East Japan Railway Co

TSE:9020

Earnings Call Transcript

[Yuji Fukasawa, executive]

Ladies and gentlemen, thank you very much for your continued support for our business. And thank you very much again for coming today despite your busy schedule.

Today, I will discuss progress of the new JR East group management vision, Move Up 2027, we announced in July this year and then financial results for the second quarter and full year plan.

Let me start with basic policies of Move Up 2027. As you already know, considering the environment surrounding our business, it is clear that population will decrease further.

Changes in values related to what it means to work and changes in values through technological innovations and globalization are assumed. Besides, such changes in a business environment are expected to progress speedily. In response to such significant changes in the business environment changes in stories to create values from the provision of services with railway infrastructure as our basis to the introduction of new values to society, focusing on the affluence of everyone in their daily lives were set as basic policies of Move Up 2027.

Of course, transportation services centered on railway services are important foundations for our group to keep our credibility. We have to strengthen transportation services qualitatively, both intangible and intangibles, and revolutionize and develop transportation services through reform, productivity improvement, technological innovations and new measures.

However, in anticipation of the changes in the business environment I mentioned earlier and judging from future growth potential, we will further allocate management resources to lifestyle services and IT and Suica businesses, developing them as our new growth engines.

As we grow consolidated operating revenues over the next 10 years, we would like to increase revenues of lifestyle services and IT and Suica businesses from 30% to the total now to 40% to the total.

As I said earlier, we will continue to strengthen qualitatively and grow transportation services mainly by railways by bringing in results of technological innovation and productivity improvements. However, from the viewpoint of future growth engines and potential, we are drawing a blueprint to focus on lifestyle services and IT and Suica businesses.

This slide shows an overview of Move Up 2027.

Based on the brand or trust, which is a strength of our group, we have multilayered rail network supporting infrastructure for life and stations, which are places for people to interact with each other. By making free use of this strength, we will continue to create values of trust and affluence in 3 phases including cities, regional areas and around the world. In doing so by focusing on safety and people daily lives, we intend to realize sustainable growth of our group. That is the overview.

To achieve our reforms in the coming 10 years, we set numerical targets for the first 5 years ending March 2023.

When it comes to numerical targets for 10 years and final numerical target, there are important factors. So we decided to set numerical targets for specific actions to be achieved for the first 5 years ending March 2023.

While following the cycle of capital expenditures and efficient use of assets, we aim at expansion of scale of revenues by providing new services and others based on safe and reliable transportation. For the fiscal year ending March 2023, we aim at consolidated operating revenues of JPY 3,295,000,000,000, consolidated operating income of JPY 520 billion, consolidated accumulated operating cash flow of JPY 3,720,000,000,000 and consolidated ROA at 6.0%.

In the management vision this time, we set targets which forms the basis of achievement of these management targets and targets to drive growth. We stated clearly that we would welcome them as target for specific actions.

Let me introduce main Move Up 2027 topics about safety.

Safety will continue to be our top management priority also in the new management vision. That means safety is our top management priority we have to firmly maintain throughout the ages. In essence, group-wide efforts to pursue ultimate safety levels mean each group employee share the same understanding and work on specific measures.

As for tangible measures, we intend to welcome proper maintenance, management, strategic renewal and strengthening of facilities and rolling stock. Intangible measures include strengthening practical safety education and training partly due to expected rapid generation change.

As you see here, we are also working on measure to install training operation simulators at all the train crew offices. We are also strengthening security so that passengers can use our services with peace of mind.

To realize sustainable growth of our group, from the viewpoint of ESG management, it is necessary to strive to solve social issues through our businesses, contribute to the development of regional society and deepen the trust that people and communities and customers have in us. That is why we positioned ESG management for the first time in the big picture of group management vision. Besides, results of technological innovation have to be at the center of operational reforms. So by combining railway technologies and IT, we will realize reforms of customer services and operations.

