TKP Corporation (3479) Earnings Call Transcript & Summary

Ladies and gentlemen, we would like to start the financial results briefing of TKP Corporation for the fiscal year ending in February 2025 third quarter. I would like to introduce the participants from the left-hand side, President and CEO; Takateru Kawano; next, CFO, Koji Nakamura. We have just announced financial results for the third quarter. We would like to cover the outline as well as the business strategy before we go into the Q&A session. We are scheduled to end at 5 p.m. Japan time. Nakamura-san, please start.

Good afternoon, ladies and gentlemen. I would like to start the financial results briefing for the fiscal year ending in February 2025 third quarter. Usually, I like to -- I would go over the numbers. And after that, Mr. Kawano will give you the overview of the business strategy. That's the same format we like to follow today. For Q3 results and business progress summary, there are some highlights. As you can see, the first point is that September this year, we have started consolidation of Lilycolor into our P&L. So the number have grow naturally. Excluding Lilycolor, we have an apple-to-apple comparison. Even on that basis, for Q3 year-to-date, we have had the record high net sales for the parent company. So the business has been going well. Not only just the net sales, OP profits have also exceeded the same year -- same time last year results. So the third quarter result was quite strong. On the other hand, we have announced several different events. One is the revision of the forecast and another is the share buyback program, which we will discuss later. And in the lower panel, you can see the business topics. In 3 months, in Q3, we have opened 2,700 tsubo facilities. So business has been expanding. And we have opened APA Hotel Wakayama. And also in Q4,APA hotel Shonan and Grand [indiscernible] . So we have been some progress in new facility opening as well. In Q4, we have completed the TOB of Novarese. So this will be consolidated into our financial statements as well. So these business topics will be recapped later by Mr. Kawano. Now for the third quarter financial results, I would like to go over some more details. First on the numbers, on a consolidated P&L, the ones in the red are for Q3 and Q3 year-to-date numbers. For Q3, 3 months, we had JPY 19.8 billion in sales and JPY 1.732 billion in OP. On a total basis, we have JPY 40.1 billion and JPY 4.4 billion in net sales and OP. As I said at the beginning, we have consolidated Lilycolor. Therefore, on sales and other items, we have seen some tremendous growth. Well to make it easier, excluding Lilycolor, I would like to show you the apple-to-apple comparison. As you can see on this table, for Q3, we have JPY 11.1 billion. And for Q3, you can see we have JPY 31.467 billion year-to-date. Compared with pre-COVID, February 2020, that was a peak year. We have exceeded the pre-COVID level, the peak level in the past, especially for Q3 JPY 11.186 billion. In terms of any quarter, this is the best and the highest record we have had in the history. And as I said in the key points, we had a very seamless progress for the last 3 months or 9 months. So year-on-year, you can see the growth rate on the right-hand side. For Q3, 3 months as well as for 9 months, for year-to-date, we have exceeded the same time last year levels on all of the levels. As you can see at the top, in terms of business investment, we are seeing some catching up of the sales with the investment. Therefore, you can see more than the growth rate in sales. OP growth rate is higher than the growth rate of sales. So systems and people and we have invested a lot. However, despite the significant investment, sales are catching up today. So finally, we are entering into a stable income generation phase. And we are looking forward to more harvesting of profits going forward. So in prior period, we had more investment than profit. But going forward, we can proactively pursue more profits compared with the level of investment. Next page shows the sales breakdown by service. Well, as I said earlier, compared with the previous year, Q3 last year as well as Q3 of pre-COVID year, sales were higher. That is the highest in our history. In more detail, especially accommodation or room rent net sales increased significantly. As you know, at the moment, we are seeing the strong demand in the inbound tourism. Therefore, especially the hotels that we have acquired has completed buildings. Those are the ones that we can book sales right away or