Keikyu Corporation (9006) Earnings Call Transcript & Summary

I am Kaneko, Senior Managing Executive Officer of Keikyu Corporation. I will explain the financial results for fiscal year 2024 and the forecast for fiscal year 2025. Now please turn to Page 4 for executive summary. For financial results in FY 2024 compared with the previous fiscal year, revenue from operations increased 4% to JPY 293.8 billion, and operating profit rose by 27% to JPY 35.6 billion, mainly due to the effect of fare revision in the Transportation segment in the previous fiscal year. Profit attributable to owners of parent decreased significantly to JPY 24.3 billion due to the absence of the gain on the partial transfer of land interest in Takanawa Sanchome to Toyota Motor Corporation in the previous fiscal year. Progress against the latest forecast is shown in the middle of the page due to increased operating profit and the change in the shareholder return policy based on the revised management plan, which will be explained later, we have decided to raise the year-end dividend by JPY 8 from the forecast to make an annual dividend of JPY 26. As shown at the bottom, the full year forecast for FY 2025 is to increase revenue from operations to JPY 305 billion, mainly from the Transportation segment. Operating profit is expected to decrease by 15% to JPY 30 billion due to an expected increase in company-wide personnel and other expenses. With the change in our shareholder return policy, the dividend payout ratio is set at approximately 40% to make an annual dividend of JPY 34 per share. In addition, the company will perform a share buyback of JPY 10 billion. Now I will explain the consolidated financial results for FY 2024. Please turn to Page 6. Revenue from operations was JPY 293.8 billion, up JPY 13.2 billion year-on-year. Operating profit was JPY 35.6 billion, up JPY 7.6 billion. Ordinary profit was JPY 34.9 billion, up JPY 6.5 billion, and profit attributable to owners of parent was JPY 24.3 billion, down JPY 59.4 billion, partly due to the absence of a one-off gain on the partial transfer of the Takanawa Sanchome land interest. Capital investment was JPY 88 billion. ROE at the bottom decreased by 20 points to 6.7%, partly due to the absence of the one-off gain on the transfer of the Takanawa Sanchome land interest in the previous fiscal year. Now I will explain by segment. Please turn to Page 9. In the Transportation segment, compared with the previous fiscal year, revenue from operations increased by JPY 8.3 billion to JPY 118.5 billion, and operating profit increased by JPY 8 billion to JPY 18.8 billion, of which JPY 6.9 billion was from railway operations and JPY 1.1 billion was from bus operations. Both railway and bus operations enjoyed a strong increase in mobility demand. Fares for both railway and bus operations were revised in the previous fiscal year, contributing to increased revenue. Page 10 shows a breakdown of the number of passengers carried and revenue from railway operations. The total number of both commuter and non-commuter passengers carried at the top increased approximately 3% year-on-year. In the revenue from railway operations in the middle, revenue from commuters increased by JPY 2.4 billion and revenue from non-commuters increased by JPY 4.1 billion from the previous fiscal year. Please refer to the major operating expenses of the railway operations in the lower right. Repair expenses and depreciation decreased by JPY 200 million, respectively. Please turn to Page 11 for the number of passengers carried at the 2 Haneda Airport stations. The total of the 2 stations increased 10% year-on-year to show continued strong performance. Please turn to Page 12 for the Real Estate segment. The total revenue from real estate sales and leasing operations was JPY 53.9 billion, down JPY 6.6 billion year-on-year, and operating profit was JPY 6.9 billion, a decrease of JPY 2.7 billion. In the real estate leasing operations, there was an increase in dividend income from funds and the contribution from rental income from YOKOHAMA SYMPHOSTAGE, which opened in the Minatomirai District in FY '24. However, in the Real Estate sales operations, both revenue and profit declined substantially, affected by a decrease in the number of condominium units sold compared with the previous fiscal year. Please refer to Page 13 later for the condominium sales results. Please turn to Page 14 for the Leisure Services segment. Revenue from operations was JPY 31.7 billion, up JPY 1.7 billion year-on-year, and operating profit was JPY 4.9 billion, an increase of JPY 300 million. In the business hotel operations, as shown in the middle right of the page, the occupancy rate improved by 2 points from the previous fiscal year to 87%, which also exceeded the latest forecast. The UX rates also rose by 14% from the previous fiscal year. In the leisure-related facilities business, revenue declined due to the closure of a hotel in Aburatsubo in the previous fiscal year and the business transfer of the Nagano Keikyu Country Club in September 2024. The entire segment recorded a profit increase due to the solid performance of the business hotel operations. Please turn to Page 15. Revenue from operations in the Retailing segment was JPY 81.2 billion, up JPY 8.8 billion year-on-year, and operating profit was JPY 2 billion, a decrease of JPY 2 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 Tokyo. In the store business, revenue increased due to sales recorded by F-Climbing, which has become a subsidiary and higher customer traffic in existing stores of supermarkets and convenience stores. However, profit decreased due to increase in utilities and personnel expenses. Please turn to Page 16. The Other segment reported an increase in revenue due to increase in completed construction projects and an increase in profit due to reduced expenses with a decrease in provision for loss on construction contracts. That is all for the overview of each segment. Next, please turn to Page 18 for