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 and attending the presentation on our financial results, out of your busy schedules. I will go over item #1 and give a summary of our financial results for fiscal year ended March 2023. Later, Mr. Okamoto, Chief PR and IR Officer, will go over item #2 and give you supplementary information. Please go to Page 4 of the presentation. Firstly, turning to the top of the page for domestic economic environment with anti-pandemic measures and policies in place, economic activities are getting back to normal with a sign of recovery. With increasing tensions in international situations and soaring global commodity prices, however, we need to closely monitor how rising inflation might dampen personal consumption. Moving on to the third bullet point. Loan demand showed a sign of recovery in the nonbank industry. Next, turning to Thailand in the center. The state of emergency was lifted in October 2022. As the pandemic subsides, economy showed a sign of recovery with the expansion of personal consumption. Turning to the Philippines at the bottom. With relaxation of restrictions on economic activities, pent-up demand emerged with strong GDP growth. The country's inflation, however, hit a 14-year high. We need to closely monitor how it will impact personal consumption. Next, please turn to Page 5 for a financial summary. Firstly, the total receivables on a consolidated basis shown on the right, grew 4.9% to JPY 2,354,500,000,000, beating the initial targets in all of the 3 core businesses. 2 factors are behind this growth. Firstly, the initiatives we put in place to effectively capture customers' loan demand, helped new customer acquisition and greater usage among existing customers, both in the loan and credit card business and guarantee business in Japan. Secondly, the weaker yen against the Thai baht boosted receivables. I'll come back to these domestic initiatives later. Looking at receivables by business. Receivables in the loan and credit card business grew 5% to JPY 914.5 billion, while guaranteed receivables increased 3.4% to JPY 1,212,800,000,000. Receivables of the overseas financial business grew 13.8% to JPY 219.4 billion. Turning to Page 6. Consolidated operating revenue shown on the left, grew 4.4% to JPY 273.7 billion, thanks mainly to receivables growth. Looking at operating revenue by business. Operating revenue in the loan and credit card business increased by 2% to JPY 145.1 billion, driven mainly by receivables growth both in loan and credit card operations. Operating revenue in the guarantee business benefited from receivables growth and a regular fee review and grew 5.4% to JPY 66.2 billion. Thanks to receivables growth and the weaker yen, operating revenue in the overseas financial business increased 10.3% to JPY 56.5 billion. With no additional reserve booked for the loss on interest repayment, operating profit shown on the right, grew 151% to JPY 87.2 billion. By business line, operating profit in the loan and credit card business increased JPY 49.5 billion to JPY 40.6 billion, while operating profit in the guarantee business grew 6.9% to JPY 25.6 billion. Operating revenue in the international financial business increased 7.3% to JPY 19.6 billion. Profit attributable to the owners of the parent, on the other hand, decreased 1.4% to JPY 54.9 billion due to an increase in deferred income taxes. Please turn to Page 7. Now I'll touch on dividends. Our base capital policy is to maintain and improve financial health and offer good shareholder return. In fiscal year ending March 2025, which is the final year of the current midterm plan, we target equity to asset of around 25%, including guaranteed receivables in the total consolidated asset, a dividend payout ratio of about 35% and return on equity of around 10% as is shown on the right. Our basic dividend policy is to improve shareholder return, supported by high profitability and appropriate shareholders' equity. Turning to profitability at the bottom left. Receivables were greater than the initial forecast in all of the 3 core businesses with consolidated operating revenue also exceeding the target. While operating profit was lower than expected, it nonetheless grew year-on-year with a return on equity of 9.9%. As for our shareholders' equity at the bottom center, we are on track to achieve an equity to asset target of 25%. With these results, we will pay a dividend of JPY 5 for the second half as we announced, which works out to an annual dividend payout ratio of 28.5%. Please turn to Page 8. Now let me review fiscal year ended March 2023. With the pandemic, which started in 2020, subsiding at last, the economy showed a strong recovery with increasing foreign visitors. The graph on the left shows the evolution of the number of new cases. As many as 230,000 people contracted the virus daily, which is a number hard to believe now. With COVID-19 reclassified as a