TKP Corporation (3479) Earnings Call Transcript & Summary

Ladies and gentlemen, I'd like to start the presentation for the results for the second quarter of the year ended -- to be ended in February 2024 for TKP Corporation. Let me introduce the participants from TKP. To your left, the Representative Director, CEO; Mr. Takateru Kawano and then Director, CFO; Mr. Koji Nakamura. Today, based upon the results for the second quarter that we have announced this year, we are going to explain the business strategy and the results, and then we are going to give some time for the Q&A session at the end. We are going to finish this meeting at around 5:00 Japan time. Mr. Nakamura, would you please start your explanation.

Ladies and gentlemen, hello. This is Nakamura, CFO of the company. Let me introduce the results for the second quarter of the year to be ended in February 2024. As usual, I'm going to go through the results for the second quarter, followed by the presentation of Mr. Kawano, giving you the update on the business strategies of the company. Now let's get started. For this quarter, please take a look at the summary with the results. As you can see on this page, continuously from Q1, we were able to achieve increases both in revenue and profits. At the moment, the new location openings and the recruitment have been done quite actively. And as a result, we were able to achieve increases both in revenue and profits. In addition, for profits -- for ordinary profit and below, we were able to achieve record high profit levels. So we did well in the Q2. And then we saw the strong recovery in the Food and Beverage business, where we saw the slow recovery, but F&B business has been recovering very well. As you can see from the second bullet point, after the category shifted to Category 5 for COVID-19, we saw the strong recovery of the F&B business. And compared to Q1 of this fiscal year, we saw more than 30% growth of the F&B business revenue. And then last bullet point is about consolidation and acquisition of the equities in Lilycolor, 26% acquisition and we started to apply the equity method for this company. And for this quarter, we incorporated the performance of the balance sheet, and we are going to include the Lilycolor's performance from now on. And then as the second section is for business and management topics. So we have been aggressively opening new locations in Q2. And as planned, we have already achieved 10,000 tsubo annual new facility openings already. So we are making a very good progress in terms of the location openings already. Now let's take a look at the results of the second quarter of this year on a consolidated basis. On this page, we are showing our performance of Q2, including Regus sale on a consolidated basis. Please look at the red box. In Q2, revenue JPY 8.77 billion and OP, JPY 1.01 billion. As was mentioned at the beginning of this meeting, on the cumulative basis, as of the end of Q2, ordinary profit and net income were record high levels. So we are making a very good progress in this year so far. And the numbers included Regus in the last fiscal year, but additional numbers do not include Regus. So please look at the next page for the PL, excluding the sale of Regus impact. So as you can see on this page, in Q2 over the last fiscal year, excluding Regus and compare that with this year, both for the revenue and profit levels, we were able to achieve increases both in revenue and all profit levels and also on a cumulative basis. And for Q2, we were able to achieve a higher revenue and higher profits. And on the right-hand side, you see the guidance for this fiscal year towards the achievement of this guidance, there is no problem. We are making a very steady progress towards achievement of our guidance over the full year. If you look at this chart, gross profit margin and OP margin are down by 0.3% and slightly 0.1%, respectively. That's because of the openings of new locations and recruitment, which were done actively because we wanted to capture upcoming recovery of the demand. And that's the first reason. And the second, F&B business has been recovering steadily. So this is a cost of F&B business, which is cost of goods sold. So the cost ratio has