Park24 Co Ltd

TSE:4666

Earnings Call Transcript 2020-Q2

[Koichi Nishikawa, executive]

I am Nishikawa, President and Representative Director of Park24 Company Limited. First of all, I would like to express my sincere gratitude to the participants for taking time out of your busy schedule to attend the fiscal year 2020 First Half Financial Results Briefing Meeting of PARK24 Company Limited. Due to the impact of COVID-19, this time, we are holding the quarterly financial results briefing remotely.

Without further ado, I would like to start my presentation. I would like to go over the overall results. Slide shows the consolidated results for the first half of FY 2020.

Net sales was JPY 145.6 billion. Gross profit was JPY 25.5 billion. Operating loss was JPY 1.2 billion and recurring loss was JPY 2 billion. These were the results of the period.

With regards to the differences between the plan and the actual results, everything was related to the spread of COVID-19. The state of emergency was declared by the government and the movements of cars and people were extremely restricted, which impacted our business significantly. Therefore, all of the deviations of the actual results from the plan were derived from COVID-19 impact.

The first half landed in a loss, which is the first time since the company went public. The company went public in 1997, listing the stocks on the OTC market. It is the first time for the company since then to record a loss for a half year period.

The next page shows the analysis of differences between the initially planned recurring profit and the actual result.

Against the initial plan, the net sales decreased by JPY 15 billion due to the COVID-19 impact. Along with the decrease of the net sales, the variable expenses decreased by JPY 1.5 billion. The cost reduction, mainly SG&A expenses, was JPY 1.9 billion. We managed to recover to a certain extent. However, we still were unable to breakeven. And all in all, the first half recurring profit landed at a loss of JPY 2 billion.

I will explain the full year prospect later in more detail. But under the current environment, we are focusing on thorough cost-reduction measures throughout the year. We are suppressing a variety of cost items, hoping to improve the profit for the full year period.

When we look at the external environment, the volume of traffic and the movement of people have not returned to norm. We expect that we will continue to face very tough conditions for a certain period of time in the second half as well. Faced with the spread of COVID-19, we have established our basic policy and prevention measures. Above all, we are prioritizing measures to keep customers safe.

The specific measures are shown on the right-hand side of slide Page 5. They include, for example, strengthening of in-vehicle sterilization of Times, Car services, installation of disinfectant sprays in Times Car vehicles, and the service staff at the sales offices of car rentals to wear masks at all times without exception, sterilization of the car rental stores and installation of sanitizing sprays. Also, large-scale events and seminars were canceled. All of the activities involving close contacts, closed gatherings and closed spaces were canceled.

The second point is to keep employees safe. We banned all of the nonessential, nonurgent domestic and international business trips and moving between offices. We also leveraged the use of web and teleconferences. The basic idea is to work remotely from home and handle work as much as possible. In case an employee has to commute to the office for some reason, the congested commuting hours are to be avoided. Also, we recommended the use of company cars and car-sharing services in the neighborhood. The highest priority is to avoid contact with other people. So even when an employee has to come to the office, we ensured that the risk of infection does not rise. Also, for those who are pregnant or those who have underlying diseases, we provided special leave of absence. So we thoroughly implemented measures to prevent our employees from going out to places where there's congestion of people so as to avoid all members of the group to be infected. So that was the second item.

The third item, although the number of people infected has decreased compared to the peak time, the type of services we provide are categorized as the transport infrastructure services. So even in the situation where COVID-19 is widespread, so long as there are users, we strive to continue our services. We made a variety of adjustments and efforts so that we can continue to provide both our Parking and Mobility services. Based on these policies, we have implemented various measures and we have continued our business. However, the overall volume of traffic and the movement of people have declined significantly, so our businesses have landed with very tough results this period.

Page 6 is the summary of the impact of COVID-19 on external environment and on each businesses.

