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

[Interpreted] This is -- from Public Relations and Investor Relations. Thank you very much for taking the time out of your busy schedules to attend this online results presentation. I'd like to take this opportunity to extend our appreciation to you for your kind support to our firm. There is one request that I'll have to make before we get started. We'll control the mute function, so please refrain from touching the button. Mr. Okamoto, Chief PR and IR Officer, will spend the next 15 minutes or so, including the time needed for translation to give you an overview of financial results for the year ended March 2022 and walk you through the new midterm business plan, which starts this fiscal year in progress. And later, we'd love to start entertaining questions from the participants. Thank you.

[Interpreted] This is Okamoto from Public Relations and Investor Relations. Thank you for attending the presentation. First, I would like to give you an overview of the consolidated financial results. For that, please go to Page 4 of the presentation. Firstly, as the impact of people staying home during the pandemic lasted longer than we anticipated at the start of the fiscal year under review, our recovery of receivables did not come soon. With the lifting of the state of emergency, however, there was a sign of recovery in the third quarter. The total receivables on a consolidated basis grew 0.4% to JPY 2,244.9 billion. Looking at receivables by business. Receivables in the loan and credit card business grew 1% to JPY 871.1 billion, while guaranteed receivables increased 0.3% to JPY 1,173 billion. Receivables of the overseas financial business, on the other hand, shrunk 0.5% to JPY 192.7 billion. Turning to Page 5. Operating revenue, as shown on the left, dropped 1.6% to JPY 262.1 billion. Operating revenue in the loan and credit card business decreased 1.5% to JPY 142.3 billion. Operating revenue in the guarantee business came down 2.2% to JPY 62.8 billion. Operating revenue in the overseas financial business, on the other hand, declined 1.7% to JPY 51.2 billion. Contraction of average receivables is mainly responsible for the decreases in revenue. Moving on to operating profit shown on the right. Operating profit came down 64.8% to JPY 34.7 billion since we topped up the reserve loss on interest repayment, given the recent trend of interest repayment claims. I'll come back to this with more details later. We, on the other hand, carefully reviewed the recoverability of our deferred tax asset in view of future earnings for the year ending March 2022 and beyond. In accordance with operating guidelines on the recoverability of deferred tax assets, we decided to book an additional deferred tax asset, which, in turn, reduced deferred income taxes by JPY 44.3 billion and boosted profit instead. As a result, profit attributable to the owners of the parent decreased 29.4% to JPY 55.6 billion. Lastly, as for dividends, shareholder return is one of the important management metrics. Our basic policy is to offer a good shareholder return while considering business performance and shareholders' equity. Operating revenues in the 3 core businesses were higher than the original targets. And operating profit, excluding provision for loss and interest repayment was also higher than the initial target. Equity to asset, including guaranteed receivables in the total consolidated assets reached an immediate target of 20%. With these results, we plan to increase the year-end dividend from JPY 3 per share to JPY 4 as we announced on April 20, bringing that annual dividend to JPY 7. Next, I'll walk you through some of the topics from the fiscal year under review. Please turn to Page 6. During the pandemic, we could not grow receivables as we anticipated. We, however, had good discussions as to what we could do in this challenging environment and believe we were able to seize for future growth. Firstly, I would like to touch on cardless and cashless initiatives. Last October, we launched a service which instantly issued a virtual Mastercard via a smartphone. This enables customers to shop online before they receive the physical card. It also comes with a function which allows customers to borrow and repay using 7 Bank's ATM without a physical card. We hope these 2 service offerings will help to improve customer convenience and grow receivables going forward. Please go to Page 7. We changed the concept of our TV commercials and started to use new TV personalities last August. Traditionally, we emphasized product features such as 0 interest rate and immediacy. In the new commercial, we focus on the concept, now is the time, invoking more specific user scenarios and occasions. Moreover, we have emphasized first with the top line outcome for the first time. We launched, Start (sic) [Challenge] What You Want to Start, project with the hope that [indiscernible] activities outside our core businesses, including the non-credit card business, we want to support people with the first experience and build a society where everybody can take on a challenge. Please move on to Page 8. To lay the groundwork for future growth, we set up subsidiaries from 2 different perspectives; further penetration of the domestic market and regional expansion. For further penetration of the domestic market, we founded GeNiE, embedded finance business in April. And for regional expansion, we set up a subsidiary in Malaysia last July. We plan to aggressively invest management resources in the 2 firms to grow and help them drive the Acom Group's further growth in the near future. Please go to Page 9. Our efforts and initiatives have earned us good external ratings. We ranked #10 in a joint survey by Mynavi and Nikkei in popularity of companies ranking in 2021 among new university graduates; #4 in 