next day. Therefore, we are getting some benefits out of those opportunities. So we are increasing sales that way. And at the same time, for the meeting rooms, room rents option and accommodation, we are increasing profit as well. As we will discuss data for the meeting room business by adding new products we are getting ready for the next stage of growth. At the moment, hotels are growing, but at the same time, for meeting rooms, there will be a jump up going forward in terms of their contribution going forward. Next slide shows the balance sheet on a consolidated basis. From Q2, we have added Lilycolor. Therefore, the size of the balance sheet is much larger this year, store openings and hotel for the hotels and meeting rooms, we have been very proactive in the opening activities. Therefore, the cash has reduced by JPY 10 billion. On the other hand, for the fixed assets, it has increased significantly. So that is the highlight of the balance sheet. But having said that, despite the very proactive investment, our net asset is JPY 47 billion. We have 43% in equity ratio, which is very solid in terms of the balance sheet, the health of the balance sheet. Well, as I mentioned at the very beginning, we have conducted a share buyback program -- conducted the share buyback program announcement just today. And you can see the outline here. Well, given the balance sheet situation as well as the operating cash flow situation, we have decided to enhance the shareholder return as well as the capital efficiency. From that perspective, we have decided to conduct a share buyback program. In terms of the shares, at the maximum 2.14 million shares or 5.05% that will be included. And at the maximum, the acquisition price is JPY 3.5 billion. So starting tomorrow, January 15, we are starting this program. And the revision of the business forecast, this is a bit hard to read. And the right-hand side, this is the new plan we have revised the lending numbers to align with these new plan numbers. As we have mentioned, excluding the Lilycolor, the those numbers, excluding Lilycolors, on a consolidated basis, exceeded pre-COVID for the latest 3 months and also the 9 months year-to-date, especially the latest 3 months, we hit the record high net sales. So the business itself is solidly progressing. But in terms of the plan, the growth rate was excessively forecasted. So compared to the plan, it's below the original plan. And also Lilycolor that has made as our subsidiary, their performance is on a downward trend. Therefore, this was also the downward impact compared to the previous announcement that was on the July 11. So that's why we announced the new one, JPY 59 billion and the after tax, this is JPY 4 billion, and the ordinary profit and the net sales stores are still the record high numbers. These are already the announced numbers. And the -- for the year ending in February 2026 and beyond, including the Novarese, the subsidiaries numbers, those are under scrutiny. So as soon as we complete the review, then we would like to make an announcement. And next is the Q3 business summary. This is the actual of the opening and extension and the close for the -- we opened 9 facility and extending the those floor space. So in total, 4,093 tsubo and the rental space wise is 2,700 tsubo and this 4,093 tsubo as a net income and we are extending the those floor spaces. And these are the actual numbers, meeting rooms, lodging accommodation in total, 277 facilities and the contracted floor space is 160,000 tsubo. And we are the operators of such a rental space and the lodging and the hotel facilities. And next is the KPI transition, the net sales per tsubo. This is the comparison pre-COVID and the post-COVID. The right-hand side is the Q3 [ landing ] level. The JPY 37,980 is the sales part per tsubo. As you can see here, the pre-COVID number at the level of the pre-COVID and the unit price has come back. And in the future, we want to extend the floor space. At the same time, we would like to increase the unit price to contribute significantly to the net sales increase. This is my last part, rental space, flexible space by usage. So this is looking at the sales mix on the right-hand side as the Q3 this year, as you can see here, there's no outliers. This is the good sales mix to recognize the net sales. So volume-wise, the revenue-wise, we would like to continue to grow those in Q4 and beyond. That concludes my part, including the summary of those numbers and financials. And Mr. Kawano will talk about the update on the business strategy. Thank you.

