Seven & i Holdings Co., Ltd.
Q2 2024 Earnings Call Transcript

Published: 17 Oct 2023

[Ryuichi Isaka:]

Good afternoon, everyone. My name is Isaka, President and Representative Director of Seven & i Holdings. Allow me to express our sincerest appreciation for your continued understanding and support for the Seven & i Group’s corporate activities, and to thank you for taking the time off your busy schedules to participate in today’s financial results presentation for the second quarter of fiscal year 2023. Shown on this slide is today’s executive summary. Operating and ordinary income achieved record highs in the first half of fiscal year 2023. The transfer of shares of Sogo & Seibu was completed on September 1st, as we continue making steady progress on strategic initiatives such as the review of the business portfolio. The same can be said in regard to the fundamental transformation of Superstore operations in the Tokyo Metropolitan Area, as we make steady progress toward our stated fiscal year 2025 target. I will be going over the details later on in today’s presentation. Next is today’s agenda. CFO Maruyama will be going over the consolidated results for the first half of the fiscal year and the fiscal year 2023 forecasts, after which I will be discussing the Seven & i Group’s management policy. I would now like to yield the floor to CFO Maruyama.

[Yoshimichi Maruyama:]

Hello, everyone. My name is Maruyama. Allow me to go over the consolidated results for the first half of the fiscal year and the fiscal year 2023 forecasts. First are the consolidated results highlights for the first half. Revenues from operations stood at JPY5,547.0 billion, corresponding to 98.2% of the same period of the last fiscal year’s results, and 99.9% of the initial plan. Operating income stood at JPY241.1 billion, corresponding to 102.7% of the same period of the last fiscal year’s results, and 102.2% of the initial plan. Ordinary income stood at JPY226.8 billion, corresponding to 103.2% of the same period of the last fiscal year’s results, and 103.1% of the initial plan. As you can see, while revenues from operations registered both a year-on-year decrease and an underperformance versus the initial plan, primarily on account of the fuel business in North America weighing down on results, a strong performance from domestic operations drove results and allowed us to post record results in terms of both operating and ordinary income. We recorded special losses derived from the transfer of shares of Sogo & Seibu so, on account of this, net income attributable to owners of parent came to JPY80.2 billion, corresponding to 59.0% of the same period of the last fiscal year’s results, and 58.1% of the initial plan. With that being said, on an adjusted basis excluding the impact of the transfer of shares of Sogo & Seibu and Barneys Japan, net income stood at JPY143.9 billion, corresponding to 105.8% of the same period of the last fiscal year’s results, and 104.3% of the initial plan. These results indicate a steady increase in the Seven & i Group’s earnings power, and additionally, a weaker yen had a positive impact of JPY9.7 billion on operating income. This slide shows year-on-year change on a per-segment basis for revenues from operations, operating income, and EBITDA. Overseas convenience store operations saw record fuel cents per gallon levels in the first quarter of fiscal year 2022, brought about by temporary, non-recurring factors. Consequently, in fiscal year 2023, operating income suffered a significant year-on-year decrease in the absence of these factors, with this decrease becoming a cause for concern for stakeholders. However, cents per gallon in the second quarter this year significantly exceeded levels during the same period last year, and this allowed us to significantly reduce the decrease in operating income. Additionally, domestic operations, especially Domestic convenience store operations as in the first quarter, remained strong and drove overall growth. Furthermore, Domestic and Overseas convenience store operations drove EBITDA, which grew by JPY28.1 billion on a consolidated basis. This slide contains the aforementioned results for the segments, this time compared to the plan. Operating income and EBITDA realized results exceeded the plan across all segments, with the exception of Overseas convenience store operations. Next are the fiscal year 2023 forecasts. I would now like to go over the main factors behind the revision to the consolidated financial forecasts for fiscal year 2023. On September 1st, we released an assessment of the impact of the completion of the transfer of shares of Sogo & Seibu on the Company’s performance, and furthermore revised the annual exchange rate forecast from JPY131 to the US dollar, to JPY137. Today’s revision to the forecasts, as it pertains to consolidated revenues from operations, to sales for Seven-Eleven Japan, and sales and gross profit for 7-Eleven, Inc. was done in light of the trend in fuel retail price and merchandise sales results in convenience store operations in Japan and the United States. In particular, there remains a great deal of uncertainty in terms of the outlook for the U.S. economy and consumer spending, as well as in terms of the ForEx market. Furthermore, fluctuations in each relevant factor have both a positive and negative impact on profits, so for this reason, as it stands, the forecast for consolidated operating income and all other profit line items remain unchanged. In summation, within the scope of the consolidated financial forecasts for fiscal year 2023, we have revised revenues from operations to JPT11,432 billion, corresponding to 96.8% of the same period of the previous fiscal year’s results. The operating income forecast remains unchanged at JPY525 billion, corresponding to 103.6% of the same period of the previous fiscal year’s results, as does the net income forecast at JPY230 billion, corresponding to 81.9% of the same period of the previous fiscal year’s results. Furthermore, on an actual results basis excluding the impact of special losses, we expect JPY293.7 billion in net income, corresponding to 104.6% of the same period of the previous fiscal year’s results. We therefore expect to realize steady growth. Please allow me to use this opportunity to go over the purpose and outcomes following the completion of the transfer of shares of Sogo & Seibu on September 1st. Sogo & Seibu ended with a deficit in the last four years, and also owed approximately JPY300 billion in debt, which included financing from the Seven & i Group. Within the scope of the Seven & i Group’s strategy, we had deemed it unfeasible for us to continue allocating management resources to Sogo & Seibu. Given this, and considering the Fortress Investment Group’s extensive expertise in the areas of real estate and corporate turnarounds, as well as the vast capital resources at its disposal, we deemed entrusting the operation of Sogo & Seibu to them as the best option available. More specifically, we determined that Fortress Investment Group should be the best option available for Sogo & Seibu to pursue a new vision as a department store, in terms of an improvement to its growth prospects and capital efficiency, as well as in terms of the continuation of employment and of the business itself. The sale of Sogo & Seibu impacted the Seven & i Group in two ways. First, of the approximately JPY170 billion in Group Finance extended to Sogo & Seibu, we forgave JPY91.6 billion of this debt. However, taking into account the amount left after this debt forgiveness and considering tax effects, we can actually recover over JPY100 billion in capital. Second, the JPY125 billion in domestic bank financing obtained by Sogo & Seibu will no longer feature in the Group’s consolidated balance sheet, reducing the Group’s consolidated liabilities and improving its financial position. In light of this, the closing of this sale represents a significant opportunity for Sogo & Seibu in that it allows it to free itself from a large financial burden to re-embark on a growth trajectory. For the Seven & i Group, too, while it incurred a temporary, non-recurring special loss, the sale allows us to further improve corporate value and the shareholder value, primarily through improvements to capital efficiency. I would now like to detail our capital re-allocation plan, following the recovery of capital after the sale of Sogo & Seibu. Domestic and Overseas convenience store operations are the main generators of operating cash flow. We will be re-allocating this operating cash flow and the cash inflows resulting from the transfer of shares of Sogo & Seibu, to businesses with strong growth potential, with a special emphasis on convenience store operations. We also intend to use this cash to reduce the interest-bearing debt balance, thus improving our financial position and to enhance shareholder returns, including share buybacks. We will be revealing the details of this shareholder returns strategy in a timely manner as soon as a decision is finalized on this front. Furthermore, we will be distributing an interim dividend of JPY56.5 per share, as stated in the initial plan. This concludes my presentation. I would now like to yield the floor to President Isaka, who will be going over the Seven & i Group’s management policy.

