Park24 Co Ltd

TSE:4666

Earnings Call Transcript 2021-Q2

[Koichi Nishikawa, executive]

Good afternoon, everyone. I am Nishikawa, President and Representative Director of Park24 Co., Ltd. Thank you very much for taking time out of your busy schedule to participate in today's briefing on PARK24's financial results for the second quarter of the fiscal year ending October 31, 2021.

I would now like to explain our financial results for the second quarter following the presentation material. First of all, let me go over the consolidated results for the first half.

Net sales were JPY 121.8 billion, which is a decrease of JPY 8.1 billion from the planned JPY 130 billion. Gross profit was JPY 17.2 billion, a JPY 6.6 billion decrease compared to the plan. Operating loss was JPY 6.5 billion, a JPY 6 billion increase over the planned JPY 500 million. The recurring loss was JPY 8.9 billion, an increase of JPY 5.4 billion from the planned loss of JPY 3.5 billion. As a result, we have posted a loss for the first half in 2 consecutive fiscal years. These were the consolidated results.

The next page is an analysis of the differences from the plan. On the waterfall chart, the first one on the left is the first half of FY 2019 when there was no impact from COVID-19. This is a comparison from that time. We were impacted by the COVID-19 pandemic. The main reason for the difference from the plan for this period is the second and third emergency declarations by the government. We did not include them in the plan, and this was the biggest factor.

The waterfall chart on your screen shows various figures. And the total impact of COVID-19 on recurring profit was JPY 26.1 billion. Although we had anticipated that we will be impacted by COVID-19, our initial plan was a loss of JPY 18 billion. However, the impact of the emergency declarations, which we had not factored in, was equivalent to JPY 8.1 billion on top of the JPY 18 billion in the plan. Therefore, the total impact was JPY 26.1 billion, higher than the JPY 18 billion originally planned.

Since we anticipated the impact of COVID-19 of JPY 18 billion, we continued our thorough cost reduction efforts from the previous fiscal year. As a result, we were able to reduce the costs by JPY 7.1 billion. Our initial plan was to reduce costs by JPY 4.5 billion, but we were able to achieve an additional JPY 2.6 billion in cost reductions. So we were able to reduce costs by JPY 7.1 billion compared to the planned JPY 4.5 billion reduction.

However, the impact of the emergency declarations were even greater. And although the cost reductions exceeded the initial plan, it was not enough to cover the decrease in sales. And as a result, the forecasted loss expanded further. So this was the situation of the first half.

Page 4 shows consolidated sales trend of the first half. This graph is a little difficult to see because there are 4 line graphs, but they show the monthly changes in consolidated net sales during the year from November to October. The line graphs are FY 2019, the previous fiscal year, the current fiscal year and the initial plan for the current fiscal year. The red line, which runs through May, shows the actual results for the current fiscal year. The light gray dotted line above is the initial plan for this fiscal year. We exceeded the initial plan in November, which was the start of this fiscal year. And the results for December was almost in line with the plan.

As you may be aware, the second emergency declaration was issued in January at the beginning of the year. Due to that, the deviation from the plan has been widening since January. This situation is still continuing at the moment. You can see that the overall trend is, to some extent, parallel to that of FY 2019 when there was no impact of COVID-19. Although the overall trend is similar to that of a normal year, the overall traffic volume is shrinking impacted by the emergency declarations, and the monthly results are quite diversion from a normal year.

Page 5 shows the difference between the actual and planned business profit and loss by segment. On the left, there are business segments. Parking Business Japan, Mobility Business, Parking Business Overseas and Business Development. On the right are the actual sales, recurring profit and loss, the impact of COVID-19 on recurring profit and loss and cost reductions.

If you look at this chart, the Parking Business in Japan was originally planned to be in the black with a recurring profit of JPY 9.5 billion. But the impact of COVID-19 has increased by JPY 4.1 billion from the plan. Cost reductions were JPY 1.3 billion higher than planned, but this was not enough to cover the JPY 4.1 billion negative impact. So the Parking Business in Japan ended with a profit of JPY 6.4 billion compared to the JPY 9.5 billion profit originally planned.

Similarly, the Mobility Business was planned to be in the black by JPY 3.3 billion by the end of the second quarter, but the impact of COVID-19 was JPY 2.6 billion larger than planned. Cost reductions were also JPY 400 million higher than originally planned, but the result was a recurring profit of JPY 1.2 billion.

In the Overseas Parking Business, the initial plan was for a recurring loss of JPY 6 billion, but the loss expanded by JPY 900 million to JPY 6.9 billion. Due to COVID-19 and the prolonged lockdown, the loss was JPY 900 million worse than originally planned.

