Keikyu Corporation (9006) Earnings Call Transcript & Summary

I am Kaneko, Managing Executive Officer of the Management Strategy Department. I'll explain the financial results for the second quarter of FY 2024 and the forecast for FY 2024. Please turn to Page 4 for executive summary. On year-on-year basis, revenue from operations increased 10% to JPY 140.9 billion, and operating profit increased 37% to JPY 19 billion due to the fare revision in the Transportation segment in the previous fiscal year. Profit attributable to owners of parent was up 48% year-on-year to JPY 13.6 billion, mainly due to decreased income taxes as the recognition of past impairment losses was allowed as a tax procedure with the succession of the Nagano Keikyu Country Club business. Progress on the initial forecast is shown in the middle. Operating profit was higher by JPY 3.7 billion than the initial forecast, as it exceeded forecast in all segments, specifically in the Transportation and Real Estate sales segments. Based on the second quarter results, we have revised upward our forecast for the fiscal year ending March 2025, as shown at the bottom, although the forecast for revenue from operations has been revised downward from the initial forecast to JPY 303 billion to reflect the delay in progress of condominium sales. Operating profit is now forecasted as JPY 33 billion, up JPY 3 billion from the initial forecast to reflect the strong performance of each business while anticipating the expenses postponed to the second half of the year. Profit attributable to owners of parent is forecasted as JPY 21.5 billion, up JPY 4.7 billion from the initial forecast. Furthermore, in line with the upward revision of the profit forecast, we plan to increase the annual dividend for this fiscal year by JPY 2 to JPY 18. Next, I will explain the results for the second quarter. Please turn to Page 6. This slide shows the consolidated statement of income. Revenue from operations was JPY 140.9 billion, up JPY 12.9 billion year-on-year. Operating profit was JPY 19 billion, up JPY 5.1 billion. Ordinary profit was JPY 18.3 billion, up JPY 4.7 billion, and profit attributable to owners of parent was JPY 13.6 billion, up JPY 4.4 billion. Capital investment, including investment in the real estate SPC was JPY 2.6 billion. Now I will explain by segment. Please turn to Page 9. In the Transportation segment, revenue from operations was JPY 59.3 billion, up JPY 6.1 billion year-on-year, and operating profit was JPY 11.7 billion, with a year-on-year increase of JPY 5.5 billion, of which JPY 4.8 billion came from railway operations and JPY 700 million from bus operations. Both railway and bus operations benefited from fare revisions for JPY 4.3 billion and recovery in mobility demand. The same reason is applicable to the achievement of the original forecast for the first half, but the bus operations were affected by a decrease in personnel and other expenses. The power expenses of railway operations and the fuel costs for buses and taxis decreased by a total of about JPY 200 million year-on-year. Page 10 shows a breakdown of the number of passengers carried and revenue from railway operations. The total number of commuters and non-commuters shown at the top increased 2.9% year-on-year. For the revenue from railway operations shown in the middle, revenue from commuters increased JPY 1.8 billion and revenue from non-commuters increased by JPY 3.1 billion year-on-year. Please refer to the major operating expenses of the railway operations in the lower right. Electric power expenses and depreciation decreased mainly. Page 11 shows the number of passengers carried at the 2 Haneda Airport stations. It increased 9.8% year-on-year, mainly due to increased overseas visitors. Next, please turn to Page 12 for the Real Estate segment. Revenue from operations in the Real Estate segment increased JPY 2.9 billion year-on-year to JPY 23.7 billion for a total of sales and leasing operations and operating profit was JPY 3.3 billion, down JPY 400 million year-on-year. In the real estate sales operations, revenue increased due to the sale of interest in business sites despite a decrease in the number of condominium units sold in this quarter. In the real estate leasing operations, revenue increased due to an increase in dividend income from invested real estate funds and increased rent income from a rental office building opened in May, but profit decreased due to increased expenses associated with the opening of this building. Next, please turn to Page 14 for the Leisure Services segment. Revenue from operations in this segment was JPY 15.1 billion, up JPY 500 million year-on-year, and operating profit was JPY 2.2 billion, down JPY 100 million year-on-year. In business hotel operations, as shown in the lower right, the occupancy rate improved by 5 points year-on-year to 87%, exceeding the first half