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

This is Takashi Goto, President of Seibu Holdings. First, I will give you an overview of the first half results. Since last year, the spread of COVID-19 has had a significant effect on economic activity and the Japanese economy remained in a tough situation during the first half of the fiscal year ending March 2022. Under these circumstances, the Seibu Group also faced an extremely harsh business environment with the decline in demand due to people refraining from going out, resulting in profit attributable to owners of parent in the first half being minus JPY 12.7 billion, although this was a JPY 26 billion improvement from the same period last year. Recently, we are finally starting to see signs of recovery, thanks to progress in vaccine injections and the easing of restrictions on people's activities. However, the magma of consumption remains underground and seems to be waiting for the right time to surface. In this full year's consolidated earnings forecast, we are assuming a pickup in people's activity, thanks to progress made in vaccinations and the phased easing of restrictions. However, due to the timing of this recovery being slower than what we anticipated when forming the forecast, operating revenue is expected to underperform what we announced on May 13, 2021, by JPY 49 billion. In response to this, we will implement further cost control, including the reduction of directors' compensation, which we have been continuing since last April to this day, foregoing the annual incentive stock compensation for 2 consecutive years, reducing employee bonuses, the reduction and deferral of various expenses, including nonessential and nonurgent investments. And as a result, we expect to reduce fixed expenses for the full year by around JPY 30 billion compared to the previously announced target of EUR 22 billion, but this will not be enough to cover the decline in operating revenue. We, therefore, revised our forecast, lowering operating profit from JPY 9 billion to a loss of JPY 8 billion and the loss of profit attributable to owners of parent widening from minus JPY 5 billion to minus JPY 14 billion. Under these conditions, we focused on the themes of looking ahead to our vision for the group in a post-COVID-19 society, overcoming the impact of COVID-19 and creating a pathway for rapid growth in formulating the fiscal year 2021 to 2023, Seibu Group's medium-term management plan for the 3-year period ending fiscal year 2023 and advanced initiatives with a 3-point framework comprising management reforms, digital management and sustainability. We carried out management reforms on the themes of asset-light business operation, lowering the breakeven point and service transformation to suit the new normal. In asset-light business operation, we worked on making selections with no exceptions for all assets and businesses on whether to sell or securitize or to maintain ownership to maximize the value of assets that we will continue to hold and moved forward with an evaluation to flesh out these policies. As the first step of asset-light business operation, we decided to securitize some of our rental properties, the Shin-Yokohama Square Bldg., Shibakoen 2-chome Bldg. and the Shin- Yokohama Seibu Bldg. The intention is to generate cash through asset securitization as well as to build up a wide range of expertise as we venture into the comprehensive real estate business with Seibu Properties continuing to partially manage the subject properties. In terms of making our hotel portfolio more asset-light, we are currently in the process of selecting the subject assets as well as the investors. We were initially planning to complete and announce the results of the selection process by the end of calendar year 2021. But as we are progressing more cautiously in selecting the investors with whom we can rely on as long-term partners as well as in the building of the structure of securitization, we now plan to complete and announce the results of the selection by the end of the fiscal year ending March 2022. Meanwhile, in terms of the reorganization within the group, we are currently considering the optimal structure of Prince Hotels and Seibu Properties following the reorganization. And as of today, we are on track to make an announcement by the end of this calendar year. The current business environment will bring about changes in people's values and activities that are not one-off but are here to stay in the next fiscal year and onwards. By doing our utmost on the 3 themes of management reforms, digital management and sustainability during the current midterm plan period, we would like to make this a step for long-term future growth, and we'll seek to achieve both economic and social value. Lastly, on November 10, 2021, we resolved to select the prime market as the market segment we belong to as part of the Tokyo Stock Exchange's introduction of its new market segments on April 4, 2022. We will continue to strive for sustainable corporate and shareholder value growth in the new market segment. The Seibu Group has, in the past, powerfully overcome crises such as the global financial crisis as well as the Great East Japan earthquake. We are determined to overcome this COVID shock, too, with the solidarity and challenging spirit of the group that we have built up so far. We sincerely appreciate the continued support of shareholders and investors to the Seibu Group. Thank you.

