East Japan Railway Co

TSE:9020

Earnings Call Transcript 2022-Q2

[Kiwamu Sakai, executive]

[Interpreted] I'm Sakai, Executive Director. Thank you very much for attending despite your busy schedule. I will explain based on the material at hand.

The summary of financial results for the second quarter and plan for the fiscal year ending March 2022 is shown on Page 3 and after. As indicated with asterisk, we adopted accounting standard for revenue recognition in this fiscal year as we didn't adopt the standard up until the last fiscal year, numbers excluding the impact are described in brackets for reference for comparison.

Page 4 shows financial results for the second quarter and revised plan for the fiscal year ending March 2022. I will explain each segment later. Results for the first half were severe, mainly due to a state of emergency. Although we expect recovery in the second half, the pace of recovery will be slower than our expectation in the beginning of this fiscal year. Therefore, we had to revise the initial plan.

As you see on Page 4, operating revenues increased year-on-year. However, as you know, both nonconsolidated and consolidated results for the first half were around 60% of pre-COVID-19 level, the level of the first half of 2 years ago. As shown on the right, full year plan is also around 70% of the fiscal year ended March 2020. That means recovery to pre-COVID-19 level is not expected yet. As you see at the bottom, there is no change to the full year dividend of JPY 100 per share, an interim dividend of JPY 50 per share from the initial forecast.

Page 6 shows nonconsolidated full year plan. On the far right, major factors behind year-on-year change from the last fiscal year the revised plan are described.

Let me explain briefly change from April plan shown on the second column from the right. That's for revisions from April plan, passenger revenues were revised down significantly. I will talk about the outlook later. Other revenues were revised up by JPY 73 billion is mainly due to liquidation of assests. We established JR East Real Estate Asset Management Company Limited. We intend to sell properties to funds formulated by the company and build a turnover-based business model.

As we do business of selling real estate as our business, we shifted real estate sales from extraordinary gains or losses to operating income or loss, starting with full year plan this time. We revised down operating expenses. Expenses of each item was revised down. We dug deeper into cost reduction plan made in the beginning of this fiscal year. I will show you the list later.

Nonoperating income or expenses was revised up. It is mainly due to dividend income from subsidiaries and the dividend income is eliminated in consolidated statements. Extraordinary gains or losses were revised down. As I mentioned earlier, we transferred real estate sales to operating revenues. In spite of this, the decrease is relatively small. That is because we will increase sales of stocks mainly cross shareholdings from the initial plan. As a result, extraordinary gains or losses were revised down by JPY 17 billion. That's all for Page 6.

Page 7 shows consolidated results for the second quarter on the left and full year plan on the right. Please look change from April plan shown on the far right. I'll explain revenues and income by segment later. Operating revenues for real estate and hotels were revised up by JPY 48 billion due to the same reason I mentioned earlier. The revised nonoperating income or expenses was revised up by JPY 4 billion was because group companies received subsidy for cooperation to prevent the prep of infection. Loss attributable to owners of parent were JPY 160 billion, which is JPY 196 billion worse than April plan.

Now I will talk about each segment, specifically on Page 8 and after. For Transportation segment, results and outlook of passenger revenues, accounting for a big share of the segment are shown here. As you can see, light yellow bars indicate the periods when the state of emergency was declared in Tokyo. As you know, a state of emergency was declared for long term its fiscal year. Passenger revenues were significantly impacted.

This graph shows a comparison with pre-COVID-19 revenues, both conventional lines in Kanto area network and Shinkansen revenues were sluggish. Dotted lines show April plan expecting recovery. As you see, results were lower than April plan. On the right, you see outlook for the third and the fourth quarters. For the third quarter, 50% of is expected for Shinkansen and 70% for conventional lines in Kanto area network for October and November. This situation is likely to last up until November, a vaccination for all those who want to be vaccinated will be over in November, we expect recovery after that.

