Seibu Holdings Inc. (9024) Earnings Call Transcript & Summary

This is Takashi Goto, President of Seibu Holdings. I will first give you an overview of today's presentation. Since last year, COVID-19 has had a devastating effect with a significant impact on economic activities. The Seibu Group is facing an extremely dire business environment due to the decline in demand from less people going out as well as other factors. In the year ended March 2021, we booked a net loss of JPY 72.3 billion, the largest since the establishment of Seibu Holdings. In fiscal year 2020, we concentrated our efforts on overcoming this crisis. While maintaining the highest level of considerations on the safety and security of our operations, we have been implementing various measures with speed, such as cutting director compensation, which has continued to this day since last April; no annual stock compensation incentives for 2 consecutive years; cuts in employee bonuses; curbing nonurgent and nonessential investments and expenses, all with the aim of minimizing the negative effect of the pandemic on our financials. As a result, we were able to achieve a positive EBITDA of around JPY 1.8 billion in contrast to the JPY 4 billion loss that we had forecasted as of February 25 despite the significant decline in our top line revenues. Moreover, we took agile and flexible actions during the period to secure working capital and maintain the level of consolidated net assets such as by the issuance of preferred shares by Seibu Railway and Prince Hotels. On the other hand, although very disappointing, we decided to not pay out the interim and year-end dividend for the fiscal year ended March 2021. With changes in people's values and behavior, we expect the current business environment is not temporary and will continue and further progress in the next fiscal year onwards. Last year, on September 24, the Seibu Group announced bold management reforms to overcome the COVID-19 pandemic. Since then, Seibu Holdings has taken the lead in contemplating further reforms. This time, we have prepared a new medium-term management plan for the fiscal years ending March 2021 to March 2023 so that the Seibu Group continues to meet the needs of customers and to achieve strong and sustainable growth in the post COVID-19 era. There are 3 key themes in this management plan. The first theme is management reform. We have decided to fundamentally review our past business model in order to adapt to people's changing values and behaviors during COVID-19 and in anticipation of future crises that could hit us repeatedly and to transform ourselves into a group that can maximize corporate value regardless of the situation. There are 2 key components to these reforms. The first is to transform into an asset-light business model. To this day, the Seibu Group has been growing through a business model based on the ownership of assets. While this has had its benefits, it does make it harder for us to respond with agility and flexibility to a crisis like the one we face today. And we felt the need to innovate ourselves towards the future. Becoming asset-light does not simply mean selling off our assets. For example, in our hotel business, we will continue our involvement as operator under the MC or Management Contract structure. Through this transformation, we will rebuild our corporate structure into one which is resilient to change so that we can continue sustainable growth in any type of business environment. The second component of the reforms is to completely separate the ownership and operation of the group's assets and improve the competitiveness of both the asset owner and operator. The decision to change the group structure with regards to Prince Hotels and Seibu Properties was precisely in relation to this initiative. With the new structure, the new Prince Hotels will, as hotel operator, seek to build a hotel chain with the highest level of quality in the industry while remaining asset light in its business model. And the new Seibu Properties will, as asset owner, seek to maximize the value of the group's overall real estate portfolio, including the assets it takes in from Prince Hotels, achieve dramatic growth in its business and transform itself into a comprehensive real estate company. We will work on these 2 initiatives, leaving no exceptions, and transform our business model with speed towards the post COVID-19 era. The second theme is digital management. With the progress of digitalization in recent years, our customers' needs are becoming more diverse, while COVID-19 accelerates changes in people's values and behavior. Under these circumstances, all industries are experiencing competition from new players from other sectors, most notably with digital platforms. The Seibu Group will position this change as an opportunity and use digital technologies in various businesses, add value to our real brick-and-mortar businesses that make the most use of our rich assets and expand the fan base of the Seibu Group. The third theme is sustainability. The Seibu Group has declared it will focus on sustainability actions in 4 areas: safety, environment, society and corporate culture. In the new management plan, we will promote green management, which will strengthen and deepen our environmental initiatives. As the first step, we have set a target for the reduction of CO2 emissions as well as making a Board decision to support the TCFD proposal. We will continue to take proactive actions while assessing the impact of both climate change risks and business opportunities. During the period of the new medium-term management