I will now explain using the material titled Overview of Financial Results for the 3 months ended September 30, 2021. Please turn to Page 3. These are the results for the first half. With the repeated declarations of the state of emergency as well as the periods becoming long term and the serious lack of human traffic that followed, the business environment remained tough. Despite this, we achieved a 25% year-on-year growth in operating revenue. As for profit, we secured a positive EBITDA of JPY 23.5 billion, thanks to revenue growth as well as efforts to control our costs. Operating profit and profit attributable to owners of parent were still negative, but the loss was much smaller than the same period last year. As for fixed expenses, we achieved a JPY 20 billion reduction from the first half of 2 years ago as a result of cost control. As we show on Page 9, we achieved a JPY 14.3 billion reduction in the Hotel and Leisure segment and JPY 2.8 billion reduction in the Urban Transportation and Regional segment. We booked JPY 5.3 billion of extraordinary losses. This was the fixed expense from the temporary suspension of operations, which we transferred to extraordinary losses. We also booked a loss of JPY 3.5 billion from the disposal of subsidiary shares in relation to the disposal of Seibu Kansai shares on the 1st of July. Please see Pages 4 and 5 for the ups and downs in each segment. Now please turn to Page 7. Here, we summarized the business status during the first half. On the right is the status of this quarter and on the left is the status of the previous quarter. In this quarter, in the hotel and overseas hotel operations, we suspended the operation of some facilities as well as consolidating hotel operations. The Seibuen Amusement Park, which underwent a renewal, reopened on May 19, but with limited capacity to control the number of visitors, while Seibu Lions also held games with limited entry into the stadium. On Pages 8 to 10, we summarize the progress of the 3 focus initiatives in the midterm management plan. Asset-light business operation is explained on Page 8, and the details are as our President, Mr. Goto explained earlier. Please turn to Page 9. This is the second point of our management reforms, lowering the breakeven point. As mentioned earlier, fixed expenses in the first half declined JPY 20 billion from 2 years ago, and we outperformed our first half cost reduction target by JPY 6 billion. For the full year, we are planning to go further than our initial cost reduction target of JPY 22 billion and reached minus JPY 30 billion. We are also continuing to work on other measures outlined in the midterm management plan such as bringing the hotel operations in-house while controlling our headcount as well as reviewing the way we operate our railway carriages. The third management reform is service transformation to suit the new normal. We list the actual measures on Pages 9 and 10. By transforming our services to capture opportunities that arise from changes in values and people's actions brought about by COVID-19 and continuously generating incremental value, we will increase the number of fans of Seibu Group, who repeatedly use our group's wide range of services. Please turn to Page 30. This is the revision to our earnings forecast. As our President, Mr. Goto explained at the beginning, we have revised our full year forecast based on the first half results as well as the current business environment. For your reference, we have not included the effect of the securitization of the hotel assets in this forecast. Please see Pages 31 and 32 for the outlook by segment and Page 33 for the current trends in the railway and hotel businesses. Lastly, please turn to Page 34. I will explain about how we are managing the risk of hitting the financial covenant. As of September end, the only contract with a covenant related to our profit level are the syndicate loans. There are 9 contracts and the loan balance is JPY 119.1 billion. For all of the contracts, the majority of the lenders accounting for 67% or above of the loan balance are financial institutions with which Seibu has close relations, including our major lenders. The assessment timing of the profit covenant is at the end of the fiscal year, and we have not hit this covenant as of today. However, if it becomes evident that we are going to hit the profit covenant, we can request the lenders to not exercise their right to request repayment. Since the majority over 2/3 of the lenders are financial institutions we have close relationships with, I have no doubt that they would agree to our request. Going forward, we will continue to closely share information with our lenders and agents. That is all for me. Thank you.