This slide lists what took place from January to June related to COVID-19 as external environment and how they impacted each of our businesses. Overall trend is that it was tougher in February than in January, in March than in February, in April than in March, in May than in April. The business results worsened as it progressed. But current situation indicates that things have bottomed out in May. For parking, in Japan, we are seeing some signs of improvement in utilization in June compared to May. Similarly, for car sharing, although small, we are seeing improvements in June. If things will continue as it is now, we will likely to reflect and say that we hit the bottom in May.

Moving on to Page 7. This shows that the utilization of parking facilities in comparison to the same month a year ago and against the initial plan from November to April.

The top right chart on Page 7 shows the comparison with the initial plan. The bottom chart is versus same month a year ago. As you can see on both of these charts, until February, the utilization was above 100% year-on-year. However, it started to decline rapidly from March. It dropped by as high as 17% in March and further 20% decline in April. So the utilization of parking facilities sharply declined in March and April, also against the initial plan. In April, the utilization was very low. It was 63.3%.

Moving on to Page 8. From January of this year, we started to generate weekly net sales year-on-year results. Looking at this data, we can say that until third week of February, we were achieving positive year-on-year results. But from fourth week of February, the net sales started to underperform last year. The fourth week of February is when the government announced that all the elementary, junior high and high schools in Japan are requested to close temporarily. The utilization had started to decline from around that time. After that, the Tokyo metropolitan government requested the residents to stay home during the weekend. The state of emergency declaration was issued for 7 prefectures. And in the third week of April, the state of emergency, the declaration was expanded to all of the prefectures. The very bottom was the first week of May. However, in terms of the comparison with the same week of the previous year, the first week of May last year was golden week, so we need to take that into account to some extent. But still, it is as low as 50.2%. So even if we factor in the golden week impact, the first week of May, in our view, was the bottom. After that, in the second week of May, the state of emergency was lifted for 9 prefectures. And on May 25, which was in the fourth week of May, the state of emergency was lifted completely. Along with that, in terms of year-on-year comparison, after dropping to 50% in the fourth week of May, it returned to 75.3%. So the improvement of roughly 25% was achieved. So you can clearly see from these figures that the bottom was actually the beginning of May.

Under such circumstances, we have formulated 5 policies in order to achieve early improvement in earnings.

First is to be highly selective in new sites to develop. Under the current environment, although it was difficult to directly visit the landowners and negotiate, for the ongoing projects we are currently proposing, we are using tools such as phones and teleconferences to continue to develop new sites, although we were being highly selective.

The second is to reduce loss-making facilities through measures such as rent revision. These are facilities running at a loss chronically even during the normal business environment. Under the environment we are facing now, the loss from such facilities will expand significantly. So we are sorting out such contracts and proactively approaching to cancel such contracts.

The third is the temporary freeze of new initiatives. We have developed our proprietary payment machine called Times Tower, and we were planning to proactively replace and install Times Tower during this year. This will require cost, so we will temporarily freeze the replacements this year. I believe it will be difficult to resume this initiative within this fiscal year. We will be making the decision monitoring the situation. But with regards to the installation of Times Tower, the resumption will likely be in the next fiscal year, which is the year ending in October of 2021.

The fourth policy is to conduct a fundamental review of the group's expenses. We are reviewing cost items, including facility management and maintenance expenses, indirect expenses and operating expenses. We have conducted a thorough review in order to suppress the cost as much as possible and suppress SG&A.

The fifth policy, we feel very sorry to the landowners who are lending their land for parking facilities. But given the current circumstances, for almost all of the properties, we made requests to the landowners to reduce the rent. We are continuing this effort now. The cost of land makes up the largest portion of the cost of the parking facilities. So we have made requests striving to reduce the cost of land.

So these are the actions we have taken in our effort to somehow cover for the decline in sales. So that covers our policies and countermeasures for our Parking business.

Page 10 explains the status of our Mobility business. The top right chart shows the results of the Mobility business against the initial plan and the bottom chart shows the results versus the same month a year ago.