2022 and #2 in 2023. We were awarded as a Welfare Promotion Corporation under welfare award and certification system, Hataraku Yell. The award is given to only 5 companies for their outstanding efforts. Our welfare program and its high usage helped us win the award. Please go to Page 10. We also received good credit rating review. R&I upgraded us from BBB+ to A- last July. And more recently, they further upgraded us by 2 notches from A- to A+ this April. Please go to Page 12. First of all, I'd like to give an overview of the loan and credit card business. The combined receivables shown on the left, grew 1% to JPY 871.1 billion with loan receivables of JPY 783.1 billion and credit card receivables of JPY 87.9 billion. Despite the pandemic, we grew credit card receivables by JPY 9.1 billion since we effectively responded to customers' demand as it shifts from cash to cashless transactions and from physical stores to e-commerce sites. Loan receivables on the other hand shrunk 0.1% as loan demand remained weak, despite a sign of recovery in the third quarter and beyond. Please turn to Page 13. Operating revenue shown on the left, decreased by 1.5% to JPY 142.3 billion due to the contraction of average receivables. Operating profit shown on the right, dropped to negative JPY 8.8 billion due mainly to an additional reserve of JPY 58.9 billion for loss on interest repayment. Please go to Page 14. The number of new accounts grew 29.8% to 233,458. With the spread of the virus, new customers decreased the year before as loan demand dropped significantly. With the declaration of state of emergency, our recovery of loan demand slowed down at 1 point. With ad activities, focusing on the Internet, however, we were able to achieve target new accounts of 230,000. Going forward, while there continue to be uncertainty about the future prospect of the pandemic, with normalization of economic activities, we anticipate loan demand will recover and that new customers will go back to a pre-pandemic level. For the fiscal year in progress, we target 260,000 new accounts. Please turn to Page 15. The ratio of bad debt expenses shown on the right came down by 35 basis points to 3.04% with bad debt expenses decreasing by JPY 2.7 billion to JPY 26.4 billion. 2 factors are responsible for the decrease in bad debt expenses. As loan demand remained weak, borrowers use extra cash on hand to pay down their debt. Secondly, we accommodated a request for long-term installment repayment from borrowers with lower [indiscernible] loans or long-term delinquent loans. Please turn to Page 6 (sic)[16]. NPLs shown on the left, increased JPY 4.2 billion to JPY 64 billion, while the NPL ratio shown on the right, increased by 55 basis points to 8.17%. NPLs increased because delinquent loans of 3 months or longer migrated to restructure loans as we accommodated a request for long-term installment repayment from borrowers with lower mediated loans or long-term delinquent loans. This, in turn, resulted in an increase in restructured loans. Since restructured loans have a relatively low loan loss ratio, we believe it will help lower bad debt. Please turn to Page 17 for the loan guarantee business. Firstly, with a sign of recovery of loan demand in the third quarter and beyond, guaranteed receivables of ACOM and MU Credit Guarantee were JPY 1,012.3 billion and JPY 160.7 billion, respectively, with a 0.3% growth of combined receivables to JPY 1,173 billion. Please turn to Page 19. Operating revenue shown on the left was JPY 52.2 billion for ACOM and JPY 10.6 billion for MU Credit Guarantee with a 2.2% decrease of combined revenue to JPY 62.8 billion. Operating profit shown on the right, declined by 4.2% to JPY 23.9 billion. There are 2 reasons why operating revenue declined 2.2%, while guaranteed receivables grew 0.3%: Firstly, average receivables contracted; and secondly, guarantee fees came down due to a regular review. Operating profit, on the other hand, decreased mainly because of the drop in revenue was not fully offset by cost reduction. Please move on to Page 20 for receivables for claim and bad debt expenses. Receivables for claim shown on the left increased 5.7% to JPY 54.5 billion. 2 factors are behind this increase: Firstly, we accommodated a request for long-term installment repayment from borrowers whose loans became receivables for claim, which in turn, resulted in reduced bad debt, but as these loans remained as receivables for claim. And secondly, delinquent loans, which we had to acquire from some partner banks, temporarily increased. The ratio of bad debt expenses shown on the right, dropped by 41 basis points to 1.96% with bad debt expenses decreasing by JPY 4.2 billion. Next I'd like to give an overview of our financial business outside Japan. Please go to Page 21. Receivables of our overseas financial business in Japanese yen, shown on the left, decreased 0.5% to JPY 192.7 billion. This is because during a lockdown, easy buy, which represents most of the receivables, had its branches and books located inside retail facilities temporarily close and also had restricted outside sales activities. EASY BUY's receivables outstanding on a local currency basis, shown on the right, decreased by 0.8% to THB 55.6 billion. Please turn to Page 22. Operating revenue of international financial business, shown on the left, dropped 1.7% to JPY 51.2 billion while operating revenue of EASY BUY on a local currency basis, shown on the right, decreased 3.2% to THB 14.6 billion. EASY BUY's revenues came down because its interest income dropped after its maximum lending rate was lowered from 28% to 25% on August 1 in 2020. Please turn to Page 23. Operating profit of overseas financial business came down 7.7% to JPY 18.3 billion. Operating profit of EASY BUY, on a local currency basis, shown on the right, decreased by 6.7% to THB 5.5 billion