Edited Transcript of 4666.T earnings conference call or presentation 16-Dec-14 12:00pm GMT

Tokyo Jul 27, 2020 (Thomson StreetEvents) — Edited Transcript of Park24 Co Ltd earnings conference call or presentation Tuesday, December 16, 2014 at 12:00:00pm GMT

PARK24 Co., Ltd. – President & Representative Director

Koichi Nishikawa, PARK24 Co., Ltd. – President & Representative Director [1]

Good afternoon, ladies and gentlemen. I am Nishikawa of PARK24. Thank you very much for attending the October 2014 financial results briefing meeting of PARK24 despite your busy schedule and this rainy weather.

Without further ado, I would like to start my presentation on the October 2014 results in accordance with the screen in front and the handouts.

First, let me go over the final numbers for the year ended October 2014. We posted net sales of JPY 167.02 billion; gross profit of JPY 44.09 billion; operating profit of JPY 17.55 billion; recurring profit of JPY 17.5 billion; and net income of JPY 10.38 billion. It is obvious if you look at these numbers that we landed with increase in sales and decline in profits for fiscal 2014.

You can see our plans on the right. And the rightmost column shows our initial plan. And to the left is the revised plan after the interim earnings announcement. Compared to the revised plan, we were JPY 100 million ahead in recurring profit, but we were behind JPY 4 billion in recurring profit when compared to the initial plan.

Page 3 shows key factors of change in recurring profit. In the year ended October 2013, we posted JPY 19.5 billion in consolidated recurring profit. In fiscal 2014, there was an increase of JPY 2.7 billion attributed to the Times parking facilities and another JPY 700 million increase due to car sharing business, which were the 2 factors to push up the profit year-on-year.

On the other hand, there was company-wide increase in costs worth JPY 500 million. Furthermore, as I explained at the interim financial results briefing, there was a heavy snowfall in February this year which led to the drop in utilization rates of parking facilities as well as our car sharing business, with a negative impact of JPY 700 million approximately.

Then there was various factors attributed to the consumption tax hike. The first was a direct negative impact of the tax hike of 3 percentage points in and of itself worth JPY 2.2 billion. As parking fees are indicated inclusive of consumption tax, we’re not able to pass the exact amount of tax increase directly on to the prices which resulted in a decline of JPY 2.2 billion in profits. We did try to absorb this tax hike of 3 points by changing the overall parking fee scheme but only managed to absorb the impact by about JPY 500 million.

And the biggest negative factor was the decline in the number of vehicles coming in and out of the parking facilities. As the volume of traffic went down, the number of vehicles using the parking sites and the hours they stay there have decreased. This deterioration in the external environment resulted in the drop of JPY 2.5 billion in profits.

All in all, the recurring profit ended up at JPY 17.5 billion.

Page 4 shows operating profit by business segment. In the year ended October 2014, the Parking Business posted JPY 23.614 billion; the Mobility Business, JPY 1.053 billion; which gives us a total operating profit of JPY 24.668 billion.

Compared to the year before, the Mobility Business saw an increase in profits, but the significant decline in profits of the Parking Business led to the big year-on-year decrease in total operating profit in fiscal 2014. The operating profit in the Parking Business in fiscal 2014 was only 92.8% of the year before, which was extremely low.

Notice that, at the bottom chart showing the chronological changes in operating profits in Parking Business, in 2008 it was 80.2% of year before, which was the first year-on-year decline in profits of the Times parking business, which — with increased sales. But back then, after the revision of Road Traffic Act and the crackdown on illegal parking was outsourced to the private sector, for 1 year since 2006, the parking industry enjoyed a boom temporarily, followed by a negative rebound. And in 2008, the overall economy went sour rapidly, leading to a decline in traffic volume. So this dual blow resulted in the first decline in profits in the Parking Business in our company’s history. So in fiscal 2014, we posted the second year-on-year decline in profits since we launched Times business.

So we suffered a significant deterioration in profits, but let me go into more details on Page 5, which shows year-on-year comparison of net sales of Times parking facilities. The vertical dotted line drawn in the middle indicates the month of April. As you can see, the average sales over the 4 months before the consumption tax hike was 109.1% of the same period a year before. After the consumption tax hike, the number dropped dramatically to 103.1%, down 6 percentage points. Here is the breakdown of the 6 points: the 2.4 percentage points attributed to the direct impact from the tax hike and 3.6 points caused by the decline in traffic volume.

