Acom Co., Ltd. (8572) Earnings Call Transcript & Summary

Thank you for joining this presentation. I'd also like to extend my heartfelt appreciation to all of you for your kind support to and understanding of our company. We have decided not to host a presentation on-site to prevent the spread of the coronavirus. But to keep the level of communication with the market, we have decided to do it online this time. We ask for your kind understanding. In my presentation, I will touch on item number one, annual forecast for fiscal year March 2021; item numbers two to five, business environment, trend of the personal card loan market, financial results summary, composition by segment; item number six, loan and credit card business; item number eight, guarantee business; items number 10 and 11, target markets in overseas financial business, overseas financial business; and lastly, item number 16, dividend status. Later, Mr. Okamoto, Chief PR and IR Officer, will go over some of the highlights of nonconsolidated outcomes, financial results, interest repayment, provision for bad debt, financial expenses and impact from the coronavirus. Please go to Page 4 of the presentation. First of all, full year forecast for FY March 2021. Talking about operating environment surrounding our group, there is poor visibility ahead as governments and financial authorities have declared a state of emergency and issued various regulations. This, in turn, has caused economic stagnation and the world economy is likely to worsen and remain difficult for an extended period of time. In this environment with all the uncertainty, which is likely to impact receivables, revenue and profits of companies within our group, we are unable to make rational forecasts for the fiscal year ending March 2021. As we try to gauge the magnitude of the impact from the situation, once it has become possible for us to make rational forecast, we will immediately share them with you. We ask for your kind understanding. Please go to Page 5. In The fiscal year under review, the Japanese economy continued to show a gradual recovery with improved employment and personal income as well as a recovery in consumer spending, thanks in part to some government policies. Going forward, however, the economy will face prolonged difficulty as the impact from COVID-19 will start to emerge. As for economic environment in 2 countries outside Japan where we have operations. First, in Thailand, personal consumption, which had remained strong now shows a sign of some slowdown with its real GDP growth slowing down to below 2% as its exports deteriorated due to the trade friction between the United States and China. In the Philippines, while personal consumption remained strong, thanks in part to policy measures to check inflation, there is increasing concern about a possible economic slowdown as its exports deteriorate just like Thailand. In Japan, as is shown at the bottom left, the nature of competition in the consumer loan market is that it's not just confined to competition among players within their own traditional bank and nonbank categories. The market served by banks has continued to post negative growth as they introduced voluntary measures in response to the Japanese Bankers Association's new policy guideline. The market served by nonbanks, on the other hand, has continued to still expand. While requests for interest repayment have continued to steadily decline, we need to closely monitor their trend as they are susceptible to changes to the external environment. In Thailand, despite a sign of a slowdown of personal consumption, the personal loan market continued to show steady growth, as is shown at the bottom right. We need to continue to monitor trend in the market. However, the Thai Central Bank introduced new regulations for consumer lending and credit cards back in September 2017 amid concern about growing household debt. In the Philippines, despite a slowdown of GDP growth, the personal card loan market has continued to expand steadily as personal consumption grows. In the fiscal year ending March 2021, on the other hand, economy in these 2 countries have started to deteriorate as the coronavirus spreads. While an economic environment is likely to be challenging, both at home and abroad, all the employees in our group are united in trying to respond to capital needs of consumers; and two, inquiries about borrowing and repayment with speed, kindness and flexibility while trying to prevent the spread of the virus. Please turn to Page 6. On this page, you can find the past evolution of the size of the personal card loan market. As the left graph shows, according to preliminary data from December, the total market shrunk 1.7% to JPY 10.380 trillion. It has continued to contract as the market served by banks post negative growth. Looking at subsegments of the market served by banks, shown at the top right, has continued to shrink with 4.3% year-on-year contraction to JPY 6.40 trillion (sic) [ JPY 6.04 trillion ] in December. One of the factors behind this contraction is bank's voluntary measures to respond to the Japanese Bankers Association's new policy guideline. The nonbank market shown at the bottom right, on the other hand, has continued to