As I mentioned, at the time of the announcement of financial results in December last year, it was difficult to forecast in the future. To some extent, it depended on the spread of COVID-19 infection. At that time, there was some talk about declaring a state of emergency. However, it was difficult to judge the extent of impact to our business. We expected that the operation would not improve significantly, but we could not predict that a state of emergency would be declared twice this fiscal year. We had anticipated some impact of COVID-19, but the impact was even greater than initially planned. This is the main reason for the difference from the initial plan.

The next page, Page 6, shows the monthly sales trend by segment, and this is for Parking Business Japan. There are 4 line graphs and, as previous page, they show the results for FY 2019 when there was no impact from COVID-19, the previous fiscal year, the current fiscal year and the initial plan for the current fiscal year.

In the Parking Business in Japan, the results were close to the initial plan to some extent until November and December, but the gap widened from January and February at the beginning of the year. In March, there were some signs of catching up. But in April, the impact became apparent in the results. Page -- the major market Tokyo was affected by the state of the emergency declaration, and this created the widening of the gap.

Page 7 shows the monthly sales trend of the Mobility Business. This is also shown in 4 line graph. For the Mobility Business, as was the case in the previous fiscal year, the improvement was faster compared to the Parking Business. In the background, demand for car sharing services, which allow people to travel long distances independently, has increased due to the fact that people are not using public transportation in the name of avoiding the spread of COVID-19. The overall movement of people was restricted. But even in this situation, in the fiscal year, the improvement was faster than in the Parking Business.

In this fiscal year, the second and third emergency declarations were issued, which we had not initially anticipated. When the overall movement of people decreases, the denominator will shrink. And even if there is demand for people who do not want to use public transportation, the overall pie will become smaller, So the environment will be different from the original plan. So compared to the plan, the sales results progressed at a lower level. As shown here, in comparison to the parking lot business, the gap with the plan is smaller. If the environment improves, we expect the Mobility Business to catch up with the plan earlier than the parking lot business.

The next page, Page 8, shows the sales trend of the Parking Business Overseas, shown in the same line graphs. There were lockdowns in the U.K. and in Australia during last fiscal year. Lockdowns are also expected in the current fiscal year as well. As was the case in the previous fiscal year, lockdowns overseas are more strongly enforced than in Japan. And the sales have remained at a low level.

In the U.K., as reported on the TV news, vaccination is progressing, but a highly infectious type of COVID-19 variant, called the Indian type, is spreading. If the strongly enforced lockdown continues, the deviation from the plan for the U.K. will remain large. I believe that unless the lockdown is lifted during this fiscal year, we cannot expect a significant improvement. That is how we managed through this second quarter.

Our basic policies, despite the impact of the new COVID-19, continues to be to protect the safety of our customers and our employees and to fulfill our mission as a transportation infrastructure company. Frankly speaking, there are options to close or suspend the operation of cars and parking lots with low utilization. However, even though the overall movement of people is decreasing, there are still people who use our facilities. Even under current environment, our main policy is to continue our business while focusing on reducing the risk of infection. This has been our policy in the previous fiscal year, and we will continue to focus on this in the current fiscal year as well as we develop our business.

As for the initiatives we are implementing under such circumstances, we are striving to reduce costs thoroughly in the midst of the overall decline in traffic volume and users. Having said that, stopping development altogether will affect our growth in the next fiscal year and beyond. So while we will continue development, we will carefully select sites to develop. We will continue to develop sites, but we will do so with a careful selection of sites that have the potential to become profitable quickly. That is what we are focusing on. In terms of cost reductions, in the past, when there was no impact from COVID-19, we basically took a negative and cautious approach to the cancellation of parking lots from our side rather than from landlords.

Although from a profit perspective, it would be better to cancel the parking lots that are not turning profitable and chronically loss-making, we are a transportation infrastructure company and it would be unwise to close a parking lot that has already been opened for our own convenience and profit. This policy is something that has been ingrained in us for a long time, and we have been making efforts to make such properties profitable until the very end, which is what we have been doing since the beginning of this business. However, with the spread of COVID-19, we can no longer afford to maintain such policy. Since the previous fiscal year, we have been working on the cancellation of properties that are in rent.

The number of cancellations of unprofitable parking sites is shown on the upper left of Page 10. 44 cancellations were made in FY 2019 and 433 cancellations in FY 2020. During the first half of the current fiscal year, 363 sites were canceled. Although we say that we are fulfilling our mission as a transportation infrastructure company, we have no choice but to make decisions about unprofitable sites because the loss has grown so large. And so we have continued to cancel unprofitable sites from our side.

Below that, we showed the improvement in gross profit ratio. With the sales in FY 2019 as the base, we estimate that the gross profit ratio will improve by about 4%, thanks to the cancellation of unprofitable parking sites. We believe once COVID-19 subsides, the level of sales will go back to that of FY 2019 and the cancellation of such unprofitable sites will have a positive impact. This will lead to a greater improvement in the gross profit ratio of the parking business as a whole. We intend to continue to address this issue going forward.

