ANA Holdings Inc

TSE:9202

Earnings Call Transcript 2018-Q3

[Toyoyuki Nagamine, executive]

Thank you for taking the time to participate in our meeting. The main topic is our new corporate strategy. But first, I want to provide an outline of our financial results for the third quarter, which we have announced today.

Please turn to Page 4. This page shows a summary of the financial results for the fiscal 2017 third quarter. The Air Transportation business built on the favorable performance of the first half and steadily captured passenger and cargo demand. Consolidated operating revenues increased by approximately 12% from the previous year to reach JPY 1,490.8 billion. We also aggressively promoted both a comprehensive review of safety and quality services and investments in human resources. As a result, consolidated operating income was JPY 165.9 billion.

We achieved new record highs in all income categories, including ordinary income and net income attributable to owners of the parent.

Next, I'll discuss the full year earnings forecast. We are considering participating in a new maintenance outsourcing program to stabilize future expenses. Expenses will increase temporarily during the fourth quarter, so we will maintain the revised full year earnings forecast for the first half financial announcement. The financial results for the third quarter will be explained in detail later.

Please see Page 5. Now I'll discuss our new corporate strategy. First, I will review the strategies we have implemented thus far.

In fiscal 2013, our group shifted to a holdings company structure and established Japan's first LCC. Propelled by the expansion of the international business, we have continued to accelerate the speed of our growth. The updated version of our current strategy focuses on investments in safety and human resources to solidify our management platform to support further growth.

The graph below shows a 3-year performance evaluation since fiscal 2014. During each fiscal year, operating income has exceeded initial targets. Including this fiscal year, we are projecting achieving a new record high for a third consecutive year.

As you can see, the corporate strategy implemented thus far has produced results. To build on these results and pursue continued sustainable growth, we outlined our management direction for fiscal 2020 and beyond through a new corporate strategy.

Please see Page 6. Next, I'll explain some themes related to our new corporate strategy. As you can see, we divided the 5-year period from fiscal 2018 to fiscal 2022 into 3 stages: our plan is to first solidify our business platform, then use the international business to accelerate growth, and then pursue sustainable income growth. To achieve this, we have identified strategic pillars comprised of 3 points.

The first point is to expand our airline revenue platform. Both ANA and the LCCs will improve basic quality, then we will pursue an optimal portfolio and expand our revenue platform.

The second point is to select and concentrate on existing businesses and create new business domains. We will also pursue growth in non-air businesses. The third point is the utilization of open innovation and ICT. By improving our product competitiveness and promoting work style reform, we'll contribute to the realization of the ultrasmart society. Through the steady implementation of these themes, we will establish our position as a global leading airline group.

Please turn to Page 7. Next, I'll explain our business strategy. First, I'll discuss our network strategy.

The image on the left reflects our international services. For ANA, as a full-service carrier, we will further strengthen hub functions in Tokyo metropolitan area airports. We will maximize the use of Haneda and Narita as we aim to complete our dual hub model. For our group LCCs, Vanilla Air and Peach Aviation, we'll focus operations on Narita and Kansai, while also expanding business from other regional airports. We'll target strong Japanese leisure and inbound demand and contribute to regional vitalization.

The image on the right reflects our domestic services. ANA will continue to operate trunk routes, while optimizing supply to demand on local routes. We'll utilize our alliances with partner airlines to maintain our advantage as a market leader. For LCCs, we'll continue to expand the number of local routes.

Please see Page 8. Next, I'll explain our fleet strategy. We plan to increase our total fleet numbers by the end of fiscal 2022 by 40 aircraft compared to the end of the current fiscal year to approximately 335 aircraft. ANA will update aircraft, while securing the numbers required to implement our strategy. For LCCs, we'll increase aircraft in service by 50% or more.

The image on the right shows our approach to aircraft deployment. ANA will promote downsizing aircraft for domestic routes, while widely increasing them for international routes.

For LCCs, we'll expand business on domestic routes and short-distance international routes, while engaging in mid-distance international routes. We added Peach Aviation to the consolidated group last April, and will consider handing over some routes currently operated by ANA to our LCCs.

Thus far, I've explained our network strategy and fleet strategy.

For pilot development, we are also evaluating a long-term framework beyond our group to address a pilot shortage facing the airline industry in Japan.

To promote stable future business expansion, we'll pursue an optimal portfolio for our Air Transportation business as a holdings company to support our resource strategy.

Next, I'll explain our strategy for each business. Please see Page 9. First, I'll discuss the strategy for ANA. We will expand International Passenger business in Tokyo metropolitan area airports as a growth driver. From spring 2019, we'll deploy the Airbus A380 on Hawaii routes to advance our resort strategy. We will expand our network into white spots by including such methods as utilizing alliances with overseas airlines. We'll expand ASK in fiscal 2022 by approximately 50% compared to the current fiscal year. We're assuming that Haneda slots will be expanded from the beginning of fiscal 2020 in our plan.