post moderate growth over the last few years with 2% year-on-year growth to JPY 4.330 trillion last December. The market served by consumer finance companies within the nonbank market, which has continued to expand steadily, grew to JPY 2.650 trillion in December. We will closely monitor a trend in the personal card loan market, however, as its future course becomes less visible with COVID-19. Please go to Page 7 for summary of our financial results. Receivables in the loan and credit card business shown at the top, grew by 3.5% to JPY 915.8 billion, thanks to growth both in loan and credit card receivables. Guaranteed receivables increased by 1.7% to JPY 1.2332 trillion. Receivables of our offshore financial business, on the other hand, shrunk by 11.4% to JPY 201.5 billion due to the deconsolidation of Bank BNP despite steady growth of 12.4% of EASY BUY's receivables. As a result, the total receivables grew by 1.1% to JPY 2.3598 billion. Operating revenue in the loan and credit card business grew by 3.1% to JPY 149.2 billion, thanks mainly to the growth of interest income in the loan business and credit card revenue. Operating revenue in the guarantee business came down by 1.1% to JPY 68.5 billion. This is because while guaranteed receivables grew moderately, revenue decreased due to regular revisions to guarantee fees. Operating revenue in overseas financial business declined by 1.2% to JPY 56.3 billion due to deconsolidation of Bank BNP despite 9.2% growth of EASY BUY's revenue. As a result, the total operating revenue increased by 0.9% to JPY 279.5 billion. On the cost front, financial expenses dropped 27.3%, thanks to ACOM's stable funding environment and deconsolidation of Bank BNP. Provision for bad debt grew by 7.8%, largely due to an increase of ACOM's additional provision booked for possible loan losses. Other operating expenses grew of 1.5%, resulting mainly from an increase in labor cost, advertising and promotional expenses and tax and public dues. On the other hand, we booked JPY 19.7 billion of an additional reserve for loss on interest repayment, which we did not initially plan. As a result, the total operating expenses stood at JPY 203.8 billion. The total operating expenses came down by 7.1% since JPY 39.4 billion of additional reserve for loss on interest repayment was booked in the year ended March 2019. Later, Mr. Okamoto will give you more details about the additional reserve. This resulted in consolidated operating profit of JPY 75.6 billion, ordinary profit of JPY 75.1 billion and profit attributable to the shareholder, the parent company, of JPY 59.6 billion. Next, please go to Page 8 for breakdown by segment. Looking at the breakdown of receivables among different business segments. As is illustrated by the graph at the top left, the loan and credit card business accounted for 38.8%, the guarantee business representing 52.3% and overseas operations, 8.5%. The split of operating revenue illustrated by the graph at the top right, on the other hand, is the loan and credit card business accounting for 53.4% while the guarantee business representing 24.5% and offshore operations 20.1%. Please find the past trend of operating profit before interest repayment expenses by segment at the bottom right. The loan and credit card business accounted for 50.1% with JPY 47.7 billion while the guarantee business and overseas operations represented 26.2% and 23.5% with JPY 25 billion and JPY 23.3 billion (sic) [ JPY 22.3 billion ] each. Please go to Page 6 (sic) [ Page 9 ] for an overview of the loan and credit card business. The total receivables on the top left grew by 3.5% to JPY 915.8 billion with loan receivables of JPY 840.8 billion and credit card receivables of JPY 75 billion. Operating revenue shown at the top center grew by 3.1% to JPY 149.2 billion, mainly thanks to an increase in interest income and credit card revenue. Operating profit before provision for loss on interest repayment shown on the right, on the other hand, dropped by 6.9% to JPY 47.7 million, due largely to an increase in additional provision booked for possible loan losses. The average yield of the loan and credit card business shown at the bottom center dropped by 5 basis points to 15.05%. The ratio of bad debt expenses shown at the bottom right increased by 9 basis points to 3.29%. Later, Mr. Okamoto will talk about an increase in the ratio of bad debt expenses and factors behind changes in additional provision for bad debt. Please go to Page 11 for overview of the guarantee business on a consolidated basis. During the fiscal year under review, while they kept voluntary measures in place, which they introduced after the Japanese Bankers Association issued a policy guideline, we try to maintain close communication and further enhance collaboration with our partner banks. As is shown at the top left, guaranteed receivables of ACOM and MU Credit Guarantee were JPY 1.0716 trillion and JPY 161.5 billion, respectively, with moderate 1.7% growth of combined receivables to JPY 1.2332 trillion. Operating revenue at the top center was JPY 57.6 billion for ACOM and JPY 10.9 billion for MU Credit Guarantee with a 1.1% decline of combined revenue to JPY 68.5 billion. Operating profit shown to its right