At the beginning of the fiscal year, we had expected this situation to start recovering from around late August or September. But as it turned out, the Parking Business remained lackluster in September and October. One of the reasons behind the lackluster performance was the traffic volume. Here you can see the changes in traffic volumes of Tokyo Metropolitan Expressway and Hanshin Expressway. Due to the heavy snowfall, in February, the traffic volume in Tokyo Metropolitan Expressway shrank dramatically. But the average traffic volume over the 4 months prior to the tax hike as compared to the year before was 102.5% for both Tokyo Metropolitan and Hanshin Expressways.

From April through October, or over the 7 months after the tax hike, the number was 98.7% for Tokyo Metropolitan Expressway and 99.1% for Hanshin Expressway. So there was a decline in traffic volume after the tax hike of 3.8 percentage points for Tokyo Metropolitan Expressway and 3.4 points for Hanshin Expressway. This shows the decline in overall traffic volume or deterioration of the external environment.

The Parking Business does not represent the ultimate destination of vehicles. And therefore, if the overall traffic volume declines, the number of vehicles that come in to the parking sites inevitably declines proportionately, resulting in the drop in the utilization rate. In that sense, the decrease in the traffic volume gave a serious blow to the Times parking business.

This slide shows the year-on-year comparison of net sales by model of parking, ST and TPS. As you can see from the charts of ST and TPS superimposed on top of each other, TPS saw a much more rapid decline after April. If you turn to the next few slides, you will see more detailed description of ST and TPS, respectively.

Take a look at ST first. The average sales over the 4 months prior to the tax hike compared to the previous year was 105.4%. This number declined over the 7 months after the tax hike in April to 102.8%, down 2.6 percentage points.

Next is TPS, which saw much more significant decline from 117.1% in average sales over the 4 months prior to tax hike as compared to the year before to 103.6% after the tax hike in April, representing a 13.5 percentage point decline between pre and post consumption tax hike. The biggest factor behind this much more significant decline in sales of TPS was people refraining from going out or from shopping after the tax hike. Due to the nature of TPS being the parking sites for customers visiting commercial facilities, they were more seriously affected, which was reflected in these numbers.

Page 10 shows the year-on-year comparison of net sales of Times parking sites on weekdays and weekends and holidays. The average sales over the 4 months prior to the tax hike compared to the previous year on weekdays was 107.7%; and on holidays, 106.8%. The number after the tax hike was 102.5% on weekdays and 100% on holidays, down 5.2 and 6.8 percentage points, respectively. Refraining from going out or shopping was again behind these numbers. But in addition, especially on holidays when parking sites are used mostly for private purposes, soaring prices of gasoline was the factor to push down the utilization rate on weekends, though the gasoline prices are settling down more recently.

Page 11 shows the net sales and cost of sales for Times parking sites for the last 3 years from the year ended October 2012. Obviously, both net sales and cost of sales have been steadily on the increase because the number of parking sites and spaces has been increasing. However, again, sales dropped after April 2014, and the gross profit fell to 96.4% of the previous year in fiscal 2014.

Looking at sales and profits, in particular profits, there is not much good news, and both were significantly affected. But in terms of development of new parking sites, it has been a tremendously positive year for us. The number of new parking sites totaled 1,977 and the number of new parking spaces counted 74,598. Both were record high numbers.

We’re able to develop these many new sites because, first and foremost, there is still much room left for developing new parking sites. Another reason was the introduction of the area system to change the sales organization from fiscal 2014. Sales representatives are now dedicated to the development of a specific geographic area assigned to them so as to be more locally rooted and able to take more customized approach adjusted to that particular area. This effort has borne fruit and got reflected in numbers even in the first year. And so the development activities have been going extremely well in the past year. Consequently, our Times parking business has expanded to reach a total of 13,994 sites, with 470,675 parking spaces.