As for the Domestic Passenger business, we'll promote optimizing supply to demand, so we anticipate that ASK in 2022 will decline slightly compared to the current fiscal year. We will invest in quality to enhance our products and services and maintain our group's greatest revenue platform.

For the International Cargo business, we'll rebuild our network to improve medium-term business profitability. To steadily capture cargo demand between Asia and North America, a market for which we anticipate growth, we'll deploy widebody freighters and strengthen our functions at Tokyo metropolitan hubs.

For our Okinawa hub, we'll continue to evaluate the competitive environment and demand trends in Asia, and pursue further optimization of the business scope. Through these initiatives, similar to the International Passenger business, we are planning an approximately 50% increase in ATK by fiscal 2022.

Please see Page 10. Next, I'll discuss our LCC strategy. Our policy for Vanilla Air and Peach is to utilize common platforms, including aircraft, fuel and maintenance to increase competitiveness, while expanding business.

By fiscal 2022, we plan to increase combined ASK for the 2 LCCs by 90% compared to this fiscal year.

The graph on the bottom left shows transitions in passenger numbers, which have increased steadily since fiscal 2011. We project the 2 LCCs will service approximately 8 million passengers in total this fiscal year.

Moving forward, the LCC business will engage in mid-distance routes to capture demand in the Asia region, which is expected to see continued growth. We will deploy narrow-body aircraft with a capability of middle-distance operation to increase our options for route destinations, which will enable us to capture a wider range of inbound and leisure demand.

At present, we plan to begin this operation in fiscal 2020 and expect this to contribute to our group's growth strategy.

Please turn to Page 11. Next is regarding our non-air business. During this corporate strategy period, we'll focus on taking advantage of our customer base.

Brand, know-how and technology. Our group possesses various tangible and intangible assets that we have developed and accumulated over the years.

For example, the ANA Mileage Club currently boasts over 31 million members. By utilizing big data, we can tap into latent demand and expand our group business. To promote this initiative, we established ANA X Inc. in October 2016 as a main entity that will further expand the ANA economic sphere by partnering with our various group companies to utilize customer data and create new value. We will fuse our cumulative data resources with new technology to rebuild our non-air business and expand revenue.

Please see Page 12. Now I'll discuss our financial strategy. The pie charts at the top indicate transitions in consolidated operating revenues. Revenues from fiscal 2014 through this fiscal year have increased an average of 4% annually. We will use this performance as a platform for accelerating our pace of growth to an average of 4.9% annually over the next 5 years and aim for revenues of JPY 2,450 billion in fiscal 2022.

The graph at the bottom shows operating income by segment. For the Air Transportation business, we'll aim for operating income exceeding JPY 200 billion in fiscal 2022. This represents 150% growth compared to fiscal 2014 and over 30% growth compared to fiscal 2017. This represents targeting an operating margin in the 10-percentage range.

For our non-air businesses well, we will promote selection and concentration to pursue increased revenues and income across all segments.

Please see Page 13. Next is our Air Transportation business. The graph at the top shows transitions in operating revenues by business. As indicated in pink, for the International Passenger business, our target is approximately JPY 870 billion in fiscal 2022. This represents a more than 80% increase in revenues relative to our fiscal 2014 performance. We also will expand revenues for the Cargo and Mail business shown in green and the LCC business shown in orange.

The graph at the bottom shows transitions in operating income and operating margin. ANA will aim for operating income of JPY 189.0 billion in fiscal 2022. In fiscal 2014, the LCC recorded an operating loss, but we have steadily improved profitability over the past few years.

In fiscal 2022, we are planning on operating income of approximately JPY 20 billion. We will aim for increased revenues and income by taking advantage of the strengths of the low-cost structure and the unique service quality we provide as a Japanese LCC.

Please see Page 14. This slide shows cost management. Our unit cost of the Air Transportation business in fiscal 2010 was around JPY 10 per ASK. But over the 6 years since fiscal 2011, we have reduced it by approximately 10% by implementing cost restructuring initiatives equivalent to a total of JPY 138.0 billion.

During this corporate strategy period, we'll promote the full-scale utilization of AI, IoT, robots, et cetera, as well as promote work style reforms to increase productivity and further improve our cost competitiveness. We are preparing to utilize new technology in innovative and unconventional ways. For example, automated airport vehicles, voice recognition technology to improve call center quality and AI to manage aircraft parts and maintenance tools.

Needless to say, promoting the deployment of fuel-efficient aircraft will help control fuel cost increases. We'll utilize these technologies, not only to simply reduce costs, but also to innovate products and services and support human resource development. This will lead to increased revenue and improve basic quality.