Having said that, actual results so far in October were higher than 50% and 70% respectively. Besides reservations for Shinkansen for November recovered to around 30% of pre-COVID-19 level. That means the current situation is slightly better than the outlook shown here. However, as you know, there are risks of the sixth wave of infection. I hope you understand the outlook reflects all the risks.

As indicated on the right, the outlook for the end of this fiscal year is 85% for both conventional lines in Kanto Area Network and Shinkansen. For Shinkansen, temporary demand due to go-to campaign and others is expected and the outlook. After that, is 80%. For the next fiscal year onwards, we haven't changed our outlook basically. As we explained in the past, we expect gradual recovery in 2022 onwards.

Page 9 shows retail and services. Results for the first half are shown on the left and full year plan on the right. The numbers in brackets indicate numbers excluding the impact of accounting standard for revenue recognition that I mentioned earlier. For the first half, as shown on the left, revenues decreased and income increased after application of accounting standard for revenue recognition, both revenues and income increased, excluding the impact. Below that, you see revenues of JR East Marketing and Communications and JR East cross station.

As you can see, the revenues increased excluding the impact of accounting standard for revenue recognition. The comment on the right is about the results for the first half, so please read the comment. The graph on the bottom shows the outlook. For Ekinaka business, centering around JR East cassation, we expect recovery to around 90% at the end of fiscal year, in line with the initial plan of this business is closely linked to railway business. On the other hand, as recovery of advertiser line business is slightly delayed. We revised our April plan for the end of this fiscal year by 20% to 70% of pre-COVID-19 level. Partly due to that, as shown on the top right, income will be lower than April plan.

Page 10 shows real estate and hotels. In this segment, both revenues and income increased in the first half and will increase for the full year. Although I repeat myself, the major positive factor was liquidation of assets. As you see in the graph on the bottom, in shopping center business, we are seeing very good recover y of space there things. We made upward revisions and expect recovery to almost pre-COVID-19 level at the end of this fiscal year.

For office business, as you know, mainly due to opening of Kawasaki delta and operation at Yokohama Tower throughout period 120% in will be maintained. Although hotel business struggle due to the impact of a state of emergency in the first half, recovery to 80% is expected at the end of this fiscal year, in line with the initial plan.

Page 11 shows others. Both revenues and income of this segment decreased in the first half. Excluding the impact of accounting standard for revenue recognition, revenues decreased and income increased from JPY 3.5 billion to JPY 4.2 billion. This is mainly to be card. We received annual fee of eCard due to periodic allocation. posting of the fee is post point to the next fiscal year. Based on accounting standard for revenue recognition, there is no change in the long run. Excluding the impact, income increased. For the full year, shown on the right, operating income is expected to be JPY 14 billion. However, excluding the impact of accounting standard for revenue recognition. Operating income will be higher than that. So we can expect increase in revenues and income also for the full year. Having said that, as shown on the phone right income will be JPY 2 billion lower than April plan. As shown on the bottom, this is partly due to a decrease in orders for IC cars at JRE mechatronics. That's a for Page 11.

Page 12 shows the status of cost reduction. In the beginning of this fiscal year, I explained cost reduction plan of JPY 70 billion in total. After that, in consideration of challenging business conditions and others, we revised the plan by more than JPY 30 billion to JPY 103.5 billion in total in October plan. not only the parent company but also group companies reduced bonuses and maintenance expenses further in the first half, and we are seeing the effect. Consolidated capital expenditures were revised down by JPY 76 billion from the original plan of JPY 674 billion. The details are shown in reference materials.

Out of JPY 76 billion, JPY 30 billion will be from investment needed for the continuous operation of business. This is due to cost reduction as a result of review of construction methods and others and postpone investment to the next fiscal year onwards, JPY 41 billion from reduction will be from growth investment. In the same way, this is due to cost reduction as well as timing difference of acquisition of Real Estate. [indiscernible] of reduction will be from review on priority budget allocation. We revised down capital expenditures plan by JPY 76 billion in total. Page 13 shows fund raising. There is no change to policy and others. In the middle, the updated latest data of fund raising situation is shown. So please confirm that.