dropped by 1% to JPY 25 billion. While guaranteed receivables grew 1.7%, operating revenue declined due to a regular review of our guarantee fees. Please go to Page 13. Please find target markets and an overview of our offshore operations on this page. We continue to try to aggressively expand our international financial activities during the fiscal year under review. EASY BUY, which operates loan business in Thailand, has continued to steadily grow the number of new customers with aggressive promotion of its Umay+ brand in its effort to improve its brand equity and expand new customer acquisition. The company continues to enjoy the #1 position in the nonbank industry in the country, and as the leading company, it has built a competitive advantage in brand equity and customer traffic. In the Philippines, ACOM Consumer Finance Corporation, which started personal lending business in the Metro Manila area back in July 2018, has grown its receivables as planned. The company has aggressively promoted marketing activities. And as of the end of December 2019, it had a total of 5 branches and 15 booths. While closely monitoring impact from the coronavirus, we will continue to conduct market research, mainly in ASEAN countries for possible entry in the future. Please turn to Page 14 for overview of our international operations. Please find receivables, operating revenue and operating profit in Japanese yen in the top row. Receivables outstanding shown at the top left shrunk 11.4% to JPY 201.5 billion due to the deconsolidation of Bank BNP. Please find the magnitude of currency impact below the bar graph. EASY BUY enjoyed an JPY 11.5 billion positive impact from the appreciation of the Thai baht against the yen, which, in turn, helped the growth of its receivables. As is shown at the top center, despite steady growth of EASY BUY's interest income, the total operating revenue dropped by 1.2% to JPY 56.3 billion due to the deconsolidation of Bank BNP. On the other hand, operating profit, shown to the right, grew by 13.1% to JPY 22.3 billion. Please find EASY BUY's receivables, operating revenue and operating profit in local currency at the bottom of the page. Its receivables outstanding shown at the bottom left, grew by 5.6% year-on-year to THB 55.4 billion, while operating revenue shown at the bottom center grew by 6.1%, THB 15.4 billion. And operating profit shown on the bottom right, increased by 10.2% to THB 6.5 billion. The growth of operating profit was more significant than the operating revenue growth of 6.1%, thanks to a decline in financial expenses and better control of other operating expenses. The company's marketing strategy, including its aggressive sales activities, advertising strategy as well as its branch strategy are paying off with steady growth in new customer acquisition. The rate of growth of its receivables, however, is expected to slow down due to the new lending regulation introduced in September 2017. On top of that, with COVID-19, the number of new customers is likely to come down, and the rate of growth of its receivables is expected to slow down year-on-year. We will closely monitor market trends. Improving the quality of loan asset remains the most important challenge for the business. The company will carry out marketing activities while taking measures to prevent the spread of the virus to make share. Safety of its customers and employees will be the top priority. Please turn to Page 19. Last but not least, I will talk about dividend. Our basic dividend policy is the one where we try to have stable and sustainable return to our shareholders and further improve it while looking at our financial results, our equity and operating environment. In the fiscal year under review, revenue and profits increased steadily, thanks to the growth of receivables in the 3 core businesses. However, while the number of claims with interest payment has continued to steadily come down, the actual number of claims was greater than we anticipated. And as a result, we decided to top up the reserve to reflect the market environment and more recent trend of claims. On top of that, as for operating environment goes, there is not much visibility due to COVID-19. Lastly, the equity-to-asset that we target is 20%. With guaranteed asset included in the total consolidated asset, the current equity-to-asset ratio of 16.5% is still below that target. In this environment, we will pay JPY 2 per share for the second half of the year under review as we initially expected. As for interim and year-end dividends for the year ending March 2021, we have made no decision yet since we are not able to make any rational earnings forecasts. Once it has become possible to make forecast, we will immediately announce earnings and dividend guidance. And this will do for an overview of financial results for the year ended March 2020. In our effort to live up to expectation of investors, we will endeavor to become a corporate group, which maximizes corporate value through sustainable growth and contributes to the society in various areas while keeping close communication with MUFG. I would like to end my presentation by asking for your continued support and guidance to our group. Thank you for your attention.

