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

Good morning. This is Takashi Goto, CEO of Seibu Holdings. Let me explain the management structure for fiscal year 2023. Starting from this April, we have 2 representative directors, myself being the Representative Director, Chairman and CEO, while Mr. Nishiyama is Representative Director, President and COO. Moreover, in the shareholders' meeting this June, Mr. Shuichiro Ogawa is expected to be appointed President of Seibu Railway and Mr. Yoshiki Kaneda to be appointed President of Seibu Prince Hotels Worldwide, both of which are key entities in the group. The aim of this shift to a new structure is to make the overall group management younger as well as enhancing specialization. We are establishing a structure that can adapt in the right way and with higher speed to sudden changes in the external management environment and execute the current midterm management plan by reinforcing the management structure to promote new strategies in order to achieve sustainable growth of the group, while making the presidents of our core group companies younger. I will continue to fulfill the important role of Representative Director, while handing over the responsibility of business execution as well as some of our stakeholder-related activities to our COO, Mr. Nishiyama. I, as CEO, will lead the group towards sustainable growth in the future, taking a long-term and big picture perspective. We are in the age of the so-called VUCA, making it extremely hard to forecast the future. We believe Seibu has established a management structure with which we can take the lead in resilience and sustainability, namely a Seibu Group that can powerfully survive such an age and achieve further growth. I plan to continue to lead the group together with this new management team. Next, let me explain the overview of our results. Consolidated operating profit for the fiscal year ended March 2023 was positive at JPY 22.1 billion. The year before that, we booked a loss of JPY 13.2 billion, which means we achieved the JPY 35.3 billion year-on-year improvement in profit. Due to the recovery being slower than initially expected for commuter demand in the railway business and inbound demand in the hotel business, as well as the surge in cost of power and fuel and raw materials, we did not reach the JPY 31 billion operating profit announced at the beginning of the fiscal year. However, we were able to turn profitable after 3 fiscal periods and are steadily recovering from the COVID pandemic as well as achieving positive results from our management reforms. Profit attributable to owners of parent was plus JPY 56.7 billion, up JPY 46.1 billion from the previous year due to factors such as the booking of extraordinary income from the transfer of 26 properties, including the Prince Park Tower through the hotel asset-light initiative, which is part of our management reforms. For the current fiscal year ending March 2024, we are forecasting an operating revenue of JPY 462 billion, which is up JPY 19 billion from our previous forecast and up JPY 33.5 billion year-on-year. Operating profit is forecasted to be JPY 36 billion, which is JPY 19 billion lower than our previous forecast, but JPY 13.8 billion higher than the previous year. As Mr. Nishiyama will explain later, we expect a significant impact from the rise in the oil price as well as wages. Under these circumstances, Seibu will thoroughly focus on raising prices in order to achieve the budget, and we'll take on the challenge of outperforming our revenue projections. This is especially so in the hotel business where we will not only pass on the rising costs but strive to enhance our brand power and hospitality so that customers will be more accepting of higher prices. Recently, on May 8, following the Golden Week, COVID-19 was downgraded to a Class 5 infectious disease. With the whole of Japan taking steady steps towards the post-COVID era, we expect economic activity in Japan as well as inbound tourism to normalize. The Seibu Group will turn these changes into business opportunities and engage in initiatives so that we achieve the budget and return to the pre-COVID level of profit as quickly as possible. As for the progress in our midterm management plan, we continued to work on the 3 core strategies of management reforms, digital management and sustainability. For management reforms, we transferred 26 assets as part of the hotel asset-light initiative, mentioned earlier, and signed MC contracts for the transferred assets, thereby establishing a structure in which we continue to be involved in the operations of the assets. In terms of management reforms in the Urban Transportation and Regional business, we transferred properties owned by the Seibu Railway to Seibu Realty Solutions, which aspires to become a comprehensive real estate company, thereby allowing Seibu Railway to focus on its core railway business as well as generate value along its railway lines. As a result, we were able to shift the structure of our 3 core businesses, to one in which each can focus on heightening their specialty and improving earnings. We set up the shared services company, Seibu Process Innovation with the aim of standardizing our back office functions and will begin operations on June 1. By