TKP Corporation (3479) Earnings Call Transcript & Summary

Thank you very much for waiting. I would now like to start the TKP financial announcement for the second quarter of the fiscal year ending February 2025. We would like to introduce the participants for today. Towards your left, we have the Representative Director and President, Mr. Takateru Kawano; and our CFO, Koji Nakamura. And today, the overview of the financial results announcement and business strategy will be presented, and we will take time at the end for Q&A, and we expect to end the meeting around 5:00 p.m. today. And so without further ado, we will hand over to Mr. Nakamura for the presentation.

Good afternoon, everybody. So for the fiscal year ending our second -- February of 2025, we would like to start the earnings call for the second quarter. And as always, I will be, first of all, give you the overview of the financial results, and then I will hand over to Kawano to present on the business strategies and the topics. And now in terms of the summary of the financial and also the progress of the business, and I'd like to cover the summary of the topics. And for the second quarter, the meeting spaces -- rental spaces and food and drinks, these trended quite strongly. And on a cumulative basis for the second quarter, the sales grew by 11.3%. So we were able to exceed the level of before COVID. And so we had been able to enjoy a very solid result for the 3 months. And in terms of the expenditures, especially around the labor cost, there is increase in SG&A. But despite that looking at the operating margin for the second quarter on a stand-alone basis, it was better than the same time last year. And in terms of the business topics, the openings in the first half was relatively slow. This was mainly in the leisure and lodging business, but we will be accelerating the openings, mainly in the rental space in the second half, and so we will continue expansion of the business. And the hotels, as I mentioned earlier, have been solid in the first half, and we will continue to open it in the second half as well. And also we are investing in the Spacemarket. But apart from that for Lilycolor as well as Novarese, we have the subsidiary under equity method and also the subsidiary -- consolidated subsidiaries, the investment will continue. And Lilycolor will be consolidated as of August for the balance sheet. And that is the consolidation that we're doing. And I would now like to move into the overview of the financials. And starting from the numbers on the consolidated financials as you see here the chart that it is highlighted in red is the numbers for the YTD basis as well as for the quarter and JPY 20.2 billion in sales and OP was JPY 2.27 billion. And after adjusted -- ordinary profit is JPY 2.6 billion and the net profit is JPY 2.4 billion. In terms of sales, as I mentioned earlier, mainly around food and rental spaces and also leisure and lodging, both are very solid. And so it's 14.3% growth on a consolidated basis. Sales before COVID, excluding [ Regus ] when you compare apple to apple, it was JPY 20.1 billion, and so we were able to exceed the pre-COVID level sales. So continuing from Q1, we have been able to end at a very solid level. And in terms of cost of goods, the opening of the rental space was quite slow. This is a matter of timing. And because of that, that was pushed forward into the second half. And so the utilization of the spaces that was opened in the first half has increased. So therefore, the cost ratio has improved. And as a result of that, for last year and this year, it's within the assumption, and so the gross margin that we are targeting, which is around 40%, is being achieved. And in terms of SG&A, at the same time -- compared to the same time last year, it is increasing quite significantly. But as we mentioned at the Q1 earnings call are labor cost. Starting from the first quarter of last year, we started to hire, and we went into full scale in increasing the headcount. And compared in August, we have around 200 increase in headcount. And so we are expecting the demand of rental space and leisure and lodging to continue. And in order to support that we're increasing headcount, and that is why the labor cost is increasing. However, the increase is starting to settle down. And so the SG&A growth will not be as steep as what we saw before. But labor cost is still lower than pre-COVID, but we are establishing a structure that has a more efficient usage of headcount. Another reason for increasing SG&A is that the sales for leisure and lodging is increasing of the mix and the OTA related sales are increasing compared to before and also system renewals. Because of the system renewals, there's an increase of the onetime cost of about JPY 60 million, and that is starting to settle down. And so I don't think it will come down, but in the recent terms, it is higher than the previous year. And because of those reasons, the total SG&A has increased. And as a result of that, OP was JPY 2.73 billion in OP was the result. And -- that was what we achieved, as you saw. And in terms of the ordinary profit compared to second quarter of last year, it has gone down quite significantly, and that is because Lilycolor was acquired. And because of that acquisition, there was some negative goodwill at the time of the