So let me give you the update. First is the rental space and the flexible space. In Q3, 2,700 tsubo new opening was achieved. In Q1, 349 tsubo and the Q2, 1,265 tsubo and the Q3, 2,700 tsubo. Altogether, 3 quarters, close to the 5,000 tsubo extension has been achieved. And in Q2 results announcement, I said that we are planning to increase by 3,000 tsubo in the second half. And with these, I think those are almost attained. And we made the announcement the other day. This is about the Fabbit. The rental space -- meeting space is expanding and there is the increasing need. And as you saw on the presentation materials, the ordinary profit is a record high and the net sales is increasing. There are some voices that may be forecast was too high. But if you look at the year-on-year comparison, TKP rental space growth is very steady. Previously, with Regus, we were running the flexible office, the meeting room. But the Regus was divested and that part was missing. But this time Fabbit has been acquired from Apaman. So we are reentering into the flexible office market. That is the Fabbit business. And currently, there are 20 sites, Hawaii and Bangkok as overseas and also domestic sites, and the TKP is combined together. So TKP Fabbit or Fabbit by TKP. TKP resource is multiplied by the Fabbit. So this is the joint opening was TKP. The difference was that Regus. Well, Regus was 100% subsidiary. But this time, we received the business transfer. So as a part of the TKP main business, we will be rolling out the TKP Fabbit. That is the difference. TKP and Fabbit, well, I will be directly navigating TKP and Fabbit. So for example, the space could be leased out on an ROE basis or monthly basis or used as a co-working space. So we want to roll out the flexible office spaces. And the great variation strategy, the rental space and the co-working space and the virtual office space stores will be rolled out and also the Fabbit spot this feature will be provided. TKP's rental space launch will be used. The business people who are on the move or on business trip or the people who are working remotely. So the people who are using the TKP meeting rooms, they can use this space temporarily as a lounge and their own spaces. And the rental office, if the people want the independent office, then the we will lease out such space as a short-term office for those users. So we'll be very flexible. By combining the TKP resources, we do have the comprehensive outsourcing structure with the acquisition of the Fabbit, TKP, well, actually, the freelancers and the virtual office users and start-up companies and small medium business people and the medium-sized and the large enterprise users. Well, it used to be the focus on the enterprise large companies see office demand. But now or going forward, this product or the offering could be used by the many different people. Next is the hotel, leisure and lodging business. In Q3, APA Hotel Wakayama opened and APA Hotel shown [indiscernible] also [indiscernible] was renovated. So it's called the grand [indiscernible]. It used to be used as the company's seminar hotel, 105 rooms were available, but the number of the rooms were reduced to 55 rooms and the double the room space. So individuals and inbound users can use that and hot springs or sauna and spa and the hot springs are available, and the people can utilize this facility, and this will open in February. Also in Beppu City Oita we have Shonin Park facility. So in July this year, we are opening. Furthermore, in terms of more progress on openings, these are the ones to be opened. In February, we are opening Yugawara. And in April, TKP Cottage hotel within AEON Mall Cottage Hotel nONIWA will be opened. And after that, it will be followed by Shonin Park in Beppu Oita in December this year. We have APA Hotel Oita Ekimae opening. And after that, Hakone Gora will be opened in 2027. So the existing Lectore will be renovated into a new hotel. Just recently, in January, APA Hotel Shonan [indiscernible] and in February, Momoyama was also opened. All of the directly operated hotels are under operation, there are 29 facilities. Next, I'd like to talk about strategic investments and business alliances. The red triangle shows the existing TKP business, the rental space and that at the top with [indiscernible] Bridal business Novarese, which is our subsidiary and also preferred shares were purchased today for ESCRIT. So those are under the [indiscernible] brand. So on weekdays, we are providing these services to corporate customers. For rental office, we have a Fabbit brand. That's the brand under which we are conducting this rental office business going forward. For Lilycolor, we are enhancing this business towards the vertical integrated business model. Especially for ESCRIT, Novarese for the collaboration, under the Bridal business, we are expanding the collaboration going forward. And also for Shoningahama, this is under the regional revitalization initiative. So strategically, we are making business investments. Let me give you some more details on this. First, on bridal business, at the moment, we have Novarese, 60% of the stake for shares