very bottom, which we've underlined for emphasis. Be a company where people can work with confidence and peace of mind. We recognize this as the foundation for recruiting and developing young talent in today's environment. This is why it's included as guiding principle. The details are outlined in the slide. Given time constraints, I would appreciate it if you review them on your own. This shows our businesses and the value chain within the group. On the far left is the real estate business operated by J. Front City Development. Within the value chain, this covers the real estate function from initial marketing to building construction. The current J. Front Design & construction is shown within the red frame. This involves everything from design and planning to construction and on-site execution as well as maintenance. For department stores and commercial facilities, it also provides interior supervision overseeing the environment when tenants move in. Now PARCO Space Systems overlaps with the red framed area, but also extends into the blue sections on the right and bottom. The company specializes in facility management and equipment-related work, notably electrical installations. By integrating and expanding these capabilities under the new company, J. Front Prime Space, the value chain will expand. I hope you understand this diagram is illustrating how the expanded value chain will support further business growth. The new company will officially launch in FY 2026, and this slide outlines the outlook for our market environment. Fundamentally, the market remains robust, particularly in Tokyo, where many cranes are visible and buildings continue to rise. In the luxury brand segment as well, certain brands are still actively investing in new projects. However, labor shortages are truly significant across all industries, not just ours. The challenge is how to secure and retain talent while continuing to win new projects. Additionally, the construction industry is facing soaring material costs and labor wages, which, in some cases, have doubled construction investment costs and even led to project cancellations. These factors are significant concern for the future. As for the building maintenance and facility management business, we anticipate solid growth in demand for maintenance and operational management as more buildings are completed. However, labor shortages are an issue here as well. While the number of foreign workers has increased in recent years, retention and various other requirements remain key challenges. Securing talent will be critical for future growth. The number of companies in this space is limited and few can employ significant workforce. Therefore, we intend to firmly position ourselves within this field. This outlines the basic policy of our growth strategy. As I mentioned earlier, we excel in creating high-quality spaces in the luxury brand and the hotel segments. By combining the expertise of J. Front Design & Construction, spanning design and planning with PARCO Space Systems, specializing in operational management, we will offer a one-stop solution. To the best of my knowledge, there are very few companies in the market that can deliver end-to-end services like this. Our goal is to establish ourselves as a unique and unmatched company. The specific policies are outlined in the lower section of the slide. For interior and facility businesses, we prioritize leveraging our design and technical capabilities while maintaining strong relationships with developers and other clients. By delivering high-quality results on site, we secure repeat businesses. We intend to continue growing the cycle. In the facility business, our current portfolio consists largely of PARCO and Daimaru Matsuzakaya properties. Naturally, we have accumulated expertise there. Through Prime Space, we plan to broaden our base and into external facility operations beyond the group. Next, the strength and industry positioning of our interior business. As noted earlier, we specialize in high-quality interior construction, which sets us apart from other companies. With the addition of facility operations, we have described our positioning as shown on the slide. Companies such as Nomura and Tanseisha focus extensively on exhibitions and events, giving them a very broad market scope. Meanwhile, our competitors in interior construction are department store affiliated firms, namely Takashimaya Space Creates of Takashimaya and Isetan Mitsukoshi Property Design of Isetan Mitsukoshi. In the department store interior sector, these 3 companies are generally the main competitors. While we compete in the high-quality interior segment, the new company will broaden the scope. PARCO Space Systems brings expertise in the middle volume type segment and also handles commercial facilities and digital signage. As indicated by the diagonal dotted line, our market positioning will cover these areas. Our aim is not to pursue the same domains as Nomura or Tanseisha. Rather, we plan to steadily expand the areas where we are strong. Finally, this is our vision for 2030. With the establishment of Prime Space in March 2026, we aim to achieve sustained business growth towards 2030, increasing both revenue and profitability. However, as mentioned earlier, we face various challenges, including labor shortages. By pursuing measures such as M&A and business alliances and with the ambition to surpass companies such as Nomura and Tanseisha in the industry, we will strive to move to a higher level. The final page contains appendices, including industry market trends and related information. Please feel free to read them at your convenience. This concludes my presentation. Thank you very much.

Next, following on last year's IR Day discussions on group talent strategy, we will focus today on a unique initiative within our company, value co-creation through talent exchange. I will now invite Mr. Kobayashi, who is originally from PARCO and currently working at GINZA SIX to give the presentation. Mr. Kobayashi, please.

