East Japan Railway Co

TSE:9020

Q3-2025 Earnings Call

[Atsuko Itoh, executive]

Now I would like to explain the third quarter and financial results of the JR East Group. Please look at Page 2, where you will find the highlights of the financial results. Overall, it is fair for me to say that, basically, we are currently making progress according to the plan. In the table, the result is shown as of end of December 2024. The top line increased by JPY 125 billion year-on-year basis and operating income increased by JPY 54 billion to JPY 352.5 million. Furthermore, quarterly profit attributable to owners of parent, while net profit increased by JPY 31.3 billion to JPY 216.6 billion.

On the right side, you can see the figures for the performance forecast announced at the beginning of the period. In terms of net profit, the figures show that the profit target for the end of the fiscal year has already been exceeded in the third quarter. But as you have been informed in the fourth quarter, mainly for infrastructure, railways, maintenance costs and other settlements will be included. So we currently expect that the total will land at the performance forecast for March 2025, as shown on the right side. As for the details, the middle part shows an increase in revenue and income due to an increase in railway usage and increase in sales at EKINAKA stores, mainly JR Cross. These have resulted in the fourth consecutive period of top line revenue growth and thanks to this, all profits have increased. There are now 4 segments and the top 3 have increased both revenues and income and only the Others revenue grew, but profits declined.

As we mentioned this briefly back in the second quarter, the withdrawal cost for the wind power generation business related to the energy business, were recorded in this quarter, which resulted in an increase in revenue and the decrease in profit. At the bottom, the performance forecast and dividend forecast. But since these are still based on the forecast announced at the beginning of the period, there are no revisions.

Next, please look at Page 3. This shows the increase or decrease in consolidated operating income year-on-year basis. The income increased to JPY 352.5 billion, up JPY 54 billion. And the biggest reason for this increase is the increase in JR transportation revenue, which is about JPY 73.5 billion. Though it's not mentioned here, as for the breakdown, JPY 9 million for commuter passes and JPY 64.5 billion for noncommuter passes. The breakdown of noncommuter passes is almost 0.5% and half of conventional lines. Shinkansen is slightly stronger at JPY 34 billion, and the rest is conventional lines.

The increase in passengers is JPY 52.5 billion and inbound is JPY 1.5 billion. We expect Tsuruga, Hokuriku Shinkansen to be JPY 7.5 billion and increase in revenue due to the revision of regular green car fares is about JPY 2 billion. The increase in the revenue from Retail & Services, Real Estate & Hotels as well as the increase in Others being JPY 9 billion, which were driven by the contract development of systems by our information processing company.

As for real estate sales, there was a very large sale of Meguro Mark in FY '23. So there was a drop in revenue as a reaction to this big increase in revenue. But in this fiscal year, somewhat low-cost properties are being sold. So overall, real estate sales are working to increase profit. Personnel expenses increased by JPY 10.5 billion, but this is mainly due to the group companies such as JR Cross and Nippon Hotel. As for maintenance expenses, we have set the expenses at JPY 310 billion for this fiscal year alone. But due to the factors such as rising prices and tight spend for maintenance due to the COVID-19 pandemic now being less tight. So this is -- this increase is having its impact on the declined profit. The cost of retail and services in response to revenue. As for the other expenses, the increase is mainly due to depreciation, trains, structures and others and taxes and public charges, including land revaluations, have increased.

Please look at Page 4. Page 4 is the consolidated income statement. The top half show segments, and I'll touch upon them later. The bottom half is nonoperating expenses, an increase of JPY 3.3 billion from the last year is due to an increase in interest expenses paid. Regarding gains in -- extraordinary gains and losses, there is an increase in gains on the sales of investment securities, but this is due to the sale of shares in some financial institutions. Impairment losses are due to the impairment of some lifestyle solutions properties.

This, I'd like to explain in details by segment. Please look at Page 5. On Page 5, this is the Transportation business. The biggest -- the reason for this JPY 76.9 billion increase in operating revenue is transportation revenue. In addition, J-TREC and the fair revision of monorails have also had a partial impact on this. If you look at the actual and planned railway business passenger revenues on the bottom left, it is 105.4% of the plan for the third quarter, exceeding the plan. The cumulative total is 100.3% of the plan. Commuter passes have been strong since the beginning of the period. And Shinkansen's negative performance has been reduced substantially. On the right side, we have the Shinkansen conventional lines and commuter passes and all of this also exceeded the plan in the third quarter.

