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

This is Takashi Goto, President of Seibu Holdings. I will first provide an overview of yesterday's announcement. The business environment remained challenging with the COVID-19 pandemic and the repeated declarations of the state of emergency as well as people's strong hesitance to go out. However, with the pickup in demand for going out from autumn as well as Seibu's own efforts to provide services that cater to people's needs during the pandemic, our operating profit, although negative at minus JPY 13.2 billion, improved significantly year-on-year by JPY 38.3 billion. Net profit attributable to owners of parent was JPY 10.6 billion, turning positive after 2 fiscal years, which was an improvement of JPY 82.9 billion year-on-year. This was due to factors such as the booking of extraordinary gains from the disposal of Seibu Construction as part of our management reforms. Recently, we are finally beginning to see signs of recovery, thanks to progress made in vaccine injections as well as the easing of restrictions on people's activities. Domestic hotel revenue during the Golden Week between April 29 to May 8, was up around 90% from last year and was at 85% of the pre-COVID level. Hotel revenue recovered to the pre-covered level in Seibu's main resort areas of Karuizawa and Hakone, and we feel the magma of consumption is finally starting to show signs of movement. The government has begun considering reopening the border to foreign tourists, and we are hoping for a clearer road map towards the post-COVID era going forward. Under these circumstances, Seibu 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 in the fiscal year ending March 2024 and advanced initiatives with a 3-point framework comprising management reforms, digital management and sustainability. In fiscal year 2021, the first year of the plan, we prioritized management reforms. As Mr. Nishiyama will explain later, our prime focus was on reforming the Hotel and Leisure segment, which was most impacted by the pandemic. The first initiative is the structural reorganization of Prince Hotels and Seibu properties. Seibu Prince Hotels worldwide, which became a hotel operation company through this reorganization, aims to increase its hotels in Japan and globally from the current 86 to 250 in the next 10 years through asset-light hotel chain management. Seibu Realty Solutions, which aspires to become a comprehensive real estate company, we'll seek to maximize the value of the group's assets using various methods. As part of this initiative, it will redevelop not only its central Tokyo assets, such as the Takanawa and Shinagawa area, Shibakouen and Shinjuku, but also the popular resort areas of Karuizawa, Hakone, Furano while focusing on sustainability. The second initiative is hotel asset light. On February 10, 2022, we selected GIC, the sovereign wealth fund of Singapore as our partner. We signed a basic agreement with Reco Pine Private Limited, a subsidiary of GIC with the objective of maximizing revenue from the 31 properties, which are subject to this transaction, promoting the asset-light strategy of our group's assets, the further development of the hotel and leisure segment and ultimately, the maximization of the corporate value of the Seibu Group overall and building a long-term partnership between the Seibu Group and GIC. We are currently in negotiations towards the closing of the deal. We have newly set up the DX and Marketing business strategy department and the sports, arts and culture Business Strategy Department in Seibu Holdings. In order to strengthen the group's planning functions, including DX strategy, et cetera Seibu Holdings will take the lead and powerfully promote the group's DX strategy, which is crucial for future growth. This fiscal year, we will focus on management reforms in the Urban Transportation and Regional segment. Commuter revenue for Seibu Railway has been steadily declining due to factors such as the spread of remote work in Japan. With changes in people's values and behavior resulting from COVID-19 being here to stay, we expect the chances of a full recovery of commuter revenue to be low and will, therefore, reform its earnings structure. The details are yet to be finalized, but the concept will be to establish the optimal structure for the Urban Transportation and Regional segment, which is a mix of various businesses to strengthen profitability and achieve group synergies. Seibu is also promoting partnerships. And in the railway business, we are strengthening our comprehensive alliance with East Japan Railway Company or J.R. East, and we'll be developing new rolling stock as well as introducing sustainable cars that are more environment friendly. Sustainable cars is a term original to Seibu referring to rolling stock acquired from our peers with no painting on the exterior or VVF inverter controlled rolling stock. Introducing such rolling stock makes possible: one, easier maintenance; two, less use of electricity; and three, lower burden on the environment by recycling, rolling stock. Moreover, Seibu Holdings will consolidate and standardize administrative support operations and reallocate its human resources. We will create an environment that accommodates new work styles in the shared services company that is to be newly established and further promote diversity. Lastly, on dividends. In the year ended March 2022, the challenging management environment due to COVID-19 continued, and we booked an operating loss for 2 consecutive years. However, with steady progress being made in management reforms, we have kept the year-end dividend at JPY 5 per share as initially planned. As for the annual dividend for the March 2023 fiscal year, we comprehensively consider the securitization of the Hotel and Leisure segment assets as well as the consolidated earnings forecast, our funding and other factors and are planning to pay an interim dividend of JPY 5 after 3 years. And together with the year-end dividend of JPY 5, we are planning to pay JPY 10 per share. We expect the current business environment to continue in the years to come with changes in values and behavior that are not one-off. In this midterm plan period, we will do our utmost on the 3 teams of management reforms, digital management and sustainability as the foothold for long-term growth and seek to achieve both economic and social values. The Seibu Group has powerfully responded to and overcome hardships such as the global financial crisis as well as the great East Japan earthquake. Through the solidarity and challenging spirit of the group that has been built up so far, we will again overcome this pandemic and continue our drive forward in management reforms in the second year of the management plan. We appreciate the continued support of our shareholders and investors to the Seibu Group. Thank you.