forecast by 2.8 points. Daily rates also increased 10% year-on-year. In the leisure-related facilities operations, revenue decreased due to the closure of the hotel in Aburatsubo in the previous fiscal year as well as the business transfer of Nagano Keikyu Country Club, and operating profit decreased due to increased personnel expenses at Keikyu Kaihatsu. Next, please turn to Page 15. Revenue from operations in the Retailing segment was JPY 39.2 billion, up JPY 3.4 billion year-on-year, and operating profit was JPY 900 million, down JPY 100 million. In the Department Store and SC operations, both revenue and profit increased due to higher out-of-store sales in department stores and strong sales at shopping centers. In the store business, sales increased due to recognizing the sales of F·Climbing Company Limited, a supermarket company that became a subsidiary in the previous fiscal year, as well as strong sales at existing supermarkets and convenience stores. On the other hand, profits decreased due to increased utilities and personnel expenses. Next, please turn to Page 16. Other businesses reported increases in both revenue from operations and operating profit. That is all for each segment results. Next, please turn to Page 17. I will explain the differences from the first quarter. In the Transportation segment, Keihin Kyuko bus implemented fare revisions for airport and medium distance routes in July and August. And in the Retailing segment, sales of F·Climbing Company Limited started to be recognized from the second quarter. Next, please turn to Page 18 for nonoperating and extraordinary income and losses. Nonoperating profit decreased due to decreased gain on sales of investment securities. For the loss on retirement of noncurrent assets and extraordinary losses, JPY 1 billion was recorded for the removal of existing buildings in the redevelopment of the Aburatsubo area. Please turn to Page 19 for the consolidated balance sheet. I will explain only the items with significant changes. Cash and deposits exceeded JPY 140 billion at the end of the previous fiscal year due to the partial transfer of interest in Takanawa Sanchome land, but this item decreased by about JPY 60 billion to JPY 87.6 billion due to the payment of income taxes payable related to this transfer and the payment for the completed part of the consecutive grade separated crossing construction near Shinagawa Station. Investment securities increased due to investments in real estate funds. Total net assets increased by JPY 11.3 billion, mainly due to an increase in quarterly net income. Net interest-bearing debt outstanding at the bottom was JPY 387.3 billion, an increase of JPY 49.1 billion, and equity-to-asset ratio was 35.2%, up 2.5 percentage points. Next, I will explain the full year business forecast. Please turn to Page 22. Please refer to the revised forecast in the middle column. We forecast that revenue from operations is JPY 303 billion, down JPY 2.4 billion from the initial forecast. Operating profit is JPY 33 billion, up JPY 3 billion. Ordinary profit is JPY 31.2 billion, up JPY 3.4 billion, and profit attributable to owners of parent is JPY 21.5 billion, up JPY 4.7 billion. Capital investment is JPY 112.6 billion, down JPY 5.3 billion from the initial forecast. Next, please turn to Page 23. As I explained earlier, the operating profit forecast for this fiscal year is JPY 33 billion. I will now explain the factors that make up this forecast with changes from the initial forecast. The increasing factors in the first half are as follows: The Transportation segment was up JPY 1.3 billion due to a recovery in mobility demand. The Real Estate segment was up JPY 1.2 billion due to an increase in gross profit and postponement of expense recognition, and the Leisure Service segment was up JPY 400 million due to the strong performance of business hotels. As a result, the first half recorded a result which was JPY 3.7 billion higher than the initial forecast. On the other hand, in the second half, although the Leisure Services segment is expected to increase by JPY 300 million by continuous strong performance, the Transportation segment will see only a slight increase, as increased demand will be offset by rising expenses, and the Real Estate segment is estimated with a decrease of JPY 600 million due to delayed progress of condominium sales. As a result, the full year operating profit is forecasted as JPY 33 billion, up JPY 3 billion from the initial forecast. Please refer to Pages 25 through 31 later for assumptions used in the forecast for each segment. Next, Page 32 describes shareholder returns. As I mentioned in the summary at the beginning, we have revised upward the interim and year-end dividend for this fiscal year to JPY 9 per share, up JPY 1 from the previous forecast or an annual dividend of JPY 18 per share. That is all for my presentation.