[Ryuichi Isaka:]

This is Isaka speaking. I would now like to go over the Seven & i Group’s management policy. This slide shows the status of progress of the strategic initiatives within the scope of the Medium-Term Management Plan, as outlined on previous occasions. The transfer of shares of Sogo & Seibu was completed on September 1st. We believe this transfer marked a new start toward re-growth for Sogo & Seibu with support from the Fortress Investment Group. Additionally, within the scope of the fundamental transformation of the Superstore operations as announced on March 9th of this year, the merger between Ito-Yokado and York was completed on September 1st. I will be going over the specifics of the Seven & i Group’s plan toward the fundamental transformation of Superstore operations in the Tokyo Metropolitan Area. We will be carrying out the fundamental transformation of Superstore operations in the Tokyo Metropolitan area with a fiscal year 2025 target, but first allow me to go over the situation for this business as it currently stands in fiscal year 2023, the first year of this strategy. In the first half, EBITDA stood at JPY6.4 billion, corresponding to 109.2% of the same period of the last fiscal year’s results, and 139.5% of the initial plan. We furthermore expect a strong performance for the full fiscal year, and therefore believe this fiscal year will mark a strong start toward the execution in earnest of fundamental transformation. This slide is a reposting of the presentation materials used in the presentation held on March 9th, 2023, covering the results of Group Strategy Reevaluation. We will be carrying out the fundamental transformation of Superstore operations by executing fundamental initiatives one through four, coupled with monitoring with visibility as shown in number five. Through this, we seek to achieve an EBITDA of JPY55 billion and 4% or more of ROIC for Tokyo metropolitan area Superstore operations in fiscal year 2025. Next, I will explain the process for implementing a fundamental transformation of Superstore operations. First, we formulated, in a top-down fashion, targets to be achieved, and then carefully reviewed and considered approximately 4,800 initiatives generated in a bottom-up manner, refining this number down to approximately 2,500 initiatives to be implemented and executed. Within these, we further prioritized initiatives with a higher probability of success and larger benefits to be derived. Furthermore, the formulation of this action plan for fundamental transformation involved discussions, starting with the preparation and design periods carried out by the Strategy Committee, which consists exclusively of independent outside directors. The four fundamental initiatives are as follows

[End of Q&A:]