increased. As a result, profitability has deteriorated a little bit, but this is the spending that we are making towards the future demand. And for revenue, in Q1, JPY 9.22 billion, Q2, JPY 8.727 billion. So the revenue declined by about 3%. And normally, compared to Q1 to Q2, usually, revenue goes down by 7% to 8% or even 10% normally. But for this Q2, revenue declined only by 3%. So in that sense, I think we did very well in Q2. We wanted to achieve a little bit more than this, but we achieved JPY 8.7 billion revenue, which was much better as the off-peak season in Q2 compared to other years. So this momentum of business recovery has been continuing, especially supported by the strong recovery of the food and beverage business, which is supporting the strong performance of Q2 so far. And excluding Regus, revenue OP, if you look at the trend on a quarterly basis from the past, this is a chart. On the left hand side, 2020 February, this is before COVID, and then COVID outbroke outlook and then declined, and it's been recovering since then. That's the trend. And as I mentioned repeatedly, we have been recruiting actively, and we have been actively opening new facilities, new locations. And even with that, we've been seeing steady profit recovery. So steadily, our traffic demand is coming back. Next, this is the trend of consolidated revenue by service, like room rent and option revenue on a quarterly basis. On the right-hand side, this is Q2 results, service mix. As you can see from the top sentences, F&B revenue, increased to JPY 1 billion. In Q1, it was JPY 800 million. So F&B revenue increased by JPY 200 million to JPY 300 million. So this is off peak season. So August season, but steadily, we see the recovery of F&B revenue. So as we progress towards the end of the year, I think this F&B mix is going to increase more. And lodging revenue, Leisure are Lodging, it's been flat at around JPY 2 billion. And there was one net reduction of one building facility. As a result, our revenue declined by a few hundreds of millions of yen, but still, it's been flat at JPY 2 billion. So actually, fundamentally, it has increased, excluding this one reduction of one location. So although the mix of revenue was flat, but this indicates that demand is coming back very steadily. On the next page, we are showing the consolidated balance sheet and statement of cash flow. After selling Regus, the net interest bearing debt has been decreasing. And our equity ratio has been increasing, and this is continuing cash and cash at hand is JPY 28 billion at the moment. And interest-bearing debt has been repaid down to JPY 29 billion. So net debt is about 0 at the moment. On the other hand, the usage of cash. One, I would like to use it for new location openings and recruitment. We'd like to use it for core businesses and that's what we have been doing. In addition, investment in Lilycolor, we are investing in businesses quite actively. So we invest in core businesses. We invest also in peripheral businesses. So in those 2 areas, we are trying to spend more to expand using cash. And cash flow statement, if you look towards the bottom, the cash flow from operating activities, cash flow from financing activities and free cash flow, as you can see from those lines, the cash flow is good, but one additional topic, which is our operating activity cash flow in Q2 of the last fiscal year, compared to that, it shows slight decline. That's due -- that requires additional explanation. Number one, Regus is now out of our consolidation. So as you know, Regus has a large CapEx business model trying to recoup the investment for over a long period of time. So there's a big cash outlay. And then with the each quarter cash flow, they recoup from the investment asset business model. So operating cash flow was higher in that regard, but now we don't have Regus. So operating cash flow looks lower. That's the first reason. On the other hand, investment cash flow, we didn't invest last year. But on the other hand, the investment cash flow was reduced because of sale of Regus. Another point is about corporate income tax payment in the previous year. There was some reversal of refunding. So the net payment was JPY 100 million. It