Next, please look at Page 6, which shows the indicators related to the Transportation business. The upper left shows the Shinkansen passenger volume, weekdays and holidays, and the upper right shows the breakdown by destination. First, looking at the weekdays and holidays, the blue line for December is slightly lower than October and November.

On the right, the green line for the Tohoku Shinkansen is slightly weaker in December compared with October and November, though it exceeded 100%. The reason for this is the same for both. The tickets for the discount [ together ] for the senior. Last year in 2023, the usage peak was December. But this year, November was the peak. So there was a monthly discrepancy, which is why it looks like this. The lower left shows an inbound revenue. Inbound revenue totaled JPY 28 billion in the third quarter on a cumulative basis, which is 95% of the plan. However, if we look only at the third quarter, it was 103.6% above the plan. So we'd like to continue to build on this as we approach the end of the fiscal year.

Regarding the purchase rate of off-peak commuter passes, we expanded the discount from 10% to 15% in October. So the purchase rate has increased slightly but it is still not yet at the target purchase rate. So we would like to make further efforts in order to appeal the benefits for companies.

Next, on Page 7, Retail & Services. As shown in the figure on the bottom left, retail operating revenue, mainly from JR Cross is doing very well. We are right on the plan, and we are making good progress according to the plan.

On the right side, the operating revenue from transportation advertising has been recorded in a way that far exceeded the plan, and the figures themselves are in line with that. But compared to 2019, it is still only about 83%. So as we are communicating this point for some time, we would like to further promote the appeal of transportation advertising to customers, but clearly digital advertising in order to increase advertising revenue.

On Page 8, Real Estate & Hotel business. Real Estate & Hotels -- real estate sales with rental income and increased revenue from the managed properties and hotels along with transportation. This segment is driving the good performance very strongly. The operating income from shopping, offices and hotels exceeded the plan, resulting in 110% performance in the third quarter. You can see it in the hotel business results in the bottom right, Hotel Metropolitan and Hotel METS are both doing well. If you look at the next page, you will see the related indicators.

First, at the bottom, you can see the hotel occupancy rate and the hotel room rate, both occupancy rate and room rate have increased mainly due to the inbound tourists following the second quarter. To the right the leasable floor area for offices in the middle row. The vacancy rate is 1.5%, which I think is reflecting the value of our offices. In addition, inbound revenue from Lifestyle Solutions was JPY 32.4 billion in the third quarter, which shows the growth of 144% from the previous year or 126% above the plan and the hotels mentioned earlier in the shopping sales as well as retail sales, which we have now included in our targets are all performing well. We will definitely exceed the planned JPY 36 billion under those circumstances.

Next, on Page 10, the last section, Others. The top line again JPY 68.7 billion, up JPY 5.8 billion from last year due to the increase of system contracts, revenue from JR East Information Systems, which I mentioned earlier. And then GATES, an overseas subsidiary that was newly consolidated in the second quarter of last year, a Singaporean track construction company getting on a regular year basis. As on operating income, as I have already mentioned earlier, our profit dropped due to the recording of withdrawal costs from the energy division and Others.

Also, IT & Suica, the results are shown here. If you look at the bottom right, you will see an increase in revenue and a slight decrease in operating income. However, this is due to the advertising expenses and the costs were recorded flexibly depending on the business performance. So there will be no major impact on the plan.

Page 11 shows the consolidated balance sheet. Herein the cash and the deposit section has increased to some extent because we have issued foreign bonds and corporate bonds for future growth investments.

Page 12 shows the consolidated interest-bearing debt and the capital expenditures. First, interest-bearing debt as a whole has increased by just under JPY 100 billion compared to the end of last year. The average interest rate has also increased by 0.08% to 1.56%. On the other hand, as I mentioned earlier, cash and the deposits have become a little larger. So net interest-bearing debt has decreased slightly compared to the end of last year. Capital investment is planned to be JPY 819 billion, mainly for the growth investments in this fiscal year. In the third quarter, it was JPY 388 billion. So there is a large gap in the figures, but this is mainly for Takanawa and the capital investment is scheduled to be recorded in the fourth quarter.