On the overall Mobility business, it was progressing at around 100% from November to February. But in March, the year-on-year sales dropped to 87.7%, and in April, it was 55.8%. It dropped to nearly half. It was impacted by the fact that the movements were restricted for both companies and individuals. The results of March and April were significantly impacted.

Speaking on the breakdown of the Mobility business, Page 11 shows the results of the rental car services. The chart on the top right is versus initial plan and bottom right is versus the same month a year ago.

As you see, in April, the year-on-year sales declined to 44.1% to less than half. From November to February, compared to the previous year, the sales was not necessarily strong, but from March onward, due to the impact of COVID-19, the sales declined significantly.

Page 12 shows the results of the car-sharing services.

Looking at the bottom right chart showing the results versus same month a year ago, from November until February, the sales was higher than the same month a year ago. It was progressing positively and holding out in March at 99.8%. But in April, it dropped to 65.9%, a decline of about 35% year-on-year. And in April, there were declarations of the state of emergency and weekend stay home requests. The business was significantly impacted by these incidents.

Under such environment, we formulated policies and countermeasures for Mobility business. There are 5 policies.

Firstly, we will strongly promote Times Car service. As you saw, rental car business was affected more significantly than Times Car business compared to the same month of the previous year. Times Car service is simply saying the mantra of rental car and car-sharing services. Repurposing the rental car vehicle as Times Car will help us improve utilization. That's why we would like to strongly promote Times Car service as a company policy.

Next is to streamline the number of vehicle we own, with focus on rental car vehicles, which means we cut the number of vehicles for optimization's sake. Conventionally, the best procedure will be to sell used car in a used car market. However, in March, April and May, the market itself was extremely sluggish, so we rather focused on cost reduction through removal of license plates to curtail tax and insurance.

The third one is particularly for rental car business, improvement of the stores' operations. That does mean enable us to deploy less staff, optimizing operating resources contributed to labor cost reduction.

And the fourth one is to conduct fundamental review of group expenses. We strive to reduce expenses as we did for Parking business.

The next one is the step-up initiatives to encourage use, which we started from March. Considering risk of infection, overcrowded train during commuting time can raise risk. We offered a discounted price for car share service at JPY 500, limited to the time from the night before till the next morning. We attempted to spur demand under this campaign by providing car-share service for those who didn't want to use crowded train. That's the status of the Mobility business.

Next, Page 14 covers overseas business.

The right chart on the page represent comparison of monthly sales against initial plan and same month of a year ago. We collected data until March due to 1-month lag in overseas cutoff day. Actually, April and May went through extremely difficult time. Until February, the business trended similarly to the same month a year ago. The March stood at 71.7%, followed by April and May, when strict lockdown was imposed in overseas sites attributed to far lower decline in result than domestic Parking business. As a result, overseas business was severely affected by COVID-19 than in Japan.

We also devised policies and countermeasures for overseas business. Although it says we develop new sites more selectively, these sites were mostly selected already for development. As of the beginning of this fiscal year, Especially in U.K., we finally established a solid foundation ready to shift gear to aggressive mode. We prepared ourselves from last November for acceleration of business to achieve 14 new sites development. To tell the truth, it was a spoil from early stage. As a matter of fact, new sites development in overseas business, including U.K., Australia, Singapore and Malaysia, become challenging this fiscal year. We do intend to selectively develop new sites as long as they are promising to bring profit. But in reality, it is difficult to facilitate it now. Another one is to review parking facility operating methods. Turning manned facilities into unmanned ones reduce labor cost. We identify the sites and spaces to be manned in order to pursue low-cost operation. The third policy is to request a revision of rents, as we do for domestic business. This is simply an effort of asking, and we will continue to ask for rents revision. The next policy is to tighten profit management, which means operational expenses should be strictly controlled by saving as much as JPY 1 in overseas business as well as domestic business.

In addition, we make great efforts to reduce our cost and secure liquidity on hand in all group companies.

Firstly, we enhance human resources management by actively optimizing human resource allocation and placing a right person in a right position. In a sense, we build a thorough structure where we can run business without increasing workers. We currently freeze on a mid-career recruitment. Those divisions which initially expected mid-career workers to join are now asked to reallocate existing resources to address the challenge.