Category V infectious disease from Category II earlier this week, as this subsides, we hope the economy will further improve. With the resumption of economic activities, loan demand also recovered. We have tried to effectively capture customer loan demand and improve customer convenience by reducing the number of items on a loan application form, which I will come back to. Thanks to these efforts, the number of new customers, shown on the right, increased to 309,000 annually, far exceeding the original target of 260,000. The number of new customers topped 300,000 annually for the first time in 17 years since fiscal year ended March 2006. We'll continue to focus on driving new customer traffic. Please turn to Page 9. Now I'd like to review how we have been progressing in the midterm business plan. In the medium-term plan, we work to lay the groundwork for the expansion of business domains for future growth of each business. Please find the 16 key initiatives we focus on in the medium term. Today, I will touch on the ones in red. Please go to Page 10. Firstly, I will walk you through the creation of new businesses and services for future growth. We launched a service enabling Apple Pay and Google Pay in April and May 2022, respectively, enabling users just to hold up a smartphone to use Acom's credit card without carrying physical cards. Our customers enjoy the great convenience this service brings for shopping. Payment amount has increased as much as around 20% among customers with smartphone payment set-up. We'll promote this function effectively to our customers to further expand the credit card business. Turning to the center of the page, we changed an application form for first-time applicants in February. Currently, more than 90% of applications are via the Internet, mostly via smartphone. We reduced the number of items on application form to lessen the burden and stress they may experience when they fill in the form. This, in turn, improved the ratio of completed forms by 3.2 percentage points. Turning to the right. [indiscernible] launch embedded finance business. Due to a delay in IT system development and other factors, the plan has been pushed back. We now face a crucial moment, and the management team of Acom and members of [indiscernible] will work together for the launch of the new business. Please turn to Page 11. I Next, I would like to touch on partnerships with nonfinancial companies in the guaranteed business. We started a partnership with LINE Credit in March of this year. While having access to over 19 million LINE users is LINE Credit's strength. We believe we can help them expand this business with our own strength of credit screening. Although we don't disclose balance outstanding for each partner with a number of applications [indiscernible] we believe receivables are certainly growing with more than expected guarantee applications. We'll try to look for other potential partners besides LINE Credit. Please go to Page 12. As we already announced, we received a license as a money lender from Malaysian authorities last October. We have set up an office and moved ahead with IT system development to prepare for the start of operations scheduled for September. Partially because we need to acquire a license for each of the branches in Malaysia, we assume we will mainly drive customer traffic and run the business over the Internet. Authorities are currently reviewing our application for online license needed for these activities. We aim to start business in one more country besides Malaysia during the midterm business plan. We have continued with our research activities in Asian countries outside Malaysia. Please turn to Page 13. Next, I will touch on building a solid talent base through hiring, skill development and retention and improving employee engagement by sharing a vision throughout organization. Since business will only succeed when you have people to work with, we are aware it is important to run business with relationship based on mutual trust between members and a company. In a program to share vision throughout organization shown at the top, an executive serves and facilitates and discusses this vision together with around 20 employees each time. We hope this will help each and every one of our employees see our vision as their own and relate it to day-to-day operations with improved engagement through clear standards for daily actions. Turning to the center. We relocated our headquarters in [indiscernible] in December last year. At the previous location, we occupied 2 floors with 3 separate sections. The physical separation hampered smooth communication. We have -- we hope having all the head office staff on a single floor, will naturally encourage communication and innovation. I myself get to see members more often and feel it has expedited decision-making. Turning to [indiscernible] at the bottom. While many companies decided to raise pay this