Next, let me turn to the car sharing business, or Times Car PLUS under the Mobility Business. We entered into the car sharing business on a full scale in July 2009. Since fiscal 2012, we have been striving to reach a breakeven point on an operating income level. And finally, after 5 years since its inception, in fiscal 2014 we managed to generate a positive operating income of JPY 16 million. Net sales were JPY 10.39 billion, slightly ahead of the plan of JPY 10.3 billion and the operating income at JPY 16 million was also ahead of the plan of being breakeven.

This slide shows the number of vehicles and members in Times car PLUS business. The number of vehicles totaled 10,061, topping the 10,000 as planned. The membership stood at 414,965 as of October 2014.

In both fiscal 2012 and 2013, we worked hard to break even on an operating income level on a full year basis, but we failed to improve the utilization rate on weekdays to the level that we assumed to achieve. Therefore, what we continue to focus on was to acquire corporate members.

On Page 16, you can see the status of corporate members. The ratio of corporate members increased year-on-year by 1 percentage point in fiscal 2014 to reach 35.5%, while the amount spent on vehicle per day by corporate members on weekdays increased to 125.4% of the year before. Although it is taking time, acquisition of corporate members has steadily helped increase utilization on weekdays, which was one of the major reasons why we succeeded in turning the business into a profitable one in fiscal 2014.

The next page shows the average net sales and expenses per vehicle per month. In the year ended October 2014, they were JPY 99,800 and JPY 99,600, respectively, with sales outperforming costs by JPY 200, which allowed us to post a positive JPY 16 million in operating income.

After fiscal 2013, the fraction of new vehicles against existing vehicles have been relatively high. However, in fiscal 2014, there were 7,000 existing and 3,000 new vehicles, which also helped us to achieve profitability. As I’ll explain in more detail later, in the year ending October 2015, the breakdown is planned to be 10,000 existing and 3,000 new vehicles, representing a further decline in the share of new vehicles. Therefore, our plan is to post even greater positive operating income in fiscal 2015.

Page 18 shows the shareholder return with the historical dividends per share and payout ratios. In the year ended October 2014, we have increased the dividend per share by JPY 10 year-on-year. In fiscal 2014, we have suffered the second decline in profits since we launched our Times parking business, and yet we are increasing dividend. The biggest motivation behind this decision is our desire to communicate our message to shareholders that we are expecting to continue to grow in the years ahead. The payout ratio would be 69.8% as a result.

Although in fiscal 2014 we suffered a significant year-on-year drop in profits and fell short of the plan by more than JPY 4 billion due to factors in the external environment, concerning the overall business foundation, including the supply-demand balance in the entire parking business industry, spaces available for further development of parking sites and potential future growth expected in the Mobility Business, including the car sharing business, we are absolutely convinced that there has not been any major change in terms of the group’s capability to grow in the future. Therefore, even though the payout ratio will be pushed up significantly as a message to demonstrate such confidence, we have decided to raise the dividend per share by JPY 10.

That was all for the overview of the financial results of the year ended October 2014. Now I would like to turn to our plan for the year ending October 2015.

Net sales are expected to be JPY 180 billion; gross profit, JPY 47.6 billion; operating profit, JPY 18.6 billion; recurring profit, JPY 18.5 billion; and net income, JPY 11.5 billion.

We, as PARK24 Group, have always given top priority to profitability, starting from operating income, based on our assessment of the potential of the whole parking business or market. And we have been telling shareholders that we have refocused our efforts to achieve continued double-digit growth for as many consecutive years as possible.

So despite our commitment to sustainable double-digit growth, our guidance indicates that recurring profit for October 2015 period will go up 5.7% over the previous year. Growth rate would be 5%, only a single digit, following a struggling fiscal year ending October 2014. We still face a rather uphill battle.

At the beginning of fiscal year we plan to introduce more granular parking fee system to absorb incremental tax, but only offset 1/3 of the impact from the tax hike.

Since — on the hindsight, since the introduction of the TONIC, the online system, we have been committed to optimize parking fee system and maximize profits. Regrettably, it may sound an excuse, we think that no margin’s left for us to achieve additional 3% growth.

In the first half of the October 2015 period, more negative year-on-year comparisons would come out. Our performance will start to show year-on-year growth after April next year as the same tax ratio of 8% would be applied. However, we project our performance for the 5 months starting November, December, January and February would be another testimony of the weak businesses, so we expect the recurring profit would be JPY 18.5 billion.