consolidating and standardizing our administrative support operations with this entity, we will reallocate our human talent resources within the group. In terms of digital management, we began utilizing the group marketing infrastructure and developed services to further expand the group's customer base while renewing our accounting system. We will continue to manage customers on a group-wide basis through measures such as integrating and expanding our membership programs and work to increase the number of fans of Seibu Group, who are repeat users of our services. As for sustainability, we revised our targets for greenhouse gas emissions reduction, which is an urgent priority as well as starting to use renewable energy in our major facilities such as Tokyo Garden Terrace Kioicho and Karuizawa Shopping Plaza. As a result of our efforts in these areas, we believe we are making steady progress overall on management reforms, digital management and sustainability, which form the core of our midterm management plan. Next, let me explain about our dividends. We have already announced the revision to our dividend forecast in March. We are paying a year-end dividend of JPY 20, making the full year dividend JPY 25, which is JPY 15 higher than the full year dividend forecast of JPY 10 announced at the beginning of the fiscal year. We decided to increase our dividend because we made good progress overall in management reforms, and we have better outlook on improving our financial status as well as the recovery in our recent business performance. As for the current fiscal year ending March 2024, we plan to pay a JPY 25 full year dividend with the expected steady recovery in our profit level that I explained earlier. We will continue to aim to strike the right balance between returns to our shareholders and investments for future growth. And going forward, the key to heightening the specialty of our 3 core businesses and providing services that are unique to the Seibu Group will be our human resource strategy. When referring to our human resources, we use the Chinese character [ zhen ], which means treasurer. Our intention is to focus more than ever before on growing our human resources. I believe the source of a company's growth is the power of its people, and that is precisely the treasurer of the Seibu Group. We will create an environment in which we can steadily enhance that power and allow our employees to fully exert that power. As we will explain about our human resource strategy later, this fiscal year will be the trial phase, and we will aim to become a professional organization with heightened specialty. The strength of Seibu Group lies in the volume and quality of its rich real assets. I believe utilizing this strength will be the key to our future growth. As for volume, the group owns more than 100 million square meters of land, which is way more than our peers. In terms of quality, we own sizable land in Shinagawa, Takanawa, Shibakoen and other major areas of Tokyo as well as in the popular resort areas of Karuizawa, Hakone and Furano of Hokkaido. Although this is rather long term, we will conduct large-scale developments in Central Tokyo step-by-step, starting from the late 2020s in order to enhance the value of our properties and achieve growth for the group. And as recently announced, we will consider utilizing the real estate turnover business model. We are still considering the details of how to proceed, but by engaging in the real estate business comprehensively, including large-scale developments, we will seek the optimal way for Seibu Group to develop and operate real estate. For the hotel business, we have been consigned to manage The Prince Kitano New York and the Grand Prince Hotel, Osaka Bay through MC or Management Contracts. And we plan to open these hotels during the current fiscal year. The Kitano is an extremely prestigious hotel, being the only Japanese owned and operated hotel in New York, while the Grand Prince in Osaka used to be operated by an international hotel chain, but Seibu was selected as operator going forward. Both opportunities are extremely meaningful as Seibu moves forward with MC projects in the future. We will continue to aim to be the #1 quality hotel chain in the industry and seek to improve not only CS, Customer Satisfaction, but also OS, which refers to Owner Satisfaction, as we expand our operations to 250 hotels. As for the Railway business, we are seeing a recovery from COVID-19, but we believe the chances of commuter revenue going back to the pre-COVID level is extremely unlikely. We will consider from multiple perspectives, revising our train fares at some point in the future. By achieving steady progress in these various initiatives, we will work to come closer to the management metrics we prioritize such as the ROE of 10% or above, ROA of 3.5% or above and the net interest-bearing debt over EBITDA multiple of below 7x, which are the mid- to long-term targets announced in May 2021. Again, we are making steady progress in the midterm management plan, and the external environment is beginning to show positive signs for the Seibu Group. As we enter the third year of the current midterm plan, we will continue our steady progress, so that it leads to our future growth. That concludes my presentation. Thank you.