acquisition. PPA, the accounting process has been finalized for the previous year, and the negative goodwill period was finalized the second quarter, but we did a retroactive booking of that, and that was JPY 345 million worth of negative goodwill. And so compared to the second quarter announcement that has gone up for the second quarter of last year. And so superficially, it looks like the profit went down up, but in reality, it's about the same. And so now we're seeing some abnormal increase in the profit last year. And last year, there was some tax impact from selling of wages and because of that, last year [ compound ] was quite large. And because of that, it looks like the profit went down, but last year number was abnormal. And so it's not as if we had some unusual situation to lower the ordinary profit this year. These are both all within the assumption. That is all related to the numbers. And when we look at the quarterly trend of the consolidated sales, this is what it would look like. And this is adjusted consolidated sales by service, and this is [ excluding ] Regus, and we are comparing so that we can see the apple to apple comparison trend. And on the right-hand side, you see the Q2 result and compared to Q1 to Q2, where there's always the busy season and the shoulder season. So therefore, it's gone down. But compared to the second quarter of last year for rental space and also leisure and lodging are both increasing. So we are seeing a very healthy growth of the sales. And as you can -- you can probably see that from this chart. And especially for leisure and lodging, we are seeing a very healthy growth, and we have a record high in sales in the most recent quarter. Next is the balance sheet, consolidated balance sheet. And as you see here as I mentioned at the beginning, Lilycolor had been consolidated into the balance sheet and because of that we see a big increase, and it might be a little bit difficult to read, but Lilycolor has a very healthy balance sheet. So just because they were consolidated, it's not going to give any impact. And the capital adequacy ratio continues to be around 40%. And we have been spending a lot of cash. I mean, we we've been making strategic investment for hotel openings and other openings. And for other Lilycolor, Spacemarket, Novarese, we have been continuing with the investment. Also, the investment cash flow is negative JPY 10.6 billion. Free cash flow is negative JPY 7 billion. So we are making upfront investment. That was what we saw in the first half. But as a result, we still have JPY 25.6 billion of cash. So in terms of balance sheet, it's very solid. So we got the robust cash flow. And from September, it will be reflected in September. And we will be achieving those results from Q3. So that's what you can see from our balance sheet and also the cash flow trend. And looking at the business in more details for Q2. First and foremost, for the -- all of the new location of putting both leisure, lodging and rental space for February '25, this first half, we had 9 new facilities and we closed 9 facilities. And the big space will be accounted for by the hotels. On the right-hand side, you can see the new opening and also floor space expansion. On the right-hand side, we have 3 hotels at the bottom, and this accounts for most of the new space openings. So in the first half, we were opening mostly hotels in new locations. And from second half onwards, as Kawano-san will mention later, we will be increasing the new location operating for the rental spaces. At this point, we have over 3,000 tsubo that's in the plan to be expanded. So with this new openings and the closings, you can see this by grade in this stable. And as a result, we have 267 facilities across Japan and have over 160,000 tsubo of contracted space. And on the top, you can see CIRQ, the Novarese facilities because they are not equity affiliate, their facilities are added. So compared to before, we have additional 36, and this is because Novarese's facilities are included in this item. And looking at the KPI sales per tsubo. In Q2, it was JPY 34,194 on the far right, that was a result for Q2. Earlier, I mentioned when I talked about the revenue, Q2 is summer season, which is a slow quarter. So normally, we see some dip. But after the pandemic, we have been on a recovery trend, and this sales per tsubo has been rising. So compared to before COVID, we are now at a comparable level. And last but not least, for the rental space and the flexible space, this is a mix by purpose far right as of the Q2 of February '25. And as you can see, compared to before pandemic, we see a steady growth for the training purposes. And one more thing to note is that from Q3 last fiscal year, the others on top has been increasing. And with the new system, we are able to foresee and calculate more accurately. So we are now able to analyze the data. And as we accumulate this database, going forward, we will be able to make more effective proposals to our clients. Also we will continue to accumulate this database so that we can improve the mix and increase the proportion of the rental space portion, which is more profitable and high occupancy rate. So that's the update to the Q2 numbers. From now, I would like to invite Mr. Kawano to talk about the strategy to date and also strategy going forward.

