East Japan Railway Co

TSE:9020

Earnings Call Transcript 2021-Q2

[Kiwamu Sakai, executive]

I will explain based on the material at hand. We announced Speed Up Move Up 2027 on September 16. The outline is shown from Page 4 onwards. The announcement was only 1 month ago, and there is no change to the basic concept. The description continues until Page 9. Page 10 shows strengthen and management efficiency fundamentally. The menu is the same as one shown in September. As you can see, there are short-term, middle-term and long-term targets, including short-term numerical targets. As you know, as we are in infrastructure sector, there are measures not leading to immediate effect. For example, reduction in service frequency in transportation timetables does not lead to significant decrease in the number of personnel or railcars immediately. However, these measures will have significant mid- to long-term effects through reduction in the number of new railcars and reduction in hiring. We are working on both short-term and mid- to long-term measures. Page 11 shows a measure we already started to take. We announced revision of timetables for last-train services. This page shows what we announced on October 21. As shown here, the major purpose is work-style reform of those engaged in night time works. As a result of this measure, we can secure nighttime work interval of more than 240 minutes, an increase of approximately 30 minutes from the current interval. Consequently, efficiency of maintenance and construction of platform gates and others will increase. The results will be seen next year onwards after the revision of timetables scheduled for the end of the fiscal year. According to our current estimate, annual reduction effect of maintenance expenses and capital expenditures combined will be approximately JPY 4 billion. Besides, as a result of revision of timetables for last trains, train service frequency can be reduced, which will have effects in the future. What we announced the other day was revision of timetables for last train services impacting customers significantly in a sense. As we do every year, we intend to reduce service travel frequency in line with actual traffic in Tokyo metropolitan area and local areas. We will announce detailed timetables in the near future. As traffic during peak hours is reducing, we will promote peak shift more. Although we may not be able to cut many train services at once, we will make sure to implement the measure in revision of timetables at the end of the fiscal year. We've been talking about fares associated with this measure, although we don't have slides for that today. We had questions at the briefing held in September. Our current idea related to revision of timetables is to provide JRE POINT for customers who use services during offpeak hours to promote peak shift. We are currently working on the system design. As revision is scheduled for the end of the fiscal year, we will announce the details in the near future. By implementing the point system, we will be able to see sensitivity of customers or to what extent we should provide benefits for customers to shift commuting time. Also, based on that, we would take measures for commuter passes for offpeak hours. Page 12 shows logistics services that utilize trains which is mentioned as a pillar for revenue growth in the menu shown earlier. I think you already looked at press releases we made one after another. Also, since September, we have been engaged in logistics services by utilizing not only Shinkansen, but also conventional lines such as the Joban Line and the Tokaido Line. As shown here in October, we started regular transportation of twice a week. At the bottom, there is a description about ESG management related measures or hydrogen powered fuel cell test trains announced the other day. Specifically, we will start demonstration of test trains on the Tsurumi Line and others at the end of the next fiscal year. That's all for my explanation of Speed Up Move Up 2027. Now let me move on to financial results and others. Page 14 shows highlights of nonconsolidated and consolidated financial results for the fiscal year ending March 2021. On Page 14, comparison with plan is indicated in red. As you can see, on nonconsolidated basis, operating revenues were JPY 8.9 billion higher than plan. And operating income was JPY 14.4 billion higher. The gap is due to a reduction in operating expenses. On consolidated basis, operating revenues were JPY 4.2 billion higher than plan. The upside is smaller than that on nonconsolidated basis. It is partly due to relationship between internal revenues and external revenues. However, basically, it is because operating revenues of some group companies were lower than plan or postponed to the second half. Operating income exceeded plan by JPY 30.7 billion, which was a significant upside. It is partially because we reduced costs, such as cleaning costs at hotels and cost reduction progressed further than plan. Besides, as is the case with operating revenues, expenses also partially postponed to the second half. Therefore, the upside of approximately JPY 30 billion will not necessarily remain in the full year. Page 15, please. On the bottom right, you see the figure JPY 156 billion we announced the other day as a total cost reduction amount of operating expenses and capital expenditures combined. This page mainly shows progress of operating expenses. Reduction in operating expenses was JPY 53 billion in the first half. As for reduction in capital expenditures, as you know, construction works are time-consuming. As we already started some construction works through notification well in advance, cost reduction effects will be seen in the second half. We are working on reduction in capital expenditures steadily to achieve the plan of JPY 64 billion in total. We would like to show final results after the second half is over. From Page 16 onwards, passenger revenues are shown. Page 16 shows main factors, so please have a look. On Page 17, you see the graph shown in the announcement in September. As described in a speech bubble, non-commuter passes revenues from Kanto Area Network of conventional lines exceeded plan by JPY 9.1 billion in the first half. As we announced the outlook in September, the upside is basically the upside for September. Mainly on the 4-day weekend in September, traffic of short distance passengers recovered fortunately, which led to the upside. Shinkansen was in line with plan in the first half. As for the current situation, inclusion of Tokyo in a go-to campaign target in October had a significantly positive impact. In a first report for October, short