PARK24 Co., Ltd. (4666) Earnings Call Transcript & Summary

Thank you very much for taking your time to join us today given your busy schedule. This is PARK24's financial results briefing for the fiscal year ended in October 31, 2021 or FY '21. My name is Nishikawa. I would now like to provide an overview of our financial results. Here are the consolidated results. This is the consolidated financial results for FY '21 as announced yesterday. Net sales were JPY 251.1 billion. Gross profit was JPY 40.6 billion. Operating loss was JPY 8 billion. Recurring loss was JPY 11.6 billion. And net loss attributed to owners of the parent company was JPY 11.6 billion. Initially, we plan for JPY 8.5 billion of profit, which is in the right table of the page for your reference, and it was our original target at the beginning of FY '21. However, the assumption of new coronavirus under the plan deviated greatly from the actual. In short, the Parking Business and Mobility Business were severely affected by the declaration of a state of emergency, which restricted people's movements for more than 7 months of the 12 months of FY 2021. As a result, we revised our original plan on October 15. These are the actual results, showing slight improvement over the revised plan. The recurring loss was JPY 11.6 billion, improved by JPY 1.4 billion against the October 15's revised plan of JPY 13 billion. The final result of FY '21 was JPY 11.6 billion in the RET resulted in the RET for 2 fiscal years in a row. Page 4 shows the waterfall chart for the period from FY '19, FY '20 to FY '21. After all, the impact of COVID-19 was about JPY 63 billion for FY '20. The period under the state of emergency was so long, which was attributed to the JPY 51 billion and negative for FY '21. Just looking at the figure, it may seem to have improved, but it's not, given the initial forecast of JPY 8.5 billion in recurring profit. The original plan itself didn't take into account the state of emergency. And this is the single biggest reason why we had a significant deviation from the original plan. Although we recovered about JPY 17.9 billion through cost reduction and other measures, we still ended up with a total deficit of JPY 11.6 billion in FY '21. Page 5 shows the quarterly trend of recurring profit and consolidated net sales. We have posted profit until the first quarter of FY '20. But from the second quarter and onwards, when the spread of the new coronavirus became apparent, our business started to be affected, leading to the loss for the 6 quarters in a row. And then the fourth quarter of the previous fiscal year from August, September to October of 2021 turned marginally positive for the first time since the start of pandemic. At the moment, after the state of emergency in Tokyo was lifted at the end of September, we maintained a positive trend for the last quarter. Page 6 shows the status of net sales and the recurring profit and loss by segment. The left chart presents Parking Business in Japan, Mobility Business and Parking Business overseas. Net sales of Parking Business in Japan stood at JPY 146.1 billion. Recurring profit was JPY 18.2 billion. In terms of Mobility Business, sales were JPY 67.1 billion with an ordinary income of JPY 3.6 billion. As for Parking Business overseas, sales were JPY 38.4 billion, but the recurring loss was minus JPY 15 billion. Business development was minus JPY 0.9 billion. In addition, there were about JPY 17.4 billion in head office costs. In total, the recurring loss stood at JPY 11.6 billion. The worst time for Parking Business in Japan was the first week of May in 2020 when utilization dropped by 50% compared to the year before. The state of emergency had been effective for a while after that week. But still, that week marked a record low. As a result, compared to that week, we have been in an upward swing for a relatively long time. But compared to FY '19, when there was no outbreak of coronavirus, we have failed to exceed the results of FY '19. Parking Business in Japan managed to remain profitable, but hovering around the lower range because of the pandemic. The same is true for the Mobility Business. Mobility Business hit the bottom in May 2020 and has improved somewhat since then. There were a few days when we exceeded the result of FY '19. But all in all, we underperformed and remain low despite the Mobility Business profitable. As for Parking Business overseas, United Kingdom and other countries such as Australia, Singapore and Malaysia faced more spread of COVID-19 in FY '21, leading to state level and regional level of lockdowns. Therefore, the overseas business was affected more seriously than the business in Japan, attributed to sluggish performance in FY '21 following FY '20. Having said that, if you look at Parking Business in Japan, Mobility in Japan and Parking Business overseas, respectively, we still remain in a moderate recovery trend. I hope that the external environment will continue to improve. Page 7 shows the balance sheet and the shareholders' equity ratio. As of the end of October 2021, shareholders' equity was JPY 25.1 billion, and the shareholders' equity ratio was 7.9%. Because of the subordinated syndicate loan, the shareholders' equity ratio and the rating assessment stood at 15.7%. But in fact, it's slightly deteriorated because of the loss posted in FY '20 and also in FY '21 when impairment loss of overseas business reduced shareholders' equities. Under these circumstances, our fundamental approach for the current fiscal year, which started in November 