Yes. So I will now take over to update you on our business strategy. So first is the new facility openings. Q3 onward, we are planning to open 3,179 tsubo. On September 1, we will open a TKP Garden City Obihiro; October 1st, TKP Hakataguchi Conference Center; and also the same date TKP Kyoto Shijo Conference Center and also October 1, we had TKP Tamachi [ Ekimae ] Conference Center, those were opened. And on November 1, we're opening TKP Sendai Aoba Dori Conference Center. November 16, also we announced today, TKP Shinbashi Shiodome Conference Center will be opened. And on December 1, TKP Garden City PREMIUM, Kyobashi Annex will be opened. And on January 1, TKP Garden City PREMIUM Hamamatsucho WTC Annex will be opened. So we have a series of new openings. And we have a collaboration with fabbit on October 1. We're using the second story of fabbit Hakata as TKP Hakataguchi Conference Center, and that was opened on October 1. And fabbit today has 20 facilities with 20,000 members. And we just announced this news, already in front of Shinbashi station, it's a Shinbashi Shiodome area. And this is the [indiscernible] head office building and the whole building in total has 1,215 tsubo and they will be opening soon. And also from the time rental, we will also be offering a more medium- to longer-term meeting room service. It was also in the weekend Nikkei newspaper. So the time rental will be shifted to a more -- or shorter or midterm rental services for local rooms or with some rest space. Also, this will be rental space that can be leased for usage of with more than 5 people. And with fabbit, regarding the segmentation of the market, they will be targeting the space, which would be suitable for usage of 5 people or less. And so smaller rooms will be with the fabbit logo and for bigger rooms with more than 5 people, it will be short term, midterm and also rental by time using the TKP brand. And for the leisure and the hotel lodging business and training in Q2, 3 other hotels were opened. The TKP's operated APA hotel is 15 hotels with 2,894 rooms, and August 1, Obihiro Ekimae APA Hotel was opened. July 23, Kyoto APA Hotel was opened. August 1st, APA Hotel Hakodate was opened and on November 20, APA Hotel Wakayama will be opened. The Obihiro and Hakodate and Wakayama those hotels. We acquired the APA Hotel from APA Hotel. So from day 1, we have revenue and also users. And we are going into the designated cities with APA Hotel. We are also accelerating the openings of APA Hotel in the tourist destinations and also mid-tier cities. We would like to expand those offerings to stimulate the original revitalization to have a hotel that's very close to the local market and community. And this is the resort hotel opening strategy on Page 20. Also, we have LecTore Yugawara, which is now going under for renovation. So not just for the corporates, this will be available for individual customers. So it will be rebranded to grand LecTore Yugawara. And right now, this year, we are opening 10 new lodgings. We achieved that target. Also, we would like to open 10 more new lodging spaces. And moving on to the strategic investments and business alliances. Right now, this is just a list of the portfolio of the investments that we're making now. And as you see here, the new ones will be APAMAN and this was an MBO. And now we are working on forming business alliance with APAMAN as well as with fabbit. And the new one will be Spacemarket, and we have invested 21.22% in our space market. And especially with regards to Spacemarket, right now, on October 11, we have signed a contract. And the convenient station, which is an unmanned meeting room and that will be posted on Spacemarket, and we have started to work on that. And from November 1, the posting will start. And Spacemarket covers things like temples or baseball spaces or old housing that can be used for training purposes. And starting from today from the TKP web page, the unique venue sales have started. Moving on to the progress of the second quarter. With regards to the rental space and flexible spaces. Towards the second half, especially in the third quarter, we are seeing good growth of banquet. In the fourth quarter, we have received many orders. So the second half is expected to be better. And for hotels, leisure and lodging, the demand is very strong. And APA Hotel -- the new opened APA Hotel has marked a very good start, too. And in terms of the strategic investment and business alliance for Lilycolor, we have sent 2 directors, and we are enhancing the collaboration right now. And for space market, as I mentioned earlier, specific alliance have started to be considered, and quite soon we think we can announce a capital alliance. And for the revised target towards achieving the midterm plan, we're making no changes, and we're trying to achieve towards the midterm plan. That is all for the summary of the progress and the outlook. That is all from me. Thank you very much.