distance passenger revenues were 74% and mid- to long distance revenues were 48% of pre-COVID-19 level, excluding special factors such as reaction to typhoons. I think we can say both short distance and mid- to long distance passenger revenues continue to be on a recovery trend. As COVID-19 infections are spreading in Europe and others, again, there are still risk factors, but our recovery is faster than planned. As shown at the bottom of Page 17, commuter passes revenues were in line with plan in the first half. As you see on Page 18, plan for commuter passes for the first half was 75.2%, and the result was 75.1%, in line with the plan. We are not seeing much recovery currently, almost flat, in commuter passes in October. Although I repeat myself, Kanto Area Network of conventional lines and Shinkansen network are performing well, though commuter passes are slightly weak. I guess customers who work remotely or go to work twice a week, for example, shifted to ordinary tickets or multiple trip tickets. So we will continue to analyze the trend. Page 19 shows operating expenses. You can see year-on-year comparison of results. As I said earlier, expenses were JPY 5.5 billion lower than plan. Maintenance expenses increased JPY 800 million year-on-year in the first half. Maintenance expenses increased in the first half due to an increase in construction supplementary maintenance associated with completion of station improvement construction works and renovation to improve the barrier-free accessibility. For the full year, we expect maintenance expenses will decrease. Page 20 shows full year plan for operating expenses with no change. As I mentioned earlier, deep digging into cost reduction progressed at our group, including some group companies. For quick effects, we would reduce publicity and advertising expenses and outsourcing expenses, such as security and cleaning expenses in the second half. Besides, we are considering digging deeper for further cost reduction. That's all for nonconsolidated results and plan. From Page 21 onwards, consolidated results and plan of each segment are shown. In Transportation, shown on Page 21, as you see in the upper middle of the slide, operating revenues decreased JPY 546 billion in the first half. Out of that, we assume the decrease due to COVID-19 was JPY 537 billion. The gap was due to manufacturing of railcars by J-TREC for other private railway companies and others. On the bottom, Shinkansen traffic volume by line is indicated. So please refer to that. Page 22 shows Retail & Services. Operating revenues decreased JPY 118.8 billion year-on-year in the first half. The negative effect of COVID-19 was JPY 108 billion. The difference was from a drop in revenues due to originally planned construction works, renovation works and others. In the middle, year-on-year comparison of J-Retail, Tetsudo Kaikan and East Japan Marketing & Communications, which account for a big share in retail and services, is described. In outlook of operating revenues shown on the right, how Ekinaka Stores and advertisement business will recover towards the end of the fiscal year, is described. There is no change to the outlook from what we announced in September basically. Page 23 shows Real Estate & Hotels. Operating revenues decreased JPY 56 billion. The negative effect of COVID-19 was JPY 65 billion. Positive factors include an increase due to opening and others. The remaining is shown on the slide. The line graph on the bottom indicates monthly sales trend of Atré, Lumine, hotels and others. For us, hotels were hit hardest. As shown by the yellow line in the graph at the bottom, hotels are recovering steadily. Although I repeat myself, hotels are also recovering steadily due to the go-to travel campaign and others in October. Page 24 shows others. Operating revenues decreased JPY 10.6 billion. We suppose the negative effect of COVID-19 was JPY 6 billion. Other factors for the decrease include a decrease in systems contract revenues received from outside customers for system replacement by JR East Information Systems and others. The structure of the table is the same. The number of e-money transactions per month is shown on the bottom. Steady recovery is shown. In October, the number of transactions is more than 90% of October of previous year. Page 25 shares nonoperating income and expenses and extraordinary gains and losses. I will comment only on major factors for increase and decrease in the first half shown in the middle. In nonoperating expenses, equity and net losses of affiliated companies increased JPY 14.3 billion. It is a reflection of our equity method companies heavily damaged by COVID-19. I will not go into the details as some companies haven't announced result yet. In extraordinary gains, gains on sales of fixed assets increased JPY 10.6 billion, mainly due to gains on sales of the former company housing site. In extraordinary losses, environmental conservation cost increased JPY 24 billion, mainly due to countermeasures for soil contamination in Shinagawa. We started provision for the allowance last year. With allowance this time, we completed provisioning for allowance for countermeasures for soil contamination associated with the first phase of Shinagawa Development project work 1 to 4 we plan to open in the fiscal year ending March 2025. That's all for nonoperating income and expenses and extraordinary gains and losses. Page 26 shows a summary of cash flows. Cash and cash equivalents at the end of September stood at JPY 338.5 billion. We secured a relatively high level of cash and cash equivalents. There is no change to capital expenditures from the announcement in September, as shown on Page 27. Page 28 shows interest-bearing debt. As you see in the bottom right, net interest-bearing debt increased to JPY 3.7965 trillion at the end of September. There is no change to plan for the use of cash as shown on Page 29. We currently plan to pay interim dividend of JPY 50 per share and year-end dividend of JPY 50 per share. Lastly, regarding fund raising policy on Page 30, we haven't changed the policy from the explanation in September basically. Balance of short-term fund raising at the end of September was JPY 680 billion in total as shown in the middle. As we repaid CP in October, the balance of short-term fund raising is JPY 445 billion. Issuance facility and contract value is JPY 1.350 trillion. That means the amount after deducting the current balance of JPY 445 billion from the total facility of JPY 1.350 trillion or JPY 905 billion is the remaining facility, which is a sufficient level. That concludes my slide presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]