At the bottom of this slide, we show transitions in unit costs based on this policy. To continue investments in safety and human resources, in fiscal 2018, we anticipate a temporary increase in unit costs. But by fiscal 2022, we will lower this by JPY 0.6 to JPY 8.8. We'll pursue unit cost reductions by implementing appropriate cost management.

Please turn to Page 15. This slide shows our financial platform. As shown at the top of this slide, we have earned an A credit rating through our years of cumulative favorable performance. Moving forward, we'll promote both our growth strategy and the financial soundness, while also increasing stock value per share.

This is a review concerning our financial and capital deal in August 2017. This objective called for simultaneously promoting both business growth and recapitalization. We secured growth capital for aircraft investments, the driving force of our revenue increase, while shifting to a strategy of improving capital efficiency by conducting a share buyback. For this strategy, we chose restricted CB designed to control dilution to take our existing shareholders into consideration. The share buyback will conclude by the end of March 2018. And over the medium to long term, we'll aim to increase capital productivity by maintaining an appropriate balance between shareholders' equity and profit.

Please see Page 16. This slide shows cash flow. As shown at the bottom left, over the 5-year period, between fiscal 2018 and 2022, we plan to secure a total of JPY 195.0 billion in free cash flow. We will continue with aggressive capital expenditures.

As shown in Table 1 to the right, EBITDA is projected to exceed the capital expenditure during this strategy period. From fiscal 2021, we expect free cash flow to increase significantly.

Capital expenditures are shown in Table 2. In addition to aircraft investments, other capital expenditures will continue at a high rate through fiscal 2018. This includes construction costs for the ANA Group training center.

Currently, we are planning to consolidate facilities around Haneda airport to achieve efficient training, while increasing safety, the foundation of our management. We are also advancing with investments in human resources, which is supporting quality and services.

Please see Page 17. This indicates our value creation targets for this strategy period. It was 2 years ago that I announced our plan to achieve operating income of JPY 200.0 billion in fiscal 2020. Based on this, we'll aim to further improve our corporate value.

As you can see, we are planning for operating income of JPY 220.0 billion and net income of JPY 133.0 billion in fiscal 2022. As we added an operating margin in our value creation targets, we'll expand our profit scope and pursue higher profitability. For ROE, we project maintaining a level near 10% during this strategy period.

Please see Page 18. Now I'll explain management resource allocation. As we advance our business and improve free cash flow, our policy will be to shift stages in our business management cycle. First, for our financial platform, we'll maintain a current A credit rating. Our growth strategy will involve continuing aggressive investments through fiscal 2020, after which we project our scope of investments to level off. Then we'll enhance shareholder returns in order to meet the expectations of our investors.

Please see Page 19. Lastly, I will discuss ESG and provide a summary of this strategy. We believe that it is the responsibility of global companies to create both social value and economic value.

For example, as shown in the graph on the right, we will approach environment by increasing the share of fuel-efficient aircraft up to approximately 80% by the end of fiscal 2022. Aircraft upgrades based on this strategy will also reduce our CO2 emissions per unit.

As part of social, we'll enhance universal services, particularly at airports, resulting in promoting a society of coexistence that respects diversity. To enhance governance, we'll implement responses to our corporate governance code and enhance our director monitoring functions. This will increase accountability for our group corporate value. At the same time, we'll enhance meaningful communication with investors to achieve continuous management reforms.

Through these ESG initiatives, we'll aim for sustainable growth of the group, while also contributing to the UN's SDGs, sustainable development goals.

Today, I discussed a summary of our strategy looking into post-2020 Tokyo Olympics and Paralympic Games. We'll utilize all our management resources, and I personally am committed to fulfilling my responsibilities for leading the ANA Group. We'll solidify our platform and position upcoming business opportunities as growth drivers, and then move towards the future.

This concludes my presentation. Thank you for your attention.

I'll provide a detailed explanation of our financial results for the 9 months ended December 31, 2017.

Please see Page 30. The highlights for third quarter earnings are shown together, with earnings transitions from the previous fiscal year. As shown in the upper right, earnings for the 3-month period during the third quarter resulted in operating income of JPY 50.8 billion, net income of JPY 34.5 billion and EBITDA of JPY 88.7 billion. Earnings for each quarter of this fiscal year represent record highs for operating income and EBITDA.

Please turn to Page 31. This slide shows an overview of our consolidated income statements. Operating revenues for the cumulative third quarter increased by JPY 159.0 billion, 12% up year-on-year to JPY 1,490.8 billion. Operating expenses increased by JPY 123.3 billion, 10% up to JPY 1,324.8 billion.