I'm Akio Kobayashi from Ginza SIX Retail Management. Thank you for joining us today. As Inagami-san said, I am currently seconded from PARCO and work at GINZA SIX. In today's presentation, I will explain how diverse talent exchanges are taking place at Ginza Six among people within the group as well as with external partners. I would like to share concrete examples to illustrate what kind of value these exchanges are creating. Let's turn to the slides. First, I'd like to briefly introduce my background. I joined PARCO after graduating from university. As noted in the slide, I have worked in a wide range of areas, including developing promotional strategies for all of our stores, corporate branding, large-scale renovations and rebranding for existing PARCO stores and overseeing new store opening projects under PARCO's expansion strategy. Later in 2024, I was seconded to GINZA SIX Retail Management, and I am now in my third year. At GINZA SIX, I belong to the Promotion & Services Department, where I am responsible for initiatives related to creating customer experience value. Moving on to the next slide. I'd like to provide a brief overview of GINZA SIX Retail Management, the company where I'm currently assigned. As many of you may already know, I would like to briefly explain GINZA SIX once again. On the left, you can see GINZA SIX, including its exterior located in Ginza 6-chome. The facility opened in 2017 as the largest mixed-use complex in Ginza. The concept of this commercial facility is Life At Its Best. This concept is reflected in the facilities' offerings. Visitors enjoy exceptional brands and products, premium services and innovative experiential value all in one place. Since its opening, GINZA SIX has consistently pursued this concept without wavering. Next, I'll explain specifically about GINZA SIX Retail Management. GINZA SIX operates as a joint venture business and GINZA SIX Retail Management serves as its comprehensive operating company, overseeing all aspects of commercial operations. This includes tenant leasing services for visiting customers, promotions and facility management. Within the Promotion & Services Division, where I work, our primary responsibilities include managing brand value and maintaining a cohesive brand identity. Additionally, we plan and implement our programs, manage membership and VIP programs and focus on enhancing customer touch points and engagement quality. Next, I will explain value creation through diverse talent exchange within GINZA SIX. There are 2 major characteristics of operations at GINZA SIX. First, many of the staff working here, including myself, are seconded employees from the JFR Group. This includes individuals with backgrounds in department stores, shopping centers, retail, real estate and creative fields. The diversity within this talent pool allows for entirely organic collaboration and integration, combining unique experiences and expertise. For example, department store staff bring deep knowledge gained from long-standing relationships with affluent customers and exceptional leasing capabilities for luxury brands. PARCO team members contribute creative project planning and content development expertise. Together, these collective strengths converge at GINZA SIX, enabling the creation of unique and innovative experiential value that transcends the boundaries of traditional commercial facilities. This next slide shows specific examples of value creation, specifically cultural outreach. Our programs embody this unique experiential value. GINZA SIX features a soaring multistory atrium space that spans from the second to fifth floors. Since 2017, we've hosted numerous large-scale art exhibitions here through collaborations with renowned artists like Yayoi Kusama. One recent example shown here is our collaboration with Kenji Yanobe on the BIG CAT BANG exhibition. This effort went beyond simple displays, expanding into installation art, original merchandise and other creative ventures, generating significant public interest. Additionally, as shown on the right side of the slide, we've utilized the rooftop of GINZA SIX for initiatives like Art Park, further enhancing cultural experiences. Cultural experience events for VIPs and brand collaborations on the next page have been highly praised for their unique GINZA SIX experience. Furthermore, the collaborations with brands shown on the right were developed in close consultation with the brands themselves, resulting in successful implementations. These initiatives are not merely events held within the facility. They are positioned and implemented as measures to deepen the brand value of GINZA SIX through tangible experiences. The core of GINZA SIX's experiential offerings is the Members-only LOUNGE SIX as described here. This exclusive lounge was created in collaboration with New Materials Research Institute. The lounge has gained recognition and acclaim for embodying Japanese aesthetics at a world-class standard. The time spent there itself is regarded as an experience symbolizing the value of GINZA, earning high praise from VIPs. We are also advancing its operation through co-creation. Finally, I'd like to share my personal reflections on working at GINZA SIX. GINZA SIX serves as a hub where diverse talent interacts, stimulating one another to uncover new insights and create new value. By combining the department stores' expertise in serving affluent customers, PARCO's creative planning and the brand value GINZA SIX has built since its establishment in 2017, we are able to produce exceptionally high-value experiences. This collaborative effort not only ensures the maintenance and expansion of GINZA SIX's brand value, but also highlights the power of talent exchange and value creation. Going forward, I believe this model can serve as a strength for other business areas and projects within the group, fostering a chain of value co-creation through talent collaboration with GINZA SIX serving as the hub. That concludes my presentation. Thank you very much for your kind attention.

