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

I'd like to extend my heartfelt appreciation to all of you for your kind support to and understanding of the 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 again. We ask for your kind understanding. In my presentation, I will touch on item numbers 1 to 4: business environment, trend of the personal card loan market, financial results summary, competition by segment; item #15, annual forecast for the year ending March 2022; and lastly, item #16, dividend status. Later, Mr. Okamoto, Chief PR and IR officer, will go over an overview of the 3 core businesses: interest repayment, provision for bad debt and financial expenses. Please go to Page 3 of the presentation. During the fiscal year under review, social and economic activities continued in Japan with preventive measures in place against COVID-19. The situation defies optimism with a possibility of another surge in cases of infection and economy remains difficult. More recently, while vaccination started mainly for medical professionals and the elderly, the situation remains uncertain with the state of emergency reissued in April. Since the situation is likely to remain uncertain with the coronavirus, we will keep monitoring the situation closely. In the 2 countries outside Japan where we operate, economy is hit by COVID-19 and remains challenging with restrictions on activities. First, in Thailand, its economy is in a difficult situation with negative GDP growth as activities are restricted following the declaration of a state of emergency. On the other hand, as positive GDP is forecast going forward, we expect a gradual recovery of the personal loan market. With the surge in new cases of COVID-19 since April, however, we need to closely monitor the situation. Turning to the Philippines, where a viral variant has been confirmed, the coronavirus continues to spread. With reinforced community-based quarantine measures imposed by the government, economy remains difficult. Turning to the market in Japan and a competitive environment is shown at the bottom left. With weaker personnel spending triggered by COVID-19, the personal card loan market shrunk. While personal consumption showed a sign of recovery in the third quarter with various government campaigns canceled and a state emergency reissued, the rate of recovery has slowed. While the number of claims for interest repayment in the nonbank market has continued to steadily decrease, we need to keep monitoring the situation carefully as the trend in interest repayment request is susceptible to changes to the external environment. Turning to the bottom right. In Thailand, the personal card loan market contracted with weaker personal consumption due to COVID-19. Moreover, the maximum lending rate was reduced from 28% to 25% on August 1 in 2020 to help customers hit by the coronavirus, including existing borrowers, following the issuance of a notice by the Thai Central Bank. We need to closely monitor its impact on operating revenue. In the Philippines, where movement is severely restricted, mainly in the Manila metropolitan area, we operate by reducing staff who come to the office. While economy remains difficult, both at home and abroad, our group will take preventive measures to ensure the safety of our customers and employees, and try to answer questions from our customers about borrowing and repayment with flexibility and kindness. Please turn to Page 4. 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 8.2% to JPY 9.59 trillion. With personal consumption, including leisure, travel and dining out significantly dampened by the coronavirus, both the markets served by banks and the markets served by nonbanks have continued to contract. Looking at subsegments of the market, as shown at the top right, the bank market, which shows an accelerated pace of contraction, shrunk by 9% year-on-year to JPY 5.56 trillion in December. Factors behind the contraction include an impact from the guideline issued by the Japanese Bankers Association back in March 2017 and the deterioration of consumer spending triggered by COVID-19. The nonbank market, shown at the bottom right, which had continued to post moderate growth in recent years, shrunk by 7% to JPY 4.03 trillion in December as consumer spending deteriorated. With the situation likely to remain uncertain due to the coronavirus, it will be some time before loan demand recovers. However, as more people get vaccinated and a stay-home request and other restrictions are lifted between summer and autumn, we expect loan demand will come back and that the personal card loan market will be back on a moderate recovery path. Please go to Page 5 for an overview of our financial results. The total receivables on a consolidated basis, shown at the top, contracted by 5.3% to JPY 2.2351 trillion. Receivables in the loan and credit card basis shrunk by 5.8% to JPY 862.8 billion because loan demand decreased as people stayed home. Guaranteed receivables dropped by 5.1% to JPY 1.170 trillion. Receivables of our offshore financial