was very small last year. But this year, it is nearly JPY 1 billion we are assuming as a tax payment. So this is another factor. And also for large projects, we paid cash in advance to be recovered later. So this is a temporary phenomena. So because of those factors, there was some irregular decline in operating cash flow. However, it doesn't mean that we had some problems in the operations there is a steady progress in our operating activities. So this was all temporary or onetime factors. Next, let me talk a little bit more about the details of each business. First, the Rental Space and Leisure and Lodging businesses and openings and the closure. On the left-hand side, you see the last year's situation as well as this year's situation until Q2, both openings and closings, it may be difficult to see, but this year, in the first half, there were 7 openings, and we closed down 13 facilities. For Q2, we opened 4 and we closed 3 facilities. In terms of the number of tsubo, 5,500 new addition was made in Q2. On the other hand, because of the rebuilding of the older buildings, there were 3 closed down. So that is totaling 571 tsubo. So the net increase is considerable. You can see the photos of the facilities we have opened or expanded. Altogether, we have 5,500 tsubo. In terms of closure or reduction, it says minus 10,290 tsubo. If you look only at this, you may think that the total has declined, but as I told you at the quarter 1 briefing, Lodging and Leisure, there was one facility we closed down in COVID. That was a very big property in terms of the size. So there was a lot of impact from this closure. And if you look at the Rental Space only, there is a net increase of 3,600 tsubo, this is a net increase. So without impacting the profitability because of the closure of one facility, we had a decline in the net area. If you look at the fourth line at the top, after the first half, even in September, we are continuing with a very active opening activities which will be discussed by the President later. Already, we have achieved 10,000 tsubo expansion plan for this fiscal year and we are going to do more openings going forward. Depending on the opportunity, we would like to open up more for the rest of this year. So I just talked about the openings. So this is the situation, number of meeting rooms by grade. In total, we have 231 and about 140,000 tsubo under operation of our company. Furthermore, for the Rental Space business I'd like to give you some more details on the next 2 slides. The first slide is about the trends in KPI of the Rental Space business, sales per tsubo, effective area -- the rentable area is the denominator, and the numerator is the meeting rooms. So this is like a RevPAR in the real estate business. For the quarter 2, we have JPY 32,141 which is up from the past trend. Compared with Q1, it is done. But because of the store opening activities, the denominator has increased. But when we have a normal operation -- normalized operation, the numerator will follow, so this should go up. Because of the openings, the denominator is a little bit larger. So year-on-year, last year, we had JPY 27,168. So there was a JPY 5,000 increase year-on-year, as you can see, clearly recovering trend of sales per tsubo. The Rental Space business, this is the second page. These are the purposes of usage like meetings and recruiting, training party exam. So by purpose, we have divided -- broken down this usage. We are getting closer to the ideal mix. At the right-hand side, you see the quarter 2 number from the top -- the third from the top, 4.1% circled by red. This one is what we talked about. I said JPY 800 million in Q1 and JPY 1 billion in Q2 for F&B sales. So this is the F&B. It is getting normalized for a quarter basis as well. On the left-hand side, this is 2020 quarter 2, on the left-hand side, this is almost the same percentage of sales -- total sales for Food and Beverage, F&B. So you can see the business is being normalized as we speak. So that was my brief explanation of Rental Space business. I shared some details about it. So that was my brief explanation. And after this, about the updated business strategy, Mr. Kawano is going to give a presentation. Mr. Kawano please.