I'm going to spend the next 20 minutes or so to go over loan business, guarantee business, interest repayment, provision for bad debt and financial expenses, and lastly, an impact from the coronavirus outbreak by focusing mainly on ACOM and some of its highlights. Please go to Page 10 of the presentation. Firstly, I'm going to go over ACOM's nonconsolidated loan business by focusing mainly on its receivables. Loan receivables, shown on the top left, grew by 2.3% to JPY 840.8 billion, mainly thanks to an increase in the number of accounts driven by new customer growth. Receivables in the mainstay unsecured lending business increased by 2.4% to JPY 836.6 billion. The number of accounts in the loan business, shown at the bottom left, grew by 3.2% to JPY 1.589 million. The reason the company missed its full year target for receivables is presumably because of the impact from the virus in March and beyond. More specifically, additional lending to existing borrowers and acquisition of new customers dropped as people have stayed home and have less needs for money. Operating revenue shown at the top center grew by 2.2% to JPY 139.6 billion, mainly thanks to an increase in interest income with loan growth. The average loan yield, shown at the top right, in the overall loan business declined by 3 basis points to 15.18%, and it was 15.2% in the unsecured loan business. The reason why the average yield was 8 basis points higher than the initial target is because of growth in new customer acquisition, which, in turn, resulted in a higher proportion of borrowers who pay 18% interest rate. The number of new customers shown at the bottom center grew by 2.7% to 261,800, overshooting the initial target. We carry out strategic marketing initiatives, including an ad program emphasizing our competitive advantage, such as instant issuance of credit cards as well as improved Internet and website functions. And also introduce a policy of spending on advertising and promotion. The ratio of bad debt expenses, shown on the bottom right, increased by 3 basis points to 3.16% with stable quality of loan asset. Please turn to Page 12 next for guarantee business. While this page shows an overview of ACOM's nonconsolidated guarantee business, a trend of receivables and revenue profit is almost the same between nonconsolidated and consolidated results. Guaranteed receivables shown at the top left grew moderately by 1.2% year-on-year to JPY 1.0716 trillion. Operating revenue shown at the top center declined by 1.9% to JPY 57.6 billion, while operating profit shown on the top right, dropped by 2.8% to JPY 21.4 billion. Operating revenue decreased despite 1.2% growth of guaranteed receivables due to a regular review of guarantee fees. Receivables for claim shown at the bottom center, increased 3.3% to JPY 54.3 billion. Receivables for claim increased only moderately due to a lower proportion of newer customers, coupled with slower growth of guaranteed receivables. The ratio of bad debt expenses, shown at the bottom right, dropped by 10 basis points to 2.39%. The reason for this is twofold: First, the proportion of newer customers who are more likely to default came down; second, loan loss is better controlled as we have agreed to request from customers whose loans have become receivables for claims for long-dated installment repayments. Please turn to Page 15 for claims for interest repayments. As is shown on the right, during the fiscal year under review, the number of claims for interest payment decreased by 8.9% to 24,700 and was below our initial expectation of a reduction of 20%. We believe this trend is attributable to a law firm, which launched ad activities using flyers and increased TV commercials. Given that the number of claims during the fiscal year under view was greater than we initially anticipated, we decided to book additional reserve to reflect a more recent market environment. Going forward, we now expect a 20% decrease of claims in the year ending March 2021 and another 30% decline in the year ending March 2022. Just for your information, the number of claims in April dropped by 27.3% to 1,600. The virus outbreak might have had an impact here since the law firm I mentioned earlier has reduced the number of employees who come to the office. While we expect the number of claims to continue to steadily come down, we'll closely monitor their trend since requests for interest repayment are highly susceptible to changing external environment, such as ad activities of some law firms. Please go to Page 16. Let me now talk about the evolution of loss on interest repayment. As is shown on the right, in the year ended March 2020, interest repaid was JPY 30.6 billion, while principal written off due to interest repayment claims was JPY 3.7 billion with a total of JPY 34.4 billion taken out from a reserve of JPY 102.3 billion. Let me now talk about the additional reserve we booked for loss on interest repayments. We expected a 20% decrease of claims for the year ended March 2020 and another 25% decline for the year ending March 2021. Given a more recent trend of claims in the market, we revisited our previous assumption for amount to be claimed going forward and consulted our CPAs and we concluded we would need a reserve of JPY 87.6 billion and we'll book the difference as a top-up. As the image at the bottom center shows, a total reserve of JPY 87.6 billion will cover 4 years of future claims until the year ending March 2024. We have decided to partially change our provisioning policy for loss on interest repayment, starting in the current fiscal year in progress. I will use the graphs at the bottom to explain. As the graph at the bottom left shows, under the previous provision policy, we booked the entire difference between the amount, which we initially assumed will be claimed in the future and the likely amount based on a more recent trend even when we had sufficient reserve currently sitting on the balance sheet. As the graph at the bottom center shows, under the new provisioning policy, we will top up the reserve on a quarterly basis when the outstanding reserve balance dips below the minimum level of reserve, we believe, we need to have and only top up the reserve to bring it to the originally assumed level of reserve. As is mentioned on the bottom right, we will revisit our provision policy when the outstanding reserve dips far below the minimum level and when