Next, from Page 13 onwards. You will see the targets for this fiscal year and FY 2027 as well as nonconsolidated information, which we have already shown to you. So please refer to them. Now skipping several pages, and please turn to Page 19, which is also a reference material. This is also about the progress in the revision of railway fares and charges systems, which we have repeatedly announced. As of now, we submitted an application for fare revision on December 6 and are currently waiting for its approval. As for when it will be approved, we simply cannot tell for certain. So we put the potential approval in 2024 to 2025 period. After the approval, we are planning to revise the fares at the end of FY '25, in March 2026. As for our policy going forward, this time, the government has been somewhat flexible toward our approach for the present value of revenue cost calculation guidelines. But on the other hand, the express fares for unresolved [ state of Shinkansen ] still needs to be approved but we are hoping it will be a shift to the notification system. So we would like to continue to prioritize this and request the government to introduce a system that can quickly respond to inflation in order to implement a simple and flexible system.

Next page, 20, is the materials attached to the December application as we have already informed you. Outline of the fare revision is shown at the bottom. But in the plan implementation date is March 2026, as I mentioned earlier. And the revision rate, revenue increase and revenue increase amount here is going to be JPY 88.1 billion, which will be added on top of the rather strict number of numerical targets we have now set. In regards to this, we are currently assuming that transportation revenue is expected to exceed 100% of the pre-COVID level in 2027.

Skipping a few pages going to Page 23. Page 23 shows what we disclosed at regular meeting in December last year. It says Going Beyond the Common Notion for Suica, and we have laid out a 10-year vision for Suica calling it the renaissance of Suica. Until now, the Suica has been recognized, mainly as a device for transportation. But in addition to transportation payments, we wanted it to evolve into a device for daily life that can be used in various aspects of the lives of local customers. To put it more simply, we would like to upgrade our Suica. The specific details are described below but to touch upon a little in the lower left in the total area, we are planning to launch mobile Suica for overseas customers this March. It will be very convenient and at the same time, for overseas customers, when there is a transportation disruption, decision will be communicated to overseas customers in a timely manner. So in that sense, it will be very convenient for inbound tourists as well.

On the top right around the spring 2027 in the regional areas, the Suica areas, and that were separated so far will be united. So you can use Suica throughout the region. Further ahead in 2028, a cloud-based center server will be realized, linking train tickets and tickets for lifestyle services, significantly in expanding the range of services. We will work out the actual details from now on, but we would like to be able to provide subscription-like products that combine train and lifestyle services, and we would like to be able to explain this with a lot more clarity in the next vision.

Within the next 10 years, the walk-through ticket gates, which have been covered a lot in the media will be realized within the next 10 years. But if possible, we would like to realize them ahead of the schedule.

Page 24 is about Takanawa Gateway City. As you know, under 2 buildings in the LINKPILLAR 1, South and North, shown at the bottom left will open on March 27. The LINKPILLAR 2 and the matters on the right side are currently scheduled to open in spring 2026. The planned project cost expected operating revenue and IRR of over 10% are currently progressing smoothly. As for the offices, more than 80% of the floor space has already been sold or is close to being sold. So finance leasing is progressing rather smoothly. As for fiscal 2024, the opening expenses will come for us. So no profit expected. And in FY '25, the 3 blocks on the right side will open one after another. So tenants will come in one after another. So as time goes on, I would like to provide you with more figures and information for Takanawa as they come in.

Starting from Page 25. When we reported in the second quarter results, the timing was a bit off. But on November 20 last year, we updated the cost of capital and our response to realizing management that is conscious of stock prices. On Page 25, according to the CAPM model, the cost of shareholders' equity is calculated to be 5% to 6%. But I think you probably think that should be a little bit higher. So we recognize that possibility of the cost of shareholder's equity rising in the future. Would like to further improve ROE and start to expand the equity spread here. For the time being, we are planning to set a double-digit ROE target for the next vision.

Then update is on Page 28. As explained earlier in the section of fares, we have improved profitability, appropriate price transfer and the project strategy. And as for the portfolio strategy, we are also discussing the optimal business structure that can maximize the group's synergies. And these are also being discussed at the Board of Directors and other meetings.

And finally, Page 29. We will continue to have more thorough dialogue with the capital markets than ever before. And from the second quarter onwards, our president was given the opportunity to give you a direct explanation and would like to explain the situation and communicate with you every quarter, even though it is going to be done via a web like today. We have also changed the fact book from a book like format to digital data. So we can update it in a timely manner. That's all from me.