April we went ahead with a 3.5% base by increase in October last year ahead of other companies. This actually amounts to a pay increase of about 5.2%, including a regular pay hike in April. We hope merit-based pay will help us hire and retain the best and brightest. These initiatives have helped us maintain high engagement rating. Please go to Page 14. Our HR initiatives have earned us good external ratings. In the area of hiring of new graduates at the top left, we ranked #3 in an industry, in a joint survey by [indiscernible] in popularity of companies, ranking among new university graduates in 2024. In the area of employee engagement at the bottom left, we ranked #4 in the large company category [indiscernible] at the top right, we received the highest rating under [indiscernible] award and certification system [indiscernible] for 2 consecutive years. In health and productivity at the bottom right, we were designated as an excellent health management corporation for 2 consecutive years. Please turn to Page 15. As part of our initiative to further promote sustainability, we created a sustainability promotion team in our corporate planning department in April last year. On the environmental front, we switched to renewables last year [indiscernible] ourselves. On top of that, we disclosed our carbon footprint in the last 5 years last September. We aim to go net zero in Scope 1 and Scope 2 emissions by 2030 and will continue effort to reduce emissions. Our sustainability effort was rated A or most advanced in MUFG ESG rating. Thanks to this rating, we received ESG management support loan from MUFG Bank. As we realized, the society will call for even greater sustainability and ESG efforts, we will continue to work on further improving our initiatives. Lastly, please turn to Page 16 for full year guidance for fiscal year ending March 2024. Please go to Page 16. Turning to receivables outstanding on the right. We're targeting 4.1% growth of consolidated receivables to JPY 2,450,300,000,000. By business line, assuming loan demand will remain strong until the second quarter driven by pent-up demand and will gradually go back to a pre-pandemic level in the third quarter and beyond, we forecast 4.4% growth to JPY 954.6 billion for the loan and credit card business and 4.6% growth to JPY 1,268,800,000,000 for the guaranteed business and with the customer support program during the pandemic lifted, JPY 219.6 billion of flattish growth for the international financial business in Thailand. Please go to Page 17. I Next, turning to operating revenue on the left. We are targeting 3.8% growth of consolidated operating revenue to JPY 284.3 billion driven mainly by receivables growth. By business segment, we forecast 4.6% growth to JPY 151.8 billion for the loan and credit card business, 5.9% growth to JPY 70.2 billion, thanks to receivables growth and a regular fee review [indiscernible] growth to JPY 56.9 billion for the offshore financial business. As for operating profit, shown in the center with revenue growth, we are targeting 3.6% growth to JPY 90.4 billion, and we're targeting 5.4% growth to JPY 57.9 million for profit attributable to shareholders of the parent. As for dividends, shown on the right, given that we expect revenue and profit growth and that we are on track to achieve equity to asset of 25% in the final year of the midterm business plan, we plan to pay JPY 6 for each half or JPY 12 annually, which works out to a dividend payout ratio of 32.5%. We will do our utmost to achieve the targets in the midterm plan, while securing stable growth of the 3 core businesses. I would like to conclude my presentation by asking for your continued support and guidance to our group. Thank you very much.

For supplementary information, I'm going to spend the next 15 minutes or so to go over the loan and credit card business, the guarantee business, international financial operations, [indiscernible] bad debt and, lastly, financial expenses. Please go to Page 19 of the presentation. Firstly, I would like to give an overview of the loan and credit card business. In fiscal year ended March 2023, with digitalization and growing demand for cashless transactions, we have worked to improve customer convenience by launching a service, enabling Apple Pay and Google Pay and reducing the number of items on an application form. Moreover, thanks to various government initiatives, loan demand for leisure, trouble and dining out recovered to the pre-pandemic level with strong new customer acquisition. As a result, the combined receivables shown on the left, grew 5% to JPY 914.5 billion, with loan receivables of JPY 810.9 billion and credit card receivables of JPY 103.5 billion. Please turn to Page 20. Operating revenues shown on the left, increased 2% to JPY 145.1 billion, thanks to receivables growth, while operating profit shown on the right, was JPY 40.6 billion as we did not top up the reserve for loss