Thank you. I would like to give you an update on business strategy. First, 10,000 tsubo new opening and expansion achieved for this year. You can see this from April 1, 28 and so forth. Like this almost every month, we opened up 2 or 3 new facilities in April and May, 2 per months and in June 3 per month. In July -- July 1, this is just one, but there was big 3,736 tsubo August 1 and 3 in September. So 12 in the last 6 months. So it's like 1 facility per 10 days. We had opened new facilities. So finally, since the beginning of this year, our store opening pace has increased, accelerated and recorded a net increase. For the first time in a long while, we had the entire building project, Akihabara Toshiba building. So for the whole building, TKP contracted the whole space. So it was a big project where we have to achieve a high profitability. Last time, Ichigaya headquarters workshop, we have converted into TKP meeting spaces. And this time, we did the same for Toshiba building. And in an intense manner with the dominant strategy, Tokyo Station and Shinagawa Station was focused. And this time, we focused on Shinagawa and opened up 2 new facilities, especially for Shinagawa the Takanawa exit area right in front of the station, where there was a Kaihin railway headquarters building in the past. We have converted this building into TKP meeting space. And Shinagawa heart, this is a corner side, 1,306 tsubo, new area and the total in Shinagawa is 2,954. This is TKP Garden City Premium Shinagawa Takanawa gate. There is a rework in this building. And in the same building, we occupied 2 floors for TKP. So this is a very convenient area building and well located, strategically located. So I'm sure that everyone will enjoy using this building. And in the ceiling, there is a speaker equipped and there is a projector screen equipped in the room. So we are having a sophisticated equipment for user conveniences. Also on the 1st of November, we are opening up a new one in Osaka Umeda area for the first time in 4 years. We are opening a new facility in Kansai area. So finally, we are opening a new facility. And also, let me talk about the operational start of the new Leisure and Lodging facilities because of the increase of the inbound traffic for the Leisure and Lodging business, occupation -- occupancy ratio has been improving. And there's cleaning cost and labor costs, which are increasing. However, more than offsetting that our ADR is expected to grow for the Leisure and Lodging business, and we can improve the profitability. And also the Party business in December and onwards, we expect a strong party demand, as Mr. Nakamura mentioned, we expect it to be even stronger. In Tokyo, we are trying to in-source F&B business. But in December, there are some days where we cannot really accept the demand with limited supply. So as early as possible, nationwide, we are trying to in-source in Tokyo support of Goka. We have bring the businesses into in-house production. And also in addition, in October, Nagoya Osaka and the [indiscernible], we are going to start operation of the kitchen -- in-house kitchen operation. On this page onwards, let me explain the strategic investments and the business partnership. This was just announced today and about the negative goodwill. For now, we are going to bring it to 0. And ordinary profit and profit levels look lower because of this negative goodwill. But at some point in Q3 or Q4, after the auditing firm finishes their audit work, it's going to be rectified. So this is only the timing difference. So currently, Lilycolor, currently, it's an equity method applied company. But from here onwards, we are going to put this company on the balance sheet. Starting from Q3, we are going to start including the performance on the income statement PL also. Lilycolor, originally, TKP Nishi-kasai is a location where we were working with Lilycolor and that was the start of our relationship. And we've been asking Lilycolor to do the interior work for us for our business. But this example is the conversion from a hospital to Leisure and Lodging facility. So they did the renovation work for this conversion. And going forward, we are going to work with them in the Space Solution business and also for owners. We have 231 TKP locations owned by the owners. So we'd like to provide owners with services by taking advantage of the leasing capability in the leasing network, we'd like to work with them for interior work, floors and walls, we'd like to work with them even further more in the future and [indiscernible] right now, we have started to take orders for the management training sessions every month. [indiscernible] is being held, provided to our customers. So we look forward to our business with [indiscernible] in the future. In particular for large clients, large corporations. So this business is about to really take off. And in the fund, where we have the LP investment, we have started to debut the investments. So LP fund investments are going to start from now on. And in [indiscernible], this PFI business project. Right now, we are going though various procedures for this project. And we expect to start the construction around in February 2024. And in spring, in 2025, we expect the start of the operation of this park project. And also rotation reservation, booking system and the travel agency business are working with Mitsubishi Estate. This is making a very good progress. In the second half of this year, continuously, we are going to keep our eyes on M&A opportunities. And also, we are going to promote our work in collaboration with Redicada company. Lastly, let me talk about what we expect in the second half of the year. So the demand high season at the end of the year is coming for year-end parties. So towards the high peak season in December, we are promoting business rollout. And during December, especially on the high peak days, we have already stopped taking orders. So I would like to resolve this supply shortage. So we'd like to really accelerate the pace of bringing outsourced kitchen work to in-house. And for dynamic pricing, which we introduced in July, there was no confusion, and it's working very well. And we expect the contribution of dynamic pricing in the all-out manner from the next fiscal year. And inbound services, especially these on the Lodging business, occupancy is improving. So from here onwards, we'd like to increase ADR. You have to think about what we should do to improve ADR. So that's going to be the focus because occupancy has increased. So now we have to work on the ADR to improve the profitability. And about the rental space, not only being used for the meetings. This can be used for events, entertainment events, [indiscernible] type purpose can be served by our rental space. So we'd like to really promote selling rentals business too. In this fiscal year, we did actions towards the next fiscal year onward in terms of sourcing, leasing and we invest in people. We invest in IT systems. So numbers that we are showing in this fiscal year include investments upon the investments so that we can really grow in the next fiscal year onward towards JPY 10 billion target. So we are planting seeds at the moment. So the numbers that you are seeing for this fiscal year represent, we are investing for the future next year and beyond. So we look forward to the improvement of the profitability in the next fiscal year and onward. This concludes my presentation. Thank you.