I am Kawamata, President of Keikyu Corporation. I will explain the progress of the 20th integrated management plan, which was developed and announced in May, focusing on major points. Please turn to Page 34. When we announced our management plan in May this year, we disclosed our thoughts on management that is conscious of the cost of capital and stock price. First, I will explain the progress and actions to the plan. As shown in the table at the top, the company's PBR was below 1x as of the end of September. We recognize that improving PBR and stock price is an urgent issue. To this end, as stated in the May announcement, we will implement initiatives from 3 perspectives of improving ROE, improving PER and establishing a cash flow allocation that will contribute to improving return on capital. The first point is the improvement of ROE. The company disclosed its ROE target in conjunction with the formulation of its management plan and have recognized the gap with the level expected by the market through dialogue with the capital market. We think that the cause of this gap is the discrepancy between the cost of shareholders' equity recognized by the company and the level expected by the market. Compared to the time when the management plan was formulated, the environment has changed with rising interest rates and the cost of shareholders' equity is also on a rising trend. In light of this situation, we are considering reexamining the ROE target based on an appropriate recognition of the cost of shareholders' equity and update the plan to turn ROIC and WACC spread positive for medium to long term in each business to achieve the target. The second point is the improvement of PER. Related to the ROE target mentioned earlier, we have not been able to clearly state our growth potential in concrete terms, and dialogue with the capital market often leads to the recognition of gaps and issues. By responding to various issues obtained from the capital market as appropriate, we will enhance IR information and improve its accuracy. In this process, we will consider and explain measures to strengthen our profitability over the medium to long term, so that the market will realize our growth potential. The third point is the establishment of cash flow allocation. We will further strengthen scrutiny of investment and dispose of low profitability assets. Regarding the upward revision of the annual dividend forecast, as explained earlier in the section on financial results, we are aware that strengthening shareholder returns is also an issue, and we will continue to study ways to address this further. Next is Page 35. From this page, I will explain the progress of individual projects. For the development in Shinagawa, preparations have been made to start construction in the Takanawa Sanchome and Station area. As described in the construction costs section at the top, there is a possibility of an increase in construction costs. Therefore, we are striving to curb costs by ordering some construction materials ahead of schedule in the Takanawa Sanchome project. We are currently conducting a close examination of construction costs and income plan and we will promptly disclose any major changes when they are found to occur. Next, please refer to the top part of Page 36. In October, we started accepting credit card payment for ticket sales at all stations. In December, we plan to start a verification test for contactless payment at ticket gates with credit cards, mainly on the airport line, which we plan to introduce at all stations by the end of FY 2025. Through these measures, we will further address the needs of overseas visitors. Please refer to the middle section. A timetable revision is scheduled for November 23. In this revision, we will increase the number of early morning and late night trains to the airport and add stops for wing trains, a train with guaranteed seats found from Tokyo to improve customer convenience. Please refer to the bottom section. Through the installation of a new packet truck on the airport line and improvement work at Shinagawa Station, we will increase the number of direct trains to the airport and establish a firm position as the customer's choice for Haneda Airport Access before the market entry by JR with its airport access line, which is expected to be built in the future. Next is Page 37. From this page, I will explain the progress of the Lineside Value Co-Creation Strategy, which is the core of business promotion and the management plan. The Lineside Value Co-Creation Strategy aims to realize more sustainable development along the Keikyu lines by co-creating new value through the creation of places along the railway lines and by acting as a link between local government, businesses and residents. The newcal project is being promoted to materialize the group's area management concept. In this fiscal