As a result, operating income increased by 27% year-on-year to JPY 165.9 billion, and operating income margin was a record high, 11.1%.

Ordinary income increased by 32% to JPY 163.8 billion. Net income attributable to owners of the parent increased by JPY 66.3 billion year-on-year to JPY 152.9 billion.

We recorded a special gain of approximately JPY 34.0 billion as valuation of shares resulting from the consolidation of Peach Aviation.

Please see Page 32. This page shows our consolidated financial position. Total assets increased by JPY 220.1 billion to JPY 2,534.5 billion compared to the end of the previous fiscal year. This includes JPY 140.0 billion financing through the issuance of convertible bonds and goodwill incidental to the consolidation of Peach Aviation.

Shareholders' equity increased by JPY 113.3 billion to JPY 1,032.4 billion. We have conducted share buybacks in the amount of JPY 49.8 billion until the end of December. However, shareholders' equity increased due to building up of the profit during the period, and the shareholders' equity ratio was 40.7%.

Interest-bearing debt increased by JPY 89.4 billion to JPY 819.3 billion, resulting in a debt/equity ratio of 0.8x, which is on par with the end of the previous fiscal year.

Please see Page 33. This page indicates the consolidated statement of cash flow. Cash flow from operating activities resulted in revenues of JPY 206.8 billion. Cash flow from investing activities resulted in expenditures of JPY 285.9 billion. Cash flow from financing activities resulted in revenues of JPY 11.4 billion.

Capital expenditures increased from the previous year to JPY 261.4 billion, mainly due to aircraft investments. Substantial free cash flow, which is based on excluding capital transfers for periodic and negotiable deposits of more than 3 months from investing activities, increased to JPY 30.9 billion.

Please see Page 34. These are our results by segment. In addition to our Air Transportation business, revenues and income for Airline Related businesses also increased. Now I will go over the details of our Air Transportation business.

Please turn to Page 36. This is a year-on-year comparison of changes in operating income for our Air Transportation business. Operating revenues increased by JPY 150.5 billion. Domestic Passenger, International Passenger and Cargo and Mail businesses all recorded increased revenues.

In the LCC business, which is recorded under other revenues, Vanilla Air and Peach Aviation also contributed to revenue increases.

Operating expenses increased by JPY 116.7 billion. The expansion of business scope resulted in increased operation-linked and sales-linked expenses. Plus, maintenance expenses also increased due to a comprehensive review of safety and service quality. As a result, operating income increased by JPY 33.7 billion year-on-year to JPY 155.4 billion.

Please see Page 38. This shows the status of our Domestic Passenger operations. The figures on the left show an analysis of the factors for the JPY 12.5 billion increase in the cumulative third quarter revenues. Passenger number factors resulted in an JPY 18.5 billion increase in revenues due to the aggressive marketing of Tabiwari promotional fares. On the other hand, unit price factors resulted in a JPY 6.0 billion decline in revenues due to changes in our passenger class mix, among other factors.

As you can confirm from the graph on the right, and on Page 37, the unit price for the third quarter alone increased year-on-year. With load factor rising to 71%, unit price improved, thanks to increased sales of higher-priced fares.

Please turn to Page 40. This is the status of our International Passenger operations. Please see the figures on the left, which show an analysis of the factors for the JPY 59.0 billion increase.

Passenger number factors resulted in increased revenues of JPY 28.0 billion due to capturing a broad range of demand along with ASK expansion. Unit price factors resulted in increased revenues of JPY 31.0 billion, thanks to our success in capturing high unit price business travel demand and the benefits of enhanced yield management.

Please see Page 41. This shows ASK and RPK trends by destination. RPK during the third quarter alone increased year-on-year for all destinations, thanks to sales growth, both in Japan and overseas.

On China routes, capturing greater inbound demand among individual travelers pushed the third quarter load factor up by 10 points compared to the previous year. We also added a Haneda to Jakarta route in August and a Narita to Los Angeles route at the end of October. Both routes are performing steadily in line with plans.

Please see Page 46. This is the status of our International Cargo operations. Please see the figures on the left. This shows an analysis of the factors for the JPY 20.5 billion increase.

Weight factors resulted in increased revenues of JPY 5.0 billion, representing a year-on-year sales increase for exports, imports and trilateral cargo. Unit price factors resulted in increased revenues of JPY 15.5 billion. We increased our unit price by over 20% from the previous year with fare hikes, particularly for export cargo and cargo from China to North America.

Please turn to Page 47. As for our LCC business, the results for Vanilla Air are shown on this page and Peach Aviation on Page 48. Both LCCs maintained high load factors, exceeding 85%. Peach started new routes last September to and from Sendai and Sapporo. Both routes are off to a good start.

This concludes my presentation. Thank you for your attention.