due to a drop in revenue and higher provision for bad debt. Please go to Page 24 for requests for interest repayment. The number of requests for interest repayment for the fiscal year under review decreased by 7.2% to 20,500, which is a less significant drop than the 10% to 15% decline we initially expected. We believe this is attributable to a loan firm, which continued its aggressive ad activities using TV and radio commercials as well as flyers. Please go to Page 25. Total drawdown during the year under review dropped 4.5% to JPY 29.4 billion year-on-year compared to the 20% reduction we initially anticipated. Because we initially anticipated 20%, this is less significant drop than we initially anticipated. This is because interest repaid remained high as a proportion of cases, which end up in court involving greater repeat interest per claim increased. Let me now explain the additional reserves we booked for loss on interest repayment. At the end of March 2020, we expected an accelerated pace of decline of claims for interest repayment, a 20% decrease for the year ended March 2021 and a 30% decline for the year ended March 2022. In contrast, the number of requests actually came down 10.5% and 7.2%, respectively, as is shown on Page 24. Given the more recent trend of claims and the market environment, we revisited our previous assumption for amount to be claimed going forward and concluded, we would need a reserve of JPY 86.2 billion and booked the difference of JPY 58.9 billion as a top-up. The topped up reserve will cover full years of future claims until the year ending March 2026. Since claims for interest repayment are susceptible to changes in an external environment, we'll continue to examine the difference between our initial projections for reserve balance and actual balance every quarter to see if we have a reasonable and sufficient level of reserves are sitting on our balance sheet. Please move on to Page 27. Next I would like to touch on provision for bad debts. Consolidated provision for bad debt shown on the left, increased 3.4% to JPY 68.4 billion due to an increase at ACOM and EASY BUY. Provision for bad debt at EASY BUY, shown on the right, increased JPY 500 million to JPY 16.7 billion. With rapid spread of the virus in July and August of 2021, it had to reduce operating hours of its call centers, which in turn resulted in a temporary increase of delinquent loans and reserve for bad debt. The provision for bad debt on a nonconsolidated basis at ACOM increased by JPY 1.2 billion to JPY 47.7 billion. Bad debt expenses dropped by JPY 7 billion, while change in reserve loan losses for loan and credit card operations was an increase of JPY 7.9 billion, a change in reserve for the guarantee business was an increase of JPY 300 million. Please go to Page 32 for a new midterm business plan, which starts in the year ending March 2023. With the future prospect of pandemic remains uncertain, economic activities are gradually getting back to normal with the lifting of state of emergency, which gives us hope for a recovery of loan demand. So receivables with cashless settlement offerings, digital investments and the key initiatives, which I will talk about later, we target growth from a pre-pandemic levels in all of the 3 core businesses and expect combined receivables to increase by JPY 250 billion from fiscal year ended March 2022 to JPY 2.5 trillion, including the embedded financial -- finance business. In the final year of the business plan, we target JPY 984.2 billion, JPY 1,319.4 billion and JPY 203.8 billion of receivables for the loan and credit card business, guarantee business and the overseas financial business, respectively. Please go to Page 33. Firstly, assuming receivables are starting to steadily grow in the 3 core businesses, we target operating revenue to grow from -- for 3 consecutive years, as is shown on the left. In the final year of the business plan, we target consolidated operating revenue of JPY 288 billion with JPY 156 billion for the loan and credit card business, JPY 73.2 billion with a guarantee business and JPY 53.4 billion for the overseas financial business. We also targeted operating profit to grow for 3 consecutive years to JPY 87.9 billion, JPY 91.9 billion and JPY 97.1 billion. Please turn to Page 34 for key midterm initiatives. Firstly, the key component of the new midterm plan is to lay the groundwork for the expansion of business domains for future growth of each business. Please find 16 key initiatives on this page. Today, I will touch on the 3 new businesses in red among business strategies on the left and one initiative on our functional strategies on the right. Please go to Page 35. Firstly I will walk you through the creation of new businesses and services for future growth. As I briefly mentioned in the first part of the presentation, we set up a new company, GeNiE. We tried to create new services in collaboration with our credit holdings with which we formed a business alliance in March by combining their credit as a service platform with a credit screening and loan collection expertise. GeNiE will be a financial service provider and offer embedded financial functions to their partners with a large end user base. This will enable their partners to embed financial functions in their services without getting a financial license themselves. End users, on their part, will be able to receive a seamless financial service from loan demand to borrowing as part of service offerings, enjoying a new financial experience. Next I would like to touch on partnerships with nonfinancial companies in the guarantee business. While we have limited our partnerships to financial institutions in the guarantee business, we'll start to look for nonfinancial companies to partner with. Customers are not just looking for cash. They are looking for something