we develop a new midterm business plan every 3 years. Lastly, given the time lag of around 8 months between making claims and reaching settlement, we expect the amount to be taken out from the reserve in the year ending March 2021 will come down by 10% to 15% year-on-year. Since the trend of interest repayment claims is highly susceptible to changes to external environment, we'll continue to revisit our reserve to see if we have enough sitting on the balance sheet. Please go to Page 17. Now I would like to touch on provision for bad debt. Consolidated provision for bad debt, shown at the top left, increased by 7.8% to JPY 81.9 billion, mainly due to an increase at ACOM and EASY BUY. Provision for bad debt on a nonconsolidated basis outcome, shown at the top center, increased by 8.9% to JPY 61.9 billion. This is because -- but the expenses increased by JPY 1 billion and a change in reserve for loan losses for loan and credit card operations was an increase of JPY 3.7 billion, while change in reserve for the guarantee business was an increase of JPY 300 million. I now would like to explain factors behind the increase in bad debt expenses and increase in change in reserve for loan losses for loan and credit card operations. As for bad debt expenses, as is shown at the bottom left, they increased by JPY 1.8 billion to 3.29% in the loan and credit card operations while they came down by JPY 700 million to 2.39% in the guarantee business. The reason for the decrease in the guarantee business is because the proportion of newer customers who are more likely to default dropped. On top of that, we were able to control loan losses by agreeing to request for long-term installment repayment by customers whose loans have become receivables for claim. Next, I would like to talk about an increase in change in reserve for loan losses for loan and credit card operations. There are 2 reasons: first, provision increase with the expansion of receivables; and second, while we have agreed to long-term installment repayment and settled with troubled borrowers in the mainstay loan business, with some borrowers, it has taken more time to negotiate, which resulted in an increase in reserve ratio. The NPL ratio in the loan business, shown at the bottom center, increased by 8 basis points to 7.14%, while loan loss ratio including principal write-offs associated with interest repayment claims decreased by 5 basis points to 3.63% with stable loan quality. Provision for bad debt for EASY BUY, shown at the bottom right, increased 8.5% in local currency, which you can find below the bars. This is mainly attributable to an increase in loan losses and increase in change in additional provision resulting from receivable growth. Please go to Page 18 for financial expenses. During the fiscal year under review, amid an improving funding environment and low interest rate environment, we continued to try to secure cheap and stable funding. Moreover, given BOJ's monetary policy and our operating environment, we tried to further control our financial expenses, bring debt duration to an optimal level and realize evenly distributed maturity. As a result, consolidated financial expenses, shown on the top left, came down by 27.3% to JPY 8.2 billion, thanks to a reduction in financial expenses on the part of ACOM and the deconsolidation of Bank BNP. Nonconsolidated financial expenses at ACOM, shown at the top center, dropped by 17.3% to JPY 4.6 billion as the stable funding environment continued. Outstanding debt shown at the top right, decreased by JPY 12.2 billion to JPY 612.3 billion with the average borrowing cost coming down to 14 basis points to a stable 0.76% as is illustrated by the line graph. The pie chart at the bottom left shows funding sources and their proportions. The split between direct and indirect funding is 36.4% and 63.6% with funding from MUFG representing 34.5%. In a low interest rate environment, the proportion of fixed-rate funding is 87.6% while long-term funding is 95.1%. Please go to Page 21. Last but not least, I would like to talk about the impact from COVID-19. Following the declaration of state of emergency in April, we have put in place measures to prevent the spread of the virus and have made the safety of our customers and employees our top priority. To introduce some of the steps we have taken, we have significantly reduced the number of employees who come to the office since April 13. We have closed branches, shortened operating hours of our automated loan contract machines and reduced the number of operating days and hours at call centers and other service centers. Despite reduced operational activities, we have tried to respond to requests of every one of our customers by answering questions about borrowing and repayment with speed, kindness and flexibility. We will make sure we stick to the customer-first policy. Looking at a month-on-month growth trend of receivables, shown on the bottom left, there was no major change in a trend compared to year earlier in January and February when the first cases were reported. In March, however, when different prefectures issued a stay-at-home request, the month-on-month growth of receivables was about JPY 1.1 billion less compared to a year earlier. More recently, in April, when the government declared a state of emergency, the magnitude of the impact was more pronounced with negative month-on-month growth. As for the number of new loan applications and new customers, there was no change in trend in January and February as they continued to grow year-on-year. In March, however, the number of new applications posted negative year-on-year growth. And in April, the magnitude of negative growth became more significant. While the magnitude of impact on receivables, revenue and profits was limited in the year ending March 2020 with economic stagnation and the worsening of the Japanese economy expected to stay for a long time to come, the impact could be significant in the year ending March 2021. So we will closely monitor the situation. For your information, Page 22 and following pages show our midterm business policy, midterm business plan and capital policy. This will do for our financial results for the year ended March 2020. I'd like to end my presentation by asking for your continued support and guidance to our group. Thank you very much for your kind attention. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]