2021, is to be determined to avert the third straight fiscal years of loss. In order to achieve this, we plan to strengthen our revenue sources and build a solid foundation for future growth in parallel. Actually, FY '22 won't be so different from FY '20 and FY '21 when it comes to what we do. We are fully committed to cost reduction. Specifically, we'll reduce operational costs for both Parking Business in Japan and overseas, while controlling land rent, which is the top cost contributors in Parking Business through negotiation with landowners. It is important to continuously work on cost reduction with the initiatives that I mentioned. In the Mobility Business, we will do the same in terms of cost reduction. But during the current fiscal year, we would just maintain the same number of vehicles. In other words, we have roughly 52,600 vehicles as of the end of FY '21, and we won't add new vehicles and just maintain them throughout the year. The reason for not allowing net increases, as I said earlier, we must do whatever it takes to turn positive as we are determined to avert the third straight years of loss. For the Mobility Business, opening a new store would increase awareness of our cars, leading to higher utilization rate and contributing to achieve breakeven result. But it usually takes time such as 2 months, 3 months or 4 months. Another reason is the cost to deploy new cars in the market. We need to invest in labor forces, and it's going to be heavy on us. That's why we don't go for a plan with adding new vehicles. Then what we would do instead is to increase utilization of each 1 of the 52,600 cars we've maintained since the end of the previous fiscal year. We are planning to focus on expanding the profitability of each unit, contributing to higher profit margin and profit. Of course, there was a lot of discussion within the company about whether stopping the net increase would cause trouble in the future. If the market size are limited and we are to lose it to others because of no net increase for a year, we wouldn't have taken this strategy. But we believe that there is still huge potential in market out there. Our market share may drop temporarily because peer companies will try to take shares away from us by adding more cars. However, once the external environment returns to normal in the next fiscal year, we could quickly boost the number of cars by 3,000 units or by 4,000 units, just like we did before. We are confident to win back market share once again. The confidence comes from our track record of our past achievements, and there is no doubt about it. So this time, rather than making a net increase, we would like to focus on increasing the profitability per unit. As for the infrastructure for future growth, as I mentioned before, it is about making business seamless. It means building the system that enables smooth and seamless sales within the group and provide greater convenience for customers. Next is what it says here, next generation of parking facilities. It is about the validation of new parking models. We'll be verifying things such as payment via QR code, payment via apps and expansion in flap plus parking. Going to more details, we would like to work on revamping internal business processes in the core systems. Based on these initiatives and approach, page then lays out the consolidated plan for FY 2022. Here are the consolidated base numbers for FY '22. Net sales are JPY 283 billion. Gross profit is JPY 63.7 billion. Operating profit is JPY 13.5 billion, recurring profit is JPY 8.5 billion, and net profit stands at JPY 2.5 billion. As I mentioned earlier, we will strive to improve profit in Parking Business in Japan as a key initiative. Although the number of new cases has been at low level, the lingering effect of COVID are still persisting, and we should keep reducing cost in the land rent in this fiscal year as long as such impacts remain. Another point is selective development. It literally means that we will carefully select and develop properties so that they will become profitable as quickly as they could do to contribute to profits during FY '22. In other words, we will increase profits with carefully selected and developed new properties, which will make close during the same year as a part of key development initiatives. And the process of implementing them will pursue next-generation parking facilities to bring changes by providing various types of payments such as app payments and QR code payments since they're being widely available in the market. We would like to introduce flap plus parking and other new forms of parking on a trial basis and evaluate their marketability as well. With regards to key initiatives in the Mobility Business, the highlight is no net increase of vehicles. We will maintain the number of vehicles at 52,600 units throughout FY '22, the same level as the end of the previous fiscal year. Then we will maximize utilization per unit. There are 2 ways to improve utilization. One is to stay at the same location, and the other is to relocate to another site. Higher utilization per vehicle at the same location can be achieved, for example, by raising awareness of residents in the neighboring areas and those who come to the area for work to solicit more new members. The latter one is to relocate to a site with higher utilization expected. We will take these measures to improve profitability of all our vehicles. We will allocate resources which are span for new business development before to improvement of profitability per vehicle