on interest payment unlike the previous fiscal year. Please go to Page 21. With aggressive advertising and promotion in response to a recovery of loan demand, the number of new accounts shown on the left, grew 32.6% to [indiscernible], which is above the pre-pandemic level and significantly higher than our initial target of 260,000. For the fiscal year in progress, we anticipate loan demand partially helped by pent-up demand, will remain strong until the second quarter, and will gradually go back to the pre-pandemic level in the third quarter and beyond. With this assumption, we forecast 300,000 new accounts. Advertising expenses shown on the right, increased 17.2% to JPY 17.7 billion for 2 different reasons: firstly, the number of new customers we gained via the Internet, who carry higher acquisition cost per account was greater than we initially projected. Secondly, the proportion of loan applications via the Internet was also higher than we initially assumed. For the fiscal year in progress, we expect the number of new accounts will decrease as loan demand currently driven by pent-up demand, will go back to a more stable level. Additionally, we'll continue to improve per-customer acquisition costs, mainly for Internet advertising. For these reasons, we project a 4.9% decline in advertising expenses to JPY 16.9 billion. Please turn to Page 22. The average yield shown on the left, declined 10 basis points to 14.7% for the combined loan and credit card business. The average yield dropped because we accommodated a request for long-term installment repayment from borrowers with [indiscernible] loans and long-term delinquent loans. We expect the average loan yield will rise toward 15% going forward since we have gained around 310,000 new customers to many of whom we charge 18%. The ratio of bad debt expenses shown on the right, increased 16 basis points to 3.2%, with bad debt expenses increasing by JPY 2.8 billion to JPY 29.2 billion. In fiscal year before last, with weak loan demand, many borrowers used extra cash on hand to pay down their debt, which helped to control bad debt. During the fiscal year under review, on the other hand, with an increase in the proportion of new borrowers as we gain more new accounts than pre-pandemic, bad debt expenses started to gradually increase towards the pre-pandemic level. While we anticipate bad debt expenses will continue to increase, we don't see this as an issue since the quality of loan asset remains stable, which I'll come back to later. Please go to Page 23. NPL shown on the left, increased JPY 2.9 billion to JPY 66.9 billion, while the NPL ratio illustrated by the line graph on the right, increased by 8 basis points to 8.25%. NPLs increased because delinquent loans of 3 months or longer migrated to restructured loans, as we accommodated a request for long-term installment repayment from borrowers with [indiscernible] loans and long-term delinquent loans. Since restructured loans have a relatively low loan loss ratio and help to lower future bad debt, we believe we have loan assets of stable quality. Please go to Page 24. Next, I will touch on the guarantee business. During the fiscal year under review, we worked on reinforcing cooperation with our partners, extended support to the marketing programs and ran joint advertisements to drive new customer traffic. Moreover, thanks to various government initiatives, loan demand for leisure, trouble and dining out recovered to the pre-pandemic level with strong new customer acquisition. As a result, guaranteed receivables of Acom [indiscernible] JPY 1,444,400,000,000 and JPY 168.3 billion, respectively, with 3.4% growth of combined receivables to JPY 1,212,800,000,000. The next page shows results of nonconsolidated outcomes guarantee business, which you can please review in your spare time. Please turn to Page 26. Operating revenue shown on the left was JPY 55.2 billion for Acom and JPY 10.9 billion for MU Credit Guarantee with 5.4% growth of combined revenue to JPY 66.2 billion. Growth of receivables and guarantee fee increases through our regular fee review are behind the revenue growth. Operating profit shown on the right, grew 6.9% to JPY 25.6 billion. Please move on to Page 27 for receivables for claim and bad debt expenses. Receivables for claim shown on the left, increased 4.9% to JPY 57.1 billion. Two factors are behind this increase. Firstly, the proportion of newer borrowers increased [indiscernible], mainly due to an increase in guaranteed receivables. This, in turn, resulted in an increase in delinquent loans, which we had to acquire. Secondly, we accommodated a request for long-term installment repayment from borrowers whose loans became receivables for claim. The ratio of bad debt expenses shown on the right, increased by 6 basis points to 2.02% with bad debt expenses increasing JPY 1.2 billion to JPY 22.2 billion. The factor I earlier mentioned when I was on the topic of the