of Novarese is acquired. And in December last year, we consolidated this business into TKP Corporation. And for ESCRIT at the moment, we have 12.59% of common shares. And on top of that, 8 Class A share of 3,000 shares have been acquired as well. For Bridal business, this is the positioning of our company. ESCRIT was focused on standard type of wedding services in the middle. Compared with that, Novarese is focused on luxury wedding services. So with these 2 areas to be expanded, we would like to capture the core market. For Bridal, before COVID-19 pandemic, we have had some markets the market size at that time was JPY 700 billion. It is down to 80% compared with the pre-COVID market size. So there are some winners and losers in this industry. So -- but there still is 80% market remaining. Therefore, we would like to expand our revenues and volume as much as possible in this market. And another area is the lighter market, like photo-based wedding services and this is the area which is expanding. So how to capture this photo-based wedding is the key to the success in the wedding business. In that sense, TKP Corporation is capturing both standard and luxury services. So we have omnidirectional positioning, we can expand into both directions, luxury direction and economy direction. So by expanding both, we can offer new types of wedding services going forward. Next, I'd like to talk about collaboration with Lilycolor. First of all, there is a collaboration with Apaman, at the moment, with the Apaman managed properties, we are offering the wallpaper replacement services using Lilycolor capability. And also, we are promoting collaboration between Lilycolor and TKP. Using Fabbit, there are 20 office today, we are expanding it to 100 in the near future. And we are converting some of the TKP into Fabbit facilities. And as we do so, we will place orders with Lilycolor. So with the Lilycolor capabilities, we are creating new rental offices. So those are the 3 business areas we are focusing today. For us, this rental space, flexible space business. At the moment, opening momentum is gathering. We are very proactive in opening new rental space. Of course, we are being selective, although we are increasing the volume. Going forward, we will focus on large-sized facilities, both for Fabbit, TKP and bridal. With those contents, we can offer complex office service offerings, including large-sized facilities. Next is the hotel and leisure and lodging business. For this business, because of the yen's depreciation going on, there still is a very solid demand that we are enjoying. Therefore, to capture the strong demand, we are proactively opening new facilities and expanding the floor space. so that we can offer more service to inbound tourists. And we are converting some of the facilities for inbound facilities. The third area is strategic investment and business alliance by focusing on Lilycolor. business. At the moment, our OP margin is quite low. Therefore, we would like to focus on enhancing this margin. That is my own personal challenge. So we would like to implement various initiatives here. And in the bridal industry, we have converted Novarese into a subsidiary. So we want to promote the collaboration with Lilycolor and other companies outside so that we can enhance the business. Last year, we have conducted a lot of business investments. Next year, we are focusing on recovering the investments and the consolidated sales of JPY 100 billion next year, we should be able to exceed this not only this, we would like to enhance the operating profits as well. And earlier, we have today, we have announced the share buyback program. And this is the first action that we are taking as a company for shareholders. We have thought about different ways, but we thought that this would be most impactful and JPY 3.5 billion. If you think about floating shares, this will be a very effective number of shares that we are planning to acquire within this program. So this will be a shareholder return. In terms of profits, if you compare with the same time last year over the same quarter last year, operating profit has a strong upward momentum and our profits are growing very strongly. And together with Fabbit on top of that, and we are expecting much more momentum in terms of the net sales and the profits -- so meeting rooms and rental office will be combined together as an offering. And we can also do the bridal business. And if there are partners we can find, we want to also expand the bridal business. So both the hardware and software are getting ready. And in the bridal area, we have acquired some skills like flower arrangement and plant arrangements and so forth. And we can cater those capabilities for the receptions of corporate customers. So together with the downward revision, we have announced those new events and businesses. So if you could understand the current momentum of the business that we have today, despite the downward revision of the forecast, I'm sure that you would understand a very strong momentum, which would allow us to increase the profits going forward. Thank you. That is all my presentation.