Page 20 delineate what I just explained in the color-coded chart. Please look at the top right-hand side, and we project monthly recurring profit before April of the October ’15 period. And we think that recurring profit would be 83% of the previous period. The biggest reason is, I repeatedly say, that the 3% increase in the tax.

And throughout this fiscal year, we forecast that business environment in October to November will sustain.

Possibly the current economic stimulus package will be put in motion to get Japanese economy back on the track to drive traffic volume. However, we cannot put our wishful scenario in our guidance and the business plans. On the other hand, we do not think that the economy would get worse. So thinking everything together throughout this fiscal year, the ongoing business environment will continue. And from the November 2014 to March 2015, we expect the recurring profit to be 83% of the previous level. But after April 2015, we’ll be able to make an apple-to-apple comparison, so we think that the recurring profit will go dramatically up to 120.6% of the previous level. On the average, we forecast the recurring profit would be 105.7% of the previous period.

In Page 21 is the operating profit trend by business. We plan operating profit of the Parking Business will be JPY 24.4 billion, that of the Mobility Business would be JPY 1.8 billion. And the total operating profit will be JPY 26.2 billion. We expect operating profit to be up 3% year-on-year.

The chart in Page 22 is the combination of the Page 20 chart and the numbers in the October 2015 period. After the sales tax increase, the sales decline sharply, but come back on track and keep on the growth trajectory. And we note that the growth (sic) [gross] profit for October 2015 would go up 6.1% year-on-year.

Now let me walk you through the major initiatives of the Parking Business. We would like to enhance area system and the team system we started in October 2014 period. You can see the word — the shift from area system to area-based. Currently, there are 3 salesmen are assigned to 1 area. And 3 salesmen visit 4 corners of the dedicated area and find diligently new parking spaces. So we further increase accuracy and success ratio, that is our aspiration for the sales department for the October 2015 period.

So in the next 3 years, including this fiscal year, we expect sales bases to be 100. And these sales bases do not — big and gigantic scale. And well these bases are small field offices or local offices, so we set up a sales base in each sales area where the salesmen are assigned so that we evolve our concept of area system to more area-based system. Eventually, we will open 100 sales bases throughout Japan to build our sales network, and we get close to the market and more targeted parking site development.

One of our big challenges for this fiscal year is how to address next tax hike of 2%, which were postponed 1.5 years. And we have to discuss how to address the next tax hike. Our takeaway is that parking fee increase is not an option to mitigate the negative impact. It is just the idea. But one of the new ideas we explore and discuss is to lower the minimum fee unit of JPY 100. Go or no-go has not been decided. The judgment call will be made just before the tax hike. But if the minimum unit becomes JPY 50 or JPY 10, administrative costs would go up dramatically. Therefore, we have to consider cost-benefit effectiveness. All Times parking facilities accept credit card, so we will look into different fee systems applied to different payment means, like JR introduced this different system.

Another one is the strengthening sales for corporate clients. That is an ongoing effort, but we’ll focus on public sectors, in health care sectors and hospitals. So we would like to accelerate our approach to those organizations. Those are our major initiatives.

So now this is the sales strategy, but our new plan calls for 2,000 new parking sites and 28,000 (sic) [68,000] new parking spaces, showing a slight increase in new sites and a decline in new parking spaces.

If I make a case here, hoping it is not misleading, those target numbers are not very critical for us. At end of the day, even if we clear the numbers of the spaces and the facilities, that is meaningless, [if] we cannot beat our recurring profit numbers. So even if new parking sites were 1,800 and the parking spaces were 60,000, our recurring profit reach JPY 18.5 billion, that would be great.

So according to our plan, we call for a decline in the new parking spaces. If that 68,000 new parking spaces are not sufficient, we will increase, but we’re very flexible in terms of changing the targets. If we achieve our plan, the total number of the parking site would be 15,244, total number of the parking spaces would be 503,675.