plan, we will make every effort on these 3 themes, thereby building a foothold for long-term growth and aiming for a sustainable improvement of corporate and shareholder value as well as striking the optimal balance between economic and social value. Lastly, with the assumption of working on these initiatives in the new management plan and improving our earnings, we plan to resume dividend payments with a year-end dividend of JPY 5 for the year ending March 2022. We sincerely thank our shareholders who showed understanding to our decision of not paying out dividends for the fiscal year ended March 2021 and would like to return our gratitude to their support as early as possible. In the past, the Seibu Group has shown its resilience and overcome hardships such as the financial crisis and the Great East Japan earthquake. I am confident that we will again triumph over this COVID shock with the solidarity and challenging spirit that the group has nurtured so far. We ask for and sincerely appreciate the continued support to the group by our shareholders and investors. Thank you for your attention. I will now explain using the presentation titled overview of financial results for the fiscal year ended March 31, 2021, and forecasts for the fiscal year ending March 31, 2022. Please turn to Page 3. First, the financial results for the fiscal year ended March 31, 2021. Due to weaker demand caused by the spread of COVID-19 and the development of a New Lifestyle, operating revenue was JPY 337 billion, down 39% year-on-year, and we booked an operating loss of JPY 51.5 billion. Despite the extremely tough business environment, we were able to secure a positive EBITDA thanks to factors such as cost reduction efforts. Profit attributable to owners of parent was minus JPY 72.3 billion. This includes the booking of gains on sales of noncurrent assets and subsidies for employment adjustment as extraordinary income and impairment loss and losses for the temporary suspension of operations as extraordinary loss. We have more information on the extraordinary gain and loss on Page 28, including details on the impairment, so please take a look. We outperformed our forecast announced on February 25 in the various P&L items, thanks to higher operating revenue driven by stronger-than-expected demand towards the latter half of Q4 mainly in the hotel and leisure segment as well as our efforts to further lower costs. Please see Pages 4 and 5 for the positive and negative factors for each segment. Please turn to Page 8. Pages 8 and 9 explain the business status by segment. In the fourth quarter, since the declaration of the state of emergency in January, we brought forward the times of the last trains of the day and shortened the hours of operation at commercial facilities. For our hotels, we flexibly adjusted our operations, including temporary suspensions as well as the consolidation of operations based on demand trends. Please turn to Page 10. This section describes our efforts to secure working capital. In the middle of the page, we explain the progress in reducing fixed costs. Compared to the amount we had in mind before COVID-19, we reduced fixed costs by JPY 21 billion in the fourth quarter and by JPY 56 billion in the full year. As for asset sales underneath that, we disposed the Sugita Golf Driving Range in March and booked JPY 12.9 billion of gain from the sale of fixed assets. Please turn to Page 11. In the COVID-19 pandemic, we are continuing business operations while placing the highest priority on the safety and security of customers and employees. As described in Pages 11 to 13, we are putting into place initiatives to prevent infections and to prevent the further spread of the virus in each of our businesses. Meanwhile, we are also working to recover earnings by opening new facilities as well as starting to provide new services in response to changing needs. Please turn to Page 14. We have positioned DX and marketing strategies, collaboration within and outside of the group and sustainability actions outlined on the next page as key initiatives and are proactively working on them throughout this pandemic. We have outlined the details on Pages 14 to 15, so please take a look. This concludes my presentation on the results for the fiscal year ended March 2021. On Page 34 onwards, we have information on the earnings and dividend forecast for the current fiscal year ending in March 2022. We will go over these when we explain the new medium-term management plan after this. Thank you for your attention. I will now explain from Page 4. The main theme of this medium-term management plan is the vision for the group in a post COVID-19 society, overcoming the COVID shock and preparing the road map for future growth. We will face the tough business environment that currently surrounds the Seibu Group and focus on initiatives centered on 3 themes: management reforms, digital operations and sustainability. As for the assumptions of the business environment, we expect COVID-19 to be brought under control in fiscal year 2022 and inbound tourism and the domestic economy to recover in fiscal year 2023. We have positioned these 3 years as the period in which we pursue our vision for the group in a post COVID-19 society and transform our business model in response to changes in values and behavior resulting from COVID-19 as well as reinforcing our corporate structure so that we can maximize corporate and shareholder value regardless of the business environment. Our vision is to become the corporate group that is best and most capable of supporting customer lifestyles. We will grow together with