operations decreased by 3.9% to JPY 193.7 billion due to an adverse impact on EASY BUY from the yen's appreciation against the Thai baht. Operating revenue on a consolidated basis dropped by 4.7% to JPY 266.3 billion. Operating revenue in the loan and credit card business decreased by 3.2% to JPY 144.4 billion. Operating revenue in the guarantee business came down by 6.3% to JPY 64.2 billion. Operating revenue in overseas financial business, on the other hand, declined by 7.4% to JPY 52.1 billion, due mainly to the lowering of the maximum lending rate in Thailand and the deconsolidation of Bank BNP. Consolidated operating expenses came down by 17.9% to JPY 167.4 billion. Looking at operating expenses by cost item. Financial expenses dropped 28.7%, thanks to a decrease of outstanding debt at ACOM and EASY BUY and the deconsolidation of Bank BNP. Provision for bad debt came down by 19.2%, thanks largely to a decrease in reserve for loan losses at ACOM. Other operating expenses, on the other hand, increased 1.4%, mainly because computer rate expenses and labor costs grew at ACOM while there were no interest repayment rate expenses. This resulted in consolidated operating profit of JPY 98.8 billion with other profits also growing. Later, Mr. Okamoto will walk you through factors behind the drop in financial expenses and provision for bad debt. Next, please go to Page 6 for a breakdown by segment. Looking at a 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 38.6%, the guarantee business representing 52.3% and overseas operations, 8.7%. 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 54.2%, while the guarantee business representing 24.1% and offshore operations, 19.6%. Please find our operating profit by segment at the bottom right. The loan and credit card business accounted for 53.3% with JPY 52.7 billion, while the guarantee business and overseas operations represented 25.3% and 20.1% with JPY 25 billion and JPY 19.8 billion, respectively. Please go to Page 17. Next, I would like to go over full year guidance for the year ending March 2022. As an impact from COVID-19 is expected to remain uncertain both at home and overseas, we have produced a full year plan based on the recent trend and information now available to our group. Firstly, in the loan and credit cards and guarantee businesses. While we believe it will be some time before domestic loan demand recovers, as more people get vaccinated and a stay-home request and other restrictions are lifted between summer and autumn, we expect receivables to start growing again at prepandemic rate in the third quarter. We project receivables to grow 1.8% to JPY 878 billion in the loan and credit card business and 3% to JPY 1.2048 trillion in the guarantee business. Next, talking of our international financial operations. Since positive GDP growth is forecast in Thailand, which represents most of our receivables, we anticipate a gradual recovery of receivables. With the recent increase in new cases of COVID-19, however, we cannot completely dispel concerns about an impact from the virus and project 3.3% receivable growth to JPY 200.1 billion. Based on these assumptions, we forecast receivables on a consolidated basis to grow 2.5% to JPY 2.2904 trillion. Turning to our operating revenue next. We project revenue to decline by 1.7% to JPY 142 billion in the loan and credit card business. This is because while we expect receivables to grow, we assume average receivables to contract slightly. In the guarantee business, we project a revenue decrease of 2.9% to JPY 62.4 billion. Here, again, we expect average guaranteed receivables to shrink slightly and guarantee fees to come down, while we assume receivable growth. Lastly, outside Japan, we lowered the maximum lending rate from 28% to 25% on August 1 in 2020 upon request from the Thai Central Bank. We project interest income to drop as a result and forecast a 1.8% revenue decrease to JPY 51.2 billion. For these reasons, we project consolidated operating revenue to decline by 2.1% to JPY 260.7 billion. Turning to operating expenses next. We expect financial expenses to come down by 14.8% due to a decrease of outstanding debt at ACOM and EASY BUY and lower borrowing costs resulting from refinancing. As for provision for bad debt, we assume an increase of bad debt expenses as well as an increase of reserve, mainly due to the expected growth of receivables at ACOM and project provision for bad debt to increase by 18.4%. Lastly, we project other operating expenses to grow 2.1% due largely to an increase in advertising and promotional expenses and fees at ACOM. Based on these assumptions, we will forecast an 8% increase in the total operating expenses to JPY 180.8 billion. As a result, we expect operating profit to come down by 19.2% to JPY 79.9 billion and other profits to decrease as well. Please turn to Page 18. Last but not least, I will touch on dividends. In our basic dividend policy, we try to have stable and sustainable return to our shareholders and further improve it while looking at our financial results, our