This is Takahashi in charge of Finance. Please turn to Page 3. These are the results of the fiscal year ended March 2022. Despite the challenging business environment due to COVID-19, we were able to grow operating revenue 17.7% year-on-year. In terms of profits, our EBITDA was plus JPY 42.4 billion, thanks to the increase in revenue, cost control and other factors. And operating profit, although still negative, improved from the previous fiscal year. Profit attributable to owners of parent was plus JPY 10.6 billion due to factors including the share disposal gain of JPY 37.3 billion in relation to Seibu Construction. In comparison to the forecast announced on February 10, both operating revenue and operating profit were lower than expected due to the quasi-state of emergency being extended until mid-March, causing the recovery in hotel usage and non-commuter railway demand to be slower than expected. Please see Pages 4 and 5 for the ups and downs for each segment. Page 22, please. This is about the financial covenants. As stated here, Seibu booked consolidated operating losses for 2 periods in a row, putting us in breach of the covenant regarding maintaining profit in relation to the borrowings listed on this page. However, we have received written consent from all the financial institutions before the end of March 2022, stating that they will not apply the stipulation concerning the forfeiture of the benefit of time. Please turn to Page 27. This is the forecast for the fiscal year ending March 2023. We are assuming COVID-19 will begin to subside and the domestic economy to gradually recover. Moreover, we have reflected the effects of progress made in management reforms such as the share disposal of Seibu Construction as well as the internal reorganization of the group. Operating revenue will grow 11.6% to become JPY 443 billion by steadily capturing demand arising from the recovery despite the negative impact from Seibu Construction being de-consolidated. Operating income is expected to be plus JPY 31 billion, with the growth in top line revenue as well as fixed expense reductions. Profit attributable to owners of parent is forecasted to be JPY 82 billion, including the disposal gain from the securitization of some of our hotel and leisure segment assets. As for the securitization of some of our hotel and leisure segment assets, the closing is expected to take place in several phases. And in this forecast, we have formulated the numbers, assuming the transfer or delivery of the assets to take place at the end of March 2023. Please also take a look at Pages 28 and 29, where we show the assumptions for the forecast as well as recent trends for the railway and hotel businesses as well as Pages 30 and 31 for the forecast by segment. From here on, Mr. Nishiyama, who is in charge of Corporate Planning, will explain the progress of the medium-term management plan.

This is Nishiyama. I will explain the progress made in Seibu Group's medium-term management plan announced last May and our targets for the fiscal year ending March 2024. This page shows the overall image of management reforms. We have been working on the 3 key strategies: asset-light business operations, lowering the breakeven point and service transformation to suit the new normal. I'll explain the details using the next page onwards. Initiatives for asset-light business operations in the fiscal year ended March 2022 are as outlined here. On July 1, 2021, we disposed the shares of Seibu Construction Supply and in December, securitized 3 office buildings, including the Shin-Yokohama Square building. In order to take the review of our business portfolio a step further, we sold 95% of the shares of Seibu Construction to MIRAIT Holdings at the end of March 2022. In the Hotel and Leisure business, we made progress in our discussions regarding securitization. And on February 10, 2022, signed the basic agreement with GIC. As part of promoting asset-light business operations, we implemented group reorganization, aiming to maximize the value of group held assets and improved competitiveness in the Hotel and Leisure and the Real Estate businesses. Next is lowering the breakeven point. First, in the fiscal year March 2022 results, the total fixed expenses of each segment declined by around JPY 32 billion compared to fiscal year March 2020. Together with the share disposal of Seibu Construction and the securitization of some of our Hotel and Leisure segment assets, we will continue to reduce our recurring fixed expenses. In the target for the year ending March 2024 for which we have announced the revised figures yesterday, we plan to lower the segment total of fixed expenses by JPY 35 billion compared to fiscal year March 2020, out of which around JPY 27 billion will be the reduction in the Hotel and Leisure segment. Next is service transformation to suit the new normal. We have positioned Prince Grand Resort, Karuizawa as an area that will aspire to become a leading or occasion resort of Japan and collaborated with partners such as East Japan Railway or JR East to strengthen our facilities as well as the offering of services and products. We have also formed an alliance with our Project Inc. to expand our outdoor business and have set up a joint venture company Step Out to promote business. We will continue to expand the base of customers that use Seibu Group's services in this new era and satisfy them so that we create more fans of Seibu