year, community hubs have been established in front of Miurakaigan Station and at Byobugaura Station, which is next to Kamiooka Station, to increase points of contact with the local community. Next is Page 38. We have promoted the expansion of mobility services with various businesses such as launching CHARICO, a flat rate subscription service of electric bicycle in Tsurumi Ward, Yokohama City, and signing a collaboration agreement with Luup to promote measures such as establishing mobility basis and analyzing transportation data. Next, I will explain business structure reform on Page 39. In the Transportation segment, there is an urgent need to improve the revenue base. In railway operations, we will promote the installation of platform doors to ensure the safety of customers as well as to realize one-person operation of trains. In this fiscal year, we will proceed with the installation of platform doors at Aomono-yokocho Station and other stations, aiming to complete installation at 5 stations. We plan to install them at 24 stations by the end of FY 2026. Also in railway operations, the company is introducing a smart support system that enables remote customer support at stations in response to anticipated labor shortages in the future and sustainable railway business operations. We plan to introduce this system to 15 stations in this fiscal year. In bus operations, Keihin Kyuko Bus has filed an application to revise fares for general routes in the Yokohama flat rate area to improve its revenue. The company aims to implement the revised fares in March 2025. In addition, both Keihin Kyuko Bus and Kawasaki Tsurumi Rinko Bus have already revised fares on airport and medium distance routes. Next is Page 40. In the Real Estate segment, we have established a new company to enter the asset management business with the aim of forming and beginning management of a private placement fund by the end of FY 2025. After establishing the real estate securitization measures currently underway, we will promote the asset management business and expand the real estate business domain while maintaining a financial balance. In addition, as shown below the table, ICHIRYU, a project to discover new businesses, was renewed and launched. And as part of the concentration of management resources stipulated in the management plan, we have transferred Nagano Keikyu Country Club, a business which was outside the railway lines. Please turn to Page 41 for a list of redevelopment projects. This table describes redevelopment plans for Shinagawa, Heiwajima, Kawasaki, Yokohama and Yokosuka areas. Some of the plans have been delayed since the May financial results briefing. So let me explain them today. Please refer to the bottom of this page. As recently announced by our joint venture partner, DNA, the Arena project in Kawasaki is now expected to be delayed by about 2 years for its opening from the original plan in FY 2028 due to labor shortages in the construction industry and other factors. In addition, the Sengakuji Station Category II redevelopment project, the northern end of the Shinagawa development area, will also be delayed by about 2 years from the original plan in FY 2029 due to its construction delay for the investigation of varied cultural properties discovered on the site as well as the rising cost of construction materials. Also, its total investment amount is expected to increase to about JPY 37.5 billion. In addition to this, the Heiwajima Station development plan is also reviewed. As such, the impact of construction costs and labor shortages are being felt in various projects. Other projects are also being reexamined. If there are any changes to these plans, we will disclose them as appropriate. Next is Page 42. We will appropriately address sustainability issues in all businesses to promote the enhancement of medium- and long-term corporate and social value through the sustainable development of society and our group. Starting this fiscal year, all electricity used for railway operations on all Keikyu lines has been replaced with electricity generated from renewable sources to achieve virtually zero CO2 emissions. This initiative is expected to reduce CO2 emissions by about 100,000 tonnes per year. In addition, Kawasaki Tsurumi Rinko Bus has started operating electric buses. For more detailed sustainability efforts, please refer to the integrated report issued on November 8. We will continue to provide new value based on sustainability promotion by our Lineside Value Co-Creation Strategy, while promoting the transformation of our business structure by launching specific measures in each business. In addition, we will strive to enhance social and corporate value over the medium to long term by ensuring financial soundness and improving capital efficiency. We appreciate your continued support. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]