equity and our operating environment. In the fiscal year under review, with lower loan demand due to COVID-19, loan and credit card receivables as well as guaranteed receivables dropped significantly. Operating revenue decreased as well due mainly to the contraction of receivables. Operating profit, on the other hand, grew thanks to lower financial expenses and provision for bad debt and no interest payment-related expenses. The equity-to-asset ratio with guaranteed asset included in the total consolidated asset temporarily reached our midterm target of 20% due to the contraction of receivables. Lastly, as for the operating environment, drawdown from reserve for interest repayment decreased as we expected. While the number of claims has continued to come down, the number of claims filed by some law firms has remained high. We need to closely monitor the situation. In this environment, we will pay JPY 3 per share for the second half of the year under review, as we initially planned. For the year ending March 2022, we assume receivables to grow, as I explained earlier. We, however, expect revenue to decrease since we anticipate average receivables will shrink. We expect operating profit to decline because we assume provision for bad debt will increase mainly due to receivables growth. As for the equity-to-asset ratio, while we expect receivables to increase, we assume the ratio to stay above 20%. Last but not least, as for the operating environment, there is increasing uncertainty about future prospects with the state of emergency recently issued for the third time, following a resurgence of COVID-19 cases. Given the situation, we plan to pay JPY 3 per share in each half with a total annual dividend of JPY 6 for the year ending March 2022. This will do for an overview of financial results for the year ended March 2021. In our effort to live up to expectation of investors, we will endeavor to become a corporate group which maximizes its corporate value through sustainable growth and contributes to the society in various areas, while keeping close partnership with MUFG. I would like to end my presentation by asking for your continued support and guidance to our firm. Thank you for your kind attention.

I'm going to spend the next 20 minutes or so to go over loan and credit card business, guarantee business, international financial business, interest repayment, provision for bad debt and financial expenses. First, please go to Page 7 of the presentation. First of all, I would like to give an overview of the loan and credit card business. The combined receivables, shown on the top left, shrunk by 5.8% to JPY 862.8 billion with loan receivables of JPY 784 billion and credit card receivables of JPY 78.7 billion. Hit by COVID-19, new and additional borrowings dropped significantly as demand for loans for such activities as leisure, travel and dining out decreased. Operating revenue, shown at the top center, decreased by 3.2% to JPY 144.4 billion mainly due to the contraction of receivables. Operating profit, shown to its right, on the other hand, grew by 87.9% to JPY 52.7 billion. Three factors are behind the profit growth: lower financial expenses; lower provision for bad debt; and the additional result of JPY 19.7 billion for loss on interest repayment, which was booked in the year ended March 2020. Later, I will come back to what's behind the drop in financial expenses and provision for bad debt. The average loan yield, shown at the bottom center, stood at 14.85% for the combined loan and credit card business, while it came down by 17 basis points to 15.01% for the loan business. There are 2 factors behind the average yield compression in the loan business: first, a decrease of the proportion loan asset represented by the 15% to 18% interest rate segment, resulting from fewer new customers; second, an impact from the across-the-board rate cut that we introduced in September 2019. Bad debt expenses, shown on the bottom right, came down by JPY 900 million for 2 different reasons: first, with weaker loan demand, the proportion of newer customers who are more likely to default decreased; second, as they have less needs for loans, borrowers might have used extra cash on hand to repay their debt. While the ratio of bad debt expenses has gone up temporarily, we expect it to gradually come down once receivables start to grow after impact from the coronavirus peaks out. Please turn to Page 8. Please find an overview of nonconsolidated loan business of ACOM on this page. The trend of its receivables, revenue and profit is similar to that of consolidated loan and credit card business. The number of new customers, shown at the bottom center, dropped by 31.3% to 179,904, mainly due to less demand for loans for such uses as leisure, travel and dining out. More recently, with another state of emergency issued, there continues to be uncertainty about future prospects. We, however, anticipate that as more people get vaccinated and a stay-home request and other restrictions are lifted between summer and autumn, demand for loans for