Group who repeatedly use our diverse range of services. Next, I will explain our initiatives in fiscal year March 2023 onwards. Please turn to Page 45. This fiscal year, we will focus on management reforms of the urban transportation and regional business. In the fiscal year ended March 2022, which was the first year of the midterm management plan, we worked mainly on the Hotel and Leisure business, which had been most impacted by COVID-19, engaging in reorganization of Prince Hotels Inc. and Seibu Properties, Inc. and a shifted to asset-light hotels. Meanwhile, in the Urban Transportation and Regional business, there is the ongoing decline in commuter demand for Seibu Railway due to more people working from home as well as other factors. With the anticipated changes in values and behavior, people will be moving less frequently, and we do not expect commuter revenue to fully recover to the pre-COVID level. Therefore, in order to fundamentally review our profit structure, we will focus on the 3 initiatives shown here, namely optimize the organizational and divisional structure, increase revenue and reduce fixed expenses, and promote the management reforms of the Urban Transportation and Regional business. As for optimizing the organizational and divisional structure, we will take steps to establish a structure that enables each of the businesses within the Urban Transportation and Regional segment to improve profitability to achieve group synergies. In terms of measures to strengthen the Railway business, namely measures to increase revenue, we will use the ride points function, promote the use of express and seated trains or trains with reserved seating only, et cetera, as well as further reinforcing the comprehensive cooperation with JR East, and consider ways to collaborate in sales and operations of the railway business. On top of the existing initiatives related to vocation and Mobility as a Service. In terms of reducing fixed expenses, we will continue initiatives such as optimizing the train timetables and achieving smarter station and train driving operations that will be realized in the next plan onwards. As for the rolling stock owned by Seibu Railway, we will continue to combine the review of our ownership strategy with repurchase plans, thereby optimizing the number of cars owned as well as introduce sustainable cars that are more environment-friendly not only for new purchases, thereby reducing energy use and fixed expenses as early as possible. By introducing such cars, we expected to improve maintenance efficiency, cut down on electricity use and lower the environmental burden by recycling rolling stock. In order to lower the breakeven point, we will promote the sharing of back-office operations. We plan to set up a shared services company and begin operations in April 2023, and are working on the design and preparations to consolidate operations. In the shared services company, we will establish an environment that accommodates new ways of working, as outlined here and further promote diversity. As for service transformation to suit the new normal, we will work on the initiatives listed here. We will begin full-fledged measures to expand the related business areas such as preparing to open camping grounds. In terms of digital management, the DX and Marketing business strategy department, which was newly set up in Seibu Holdings will strengthen the group's DX strategy and other planning functions and powerfully promote the DX strategy, which will be crucial to our future growth. In April, we newly set up the sports, arts and culture Business Strategy division and are currently focusing on strengthening sports marketing and content for the overall group. The structure of the Seibu Group going forward, including the reorganization mentioned earlier, is as shown here. Next, please turn to Page 56. These are the revised targets for the year ending March 2024. The assumptions for the business environment remain unchanged from the forecast announced on May 13 of last year, and we expect both inbound as well as domestic demand to pick up in fiscal year March 2024. At the same time, we will focus on innovating our services to cater to changes in values and behaviors resulting from COVID and reform our management so that we can recover our profit to the pre-COVID level in fiscal year March 2024. The revised numbers reflect the impact of the share disposal of Seibu Construction as well as the securitization of part of our Hotel and Leisure business assets. The earnings projections for each segment are as shown here. Please turn to Page 59. This is our financial strategy. Based on the long-term perspective, we will prioritize strengthening our financials, which have been hit by COVID, focused on returning to our shareholders as we allocate our profit. As for the 3-year cash flow, operating cash flow in fiscal year March 2022, the first year of the current plan was impacted by the resurgence of COVID, but we achieved a significant improvement from the current plan through the disposal and securitization of assets and businesses. Based on the policies explained today, we will first work on strengthening our financials, which has been hit by COVID, steadily repay interest-bearing debt and assess the right timing to redeem the preferred shares of Seibu Railway depending on the progress made in securitization of the Hotel and Leisure segment assets. This concludes my presentation. Thank you.