nonoperating and extraordinary income and losses. In nonoperating profit, gain on sale of investment securities decreased. Extraordinary income declined due to the absence of the transfer of land interest in Takanawa Sanchome in the previous fiscal year despite the contribution received for the construction of the Daishi line project for elevating trucks and establishing underpasses. Extraordinary losses increased by JPY 43.1 billion due to a loss on tax purpose reduction entry of noncurrent assets for the construction of the Daishi line project for elevating trucks and establishing underpasses, a loss on retirement of noncurrent assets for the demolition of the former Aburatsubo Marine Park and a loss on sale of the Nagano Keikyu Country Club business. Please turn to Page 19 for the consolidated balance sheet. I will explain only the items with major changes. Cash and deposits decreased due to the payment of income taxes payable related to the partial transfer of land interest in Takanawa Sanchome in the previous fiscal year. Its balance at the end of the fiscal year was higher than usual due to the allocation of funds for investments related to the construction project in Shinagawa, but it decreased by JPY 74.7 billion from the end of the previous fiscal year. Investment securities increased due to increased SPC investment for real estate securitization. Net interest-bearing debt outstanding at the bottom was JPY 399.8 billion, an increase of JPY 61.6 billion and equity-to-asset ratio was 35%, an increase of 3 percentage points. Next, I will explain the business forecast. Please refer to Page 22. In our forecast, revenue from operations is JPY 305 billion, up JPY 11.1 billion year-on-year. Operating profit is JPY 30 billion, down JPY 5.6 billion. Ordinary profit is JPY 24.5 billion, down JPY 10.4 billion and profit attributable to owners of parent is JPY 23.3 billion, down JPY 1 billion. As explained in the financial results briefing for FY '24, mobility demand continues to grow for railway operations to increase their revenue. However, we expect decreased profit due to anticipated increase in personnel expenses in each business segment, particularly in the railway operations as well as in other expenses for such as real estate advertising. Operating profit for FY 2026, the final year of the current management plan is expected to increase with a gain on sale of real estate through securitization despite anticipated increase in personnel and other expenses, capital investment is expected to increase by JPY 54.1 billion year-on-year to JPY 142.1 billion, as shown in the lower part of the page. The assumptions underlying the forecast for each segment are provided on Page 23 through Page 29 for your later reference. Next, please turn to Page 28 for the Leisure Services segment. In this fiscal year, we expect a decrease in revenue and profit for the business hotel operations due to the renovation and closure of Keikyu EX Hotel Takanawa and Keikyu EX Inn Yokohama Station East. However, the current business performance is strong and the occupancy rate is expected to increase by 1 percentage point to 88% and ADR is also expected to increase slightly. Our shareholder return policy will be explained by President Kawamata in the review of the integrated management plan. That is all from me. Thank you.

I am Kawamata, President of Keikyu Corporation. I will explain the key points of the 20th integrated management plan, which has been updated this time. Please turn to Page 4. Page 4 reiterates the outline of the medium-term management plan announced in May last year. This time, we have updated the financial management part as the amount of investment for the Takanawa Sanchome project has been fixed before the start of construction and the amount of cash allocation has been determined. In this update, we have raised the level of target management indices such as ROE and clarify the time line for achieving the target. We will achieve sustainable improvement in corporate value by improving the real estate business strategy and capital profitability in each segment and by reviewing the capital policy. The major updates are shown in red. I'll explain them in detail later. Page 5 is about the revision of target indicators such as key management indicators and shareholder returns. In dialogue with investors after the announcement of the management plan last year, we realized that there was a gap between target management indices and the capital market expectations. Based on this, the first revision we made is to raise the ROE target and clarify the time line for achieving the target. At the time of announcement of the management plan in May last year, the target was to achieve ROE of at least 6% in FY 2026, but we have revised it to at least 8%. We will maintain ROE of at least 8% in the next management plan starting in FY 2027 and aim for at least 10% in the long term. The second point is clarifying the cash allocation and strengthening shareholder returns. As explained earlier for the financial results, FY '25 estimate a slight decrease in profit with operating profit of JPY 30 billion. But in FY '26, the final year of the current management plan, the company aims to post a profit of JPY 45 billion, including the gain on sale from real estate securitization and achieve ROE of 8%. The dividend payout ratio will be shifted from the previous standard of stable dividends based on past performance to numerical target of a payout ratio of around 40%. In addition, the company has decided to implement a share buyback of JPY 10 billion in FY '25. Going forward, we will continue flexible share buybacks based on our financial conditions and optimal capital structure. For the purpose of maintaining the current credit rating, equity-to-asset ratio will be controlled between 25% and 30%, while emphasizing asset and capital efficiency. Please turn to Page 6 for the image of growing operating profit portfolio during the period of the current management plan and in the