so that we can achieve increase of usage fee sales per vehicle by about 15% on average. That's the highlight of Mobility Business. Let me move on to Parking Business overseas. Next page shows the status of Parking Business overseas. First, please see Page 13. This shows the situation of NCP in the U.K., which was affected the most by the COVID-19 pandemic and the scale of the business is the largest. As we announced yesterday in April of this year, we filed a restructuring plan under the U.K. Companies Act to the local court, and we're proceeding with the restructuring in accordance with the U.K. Companies Act. When we were discussing with the land owners about the reconstruction plan, we also received various proposals from the landowners. The main scheme of this restructuring plan is to divide the land owners into 4 groups and submit the restructuring plan. If 75% or more of 1 of the 4 groups approved the restructuring plan, the remaining 3 groups must also approve the plan. And there were some groups that raised objections and were opposed to such restructured plan. We have been negotiating for quite a long time. And in addition to the negotiations on the restructuring plan, we were talking to individual landowners. And we were discussing about proposals to reduce land rents of the parking facilities and, in some cases, to cancel the lease. In the process, we began to realize that it might be possible to negotiate with them individually without using the scheme of the restructuring plan in accordance with the Companies Act. One of the reasons is that, in light of our situation, there has been a gradual change in the situation where people have started to agree to reduction in land rents or to cooperate with us for a small amount even when they cannot agree to cut the entire amount. Also in the U.K., the lockdown has been lifted. Although in Japan, we are hearing the news of increase in the number of people infected with the latest Omicron variant. The volume of traffic is gradually increasing, and the external environmental factors have improved considerably compared to when the situation was at its worst. These were the 2 major factors. And based on these factors, we felt that it would be very possible to continue the business through self-restructuring, without executing the restructuring plan in accordance with the U.K. Companies Act. So we withdrew the restructuring plan filed to the court on the 15th. In the future, the company will proceed with self-reconstruction. As shown on Page 13, there are 246 leased facilities in total, some of which are in the black, some of which are in the red. There are 87 sites where we have completed the negotiations and 159 sites where negotiations are ongoing. There are a total of 87 sites, which have been either being canceled or reviewed for rent and other contracts. This will generate improvement in profit of about JPY 1.7 billion per year. In addition, the impact of the rent revision is JPY 300 million per year. So we were able to accumulate an annual profit improvement of JPY 2 billion per year. Going forward, we intend to further reduce the rent of the land that are under negotiation. In this way, we hope to increase the amount of profit improvement as much as possible. Regarding the initiatives for each business, the most important point in terms of the aggressive measures during this period is to promote localized times parking. To put it simply, we will accelerate the development of small-scale flat outdoor parking facilities similar to those in Japan. It says localized, meaning that, for example, in the case of the U.K., instead of putting flaps on each lot as in Japan, the entire space is monitored by cameras. The most important point is to accelerate the development of such outdoor flat, small-scale parking facilities suitable to each country's situation, which we call localized times parking. Another initiative is to promote cost reduction. We will further reduce the cost per lot, for example, through cashless operations. As I mentioned earlier, instead of building machines with flaps on each lot, we will promote machineless sites with monitor cameras. Through these initiatives, we will improve profitability. In parallel, we will proceed with the reform of our business structure. We will continue to do this for each segment. On Page 15, you can find the consolidated plan for FY '22 net sales and the recurring profit by segment. Regarding the net sales, Parking Business Japan accounts for JPY 152.7 billion. Mobility Business, JPY 79.0 billion. And Parking business overseas accounts for JPY 51.8 billion. As for recurring profit and business profit, Parking Business Japan is projected to post a profit of JPY 23 billion. Mobility Business, a profit of JPY 10 billion. And Parking business overseas is projected to put a loss of JPY 5 billion. Business development, head office costs and other expenses will amount to JPY 19.5 billion, resulting in recurring profit of JPY 8.5 billion. The balance sheet, which is based on these figures, is shown on Page 16. According to our plan, as of the end of the fiscal year ending October 2022, the shareholders' equity ratio will improve slightly to 10.5%. I explained the overall business results at the beginning of this presentation. The recurring profit is JPY 8.5 billion, but the net profit is JPY 2.5 billion. The reason why the net income is very small is that the overseas business is in the red, but the domestic business is in the black. And the tax rate on the domestic business appears very large