Now let me walk you through our major initiatives in Times Car PLUS, which drive customer friendliness and usability in a sustainable manner. The current system records demonstrate that our current vehicle reservation system is unable to make the efficient automatic reservations. For instance, if our system could rearrange the reservations of the several vehicles in the same station, 1 more vehicle would be freed up for more customers. And we will improve algorithm to build the smarter systems to optimize that reservations and improve efficiency. And also that we would like to improve the customer friendliness and customer centricity.

Also, the collision and the damaged vehicles need repair and maintenance, which leading to the idle items, so we will strengthen our operation size to reduce the waste time or non-operating hours. Also, we have been doing for the 3 years, strengthening to capture more corporate customers and also that enhance the cross-sell in the group companies.

This initiative has been already put in place, but the strengthening our integrated service with rental car business, it’s noted in Page 27, we have already started the service called PitGo. If you are a car sharing member, you rent a car, just to swipe a member card is okay, you do not fill out the application form, and you can rent a car in a very speedy manner.

So we will expand the service menu like this as a consolidation or a fusion of the rental car business in the metropolitan areas. With those initiatives, we would like to improve the bottom-up of our overall capabilities. We tried to expand our footprint throughout Japan. We’ve already entered into the 34 prefectures, but we’ll roll out our services to urban centers and key traffic networks.

In the October 2015 period, the number of the vehicles will increase by 3,000 to reach 13,000 by the end of October next year. Our target calls for JPY 14.7 billion sales and JPY 500 million operating profit. And the rationale of those numbers are the net sales per vehicle would go up to JPY 103,900 while the expenses would stay at JPY 100,300, increasing the JPY 3,600 profit per vehicle; adding up will generate JPY 500 million operating profit.

We have been working on the membership business for a long time. While the progress in this space is not as fast as we wish, but we are dedicated to offer customer-friendly resources. Our priority is to put in place to make the customers know how to save and spend Times points. Therefore, we educate the customer how to save and use their points in a very effective manner.

Previously, the customers had to log into our website to check their Times points. However, as you can see in the photo on the bottom right-hand in the Page 30, we installed the information terminals called Times Tower. If you are Times Club card member, you can check your accumulated points at the Times Tower. Also that you can change your points into the coupons. By increasing the number of the installment of the Times Tower, we would like to increase the transactions of Times Club members.

In Page 31, this is widely known, but the — it is about information distribution service called V-Low. Digitization of the terrestrial broadcasting has freed up conventional media service bandwidth to various business sectors. So our company is harnessing this bandwidth to send information concurrently or individually to all of our parking facilities, car-sharing vehicles and rental cars. This innovative information service system covers wide areas and distribute large volume of information for 24/7. So this is a great vehicle to transmit customized information and help improve our administrative activities and operations.

Lastly, in Page 32, you can see the major target numbers in the 3-year plan starting 2015. Starting from the recurring profit, JPY 24 billion of the recurring profit is showcased in this plan ending October 2017 when EPS becomes JPY 100. We expect Times parking facility to be 18,000, parking spaces to be 600,000 and number of the mobility vehicles, that is a combination of the car sharing and the rental car vehicles, to be 50,000 vehicles. And those are the target numbers we would like to achieve in the next 3 years.

Frankly speaking, this recurring profit number is the same as the target recurring profit of the 3-year plan starting in 2012. In 2012, we aimed at JPY 24 billion recurring profit, but our aspirations were delayed for 3 years. The several reasons for 3-year delay, the one is that the car-sharing business did not make ends meet quickly. And the biggest negative impact was the tax hike in the year ending October 2014. Prevailing against daunting challenges, we will make our second try to achieve JPY 24 billion recurring profit.

Now how the ongoing midterm plan is positioned in our development milestones and the road map of the growth. Internally, we aspire for 1 million parking facilities, 100,000 mobility vehicles and 10 million Times Club memberships in the next 10 years. So the ongoing 3-year plan would lay a groundwork for the next 10-year lead. These target numbers require more carefully planned targeted development of new parking sites and improving margins and profitability in the car sharing business.

And for success of the membership business, as you can see in here, the critical element is our ability to offer services that inspire the customers to join and use our points. Providing innovative services magnetic to the customers is a tall order, but we capitalize our group capabilities and resources as well as the business alliance. With those initiatives, we would like to capture 10 million membership.

With that, I would like to conclude the brief overview of the October 2015 business plan. Thank you very much.

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

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