future. The plan is to gradually increase profits by shifting the real estate business to a turnover-based business by utilizing measures such as private REITs, which will be explained later in the cycle of realizing our real estate value and utilizing it for growth investment. In addition, we will execute business transformation investment also in other businesses like the transportation business to improve capital profitability to create a long-term profit growth trend. Please turn to Page 7 for specific action plans to achieve ROE of at least 8%. There are 4 major actions. First one is strengthening the real estate business strategy to realize real estate asset value and increase asset turnover ratio. Second one is reviewing the capital policy to utilize financial leverage. Third one is implementing measures to improve capital profitability of railway and bus operations. Finally, fourth one is strengthening the corporate governance system to ensure steady execution of these 3 actions. Now I will elaborate on each action. From Page 8 to Page 9, I will explain strengthening the real estate business strategy. First, we will promote real estate turnover business to improve capital profitability and secure funds for growth investment by realizing real estate asset value. In addition to the private funds, which we are using already, the company plans to securitize real estate for at least JPY 100 billion in total by FY 2030 through the formation of private REITs to realize the value of real estate assets. By selling assets to private funds and private REITs, we intend to secure fee-based business revenue sources through asset management, property management and building management operations while retaining the possibility for continued involvement in our properties. Also, as shown in the cycle diagram, we will secure funding through securitization and create even greater added value by increasing the value of existing properties and newly acquired properties, to realize a cycle of real estate value expansion for further profit growth and fund acquisition, which will lead to the next growth investment. In order to steadily promote this cycle, we have strengthened the system by establishing the CRE strategy department in April this year. On the other hand, we are aware of the challenges in making a fundamental transformation to a turnover business and measures to address these challenges are shown in the lower right. We will proactively hire real estate specialists from outside the company to complement skills. As a preparatory step for the formation of REITs, we will accept human resources from financial institutions to an asset management company and become proficient in the business with their know-how. We will dispatch our group employees to outside companies to gain know-how and set a target for the number of qualified personnel and make steady progress. Through these actions to secure and develop human resources, we will organize the system for the real estate business and strengthen its functions. Page 9 is about the structure to steadily promote private REITs. As announced in the press release yesterday, we concluded a basic agreement with Sumitomo Mitsui Trust Bank for the formation and management of private REITs. Sumitomo Mitsui Trust Bank will invest in Keikyu Asset Management, dispatch personnel and provide a wide range of knowledge to establish a system to steadily promote the formation of private REITs, which would be difficult for us to do alone. As shown in the middle of the page, we will start REIT management in the second half of FY 2026, aiming to build up an asset of JPY 100 billion over 5 years. Page 10 is about reviewing capital policy, which is the second point of initiatives to improve ROE. The concept of cash allocation is calculated and formulated for the 5-year period through FY 2029 when the facility opening is scheduled for the ongoing Takanawa Sanchome development. Cash inflows will be generated by a combination of operating cash flow, sales associated with real estate turnover and sales of other assets while strengthening shareholder returns even during the investment phase of the Takanawa Sanchome development, keeping the appropriate level of interest-bearing debt and equity asset ratio in mind. Page 11 is also about reviewing capital policy. We explained earlier that we will raise the dividend payout ratio to around 40% from FY 2025. Accordingly, the annual dividend forecast for FY '25 is JPY 34 and the year-end dividend for FY '24, for which we will seek approval in the Annual General Shareholders' Meeting next month will be JPY 17, taking the dividend forecast for FY '25 into consideration and the total annual dividend will be JPY 26 with the interim dividend. As explained earlier, we also plan to implement a share buyback of JPY 10 billion in FY '25. We will continue to implement share buybacks in a flexible manner considering financial and balance sheet conditions and other factors. Page 12 is about the third measure for improving ROE, measures to improve capital profitability in the transportation business. In the railway operations, in order to improve earnings, the company will promote the construction of a new package truck at Haneda Airport Station and the consecutive grade separated crossing project near Shinagawa Station and enhance the access to Haneda Airport by increasing the number of trains. Also, the company promotes investments in business structure reform to build a next-generation operational structure that is sustainable in the future. Specifically, we will implement measures such as introducing smart support system for remote monitoring at stations, automated traffic signal control and conversion to one-man operation in the future. In the bus operations, Keihin Kyuko Bus and Kawasaki Tsurumi Rinko Bus revised their fares in March this year, and will continue to consider fare revisions as necessary to improve profitability. Also, as part of structural reform, the company intend to