With regards to the selective development in the lower half of the slide, in the first half of FY 2019, when there was no impact from COVID-19, it took approximately 4 months for a newly developed facility to exceed breakeven. But the facilities developed in this first half of the fiscal year reached breakeven in 2 months. The start-up time is very fast now, since we are selective in locations and carefully select sites with the right number of lots. So the pace of start-up has been twice as fast as before, and the time it takes to breakeven has been halved to 2 months.

So a carefully selected development has been going well. However, since we are very selective, the total number of development projects will inevitably be smaller. In the first half of FY 2019, which was not affected by COVID-19, we developed 976 sites. But in the first half of this fiscal year, it was 326. Compared to the normal year, the number of site development will be about 1/3. We will continue to be selective in the development in the second half and expect the number of new sites to be more or less the same as the first half.

Parking Business Overseas on the right says, developing each country's version of Times parking. What it means is a parking business for short-term rent located in an outdoor flat space, similar to how we operate in Japan. Compared to Japanese parking sites, overseas sites in U.K., Australia and Singapore are usually in a relatively large space and in the form of a built-in parking or underground parking. We continued to develop such sites, but our future focus will be the one, same as Japanese style of Times parking.

We developed 108 new sites as of the end of first half of fiscal '19 ended in October, followed by 168 sites for first half of the fiscal year 2020 ended in October and 269 sites as full year of fiscal year 2020. The current period achieved 208 new developments, and we expect 490 as of the end of FY 2021. Sales activity has been restricted due to COVID-19, but knowledge and experience under the current circumstances, such as online sales, have accumulated in the past year despite restrictions. And pace of overseas development has been accelerating even when we were selective to develop our new site, so as we do for Japan.

The bottom right of Page 10 shows the improvement of each country's version of Times parking ratio of the total number of sites. As previously mentioned, compared to the existing built-in or large space parking, the Japanese style of small space and outdoor parking will increase to 48% by the end of FY 2021 from 37% as of the end of October 2019, which means increase by 401 sites from 972 sites to 1,373 sites.

Occupancy rate of existing parking has dropped significantly, resulted in extremely severe numbers. But if you look at the breakdown, you can see steady progress of operational restructuring. Despite numerous behavioral restrictions due to the pandemic, each country's version of Times parking ratio has been improving as initially planned since that as our intention back in the time of M&A to develop new sites similar to Japanese style of car parking.

With regards to the pace, COVID-19 forces us to slow it down, but gradual improvement has been seen in overseas business. The bottom right of the page says, NCP of U.K. launched restructuring plan procedure. We launched a restructuring plan based on English Companies Act on 30th of April this year. It still takes some time to receive the results. We solemnly proceed with the restructuring plan in line with the English Companies Act.

Next is Page 11. which covers Mobility Business. The left part of the page says promote development of sales offices. You may wonder what the sales office is. Our definition is a space to store Times Car available for car sharing. It serves as a backyard to secure space for the service. We occasionally lease a new space to open a sales office The majority of the sales offices are converted from the former Car Rental stores.

As explained in the page, we established 51 new sales offices in this period. They serve as the stations and vehicle pools. Out of 51, 30 switched from the former Car Rental stores. We have 21 net new sales office nationwide. For Tokyo, we converted 17 offices from the former rental car stores out of 32 in total, with 15 new offices. We leveraged the rental car stores as existing infrastructure to operate effectively.

The basic strategy in Mobility Business was initially designed to prioritize nationwide network building. which encouraged us to actively enter to local areas with rather low occupancy rate. However, the current fiscal year has been significantly underperforming, and therefore, we concentrate vehicle placement in high occupancy areas, which is explained on the right of the page.

Simply saying, we place vehicles in high occupancy areas such as Tokyo and Osaka with more users. Regarding local prefectures, there could be prefectures with new vehicle placement in the current fiscal year. Previously, our strategy was to expand our footprint by equally covering all 47 prefectures.

But in this fiscal year, we have shifted our forecast to the areas where we can expect high earnings and occupancy rate, which will eventually push up the ratio of Tokyo. That's why the deployment ratio in Tokyo increased from 18% as of the end of October 2019 to current 24%. 1 out of 4 vehicles is placed in Tokyo. In addition, it was 15% within the 23 wards of Tokyo, but improved 19%, which means roughly 1 out of 5 vehicles is deployed within the 23 wards in Tokyo. We concentrate the vehicle placement in the area of high potential in order to increase occupancy rate. This is how we engaged in each business segment, and we'll continue these initiatives throughout the current fiscal year.

Page 12 and onward gives the overview of balance sheet. Here are the changes on the balance sheet from the end of fiscal year 2020 and the end of first quarter of fiscal year 2021 to the end of second half of the fiscal year 2021. The indicators we monitor the most are shareholders' equity ratio and D/E ratio, which are at the bottom of the page. We want to maintain shareholders' equity ratio at around 30% and D/E ratio at less than 1x.