Moving on to the final part of today's presentation, I'd like to introduce Mr. Saito, who was appointed as one of our Outside Directors this fiscal year. Mr. Saito will share his insights on the current state and challenges of the company from the perspective of an outside director. Mr. Saito, the floor is yours.

Good afternoon. My name is Kazuhiro Saito. I believe I bring a relatively fresh perspective, so I'd like to share a few thoughts. Before I begin, I would like to clarify how I personally view this group. If my perspective was completely misaligned with how those of you here and those watching perceive it, the discussion would not be productive. So I would like to first outline how I see the group. I come from a manufacturing background, but I believe this company and group fall into the category of a lifestyle and culture enterprise. This category spans a wide range from consumer goods to arts, focusing on providing solutions that enhance people's daily lives. In this category, what matters most from my experience and personal view lies in how effectively the company can acquire and retain loyal customers. Everything hinges on the ability to generate and maintain regular customers. In Japanese, we often use the word akinai, meaning commerce. It implies that customers do not grow tired, but instead continue to return again and again to visit, to experience, to order and to engage. In that sense, I believe this should be the basis of measuring the ultimate corporate value of a lifestyle and culture enterprise. In that regard, I would say that one of our group's strengths lies in the ability to continue offering content that keeps customers engaged and prevents them from losing interest. By content, I mean a broad spectrum ranging from tangible goods to experiential offerings. It is the ability to discern and curate high-quality content, combined with the capability to effectively present it to customers and translate it into actionable implemented expressions that defines the unique strengths of this group. I understand the shared foundation as a core aspect of our competitive advantage. However, when delving into the details, I believe it would be worthwhile to hear your perspectives on this matter at another opportunity as the group possesses distinct strengths that vary widely across its businesses. For example, PARCO is thoroughly culture-driven in its mindset, approach and actions. It's a cultural dream that invites customers to explore a variety of offerings and experiences while expanding networks horizontally. By contrast, Daimaru Matsuzakaya is more community-driven. It is not merely long established in its regions, it is deeply embedded in them. One might even describe it as a landmark-driven model that continues its business in an entirely different manner. I see the group as a highly unique combination of these contrasting approaches. As Mr. Kobayashi explained earlier, GINZA SIX represents an effort to intentionally bring these 2 elements together. The term community-driven may sound abstract, but I would ask you to imagine a well that produces excellent water. People naturally gather there, not only because they can reliably draw good water every day, but also because they can meet others, talk and encounter various goods and offerings available at that place. If we can truly combine the ability to conduct business through the inherent drawing power of the place itself with PARCO's strengths in fostering communication and interaction from another angle, where customers visit each morning with excitement, wondering what they will find there. I believe GINZA SIX will become a beloved brand cherished by customers for generations. Shifting slightly, I'd like to touch on branding. When children grow up familiar with a particular brand, it gains significant strength and staying power. In financial terms, such brands generate steady revenue, ensuring long-term prosperity with all stakeholders. To achieve that, however, a newly emerging brand that has gained initial traction, GINZA SIX, for example, must confront key questions over the next 20 years. How will it evolve? How will we continue to invest in it? How will we ensure its ongoing development? I see this as a significant and positive challenge for management, an important experiment in the best sense of the word. In reviewing our group's history, I was struck by its depth. There are only 900 companies in Japan with a history of over 300 years. Meanwhile, there are 45,000 companies with 100 years or longer in history globally, meaning almost 1/2 of them do exist in Japan. The enduring strength of these businesses arises from steadfast commitment to customers' trust and expectations. Rooted in the principle of service before profit, our group's retail operations have upheld uncompromising standards, consistently exceeding customer expectations. I view this as a group with a truly outstanding potential far beyond the narrow definition of retail. It is a lifestyle and culture enterprise. Despite my relatively short tenure, this reflects what I have observed and felt since joining. To be honest, challenges exist in every company, and we are no