Now we would like to start the Q&A session.

[Operator Instructions] The first one sitting in the front row.

SMBC Nikko. My name is Tazawa. First question, you didn't mention about this Page 6 to update on this -- these net sales is very good and older, but the food and beverage what about this? And it's still not getting so much profit and the net sales and the order booking status? And is it making progress towards in-sourcing? Or is it a little bit delayed? Would you please give us the update? That's my first question.

As for the food and beverage, because of the year-end and New Year, the demand grew so much. But this production is behind, and we are currently thinking about the M&A to enhance the catering business. For December, Tokyo and the Eastern Japan Kanto area, we have actually worked on the in-sourcing. However, we were still partially using outsourcing. So roughly 70%, it's in-sourced already. And the regional areas we couldn't really attract the staff, the cook and the in-sourcing is behind our plan around the 60% as of December. Having said that, it's around 60%, 70% level. In-sourcing is making progress, but it has a high volatility based on the specific date and that hasn't been leveled out, for example, from the Monday through Wednesday or a Thursday, we need to incorporate the banquet or the [indiscernible] demand. And the Monday through Thursday, if the factories are operating, then the TKP should acquire those and we need to produce the necessary items for the catering. So we are thinking about the our second factory to acquire such in-housing potential. And the demand is strong and the in-sourcing is still delayed but it's almost full. So we want to have the second factory for the Kanto region. We want to incorporate the operational factory. Looking at this chart, Q3 food and beverage, JPY 1.69 billion. On the left-hand side, the pre-COVID, it's the JPY 1.94 billion. So overall net sales is coming back, but the food and the beverage seems to be slower and delayed. What about this? Well, there used to be the large banquet halls in Shinagawa that has seated 2,000 people capacity, but that's only available in Makuhari. So we are not able to secure that large capacity in the central area whether we can get the banquet space or capacity over 1,000 people or not. That will be very important. But excluding that, those numbers are recovering close to the pre-COVID level.

And the second question, the unit price as well as the flow space will be expanded and what about the supply situation of the office spaces? The large office will be targeted and the vacancy is going down and developers are increasing the rent and the good office, can you acquire them at a good rent? And the -- originally, we wanted to acquire the 10,000 tsubo per year based on the traditional midterm plan, but you lowered that to 5,000 tsubo per year, but how much can you grow?

Thank you for the question. Well, I think 5,000 tsubo per year is appropriate. Looking at the current growth and also needed to increase the profit of 5,000 tsubo is appropriate. In that sense, 10% -- close to 10% of the net sales could be achieved through the floor space expansion. As for the future office demand REIT share price has decreased. So it is necessary to increase the rent going forward as the rent price may go up, the vacancy may increase or free rent may be available, so many adjustments will be made, I guess. As for office, if the rent increases, vacancy should go up. Then temporarily available space will be increased for TKP. That's my view. This year and the next year, office rent, if it increases, then the vacancy increases. Then for the next 5 years, there will be many honors to keep the vacant place, then the TKP can lease or rent and change that to the flexible office based on the hour or a certain period. And another one is that for example for the long term, like 10 years, free rent could be incorporated and whether to make that facility or not, that's something we really need to seriously think about that. How much initial cost do we want to spend then the number of years will change. We work and the Regus world and do we want to want into their world? Or are we going to create a TKP customized flexible office. So in February, the Fabbit will be compared to TKP. So maybe 6 months later, we will probably determine what kind of construction and procurement will be necessary. We will see the -- our own new flexible office. So please give us some time. In any case, if the office rent increases, then vacancy increases, then the 2, 3, 5 years short term, we can probably procure that at the low price or based on the actual usage. So that's a good opportunity.

The third question lastly, the future investment, Lilycolor and Novarese, I think that you mentioned that you are in a phase to recover the doors of initial investment. I talked to many investors, this may increase in the future, but the recent time is tough. So the investment may be suspended for now. And then once it's turned to profitable, then that you may want to restart. We hear such voices from the market. So including Lilycolor and Novarese, we -- or are you thinking about the investment to increase your ownership in Lilycolor and Novarese? Or are you also thinking about the new investment? So for example, the [indiscernible] factory that you mentioned, and you are also thinking about the others or you are prioritizing to make the core business profitable first? So that's mentioned on the Page 25. But looking at that, can you also mention about the future outlook.