[Operator Instructions]

From SBI Securities. My name is Ozawa. And I have 2 questions, so I will ask them one by one. First question is related to Page 17 that was announced in the Nikkie, the mid and long-term period meeting rooms. And during COVID in Shinbashi, you had office building being rented for a short period of time, and you also had Regus. But what is the difference to the conventional model? I mean the Shinbashi offices at the time, I don't remember clearly, but the rent was like JPY 30,000 and you said you can generate some profit, and I think you applied the model to the meeting space, but because your period is a little bit longer, are you going to do more renovation? And in terms of the profit model, I mean, in the past for Regus compared to the rental space, the model took longer to breakeven. But is it going to be quicker to generate the profit for this current model?

For this, the one that we had in COVID, the meeting space or the rental space was used for emergency offices or rented for vaccination space. But for this particular case, the company's function like lockers or refreshed rooms are available. And so the space can be used as an office as is for the companies. And for fabbit, it's basically the same as Regus. And so there's a reception and there is the individual rooms, and there's a space for shared space. And in Shinbashi, we're going to start 2 floors as an experiment, and there's a shared space in addition to the office space, and that is a big difference to the conventional model. So this is like a larger version of Regus. And it's like a larger version of fabbit. I mean the rental office for less than 5 person, it's typically 1 to 2 persons. But compared to that there is a larger space, and the meeting room can be used by 2 to 3 persons. And so we have designed that it can be used by smaller headcount. And just to add on to that per space, I mean, Regus used to be like JPY 100,000 per person, but the ASP structure can generate pretty good profit.

And how long would it take to break even? I mean, can you explain how long?

Well, it depends on how much you can procure. I mean, typically, one seat will be JPY 50,000 or JPY 100,000 in terms of ASP. But if we can procure at lower cost, it could be like JPY 50,000 per seat. I mean, if you rent an apartment or a condo or you can't rent it for JPY 50,000. So compared to that, we think we can rent at a lower price. But that is still being considered right now. And so going forward, how much would it be set for the office is less than 5 persons. That is all being considered. The conference centers and meeting centers are connected, and we would it rent by time. But if you were going to rent it by month, we are trying out and consider what we should do.

And the second question is related to leisure and lodging business being more aggressive around opening. I mean how should we look at the profit mix? I mean looking at the cash shape, you have JPY 8 billion in fixed cost, but the construction cost is very high. And so if compared to newly built APA, Wakayama is probably built 12 years ago, and it's probably a rebranding. And I think I remember staying there when it was Washington Hotel. So compared to newly built construct, the return on the investment is probably better. Of course, it's probably not cheap when you buy it from APA Hotel, but compared to building a new building, is it better or more efficient?

Well compared to building something new, when you think of the construction fee, you can buy it like half the cost, I mean it's already built, and it's already generating profit already. So the productivity is very good and the return is very good, and we're not making a loss, I think that's quite big. And the construction fee, once it goes down in the future, we can talk about rescrapping it, rebuilding it. But right now, we only need to do a little renovation. I mean if it's an APA Hotel, we don't need any initial investment. I mean, it's very efficient in the operation. And because we have the connection with APA, we are able to buy those facilities, and for APA, they have the policy of focusing on more larger city. And for the tourist locations, if there's any good location that we can purchase or we want to purchase. And so APA is going to focus on the larger cities. And so there is a possible -- we can look forward to similar locations coming up. Yes, we can consider potential for purchasing location. And in the tourist locations, there could be some hotels are [indiscernible] we can use by renovating. So we can be quite active in acquiring those locations.

Anyone else? Any questions?

My name is [ Samada ] from SMBC Nikko. I have one question. For this fiscal year, your view on the profit outlook. In the first half, you don't have Lilycolor contribution. So SG&A looks very inflated. So operating profit, it seems that the progress is slow. But going forward, for to achieve JPY 8.2 billion of OP for the full year. How are you going to catch up?

Yes. Thank you for the question. As you pointed out, the full year outlook, the progress vis-a-vis the full year outlook, in our view, is on track. Q3, Q4 we expect to build up the profit, and we would like to achieve the full year outlook.

And for that, I guess, are you looking at sales per tsubo, the KPI. What would be the trend or assumption?

Right now, it's comparable to be before COVID.

But what do you think is the trend going to be from Q3 and beyond?

Well, it's subject to the food and beverage services. But right now, for December and the year-end, the event seems to be quite strong. Also, we are -- actually, we have to adjust the order. But if we can take those orders successfully then I think we will be far above what we achieved pre-pandemic. But I think the progress including those KPIs have been making steady progress.