they want to get or some service they want to receive. We believe there are numerous companies with customers with the need to get or to do something now. We can build a win-win-win relationship among customers, partner companies and ourselves where we offer guaranteed service to its partners when they start loan business. We expect around 30% of the JPY 140 billion additional guaranteed receivables we target in the next 3 years to come from these new partnerships. Please turn to Page 37. Next I will talk about expansion into new countries. The combined population of Japan, Thailand and the Philippines, where we currently operate is approximately 300 million compared to a global population of around 7.9 billion. While we do not assume we can target 7.9 billion people for our business, we believe we can target twice as many people as we currently do, 600 million for our products and services. Ensuring smooth business launch in Malaysia is also important in growing the target market population by another 300 million. We will continue to make steady progress towards start-up business in that country by targeting 2023 and beyond. We don't aim to grow the target market population by 300 million people, we have mainly focused on ASEAN countries so far. But as part of market research activities, we will also explore the possibility of expanding into areas outside ASEAN. During the midterm plan, we'll try to expand into 1 or more countries apart from Malaysia. Lastly I will touch on our initiatives to further promote sustainability. We have been involved in CSR activities with an aim to take on the responsibilities the society expects us to do. We recently have developed basic policy on sustainability, which aims to combine serving social issues with enhancing corporate value. On this page, please find 5 constituents of materiality we identified. They include universal values of spirit of respect for human beings, customer first and creative innovative management, our corporate philosophy, we have valued over many years together with social initiatives, shareholders expect us of. Page 39 lists key initiatives. I would like to introduce those which we focus on in the midterm plan. First of all, offering customer first financial services or delivering financial services to people the world over, as shown on the top left, is a very sustainability initiative we should focus on. Again, by expanding into a new country, Malaysia, for instance, we can address a situation where people have to give up their dreams just because they do not have access to financial services, despite their needs of wanting to do or get something now. Domestically, during the course of the new mid-term plan, we will offer loan products in the embedded finance business. And in the guarantee business, through new partnerships with nonfinancial companies, we might be able to access those individuals who would traditionally have not been able to be accessed by leveraging customer data partner companies have. With these initiatives, we want to offer our financial services, more people have access to. On the environmental front, we are considering the introduction of renewables. We are considering the possibility of switching from the power companies who we currently buy electricity from for our ultimate long contract machines to renewable energy power suppliers before the end of the fiscal year. Please turn to Page 40. Last but not least, I will touch on our capital policy. In our new midterm plan, our basic capital policy is to maintain and improve financial health and to have good shareholder return. There is no change to our traditional policy of striking a good balance between keeping shareholders' equity at our profit level, having good shareholder return and boosting profitability. While in the midterm term before the last one, shown on the left, our top priority was to boost shareholders' equity, in the last plan shown at the center, we try to gradually improve shareholder returns while keeping shareholders' equity at our profit level as a top priority. Thanks to this effort, in fiscal year ended March 2022, our equity to asset, including guaranteed receivables in the total consolidated assets stood at 21.8% with an annual dividend of JPY 70 per share, a dividend payout ratio of 19.7% and return on equity of 10.9%. In the new mid-term business plan, as is shown on the right, in the final year of the plan, we are targeting approximately 25% for equity to asset and 35% for dividend payout ratio and a return on equity of 10% approximately. In the new plan, our basic dividend policy is to improve shareholder returns, supported by a high profitability and appropriate shareholders' equity. In fiscal year ending March 2023, with normalization of economic activities, we anticipate loan demand to come back with expansion of receivables, we expect revenue growth since we did not make expenses associated with interest repayment, we project profit to grow. Furthermore, with projected profit growth, we expect equity to asset to grow towards 25%. With these projections, we plan to pay JPY 5 per share each of with annual dividend of JPY 10. This we'll do for our new midterm business plan. We will do our utmost to achieve the targets in the new plan, while securing stable growth of the 3 core businesses. I'll have to conclude my presentation by asking for your continued support and guidance. Thank you. Now we'd like to entertain questions from the participants.

[Operator Instructions] Do you have any question? [Operator Instructions] Since there seems to be no questions, we would like to conclude the online presentation for financial results for the year ended March 2022. Thank you for your questions, please contact PR and IR office. Thank you once again for your kind participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]