Yes. As for the future, our core business, rental space business is growing steadily and the party and the banquet demand is growing. If we do this right, then we can go back to the pre-COVID net sales and the profit level. That's for sure within myself. But if it's only that, then the -- we needed -- it doesn't mean much for us. So we need to have the second or third additional point and the underlying business is supported by yen depreciation. But as a second level rocket, for example, the wallpaper business of Lilycolor. Lilycolor was selling the paper wall, and they have been doing the business for 120 years. They have an established brand. So using the wallpaper, the construction itself should be sold with the wall papers. So we need to think about the in-sourcing such construction work. That's my own theme or topic. So Fabbit construction should be ordered with Lilycolor and to make the office track record and horizontally roll out that business. And then we can run the turbo jet. And third is Novarese and the ESCRIT bridal business. The meeting room space business, both hotel and banquet space shrunk and the TKP meeting room expanded. [indiscernible] and Novarese house wedding, they actually expanded. They are not using the hotel banquet. And those are the industry peers, we grew together. So this is the business model to replace a hotel banquet space. And then those are becoming more customized or personalized by customers and the homemade bridal will be the future focus. So TKP would like to focus on this. Through this organization or industry reorganization with this business. That's the third rocket. The timing-wise, the TKP goes first and Fabbit, Silk, TKP main business should grow. And then the Lilycolor profit should grow. And then the business of the bridal will grow. So this is like a 3-phase rocket. This is how we want to grow the TKP and also Novarese PFI business and the historical structure some public items owned by the local government, those should be converted into the better facilities. We are focusing on that. This is the PFI and the asset held by the local government, we need to make the proposal to utilize them. And that will be the fourth pillar in the future for our business. In conclusion, you are -- you may make the additional investment. If it's more than JPY 10 billion on the EBITDA, then that means that we will have the investment source. And the -- so far, we actually use the resource from the Regus divestiture, but we want to reallocate this profit for the redevelopment so that we can fill this business model. Any other questions?

So the third row from the front.

My name is Ozawa from SBI Securities. I have 2 questions. First, hotel openings the midterm plan was 30, but you are exceeding that pace. So could you talk about ROI when you make the hotel from scratch, construction cost will be too much. But if it's just a rebranding, buying existing hotel, you can quickly turn over to a new hotel. And you talked about synergy with Fabbit like the hotel in Nishikasai, you can utilize Lilycolor and reduce the investment. So could you give us some more color on that front?

Regarding hotels, if we procure land and build a new hotel, it's like a ship building a new ship some time ago, it costs more money to remodel a used ship because if you build a new ship, it is too much cost. So building a new hotel is very, very expensive today. So that will not be a good idea in today's circumstances. But the renovation although it takes time, it is better. So in that sense, using leading color, we can do the renovation or conversion of used hotels. That is the first approach. The second approach is -- well, there are used secondhand hotels that we can acquire and then keep operating as is. That means we can book sales from next day. So that's the second approach that will be also effective. So in that sense, we have 29 hotels today, the revenues and OP margins are quite high at the moment. So depending on the balance sheet. So whether we lease everything or whether we own the properties, the OP margin may be different. So we like to come up with the optimum balance, looking at the balance sheet, and we will optimize both balance sheet investments as well as the earnings contribution. So we can strategically approach this from our experience. So we have the room to do that. We have enough operating profit to choose either way at the moment.

There is another question for the short-term and the midterm office offerings, which you announced when you talk about the midterm plan last time. Well, this time, you have already added Fabbit. So maybe you reviewed the strategy. At one time, right after COVID pandemic, the revenue of rental space per tsubo has gone down. So you talked about rental office for JPY 30 million -- JPY 30,000 for call center and those opportunities. But now you are reentering into flexible office strategy. In that sense, so what is the efficiency per tsubo? What is the difference from the previous strategy, and there is a new startup. So maybe you can charge more today in today's environment because there are many start-ups, more than JPY 30,000 per tsubo today. Could you talk about that?