As you already know, in June 2018, in head office, we established the technology innovation headquarters as a cross-department in-house organization to promote technological innovations. I hope you understand that these are parts of our initiatives for technological innovation.

As I mentioned earlier, in Move Up 2027, we set target for 3 phases: cities, regional areas and the world or making cities more comfortable, making regional areas more affluent and developing businesses for the world.

For making cities more comfortable, the trend MaaS is frequently mentioned recently.

Based on trust of our group be with mainly through railway services by delivering seamless transportation and various services as part of one-stop offering, we will build and create convenient living space where customers can choose the optimal transportation, purchasing and payment services for their daily lives 24 hours a day.

For making regional areas more affluent, we will create active interaction through sustainable social infrastructure and provide services for affluent living for everyone on the premise that our group will continue to be responsible for regional transportation as the problem of declining population is bigger in rural areas than in cities. In addition to reformation of transportation services to more convenient, sustainable services by promoting tourism, revitalizing communities and undertaking town planning around stations, we will achieve compact cities and networking in rural areas. That is our basic strategy.

For developing businesses for the world, starting from enhancement of awareness of our transportation services centered on railways, by packaging our transportation services and lifestyle services to match the needs of each country, we're aiming to develop business models for overseas businesses and offer more affluent lifestyles mainly for Asia.

Next, I will discuss financial results for the second quarter and plan for the fiscal year ending March 2019, starting with results for the second quarter.

This page shows nonconsolidated results.

Passenger revenues increased due to strong performance during autumnal equinox holidays, Golden Week, strong Obon festival travel and inbound tourism. As a result, operating revenues were JPY 1,063,200,000,000, up JPY 7.1 billion year-on-year.

Operating expenses were up JPY 14.1 billion, mainly due to increases in outsourcing expenses in other nonpersonnel expenses, taxes and depreciation.

As a result, operating income was JPY 248.2 billion, down JPY 6.9 billion year-on-year.

Ordinary income was JPY 231.7 billion, down JPY 7.1 billion. Profit was JPY 165.2 billion, down JPY 3.2 billion.

In the second quarter, operating revenues and income at all the levels were higher than April plan. The table on the right shows full year results for the last fiscal year and full year plan for this fiscal year.

To come to that point, we decided to keep April plan and changed. As I have just discussed, operating revenues were almost in line with plan.

Operating income was about JPY 2 billion higher due to slower progress of maintenance expenses than planned. However, for the full year, in operating expenses, other and energy in nonpersonnel expenses will be higher in the third quarter onwards. So we decided not to revise full year plan at this point in time.

This slide shows results in many positive and negative factors for passenger revenues. Passenger revenues were up JPY 5.6 billion or 0.6% year-on-year.

Revenues from commuter passes were up JPY 1.6 billion or 0.6%. Continued increase in the number of employed persons led to an increase in computer passes. That was the main factor.

As we know, computer passes revenues from Shinkansen Network were up JPY 4.4 billion or 1.6%, mainly due to strong performance during 3-day autumnal equinox holidays, Golden Week, strong Obon festival travel and inbound tourism. Revenues from Kanto Area Network of Conventional Lines were down JPY 200 million or 0.1% due to natural disasters such as typhoon despite absence in previously year's natural disaster such as typhoon, strong performance during 3-day autumnal equinox holidays, strong inbound tourism and others.

Next, I will talk about plan and results for the first half and plan for the second half and full term.

For the first half, passenger revenues were JPY 700 million lower than planned. Commuter passes were JPY 1 billion lower than planned.

For noncommuter passes revenue from Shinkansen Network were JPY 3.2 billion higher mainly due to basic trend and strong performance during 3-day consecutive holidays.

Revenues from Kanto Area Network of Conventional Lines were JPY 2.7 billion lower due to natural disasters and lower-than-expected basic trend despite holiday factors such as strong performance during 3-day consecutive holidays and Golden Week.