from the perspective of net profit, which is JPY 2.5 billion compared to recurring profit of JPY 8.5 billion. As for other initiatives, we will apply to the prime market in the market reorganization of the Tokyo Stock Exchange. We have also reviewed our executive compensation system. The most important point is that we will introduce a long-term incentive scheme. In short, there are basic compensation and short-term incentives which are evaluations of performance against the plan for the current fiscal year. The long-term incentives are designed to evaluate the contribution to the company's achievement of long-term goals. The long-term incentives include the achievement rate of ROIC, ESG-related indicators and the achievement rate of medium- to long-term results forecast. The valuation is based on the combination of these 3 indicators. So this was newly added. Incidentally, in FY '21, the short- and long-term incentives will not be paid naturally as we were in the red. The key points here are to introduce ROIC as a new indicator and to clarify ESG-related targets as part of the evaluation criteria. This is the most important point of the review of the executive compensation system. In addition, from Page 19, we have shown the activities for medium- to long-term growth. We have also included the recurring profit projections in the table. Basically, the Parking Business in Japan will grow modestly in the future. In this business, if there are no spread of infectious diseases or restrictions on behavior by the government, we can expect and capture a stable growth of the market. Although the Parking Business will grow stably, we expect the Mobility Business to be the driver of growth in the medium term. Beyond that, the long-term growth driver will be Parking Business overseas. Looking at the current situation, to be honest, we are in a difficult situation at the moment. However, markets such as the U.K., Australia, Singapore and Malaysia have very high growth potential. We are also considering overseas development of the Mobility Business in addition to the Parking Business in the future. So we believe that the overseas business will be one of the drivers in the future. With that in mind, we believe that if we continue to grow steadily, we will reach a level where we can target JPY 45 billion of recurring profit in FY '25. As for ROIC, we expect it to be around 15% in FY '25. And on shareholders' equity ratio, although it will depend on the dividends and other factors, I believe we will be able to raise it to 33% over the full year period, including FY '22. As for the shareholders' equity ratio, for the time being, we will target 30%. Until it exceeds 30%, we would like to distribute dividends in a somewhat restrained manner, rather than following the conventional dividend payout ratio. The midterm business policy is expansion of 4 networks and seamlessness. The 4 networks are: cars, communities, parking facilities and people. In short, they are Times Car members, Times parking facilities and the cities in the area. By seamlessly connecting these activities, we will enhance convenience for users. Our medium- to long-term policies remain unchanged this fiscal year, and we intend to pursue further under these policies. Lastly, I would like to explain our sustainability policies and initiatives starting on Page 22. As described here, the society we strive to achieve is one in which mobility transportation is convenient and stress-free, a society where diversity is respected, where human society and the environment are in harmony and where all stakeholders can coexist and co-prosper. What will PARK24 do in striving to achieve these goals and in terms of what we want to be? We want to be a company that provides mobility and transportation infrastructure services that are needed by the society. We would also like to be a company where diverse human resources can work actively with low environmental load and selected by stakeholders. Regarding the sustainability initiatives, in March of this year, we established the Sustainability Committee. Subcommittees covering 4 areas have been set up. The 4 areas, as you can see on the right are environment, human rights and labor, supply chain and governance. In June, we signed The United Nations Global Compact, and we also joined the United Nations Global Compact Network Japan. In July, we made the Tokyo 2020 Diversity and Inclusion Action Declaration. We formulated our policies on sustainability in August. This month, we set our sustainability goals and expressed support for TCFD. These are the initiatives that we have been working on. On Page 24, we have identified 5 materialities that the group should address. The materialities are: contribution to sustainable global environment, provision of safe mobility and transportation infrastructure services, innovation for comfortable society, promotion of active participation of diverse human resources essential for corporate growth, establishment of strong management foundation. We have listed our major sustainability themes and our targets and policies for 2030 to address these materialities. Up until now, some have pointed out that our stance on sustainability and ESG has been a little weak, but I strongly believe that the entire company and the group as a whole shall make stronger efforts in these areas going forward, and we have already started this from last fiscal year. These were the results for FY '21 and the plans for FY '22. Thank you very much for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]