customers and the local society so that we can offer support in various aspects of people's lives and drive people's behavior and their emotions, leading to the creation of a rich and sustainable society. The business portfolio is as shown here. On top of our existing strengths of transporting people or providing services using various facilities and venues, we are seeking to propose and offer attractive lifestyles and ways of spending time. Through bold management reforms with themes such as asset-light and lowering the breakeven point, we will transform the 3 core businesses while strengthening the newly established sports business. Now let me move on to how we are positioning this management plan. Due to our strategy of conducting bold management reforms with asset-light as the theme, we have withdrawn the challenge target, which was our long-term target that we have set since 2017. Moreover, the management plan has been prepared in a fixed format instead of the traditional rolling format. From here on, we explain our initiatives in relation to management reforms, digital operations and sustainability. Today, I will focus on the contents of the management reforms. We will conduct bold management reforms, leaving no exceptions, on 3 themes: asset-light business operation, lowering the breakeven point and transforming our services to suit the new normal. The red dotted box shows the upcoming changes in our organization. The first theme is asset-light business operation. As part of this initiative, we will undergo a reorganization through revamping the function and role of Prince Hotels and Seibu Properties. In order to build a corporate structure that is more resilient to crises, which we expect to take place repeatedly, we will transform our current business model, which is a mix of ownership and operation to a new model with asset-light as the keyword. Based on this policy, we will comprehensively assess the benefit of owning assets, the room for developing assets as well as the amount of cash that will be generated through disposal or liquidation. This process will take place for all assets and businesses, and we will make selective decisions about whether to dispose or liquidate them or to continue to own them. As for assets that we choose to continue to own, we will maximize their values by revamping the function and role of the new Prince Hotels, which will focus on its role as operator; and the new Seibu Properties, which will become an asset holder. I will explain the details using the next page. The current role of each business is as shown at the top of the page. The COVID shock, which was hard to anticipate, brought to light the challenges faced by each business, which had been working fine until now. We came to the conclusion that one of the ways to overcome this challenge is to completely separate the ownership and operation of our hotel assets and the new Seibu Properties as asset holder and the new Prince Hotels as operator, each will strengthen their functions and become even more competitive. As part of this initiative, we have decided to transfer the assets held by Prince Hotels as well as its asset management functions to Seibu Properties in around April 2022. As a result, Prince Hotels will focus on its role as an operator, while Seibu Properties will become the asset holder. Details of the transfer are yet to be finalized and will be announced when we are ready to do so. This page shows the future direction of the 2 businesses following the organizational reform within the group. The vision for the hotel and leisure business is to become asset-light and to build a hotel chain with the highest level of quality in the industry. As a hotel operator specializing in management contracts, we will expand our business with agility and flexibility. Meanwhile, we will expand the scope of our real estate business and make the leap towards a comprehensive real estate business. We will make effective use of assets, which the group owns nationwide. And the large-scale redevelopments in Central Tokyo will allow us to build a wide range of management expertise leading to the success of the projects. The roles of each company are as shown here. This is the road map towards our vision. There are 3 key points to highlight. The first is to decide the policy on how to utilize our hotel assets. Although nothing has been decided yet, by the end of 2021, we will select assets to dispose and shift to the management contract structure and assets which the group will continue to own. The selection process for disposal and shifting to the management contract will be conducted for all assets, leaving no exceptions, including the Prince Park Tower Tokyo. The new Prince Hotels entity following the revamp will operate hotels under management contracts and seek to further improve our performance as hotel operator. The second point is the assets which the group will continue to own. This mainly refers to properties that are to be redeveloped. The new Seibu Properties will make the best use of assets regardless of whether they are currently being used as hotels, thereby maximizing value. The third point is how the new Seibu Properties will gain expertise on asset management. We have decided to liquidate 2 of our office buildings, which are mentioned on Page 11, and sell trust beneficiary interests to NSBC. Based on these measures, both companies will fully focus on their respective functions and roles and improve competitiveness, which will maximize the value of assets owned and thereby lead to maximizing group revenues. We will work on reducing fixed costs of the urban