exception. What concerns me most is the evolving role of the company itself, particularly with the establishment of the headquarters. While I won't comment on the structure of your companies as that is a matter for each company individually, companies with grand presidential offices where the president remains seated and stationary often end up failing sooner or later. Headquarters organizations tend to grow bloated if left unchecked. While I believe they are fundamentally useless entities, my primary challenge is how to manage them and transform them into lean, high-performance headquarters that are truly useful to the field. Therefore, while we have adopted the organizational structure outlined in this presentation, it may not be the ultimate solution. In truth, this is inherently a field without clear answers. What is essential is that management maintains a flexible mindset. Above all, we must recognize that organizations naturally tend to become rigid and must be kept constantly in motion. Fortunately, in observing President's owners leadership, I see not only our commitment to developing internal talent, but also a readiness to bring in external talent when gaps are identified. At the same time, there is a clear effort to keep organizational layers as lean as possible. We intend to support these efforts and continue to monitor them closely as we move forward. This brings me to the next point, which ties into the earlier reference to akinai, commerce that does not allow customers to grow tired. The question is, how do we view our customers? In this context, customers refer to those who ultimately engage in purchasing activities. Whether or not these customers have any particular interest in the corporate name J. Front Retailing is not something that concerns me greatly. Instead, I believe we should reassess how customers view and interact with our core locations, such as Matsuzakaya in Sakae, Daimaru in Shinsaibashi and PARCO in Shibuya. I believe we need to reaffirm clearly how customers view these places and why they decide to come. Over time, as we have pursued operational efficiency and commercial efficiency, there has been a tendency to focus on placing brands organized by category inside a physical box. However, if we limit ourselves to this type of curation, the experience becomes indistinguishable. Wherever customers go, it ends up being the same. They might even opt to shop online instead. That said, human being still crave interactions with other people and want to visit places that offer unique experiences. The key question, therefore, is how we assign value to the place itself. That place becomes the brand stored in the customers' memory. Depending on how we approach it, this value can also be measured through appropriate metrics. In regard to this point, I believe we need to develop a much more rigorous understanding. Based on that, the next step, when and where will follow. It may not be limited to GINZA SIX. We could also create new formats beyond GINZA SIX. In some cases, a specific location may be better developed under the Daimaru brand or perhaps with PARCO or even Matsuzakaya. By having multiple options and adopting a flexible approach that is responsive to customer needs, I would like to see the company evolve into enterprise capable of effectively through diverse situations. As explained earlier by President Yoshimura of J. Front Design & Construction, one of our significant strengths is the ability to bring concepts to life as tangible expressions of place. This capability is extremely powerful, not only internally for our group, but also in terms of delivering solutions to external clients. If we combine this with our developer expertise, I'm confident that we can grow into an outstanding group that can create new landmark communities and provide culture networks that transcend them. Looking ahead, virtual spaces will undoubtedly become part of the equation. I believe we should embrace this possibility as well in our future endeavors. When we look at companies with history spanning 300 to 400 years, those that have reached the 100-year mark inevitably ask themselves at the key milestones what we will do for the next 100 years? A 50-year-old company asked what we will do for the next 50 years. A 400-year-old company asked what we'll do for the next 400 years. Extending that logic, the next horizon would be 500 years, assuming, of course, that the world continues to exist. While we can only hope that the world remains stable over such a time line, it is important to maintain a long-term vision while staying committed to the foundational principles, company ethos or family values that must be preserved. Over successive generations, some interpret this principle as absolute rules that must always be upheld, central pillars with no exceptions. Others may see them as foundational guidelines that permit flexibility and evolution in other areas. Ultimately, each generation may take a different approach, but I believe it is precisely this balance that has enabled such companies to endure to this day. As we look for the next 500 years, I use the phrase strength and flexibility. I do not mean it in