Now please turn to Page 3 of the material. These are the highlights of this presentation material. I will go over these points using the material. Please turn to Page 4. Here, we show the results of the fiscal year ended March 2023. As explained earlier, we achieved growth in both revenue and profit, thanks to the recovery in demand in our Hotel and Railway businesses, driven by factors including the lifting of restrictions on people's activities. As shown at the bottom of the page, we achieved positive operating profit as well as for all the subsequent profits. Profit attributable to owners of parent was plus JPY 56.7 billion, due to factors including the booking of an JPY 80.5 billion gain on the sale of noncurrent assets as extraordinary income. As you can see to the right of the highlighted section, we outperformed the forecast announced on May 23, both in terms of operating revenue as well as operating profit. Thanks to the further recovery in the Hotel business. We explained the reasons for the ups and downs in segment on Page 5 for operating revenue and on Page 6 for profit and EBITDA. So please take a look. As stated on Page 6, segment profit was positive in all business segments. We have summarized the operational status on the next page onwards. So please take a look later. And could you now skip to Page 21, please. This is a summary of our consolidated balance sheet. Net interest-bearing debt, which you can see in the fourth line from the bottom, declined to JPY 767.3 billion. And as a result, right underneath that, our equity to asset ratio improved to 23.5%. We have been working to improve our financial status and are seeing positive results. As you can see in the sixth line from the bottom, the number for noncontrolling interest has declined a lot. This is due to the acquisition and cancellation in March this year of JPY 70 billion of preferred shares issued by Seibu Railway. Please turn to Page 26. This is the earnings forecast for the current fiscal year ending March 2024. We plan to capture the demand recovery in the Hotel and Leisure business, as well as the Urban Transportation and Regional business and are expecting year-on-year growth in both operating revenue and operating profit, while expecting a decline in profit attributable to owners of parent due to the extraordinary income booked in fiscal year March 2023. When compared to our past plans, for example, if we compare the earnings forecast with the plan announced on May 12, 2022, each of the profit items are expected to be below the previous forecast due to the delay in recovery of our railway business as well as the rise in power and fuel and raw material costs. We plan to secure revenue by raising prices in each of our businesses, such as by raising the AER in our Hotel business. On Page 27, let me explain our assumptions and recent trends in the Railway business and Domestic Hotel business. Starting with the Railway business. The graph and table at the top shows our assumptions for passenger revenue we use in this forecast. In terms of passenger revenue, we do not expect commuter revenue shown in the blue line to return to the pre-COVID level despite the revenue from barrier-free fees due to factors including the popularization of telework or working from home. For noncommuter, we are forecasting a recovery to the pre-COVID level in the second half, although the pace of recovery has been slower than expected. Please now turn to Page 28. As for our domestic hotel operations, the graph and table at the top show the assumptions of key metrics used in this forecast. The table at the middle of the right-hand side shows the trend in metrics up to April and the line graph at the bottom shows the hotel booking trends up to July. As for the key metrics we are using in our forecast for the fiscal year ending March 2024, RevPAR is forecasted to be JPY 13,079, up 12% from fiscal year March 2020, which is pre-COVID. The ADR is expected to be JPY 19,031, which is up 18% the level in FY March 2020. In the flash numbers for April, RevPAR was 89% of what it was in April 2019, while ADR was 115%. Moreover, the outlook as of today for May is that RevPAR will be around 95% of May 2019, while ADR is expected to improve even further to around 120% of May 2019. We are steadily raising ADR, which is being followed by the recovery in RevPAR. Please also refer to the earnings forecast by segment on Pages 29 and 30. That concludes my presentation. Thank you.