leisure, travel and eating out will come back. Going forward, to gain 230,000 new customers, we plan to spend on advertising proactively, while also looking at a loan demand situation. Please turn to Page 9 for an overview of the guarantee business on a consolidated basis. As is shown at the top left, guaranteed receivables of ACOM and MU Credit Guarantee were JPY 1.0122 trillion and JPY 157.7 billion, respectively, with a 5.1% contraction of combined receivables to JPY 1.170 trillion. Operating revenue, shown at the top center, was JPY 53.4 billion for ACOM and JPY 10.7 billion for MU Credit Guarantee with a 6.3% decrease of combined revenue to JPY 64.2 billion. On the other hand, operating profit, shown to its right, grew by 0.2% to JPY 25 billion. Operating revenue decreased 6.3% compared to a 5.1% contraction of guaranteed receivables due to a regular review of guarantee fees. Operating profit grew despite a drop in operating revenue, thanks to lower provision for bad debt. Please turn to Page 10. Please find an overview of ACOM's nonconsolidated guarantee business on this page. The trend of its receivables, revenue and profit is very similar to that of consolidated guarantee business. Receivables for claim, shown at the bottom center, dropped by 5.1% to JPY 51.5 billion. New customers decreased as a result of a guideline issued by the Japanese Bankers Association and weaker loan demand due to COVID-19. This, in turn, resulted in a lower proportion of newer customers which has helped to improve the stability of guaranteed loan asset, pushing down delinquent loans we had to acquire. The ratio of bad debt expenses, shown at the bottom right, dropped by 2 basis points to 2.37% with bad debt expenses decreasing by JPY 1.7 billion. Two factors are responsible for the decrease in bad debt expenses: first, receivables for claim declined; second, we succeeded in controlling loan losses by accommodating a request for long-term installment repayment from borrowers whose loans became receivables for claim. Please turn to Page 12. Here, I would like to give an overview of our financial business outside Japan. Please find receivables, operating revenue and operating profit in Japanese yen in the top row. Receivables at EASY BUY, shown at the top left, shrunk by 3.9% to JPY 193.7 billion due to a JPY 10.5 billion adverse impact resulting from the stronger yen against the Thai baht. As is shown at the top center, operating revenue dropped 7.4% to JPY 52.1 billion. Operating profit, shown to the right, decreased 11.2% to JPY 19.8 billion. Three factors are responsible for the decrease in our operating revenue: first, Bank BNP was deconsolidated in the first quarter of last fiscal year; second, the yen appreciated against the Thai baht; and lastly, in Thailand, the maximum lending rate was lowered from 28% to 25% effective on August 1 in 2020, following the issuance of a notice by the central bank to help customers hit by COVID-19, including existing borrowers. 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 1.3% to THB 56.1 billion. Operating revenue, shown at the bottom center, dropped 1.7% to THB 15.1 billion, while operating profit, shown at the bottom right, decreased by 8.6% to THB 5.9 billion due to higher provision for bad debt. Next, please go to Page 13 for claims for interest repayment. As is shown on the right, the number of claims for the year under review decreased by 10.5% to 22,100, which is lower than the 20% decline we initially expected. We believe this is attributable to our law firm, which launched ad activities using flyers and also increased TV commercials. Given the law firm's recent ad activities and the number of claims recently filed, we expect the number of claims to drop between 10% and 15% for the year ending March 2022. This, however, means a lower decline than the 20% decrease for the year ending March 2021 and the 30% decline for the year ending March 2022, which we projected when we revisited our assumptions at the end of March 2020. While we expect the number of claims to continue to steadily come down, we will closely monitor their trend since request for interest repayment are highly susceptible to a changing external environment, such as ad activities of some law firms. Please go to Page 14. Let me now talk about the evolution of loss on interest repayment. As is shown on the right, during the year under review, interest repaid was JPY 27.3 billion, while principal written off due to interest repayment claims was JPY 3.4 billion, with a total of JPY 30.8 billion taken out from a reserve of JPY 87.6 billion from the end of the previous year, reducing the total outstanding reserve to JPY 56.7 billion. The drawdown during the year under review dropped 10.3% year-on-year compared to the 10% to 15% reduction we initially anticipated. For the year ending March 2022, we expect a decrease of drawdown of around 20% as a result of review of assumptions we conducted at the end of March 2020. However, as I explained earlier, the number of request for interest repayment has stayed high than we