Now we'd like to start the Q&A session. There is no limitation as to a number of questions, but please wait for the answer after asking one question at the time. So if you have questions, please raise your hand and state your name and the company name. Are there any participants who have questions. Let's go to the person who is sitting in front. We are going to bring the microphone to you.

SBI Securities, Ozawa speaking. I have two questions. So I'm going to ask one question at a time. First, sales per tsubo, which is one of the KPIs in Q2 of the last fiscal year, it increased by more than JPY 5,000. So I'd like to know [indiscernible] of the number, I think you explained the majority of the reasons. But this improvement of JPY 5000, what are the big chunks, which contributed to this boost of sales potable the most. When you open new locations, it takes time until you fill up the new location to fully occupy, which is a negative factor temporary. But the positive side, there's recovery of party demand and also dynamic pricing, there is no full impact, but is there some impact at all from dynamic pricing. And you have more locations now in central metropolitan areas. So absolute level of renting space rent is high. So I don't know what are the big contributions. But compared to Q1 sales per tsubo increased a lot by as much as JPY 5,000. And so what are the reasons?

Thank you so much. Well, the denominator is becoming larger and larger. But more than that, occupancy is improving. That's the biggest reason. In Q1, March, April and May, which includes training for new employees. But in Q2 May, June, July, we are increasing sales per tsubo, selling options, lunch boxes and other optional services. And last year, in particular, sales per tsubo was JPY 27,000, JPY 800 also, and it increased by 18% from there. So for that increase, that's because of the additional sales of options like catering and lunch boxes. That was the big contribution to data sales per tsubo.

My second question, for about more than 6 months, you have already achieved the annual 10,000 tsubo expansion ahead of time. But what are the conditions, terms of contract of leases? I think you leased with good conditions for Akihabara location. But in Shinagawa, in Q4, you opened many locations near Tokyo Station, I think rents are high, but are you winning good terms and conditions? . And there was [indiscernible] announcement of vacancy ratio and there was this issue of vacancy of large buildings. And there was a big building built in Minato ward but there's some vacancy in some of the buildings. So there are some vacant buildings, but demand is coming back. So are you being able to lease these spaces at favorable terms and conditions in terms of these rent levels? Would you please give us more color on the leasing terms?