Next, I, Nishiyama, will explain the progress in our midterm management plan, but I would like to say a word before that. As our CEO, Mr. Goto explained at the beginning, I was appointed President and COO as of April 1st. I will do my utmost with advancing forward as my motto, so that Seibu can become a group that is trusted, appreciated and loved by all stakeholders, including our customers, shareholders, investors and employees and continue to enhance corporate value. Now let me go on with the presentation. Page 35 of the material, please. This is the overall image of management reforms. Since FY 2021, we have been working on the 3 key strategies of asset-light business operation, lowering the breakeven point, and service transformation to suit the new normal. We made steady progress in management reforms through the initiatives listed here, including the review of our portfolio, such as the sale of Seibu Construction shares and the organizational changes to the former Prince Hotels and Seibu properties in FY 2021, followed by the sale to GIC of part of our assets in the Hotel and Leisure business, and management reforms in the Urban Transportation and Regional business in FY 2022. Next page, please. As disclosed yesterday, we made the following revisions to our plan for FY 2023. This is, as Mr. Goto explained at the beginning. In our assumptions for the business environment in our previous plan, we were expecting inbound demand and the domestic economy to recover to the pre-COVID level. However, we have had to revise the numbers in our plan due to the recovery in commuter passenger revenue in the railway business being slower than expected, while power and fuel costs and raw material costs went up significantly due to factors such as the rise in oil price. We will address this by raising prices in each of our businesses by providing higher value and thereby achieving our earnings forecast and aiming for even higher profit generation. In order to do so, we will seek to provide value that only the Seibu Group can offer, such as enhancing our brand power and hospitality so that customers will be accepting of our price hikes and continue to use our services. Next, let me explain the progress in our midterm management plan. Page 38, please. We reorganized the group as part of our management reforms so that the 3 core group companies can leverage their specialization. Seibu Railway will address the new era by providing seamless transportation and lifestyles as well as smart business operations. Seibu Prince Hotels Worldwide will expand its network of facilities through the MC structure, which is asset light and build the #1 quality hotel chain in the industry. Seibu Realty Solutions will form the core of Seibu Group's real estate business, expand its business and aspire to make the leap to become a comprehensive real estate company. Based on these initiatives, we believe we have been able to build that new foundation to maximize corporate and shareholder value in the post-COVID era. In order to make this structure even more real, it will be crucial to develop our human resources, as Mr. Goto mentioned earlier. This time, we have set the concept for our human resource strategy, which we have put in the presentation. Page 39, please. The basic concept for our human resource strategy is creating human resources and improving engagement. This means we will develop human talent with specialties in their fields and create an environment that brings out the best of our human resources. This initiative is crucial for Seibu Group as we aspire to become a professional organization and heighten our specialty. We will position this fiscal year as the trial phase and work on the initiatives shown here. Please turn to the next page. Here, we explain the progress made in our asset-light strategy. We executed the hotel asset-light strategy in FY 2022 and transferred 26 assets to GIC. The transfer price was JPY 123.7 billion, generating a capital gain of JPY 54 billion. The properties subject to this transfer will, under the partnership with GIC, continue to be managed by Seibu Prince Hotels Worldwide. Page 41, please. Next is the progress in lowering fixed expenses in order to lower the breakeven point. In our projection for FY 2023, we have lowered our fixed expenses by around JPY 3 billion compared to pre-COVID by transferring a subsidiary as well as progressing with the asset-light strategy. The amount of fixed expenses has increased compared to our previous plan for FY 2023. This reflects the rise in power and fuel costs, utilities as well as wages. We will address this increase in fixed expenses by seeking to offset it by generating more profit through the steady rise in our prices by offering higher value as explained earlier. Page 42, please. I will now explain our initiatives by business segment. In the Urban Transportation and Regional business, we promoted various measures to enhance usage as stated here, as well as starting to utilize the barrier-free fare system in March 2023. We are expecting to generate related revenue of around JPY 4.9 billion per annum. Going forward, we are working on measures to boost revenue, such as by increasing the number of express trains with additional fares in this fiscal year. Meanwhile, as explained earlier, we believe it is extremely unlikely that commuter passenger revenue will recover to the pre-COVID level. While further rises in power and fuel and other costs are expected. So we will consider future fair revisions from multiple perspectives. Page 43, please. As for management reforms of Seibu Railway, we are working under a new management structure from this April, including changes in how we manage the business to promote tourism along our railway lines. As mentioned earlier, this has resulted in Seibu Railway focusing on its core railway business and its function of creating value along its railway lines. Page 45, please. Next is the Real Estate business. Our strength lies in the quality and quantity of our rich real assets. We believe making use of these assets is the key to Seibu Group's growth, and we will make steady progress in the development projects. For locations in Tokyo, such as Takanawa, Shinagawa and Shibakoen, we intend to progress with discussions with the government and the planning of the facilities by the latter half of the 2020s and begin construction. We also have numerous assets in the very popular resort areas of Japan, such as Karuizawa, Hakone and Furano of Hokkaido. We will seek to add