transportation and regional business based on demand. We will also establish a shared service company into which the back-office operations of the group will be concentrated, leading to lower fixed costs. This section describes the third theme of our management reforms, which is transforming our services to suit the new normal. By accommodating changes in values and behavior resulting from COVID-19 and working on our service transformation, we will increase the number of Seibu Group fans who are repeat users of our diverse service offering. We have details on the next page onwards, so please take a look. In relation to sustainability issues, we will focus our efforts on climate change risk. As part of this initiative, we have decided to support the TCFD proposals. From here on, I will explain the quantitative targets. First, we have outlined the management KPIs that we will focus on as we implement our vision for the group in a post COVID-19 society. We will be mindful of asset light, which is one of the key themes of our management reforms and focus on capital efficiency and the optimal capital structure, thereby managing the progress of our reforms. The projected figures for fiscal year 2023, the final year of the plan, are as shown here. Through the management reforms, we plan to recover our profit to the pre-COVID-19 level by fiscal year 2023. Although these KPI figures do not reach the level to be targeted in the mid to long term, mentioned in the previous page, we will make bold management reforms with asset-light as the theme and quantify our strategy of utilizing hotel assets, which is currently being assessed therefore not factored into this midterm plan and work to make further improvements. This page shows the 3 year trend of our fixed costs. Through management reforms, such as renewing our operations to match the level of demand, bringing PM and BM operations in-house and revamping our businesses and the organizational structure, we plan to reduce fixed costs in fiscal year 2023 by around JPY 11 billion compared to fiscal year 2019. Next, I will explain our financial strategy. Based on our long-term financial strategy, in this plan, we will prioritize strengthening our financials, which have been weakened by the pandemic, while also focusing on returning to our shareholders and distributing our profit adequately. As for CapEx, we plan to invest a total of JPY 173 billion during the management plan period. With the aim of strengthening our financial base, we will select and execute investments that lead to future growth, such as the Tokorozawa Station West Side development. We will also start the large-scale developments in Central Tokyo following the planning phase, and these projects will drive our future growth. The resulting 3-year cash flow is as shown here. With profit improvement and selective investments, together with disposals and liquidation of assets and businesses, we expect the consolidated free cash flow to be positive. In terms of shareholder return, we plan to resume dividend payouts from fiscal year March 2022 while maintaining the balance with our financial status. If the recovery in base demand is slower than expected or if the changes in values and behavior due to COVID-19 exceeds our expectations, there is a risk that we do not achieve the planned figures. Even in this situation, we will strive to achieve at least the profit target by taking our management reforms a step further as well as making emergency cost reductions. Now I will explain the consolidated earnings and dividend forecast for the current year ending March 2022, which will mark the first year of the new plan. We have assumed the number of COVID-19 infections to continue going up and down, meaning the tough conditions will persist, while expecting a step-by-step easing of economic activities in the second half thanks to progress being made in vaccine injections. Based on this assumption, we plan to book an operating profit through the transformation of our services to suit the new normal as well as fixed cost reductions. We are expecting a loss in the profit attributable to owners of parent, which includes the loss from the disposal of shares of Seibu Construction Supply and the gains from the disposal of the Shin-Yokohama Seibu Building and 2 office buildings. The figures shown here do not reflect the disposals and liquidations of assets, which will mainly be hotel assets that we are currently assessing. We plan to execute this as early as possible. As shown on Page 48, we expect to turn profitable in fiscal year March 2023 and book a profit attributable to owners of parent of JPY 14 billion. This does not reflect the disposals and liquidations of hotel assets, et cetera. There could be negative effects due to deviations from our current business environment assumptions, such as strong restrictions on economic activities, similar to those in April 2020, repeating themselves. Even in this scenario, we will strive to achieve our profit target by taking further steps to dispose and liquidate assets and businesses as well as making emergency cost reductions similar to what we did in fiscal year 2020. This shows the dividend for March 2021 as well as our dividend forecast for the year ending March 2022. For the year ended March 2021, we will unfortunately not pay out a dividend. We booked a large net loss as was expected, and we need to minimize the impact on our net assets. As for the dividend forecast for the year ending March 2022, although we will not pay an interim dividend, we plan to pay a JPY 5 full year dividend. This concludes my presentation. Thank you.