Well, in Japan, I think there are many peculiar or extraordinary factors comparing to countries like United States. The vacancy is not recovering at all, looking at Manhattan in New York. But in Japan, especially in Tokyo Metropolitan area, actually, the office demand is recovering strongly, people coming back to the office. So vacancy has bottomed out at 6% is going to go up from now on. So for TKP, how are we sourcing spaces from office buildings? And if office buildings are fully occupied, we have to source spaces from other types of buildings such as retail buildings. And also relating to office buildings differently from the United States. Well, if our office market does not work, I think we can utilize basis for other purposes, events, entertainment, it doesn't have to be used for office and there's strong traffic of retail mobility, and there's a recovery of inbound travelers visiting Japan. So can't we provide them with services with our business to [indiscernible] Hotel. Tokyo Station is full of foreign travelers at the moment. So can we provide any service at all to those foreign travelers. So we have to really think about multifaceted perspective. And for one, we are sourcing spaces for office purpose in terminal station areas, Shinagawa, Kyoto, Hakata, right infront of the station -- in terminal stations within the station or near the station. So we are securing spaces there, and we are going to see what will happen to the office space. We'd like to really think about for what purpose we are going to use the spaces that we are leasing. So going back to your question, under this circumstance. So do we expect vacancy to drop from here dramatically? Not really, 6% or so is going to probably stay there. And in 2024, there are newly opened buildings. The [indiscernible] ones are to be opened in 2024 and 2025. So office building may be softened a little bit. But that provides us with business opportunities. But in Tokyo Shinagawa Station areas, everybody is paying attention to the central locations, right in front of the station. So it's difficult to get spaces anymore. So Tokyo Shinagawa Station areas. We don't want to really these other spaces at expensive extravagant rent, but I think in the terms that we are getting reasonable conditions and brands. For this whole building in Akihabara, this is aged building. So actually, for this particular whole location, we can divide into how many -- however many units we want. And this should surely contribute to our profitability. In Tokyo Station, Shinagawa Station, at last from every exit, you exit out from the station, you see TKP rental space. So we'd like to use those TKP locations or showrooms. 2024, 2025, there will be older buildings, great bill buildings, which to be put for rent in the market and vacancy will go up for those old buildings or Grade B buildings. So we'd like to source those spaces in those buildings to provide services.

Are there any other questions? Yes the person in second row.

From SMBC Nikko Securities. My name is Hamada. First question is about openings after Q2. Now tsubo sales is JPY 32,141 per tsubo. So what is your outlook on the per tsubo sales? And how about next year you had 41,000 before COVID. Do you think you can go back to that level? If the expansion continues, and so that makes it difficult for you to increase the sales part anymore? And then if that's the case, please let us know.

Thank you very much. Well pre-COVID level, how to get back to that level. Because before COVID, there was a reception party lunchbox sales that were very strong in those days. In that sense, this Garden City Premium or Garden City, how much we can expand in this building will contribute a lot to the unit price and in terms of revenue on top of that conference centers, like big conference centers in Akihabara. Those are the ones to contribute because they can affect the operating profit directly, so contribute to OP directly. So you asked about JPY 41,831, for this level for Q1, this was for February 2020 first quarter level. And for this, I think we can hit -- well from December this year, reception party business is contributing in a full-fledged basis. So Q1 or June quarter, we should see a lot of increase. And in the year after next year, we should have a full contribution. But at that time, the total base number is larger. So the sales has to be 1.2x compared with the February 2020, first quarter sales. We want to make it multiple purpose spaces. It doesn't have to be office. So how we can get out of office or on top of office, how can we provide more flexible and temporary spaces, which should be in high demand from society. And also, there are a lot of content services we can partner or acquire, incorporate those added services into our spaces. And also accommodation lodging service is something we want to focus as well. [indiscernible] is utilized a lot by individuals. So it's not only company clients, but the individual clients are our target. So we want to make our facilities more hybrid type and multipurpose type facilities going forward. But today, the Rental Space business, the core business is recovering. So JPY 41,831 unit price, we want to exceed this as soon as possible. . For Q1, we had JPY 33,000 in Q1 this year, so maybe in Q1 next year, we can go nearly JPY 40,000 and then JPY 42,000, JPY 43,000 the year after that, if we follow the same trend. And then on top of that, because the core business is recovering, so we will keep accelerating. We have done some DX initiatives for sales. So we will be active in sales and marketing and we will focus on important areas with dominant strategy and focus on the new facility openings in effective areas. And then wherever we can, we will lease the whole building, so for higher profitability. So there are 2 types, the dominant strategy-oriented area and the other is profitability focused area. For rental space, one is space for companies, not only meeting rooms, but for different ways we can lease the space for companies. It's not just a time leasing, but we want to also focus on entertainment spaces and other types of spaces for companies and also spaces for inbound tourists and individual as well -- individuals as well. And we would like to explore more diverse opportunities.

Are there any other questions from anybody else? So let's go to this person sitting at the second row from the front.