the sense that flexibility overcomes strength. Rather, I mean that we must embody both strength and flexibility together. That is the intent behind including this phrase in the agenda. To achieve this, I would like each organization to possess the strength of a single unified organism. If we misunderstand what an organization is, we end up fitting people into an organizational chart. In fact, everyone works interconnected with each other. Unless we understand the organization as a single living entity, its true strength cannot be unleashed. An organization needs 3 elements: young people who will lead the next generation, facilitators who can effectively and carefully drive the organization forward and individuals with exceptional talent. When these 3 elements come together, I believe it creates an organization that combines strength and flexibility and organization capable of unleashing creativity. This relates to not only for our HR and training systems, but also to how those systems are operated in practice. While this isn't a major challenge per se, I want to focus carefully on how we evaluate and develop our people. Having said that, within the current environment, what becomes critical is not simply how we utilize digital tools. Rather, without digitalization, it will be impossible to share the kinds of perspectives I have outlined with everyone instantaneously. In that sense, progress in this area is urgent. From my own experience, when integrating companies with diverse backgrounds, you must align the layers of HR systems in various ways. At such times, fairness and impartiality are essential, which necessitates advancing transparency. If you aim to accelerate the speed, granularity and the circulation of information, digital transmission becomes indispensable. In this regard, I believe our group and the company still face challenges looking back from digitalization. This include enhancing the agility and the performance of the headquarters and its functions, making them leaner yet more capable, developing strategies to respond to future changes from a true customer-centric perspective and strengthening our digital foundation. In addition, we must also address how we develop the talent and how we attract it. As an outside director, I intend to closely monitor these 3 areas and to provide meaningful support whenever I can. That concludes my remarks. Thank you very much for your attention.

We will now begin the Q&A session. First, Mr. Takahashi of Mizuho Securities.

This is Takahashi from Mizuho Securities. First, thank you very much for holding another highly insightful briefing. It was truly informative. I have 2 main questions. One is for Mr. Yoshimura and the other is for Mr. Saito. First, I'd like to ask Mr. Yoshimura, I have been covering your group for some time, so I believe both companies are strong businesses, and I think I understand each company's strengths. I believe we've had a chance to review that today. When these companies merge, where do you see the potential for synergy? Simply combining into a single entity is not sufficient, and I don't believe that's your view either. If Daimaru Matsuzakaya and PARCO were to continue operating separately as before, ultimately, nothing will change. In that context, what kind of synergies do you, Mr. Yoshimura, expect? I believe there will be synergies within interiors and facilities, respectively. The fact that you operate in both interior design and facility development strikes me as a significant advantage. Please share your thoughts, including from that perspective. My second question is for Mr. Saito. Thank you very much for the very clear explanation. I ask the same question of all outside directors. Although you haven't yet been in the role for a full year, I would like to ask you 2 things. First, drawing on your extensive experience, and it can be in comparison with other companies or from your own professional background how open is the atmosphere of J. Front's Board of Directors? For example, is information readily accessible? How active and substantive are the discussions at Board meetings? I ask this as a routine point of confirmation, so I would appreciate your candid impressions. Second and more fundamental, you have had a long career at Suntory with experience in both China and Japan. Earlier, you spoke about various strengths, organizational capabilities, talent and challenges. From your perspective, where do you see the core strength of the J. Front brand? Japan has many strong department store operators within that competitive landscape, what defines the brand strength of Daimaru Matsuzakaya, PARCO and J. Front as a group? Manufacturers invest heavily in marketing to extend their brand. Fortunately, J. Front has physical stores, which provide a clear advantage. However, as you move into digital spaces, I believe you will need marketing approaches from a different perspective, similar to what manufacturers have long practiced. In that context, where do you see the brand's core strengths? And what potential do you see for J. Front to communicate those trends more effectively to external audiences? I would greatly appreciate your insights.