Now I will talk about progress in Speed Up Move Up 2027. Please look at our initiatives in the first half and future direction. As you see on Page 15, there is no change to conventional policies of Speed Up Move Up 2027 and the 3 pillars. Page 16 is regarding growth and innovation, a state of emergency was released and demand is recovering, we will make sure not to miss such a momentum. We will create demand for travel aimed at vaccinated people and roll at campaigns and others. We also rolled out Tohoku Kumas during the Tohoku Destination Campaign in the first half. We will continue that, In particular, in Ichinosaki area, we are incorporating mass into on-demand transportation and implementing various initiatives for more convenience and usability.

Regarding revision and green car successes, shown on the bottom, we made a press release on October 26. We set surcharges, which was once reduced back to the previous level. The effect is expected to be JPY 1 billion and hundreds of millions of yen. We want to start the revision from spring of 2022 as green case changes can be revised with notification, revision was made speedily.

Page 17 shows creation of towns as a part of growth strategies. I think you are familiar with Shinagawa development project as well as Negrar. In anticipation of mid- to long term, we are working on development projects shown here, such as projects in Shibaura, Nakano and [indiscernible]. The projects in Shibata, Hamamoto and Nakano Station New not exit station from area are all collaborative projects with other business operators. In Acano, we are working on improvement of the station and development of free passage. In Hamamatsu, we are conducting construction for free passage and of truck station berthing, by participating in development projects near stations, including improvement of stations, we will create towns with total appeal and enhance earning power.

The own station concept is about enhancement of additional value of stations. We are working on various initiatives mentioned here, including those at propane test stage. Page 18 is regarding strengthening of management efficiency. As shown on the top right, we already announced reduction of Migrolino modality ticket offices in response to shift to ticketless and cashless society in May. As a result, we can also expect reduction in the number of personnel and creation of station space.

As for mitigation of demand peaks, we revised reserved seat limited express charge to reflect seasonal fluctuations on October with notification as it is possible to revise a charge with notification, we plan to introduce the revised charges, reflecting different demand level on April 1, 2020. For reference approval is required to revise nonreserve seat limited express charge shown on the bottom.

Page 19 is also about strength and management efficiency, we are advancing driver-only operation and other measures. Also for buses. As we discussed in the past, we are also advancing part maintenance smoothly in each system in each patient. We think such efforts are also contributing to cost reduction in the medium term. Although there is no mentioning about timetables this time, we revised timetables for large train services in the revision of last year. We are currently considering time table revisions scheduled for spring in this fiscal year. We are considering to set more flexible time tables to meet customer demand. we will make an announcement when it is decided.

Page 20 is regarding streamlining and facilities, mainly of local lines that we been discussing. As shown on the right, we are removing overhead contact lines, while making plans for that, we started to explain to local governance. The reason why we take such measures as removal of electric facilities with local governments, each to reduce maintenance costs. Furthermore, of aging of those facilities is progressing investment needed for the continuous operation of business will be necessary. When we take that into consideration, the cost will be quite huge. We are saying removal of such facilities will lead to preservation of railway lines.

People tend to take removal of overhead contact lines negatively. However, we are working on initiatives to introduce accumulated rail cars and hybrid railcars as shown in the pictures at tote in consideration of environment and others. We are also developing hydrogen-powered made cars for the future. If you assume such railcars, overhead contact lines will be no longer necessary.

Lastly, Page 21 shows ESG-oriented management, mainly initiatives in the environmental field. On the left, JR East and group companies initiatives to aim for 0 carbon in the fiscal year ending March, 2051 are introduced. We are steadily advancing various initiatives.

That concludes my presentation. We slightly changed the format of reference materials as we enriched data and others, please refer to the materials. Thank you very much.

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