value to these assets as well. As explained on Page 48, we will work on these developments, together with the real estate turnover business to maximize the value of our assets. The next 2 pages are for your reference, explaining our thinking behind the urban developments of the Takanawa, Shinagawa and Shibakoen areas. Next, on Page 48, is the real estate turnover business. It shows how we will utilize the real estate turnover business model going forward, thereby further promoting an asset-light real estate business. What we can say today is limited to what is shown here, but we will consider the actual methods going forward, including options such as setting up a private fund or a private REIT and putting in the numerous assets we own. We will utilize the proceeds to reinvest in new developments, as well as increase the number of properties that we manage and operate by utilizing the scheme. We will consider participating in the asset management business in the future and allow Seibu Realty Solutions to make the leap to become a comprehensive real estate company that handles the whole process from investing to operations. Page 49, please. As for the Hotel and Leisure business, we will enhance customer satisfaction by improving our brand power and hospitality, making use of strength unique to Prince Hotels and seek to expand the network by strengthening the relationship with hotel owners through measures such as enhancing relations with external owners and generating returns that exceed expectations. As stated here, we plan to open 6 hotels in FY 2023, including the Grand Prince Hotel Osaka Bay and The Prince Kitano New York, which Mr. Goto mentioned earlier. The Kitano is an extremely prestigious hotel, being the only Japanese owned and operated hotel in New York, while the Grand Prince in Osaka used to be operated by an international hotel chain, but Seibu was selected to operate it going forward. These 2 opportunities are very meaningful as a bridgehead as Seibu expands its network in the future. And we believe we are making good progress towards our target of operating 250 hotels. Page 50, please. This is about the standardization of our back-office functions. The shared services company, Seibu Process Innovation, which we established last fiscal year, we will begin operations in June. This entity will offer a new work style, including the option of a 4-day work week for employees while consolidating our operations and shifting our human resources to planning functions and to our business entities, thereby strengthening our earnings capability. Page 51, please. In terms of service transformation to suit the new normal, in 2021, we set up the company step out as an entity focused on outdoor businesses and step out will open the Asamayama Campground in June, making it the first camp facility for the company. We will continue to make effective use of our assets, while the BOPISTA service using smart lockers has expanded its area coverage in the tests in preparation for a full-fledged release of its services in this fiscal year. Next page, please. From here, we explain digital management and sustainability. Pages 52 and 53 refer to our digital management, while Pages 54 and 55 are about sustainability, and we introduced our initiatives. So please take a look. The same with Page 56. We will continue to place a strong focus on digital and sustainability. Next, Page 57, please. These are the major projects planned for the current midterm management plan period. I would like to note that although this is not our own facility, Warner Bros. Studio Tour Tokyo will open in June this year at the former site of Toshimaen. In relation to that, we conducted renewal construction work for Ikebukuro station, which is our terminal station as well as the nearby Toshimaen station in April. And starting next week, we will run the Studio Tour Tokyo Express train, which has the main characters of Harry Potter painted on its side. We will continue to revitalize and enhance the value of the area surrounding Toshimaen, together with the local authorities and Warner Bros. Studio Japan GK in preparation for the opening of Studio Tour Tokyo. In terms of real estate, we are working on the development of the Tokorozawa West exit area, which is expected to open in 2024. Page 58, please. This page explains the use of funds during the 3-year midterm management plan period. As for the 3-year cash flow, we were seriously affected by the pandemic in FY 2021, which was the first year of the plan, but we have been able to significantly increase our cash flow due to progress in our reforms, such as the sale and securitization of businesses. Page 59, please. This is a recap of the medium to long-term targets announced in May of 2021. The management environment will continue to be tough with the rise in oil price and other prices, but we will work to come as close as possible to these targets. Next page, please. This is our financial strategy. In our financial strategy, which forms part of the group's long-term strategy, we are aiming for the right balance between returns to shareholders and growth investments. As for dividends, we have already shown you our revised dividend forecast in March. We plan to pay a year-end dividend of JPY 20, making the full year dividend JPY 25 for the fiscal year ended March 2023, which is a JPY 15 increase from the JPY 10 we had announced at the beginning of the fiscal year. We decided to increase the dividend due to the steady progress we are making in management reforms, the better clarity we have on improving our financial status as well as the recovery in recent earnings. As for the current fiscal year ending March 2024, we are forecasting a full year dividend of JPY 25 through stable dividends backed by the steady recovery in our profit levels. Next page, please. We are continuously working on enhancing our corporate governance. The amount of basic remuneration for our directors used to be determined by the Representative Director, but that has been changed to the Board of Directors. The Chairperson of each of the committees has also been changed to outside directors. And as I disclosed yesterday, we are planning to propose a partial revision of our articles of incorporation to the Annual General Meeting of Shareholders. We also plan to shorten the term of office of our directors from 2 years to 1 year. Through these measures, we will continue to strive to enhance both corporate value and shareholder value. That concludes my presentation. Thank you.