improve the efficiency of boarding and reduce crew labor costs through the introduction of articulated buses. In addition, we will streamline unprofitable routes and concentrate resources on highly profitable routes. Specifically, we will consider transferring operations of routes in Kamakura area to other bus operators to improve efficiency. Page 13 describes the strengthening of the corporate governance system to promote initiatives for ROE improvement. We plan to transition to a company with an Audit and Supervisory Committee after the Annual General Shareholders' Meeting. We will appoint members of Audit and Supervisory Committee with voting rights as members of the Board of Directors to strengthen its audit and supervisory functions further. After the transition, the ratio of outside directors will increase to 46% as described here. In addition, the bottom of the page shows challenges in promoting human capital management, which has been pointed out by investors in SR and other communications. As I explained earlier, for the CRE strategy, we recognize the challenges of strengthening and developing internal and external human resources in the area of the real estate business, which we will focus on going forward and increasing the diversity of our management team. We will promote these initiatives under the new corporate governance system. Also, ROE will be incorporated into the evaluation indices for executive officer remuneration of FY '24 to clarify the commitment by the management to the ROE target. We have been reducing our cross shareholding over the past few years, and its net asset ratio has decreased to 15.4% as of the end of FY '24. Going forward, we will continue to actively reduce cross-shareholdings with which the rationale for holding has diminished and generate funds for growth investment and other activities. From Page 16, I'll explain the Shinagawa development project. First point is about the Takanawa Sanchome project. When we transferred the land interest to our development partner, Toyota Motor Corporation, March 2024, we disclosed the total construction cost. Since then, the construction cost has increased, reflecting the current economic environment, resulting in an increase of JPY 110 billion to a total of JPY 350 billion. The schedule remains unchanged, and construction will begin in this fiscal year to be completed in FY 2029. The building use and specifications are as provided here. We will strengthen the superiority of this development project by appealing its features, such as its superiority over other properties, including its office space with one of the largest floor areas in Japan and its connectivity to the station as well as the development in collaboration with Toyota Motor Corporation, building operation with major developers and one-stop service offerings by the involvement of our group. In addition, we intend to increase the number of users of our railway lines and maximize the ripple effect on the development along the Keikyu lines and build momentum for development of the station area in the future. Page 17 is the overview of the surrounding area of Shinagawa Development. Following the Takanawa Sanchome district plan in the West exit area, which will start construction this time, development of the station commercial area and other areas will start in stages. The development schedule and investment volume are shown at the bottom of the page. While there will be overlapping periods of investment, we will control and spread out investment timing so that there will be no excessive investment at one time. Page 18 is about enhanced potential by improving convenience in the Shinagawa area. With the opening of the Linear Chuo Shinkansen, it will take only 40 minutes from Shinagawa to Nagoya, and this will create a wide transportation zone centered on Shinagawa. In addition, as Shinagawa Station is close to Haneda Airport, it is expected to attract more passengers using Haneda Airport in this wide area. Furthermore, the Tokyo Metro Namboku Line is scheduled to be extended to Shinagawa Station by the mid-2030s and the direct connection with the building of the Takanawa Sanchome project is being considered. This will improve access to Roppongi and Central Tokyo and is expected to further enhance the potential of Shinagawa Station. Page 19 explains how the ongoing development of the Shinagawa Station area will lead to the sustainable growth of our group. We will make sure to complete this development without fail and contribute to enhance the potential of Shinagawa as a whole. Also, in order to keep the real estate turnover business on track, improve the capital profitability of real estate and secure funds for growth investment, we will include this Takanawa Sanchome project in target properties of the real estate turnover business and utilize it in the framework of private REITs and private funds for the subsequent development of the Shinagawa Station commercial area. In the process of development will enhance the attractiveness of Shinagawa in collaboration with the development by JR East and the Seibu Group to increase visitors to Shinagawa and create a virtuous cycle that will lead to the sustainable growth of the Keikyu Group by spreading the effects to the areas along the Keikyu lines in conjunction with the line side value co-creation strategy. Our development project covers the central part of the area around Shinagawa Station. We are determined to play a central role in the development of this area, which is driving growth in Japan. Finally, as I explained at the beginning, after the announcement of the management plan last year, we enhanced communication with investors, and this led to the review of the management plan. As we continue to engage in constructive dialogue with you, we will reflect your feedback to our management and strengthen each measure, and we will make sure to achieve the management targets we have set forth this time. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]