initially expected. If the situation continues, drawdown from our reserve might not come down as quickly as we anticipate. Since claims for interest repayment are susceptible to changes in our external environment, we'll continue to examine the difference between our initial projections for our reserve balance and actual balance every quarter to see if we have a reasonable and sufficient level of reserve sitting on the balance sheet. Please go to Page 15. Now I'd like to touch on provision for bad debt. Consolidated provision for bad debt, shown at the top left, dropped by 19.2% to JPY 66.1 billion, largely thanks to a reduction at ACOM. Provision for bad debt on a nonconsolidated basis at ACOM, shown at the top center, decreased by 25% to JPY 46.4 billion. Bad debt expenses dropped by JPY 2.6 billion, while our change in reserve for loan losses for loan and credit card operations was a decrease of JPY 12.5 billion. Our change in reserve for the guarantee business was a decrease of JPY 200 million. Now I would like to go over factors behind the drop in reserve for loan losses for loan and credit card business and for the guarantee business. Reserve for loan losses for loan and credit card operations decreased for 3 reasons: first, receivables shrunk due to weaker loan demand; secondly, as they had less needs for loans, borrowers used extra cash on hand to pay back their debt, which in turn lowered our reserve ratio; thirdly, as we accommodated requests from borrowers with long-standing delinquent loans for long-term installment repayment, the proportion of settled loans with a lower reserve ratio increased, which in turn pushed down our reserve ratio. As COVID-19 cases surged, loan demand dropped dramatically. This, in turn, resulted in a widening gap between customers' line of credit and their outstanding debt balance. As a result, the level of reserve for loan losses decreased. In the year ending March 2022, with a gradual resumption of economic activities, which have remained sluggish, and the expansion of additional borrowings, we expect to have greater use of the reserve. Out of concern for insufficient reserve, we decided to adjust the reserve and booked JPY 2.5 billion of additional provision in the fourth quarter. Next, our reserve in the guarantee business decreased for 2 reasons. First, guaranteed receivables shrunk with weaker demand for loans. Second, the proportion of newer customers dropped as a result of fewer new customers. This, in turn, resulted in a lower loan loss ratio. But here, again, we expect to have greater use of reserve in the guarantee business in the year ending March 2022. As we did in loan and credit card business, we adjusted the reserve and booked additional provision of JPY 1.4 billion in the fourth quarter, out of concern for inadequate reserve. The NPL ratio in the loan business, shown at the bottom center, increased by 48 basis points to 7.62%, mainly due to the contraction of receivables resulting from lower loan demand while the ratio of bad debt expenses, including principal written off associated with interest repayment, increased by 6 basis points to 3.69%. While the NPL ratio went up temporarily, once the impact from COVID-19 peaks out and receivables start to grow again, we expect it to start to gradually come down. Provision for bad debt for EASY BUY, shown at the bottom right, increased 11% in local currency because of the increase in reserve in the fourth quarter. There are 2 reasons for this. First, in a skip payment scheme, EASY BUY keeps the existing delinquent status for those borrowers with delinquent loans of 90 days or less and extended their next repayment dates. They instead fully reserved for those loans, which were not written off in the year ended March 2021, which resulted in an increase in provision. Second, they booked additional provision for bad debt as they refined their loan loss projection model because of the gap between the initial projections and actual losses they were experiencing. Please move on to Page 16. Last but not least, I would like to touch on financial expenses. Consolidated financial expenses, shown on the top left, came down by 28.7% to JPY 5.8 billion, thanks largely to a reduction of 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 17.4% to JPY 3.8 billion as borrowing costs came down thanks to good progress made in refinancing in a low interest rate environment, while outstanding debt decreased. Outstanding debt, shown at the top right, dropped by JPY 87.9 billion to JPY 524.4 billion with an average borrowing cost coming down by 7 basis points to 0.69% as it 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 33.4% and 66.6% with funding from MUFG representing 35.6%. In a low interest rate environment, the proportion of fixed rate funding is 90.7%, while long-term funding is 99%. This will do for details of financial results for the year ended March 2021. I would like to end my presentation by asking for your continued support and guidance to our company. Thank you for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]