Having said that, this is where we are: shareholders' equity ratio is 8.3% and net D/E ratio is 5.9x. We financed JPY 50 billion by subordinated loan in last December. After the rating evaluation, the shareholders' equity ratio is 15.7% and D/E ratio is 2.37x, as shown at the very bottom of the page. Our goal of 30% of shareholders' equity ratio and less than 1x of D/E ratio is not based on the rating evaluation, but should be net figures on balance sheet, and this is our current status.

Page 13. As we revised the consolidated plan for fiscal year 2021, along with the numbers for the second half. Initial plan is in the far left column, and the revised plan is in the far right column highlighted by yellow lines. Full year net sales marks JPY 255 billion, decline by JPY 27 billion compared to the initial plan. Operating profit in the initial plan was JPY 13.5 billion, which is revised to a loss of JPY 3.5 billion and the variance of minus JPY 17 billion. Recurring profit in the initial plan was JPY 8.5 billion, but it is expected to be a loss of JPY 7 billion and the variance of JPY 15.5 billion.

Let me give more color to each item. With regards to net sales, variance of JPY 27 billion is all attributed to decline of occupancy rate due to restriction of people's moves under the influence of COVID-19.

Regarding operating expenses, variable cost declines by JPY 5 billion due to decrease in net sales, while cost reduction measures in each business add JPY 5 billion. Therefore, we will realize approximately cost reduction of JPY 10 billion in total. Operating expenses are expected to decline, which will push down sales by JPY 27 billion, while costs will decline as well. So the operating loss will be minus JPY 17 billion in total. The initial planned operating profit was JPY 13.5 billion and expected to decline by JPY 17 billion to be minus JPY 3.5 billion.

The revised plan is based on the net sales. It is presented on Page 14 with the historical changes. Frankly speaking, it is about how COVID-19 status will develop. Currently, Japan is expanding vaccine rollout in large-scale facilities and our workplaces and will continue its efforts, which enable us to gain herd immunity with new cases dropping in general.

On the other hand, as reported in the media, Olympics are definitely going to take place. In such case, not only athletes, but also people of broadcasting will come in large number to Japan. How does that affect COVID-19 situation? That is exactly the point people are discussing. To be honest, it's extremely difficult to forecast. The numbers for the second half of this fiscal year is on the assumption of no state of emergency declared.

Having said that, compared to the initial plan, it would be slightly lower, but it's getting closer to around the fourth quarter. You can be either bullish or bearish on the forecast. Well, when we create a forecast, assumption is based on whether the state of emergency would be declared or not rather than being bullish or bearish. We believe such principle should be very neutral.

The next is about the revised profit and loss and the breakdown by segment. Recurring profit for the full year expects a deficit of JPY 7 billion. Here is a breakdown. Parking Business Japan will be a surplus of JPY 17.2 billion, and Mobility Business will be JPY 5.3 billion in the black. As for Overseas business, the initial plan was a deficit of JPY 6 billion, but after recalculating numbers, it is now a deficit of JPY 11.3 billion, which adds more to the deficit. The deficit in Business Development will be JPY 1 billion increase from the initial JPY 0.9 billion. All in all, initial plan was JPY 8.5 billion in the black, but a revised plan is a deficit of JPY 7 billion.

These are the assumptions of the revised plan and measures we implement. What we should do or what we can do as Park24 Group comes down to cost reduction. Therefore, we are determined to thoroughly execute relevant matches. Regarding Parking Business Japan, it says leaner business structure, which means we will continue to actively cancel unprofitable parking sites.

Since we launched Times business, we always had about slightly less than 20% of sites were unprofitable. It is not to say how Pareto law goes, but we always kept about slightly less than 20% or just about 20% if we include in breakeven sites unprofitable. We kept making efforts in the first half of the current fiscal year to lower the number by actively working on measures for unprofitable sites, and it will continue throughout this fiscal year.

Regarding Mobility Business, as previously mentioned, we will concentrate vehicle placement in high occupancy areas with high earnings potential. Times Car expand its footprint in all 47 prefectures. We deployed nationwide networks, but temporarily paused and measured to increase our presence across the nation in the established networks under the pandemic and rather continued to focus on vehicle placement in selected areas until COVID-19 diminishes.

Parking Business Overseas has increased earning power, which depends on how far we could facilitate each country's version of Times parking through site development, while continue to curtail costs and negotiate with landowners over rent reduction for existing sites. The pace of site development for each country's version of Times parking is taken up, and we want to expedite it as much as possible In order to increase the ratio of each country's version of Times parking.

That concludes the financial results briefing for the second half of the current fiscal year and a revised plan for the full year.