Thank you for your question. I will answer regarding J. Front Prime Space. With respect to the synergies that we expect from merging the 2 companies, I will begin with the interior design business. As I mentioned earlier, securing talent in this field is extremely challenging. PARCO Space Systems has around 100 people in its interior design division. At present, much of the work in commercial facilities, particularly within shopping centers involves food and retail tenants. By contrast, our focus tends to be on more luxury-oriented projects where the order value per project differs significantly. In addition, because we often secure projects upstream in the value chain, our profit margins tend to be relatively high. We won't shift all personnel to the luxury segment, but bringing some of those resources over would allow us to capture opportunities that we are currently unable to pursue due to capacity constraints. In fact, there are projects we've had to decline simply because of insufficient personnel. By optimizing resource allocation, we believe we can better capture these opportunities going forward. Another point concerns interior supervision and management. PARCO Space Systems has expertise in interior management within shopping centers. From this capability, related commercial facility projects sometimes emerge by approaching these opportunities with a focus on improving profitability and productivity. We believe we can enhance margins even on similar types of projects through better execution and operational efficiency. On the other hand, regarding the synergies between facilities, since facility operations are embedded within Daimaru Matsuzakaya and PARCO buildings, this is inseparable. Ensuring safety and security within these facilities must be maintained at all times. At the same time, as mentioned earlier, PARCO Space Systems has been steadily expanding into adjacent areas such as hotel cleaning services and acting as an agent for certain brands. These are some of the recent business ventures for PSS. These areas have strong affinity with the interior business. For example, in hotels, renovations typically occur on roughly a 10-year cycle. By being involved in operations and management, we gain early access to such information. And that enables us to create a cycle in which renovation projects naturally follow within the same company. We see significant synergy potential here. This concludes my remarks. Thank you.

This is Saito. Regarding the atmosphere of the Board of Directors, the discussions are quite active. While the debates can get intense, they are always conducted with proper decorum, of course. It may be inappropriate to say I enjoy them, but I attend each meeting with genuine anticipation. Please be assured on that point. Based on my limited by relevant experience elsewhere, I would describe the Board as both candid and vigorous in its discussions. Turning to the question of brand strength, particularly the strength of brand as a place. Daimaru Matsuzakaya is a brand that feels as though it simply belongs there. It's extremely strong. People often say a brand progresses through 3 stages: curiosity, empathy and finally, reassurance. Daimaru Matsuzakaya has fully reached that final stage of reassurance. That kind of brand does not easily falter. Conversely, because customers hold it in such regard, it is not something that we can casually tamper with. Stabilities demand respect. PARCO may evoke a similar feeling for Tokyoite who have experience in Shibuya. PARCO originally means Park, a place where diverse people gather. I believe that was Mr. Masui's original vision and remains true today, including for international visitors who gather there. Compared with the full landmark brand that feels inevitable and deeply rooted, PARCO is lighter and more fluid. It's about people exchanging information going to the PARCO Theater and perhaps stopping buying Nintendo afterward. It feels like casually gathering in a park. The weight is different, but the power to draw is very strong. Viewed from a more critical angle, the challenge for a landmark type brand is how to extend itself outward beyond its physical base and how to communicate. PARCO, on the other hand, excels at providing information to network-oriented individuals. Yet when we consider that people ultimately need physical places, the question becomes what kind of place to offer when and where in what form. While the degree of flexibility is high, it's an ongoing pursuit. Each brand has its own challenges. As I mentioned earlier, landmarks and community-based presence are essential. They serve as a foundation for communication. Why do Japanese products sell? Because they are Japanese products because they come from a place like an eyewear maker in Shibuya. Many people understand that without a physical presence, there's nothing. The question is how to expand while retaining that foundation. One possible avenue is virtual space. That said, virtual alone is insufficient. People ultimately want to go somewhere and meet others. Inbound tourism clearly demonstrates this. People feel compelled to visit. Therefore, physical places should remain the priority, complemented by outreach. Virtual or network-based outreach can deliver value in advance or at a distance. And in between lies perhaps the strongest aura, gaisho, grounded in deep customer understanding. Personally, I would not mind if gaisho traveled the world. Rather than simply following up with customers who visit our stores, I would welcome the day when a Daimaru representative is negotiating with a client in Frankfurt. I believe J. Front can find the right mix between virtual platforms, people and physical places. Given my age and perhaps conservative instincts, my personal view is that we should prioritize place. The more digital technology advances, the more people will seek warmth and physical connection. Observing the way younger generations engage passionately in fandom activities, I sense this to be true. I don't know whether that fully answers your question, but those are my thoughts.

Next, we will take a question from Mr. Shigeoka of Daiwa Securities.

This is Shigeoka from Daiwa Securities. I'd like to ask each of the 3 speakers a question. My first question is for Mr. Yoshimura. This is somewhat basic. But on Page 11 of the material, you show operating margin. Compared to other companies, what factors drive the differences in operating margin? I understand positioning and business structures differ. But in your case, what is the background to the slight decline in fiscal year 2025? Is the difference structural? And is there room for improvement?