Next policy is to reduce labor costs, including executive remuneration. We reduced executive remunerations and decided to pay no executive bonus at all, while cutting employee bonuses by 50% to pursue thorough cost control. We initially plan some expenditures for this fiscal year due to change of CI and BI started back in last year, but such activities are all frozen. We decided to only pay expenses on the minimum required activities for business continuity under strict cost management.

Also, we secured liquidity on hand. We financed through a bank to secure around JPY 30 billion on hand in long-term funds, with additional commitment line of about JPY 50 billion. Therefore, we don't need to be worried about capital for the time being.

Given the current status in the first half of this fiscal year and the countermeasures deployed, we revised the consolidated forecast for FY 2020, initially released in last December, as shown on Page 17.

Net sales were down by JPY 70 billion to JPY 263 billion from JPY 333 billion as initially planned. We expect to reduce cost of sales by JPY 14 billion to JPY 232.7 billion from initial JPY 246.7 billion. Gross profit is down by JPY 56 billion from initial JPY 86.3 billion to JPY 30.3 billion. Operating profit decreases to minus JPY 24.2 billion from JPY 26.7 billion, down by JPY 50.9 billion. Recurring profit is down by JPY 50.5 billion to minus JPY 25 billion from initial JPY 25.5 billion. This is the first time to post deficit at 6 months earnings result, not to mention full year result, since the company was listed or even since it started business in 1991. Restriction on moves and travels due to spread of COVID-19 gave a significant impact on our business.

Here is assumption to calculate revised numbers in the forecast. Page 18 shows the assumption of the revised net sales against initial forecast.

May result hit 51%, almost half of the previous year. It is expected to gradually recover by making gains of 5% to 10% and will end up comparably low level of 85.9% in October. These are the numbers used to calculate the revised forecast.

Page 19 talks about business environment assumptions as of now.

Parking business entails a mixture of positive, negative in neutral aspects. Since work from home is a new style of work drove so much attention in media, people will continue to work remotely to some extent even after the risk of COVID-19 infection diminishes, leading to less corporate demand in Parking business.

Next item is decreased use of parking facility as for indoor commercial facilities. Unless truly effective vaccine is developed and safety is secured in the same level as for influenza, despite fewer number of infected persons, people would remain reluctant to go to places which are heavily concentrated and filled with many people. If that's the case, our TPS parking spaces adjacent to endure commercial facilities could be adversely impacted. Parking facilities for outdoor commercial facilities may potentially grow, contrarily to the possibly declining indoor commercial facilities in the item #2. Reassessment of car use as means of transportation for both private and business use will be happening since those who want to avoid heavily crowded places such as jam-packed trains and buses may prefer traveling by car, which possibly pushes up utilization of parking spaces. The impact of Item #5 and 6 is neutral.

As previously mentioned, unless COVID-19 risk is reduced to the same level as influenza and effective vaccine is developed, it seems difficult to expect that the environment comes back to what we were before pandemic.

Mobility business, also less positive, negative and neutral items on Page 19.

Stay-home work becomes more normal, resulted in less demand from corporate customers. Some customers told us that they felt unsafe to touch a steering wheel and car doors which someone else has touched before. We do place a disinfection spray in a car, but still, some are reluctant to use sharing service, and it continues to leave a certain level of negative impact. As mentioned in Parking business, reassessment of using car as means of transportation is expected since people realize using car allows them to avoid crowds while traveling, a positively emphasizing convenience of car-sharing service and improved utilization. In addition, once corporate customers accelerate the shift from company cars and lease cars to car-share service as a part of cost saving, we can expect its positive contribution to the business. When we start to see a sign of recovery in travel and tourists, mobility related business will be boosted as well.

These are the business assumption for the next fiscal year going forward, and we strive to devise measures based on them.

That's the FY 2020 first half financial result briefing and a revised full year guidance I run through quickly.

Thank you for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]