Operating expenses were up JPY 14.1 billion or 1.8% year-on-year. Factors pushing our personnel expenses included provision of elder employee system that we already explained.

On the other hand, personnel expenses were pushed down by rejuvenation effects caused by a decrease in the number of employees. As a result, personnel expenses were up JPY 200 million.

Energy expenses were up JPY 2.2 billion due to an increase in fuel cost of thermal power plants and others.

Maintenance expenses were up JPY 800 million. Other nonpersonnel expenses were up JPY 5.8 billion mainly due to an increase in outsourcing expenses.

Usage fees to JRTT, et cetera were down JPY 800 million.

Taxes were up JPY 3.2 billion due to an increase in property tax and others.

Depreciation was up JPY 2.4 billion due to an increase in capital expenditures.

As for consolidated results, in transportation, revenues increased and income decreased. However, in retail and services real estate and hotels and others, both revenues and income increased.

Operating revenues were JPY 1,486,900,000,000, up JPY 22.1 billion year-on-year.

Operating income was JPY 292.2 billion, down JPY 100 million. Ordinary income was up JPY 700 million. Profit attributable to owners of parent was up JPY 300 million.

The table on the right shows results for the last fiscal year and full year plan for this fiscal year. As is the case with nonconsolidated plan, we decided to keep consolidated full year plan unchanged.

By segment, in transportation, passenger revenues, mainly revenues from noncommuter passes of JR East increased. However, as nonpersonnel expenses and others increased, revenues increased but income decreased.

In retail and services, both revenues and income increased mainly due to strong performance of businesses and a favorable sales at stores in Tokyo stations and other stations.

In real estate and hotels, both revenues and income increased, mainly due to increased revenue as a result of full period contribution from [ Piri Ichiba ], Hotel Metropolitan Sendai East and Hotel Metropolitan Saitama Shintoshin, which opened in last fiscal year. In others, both revenues and income increased mainly due to increases in revenues of information processing business and card business.

Based on results for the first half, we reviewed full year plan. As I mentioned earlier, we decided to keep plan unchanged in all the segments, including transportation, retail and services, real estate and hotels and others. This slide shows nonoperating income and expenses and extraordinary gains and losses. Nonoperating income was down JPY 400 million year-on-year, mainly due to a decrease in insurance proceeds and dividends despite an increase in equity and net income of affiliated companies.

Nonoperating expenses were down JPY 1.2 billion, mainly due to a decrease in interest expense. As a result, net nonoperating income and expenses improved by JPY 800 million.

Extraordinary gains or losses deteriorated by JPY 1.7 billion mainly due to an increase in provision for allowance for point card certificates.

The table on the right shows results for nonoperating income or expenses and extraordinary gains or losses for the last fiscal year and full year plan for this fiscal year.

As for cash flows. Net cash provided by operating activities decreased JPY 49.7 billion mainly due to increases in payments of income taxes.

Net cash used in investing activities decreased JPY 17.8 billion mainly due to increases in proceeds from construction grants. Net cash used in financing activities decreased JPY 25.8 billion, mainly due to increases in proceeds from interest-bearing debt.

Capital expenditures planned for this fiscal year is JPY 645 billion. Capital expenditures for the first half were JPY 165 billion, up JPY 5.9 billion year-on-year, which was almost in line with plan.

This slide shows the change in interest-bearing debt balance. Active allocation of cash to investment needed for the continuous operation of business, growth investment and priority budget allocation forms the foundation of the new management vision. So we don't plan to decrease interest-bearing debt in this fiscal year. There is no change to plan for the use of cash in the fiscal year ending March 2019. We will continue to make efforts to achieve numerical targets.

The last is reference materials. So please refer to the materials. So far, I talked about results for the second quarter and full year plan. There are tasks to welcome in the second half. Various tasks such as increase in revenues [ or front ] control of expenses became visible in the results.

We intend to make group-wide efforts to achieve or exceed plan. I would appreciate your continued understanding and support. That's all. Thank you very much.