loan and credit card business is also behind this increase. Next, I would like to give an overview of our financial business outside Japan. Please skip the next page and go to Page 29. Since our overseas subsidiaries have a December year-end, the financials as of the end of December 2022 are reflected here. Outstanding receivables of overseas financial business in Japanese yen, shown on the left, grew 13.8% to JPY 219.4 billion. Growth of receivables, coupled with the weaker yen, boosted outstanding receivables by JPY 20.7 billion. [indiscernible] receivables outstanding on a local currency basis, shown on the right, grew 2.2% to THB 56.8 billion. Please move on to Page 30. Operating revenue of the international financial business, shown on the left, grew 10.3% to JPY 56.5 billion, thanks to receivables growth and the weaker yen, while operating revenue of EASY BUY on a local currency basis, shown on the right, dropped 0.1% to THB 14.6 billion. We believe EASY BUY revenue came down despite 2.2% growth of receivables because a collection fee for those loans, which became delinquent on September 17, 2021, and beyond, was [indiscernible] THB 100 per borrower to THB 50 in accordance with the official gazette of the Thai Interior Ministry. Please go to Page 31. Operating profit of the overseas financial business grew 7.3% to JPY 19.6 billion. Operating profit of EASY BUY on a local currency basis, shown on the right, increased by 0.2% to THB 5.6 billion. Next, please go to Page 32 for requests for interest repayment. The number required for interest repayment decreased by 10.2% to 18,400, which is in line with the 10% decline we initially expected. We expect the number of claims to drop around 15% in the fiscal year in progress. While we expect the number of claims to continue to come down [indiscernible] limitations and other factors, we'll closely monitor its trend since it is highly susceptible to changes in external environment, such as [indiscernible]. Please go to Page 33. The total drawdown reserve for loss on interest repayment dropped 3.4% to JPY 28.4 billion with JPY 6.9 billion in the fourth quarter, which is in line with the initial forecast of a decrease of around 5%. For the fiscal year in progress, we expect the total drawdown to decrease around 10%. 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 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 move on to Page 34 for provision for bad debt. Consolidated provision for bad debt shown on the left, increased 17.7% to JPY 80.5 billion due to an increase of Acom and EASY BUY. Provision for bad debt [indiscernible] EASY BUY shown on the right, increased JPY 1.6 billion to JPY 18.3 billion. Its provision for bad debt on a local currency basis, on the other hand, stayed flattish. We believe the depreciation of the yen against the Thai baht is behind the increase. Please move on to Page 35. Provision for bad debt on a nonconsolidated basis at Acom, increased by JPY 8.8 billion to JPY 56.5 billion. While bad debt expenses increased JPY 4 billion, a change in allowance for [indiscernible] accounts was an increase of JPY 4 billion and a change in provision for loss on guarantees was an increase of JPY 700 million. Now I would like to explain what is behind the increase in bad debt expenses and a change in allowance for [indiscernible] accounts. Firstly, in fiscal year before last, with weak loan demand, many borrowers used extra cash on hand to pay down their debt, which resulted in lower-than-usual bad debt expenses. During the fiscal year under review, on the other hand, with an increase in the proportion of new [indiscernible] borrowers as we gain more new customers than pre-pandemic, bad debt expenses started to gradually increase towards the pre-pandemic level with a year-on-year increase of JPY 4 billion. Secondly, in fiscal year before last, we [indiscernible] provision in the fourth quarter, which reduced the magnitude of change in allowance for [indiscernible] accounts. During the fiscal year under review, on the other hand, with the recovery of new accounts, the proportion of newer customers increased, which resulted in a JPY 4.4 billion increase in allowance for [indiscernible] accounts. This, in turn, led to a JPY 4 billion year-on-year increase in change in allowance for [indiscernible] accounts. Please go to Page 36. Lastly, I would like to touch on financial expenses. Consolidated financial expenses shown on the left, came down by 22.3% to JPY 4 billion, thanks to the reduction in financial expenses on the part of Acom. Nonconsolidated financial expenses at Acom, shown on the right, dropped by 20.7% to JPY 2.5 billion for 2 reasons. Firstly, given the current capital market environment, we did not issue corporate bonds and turned to indirect financing and commercial paper instead, which resulted in a drop in bond issuance costs. Secondly, we made good progress in refinancing existing debt with cheaper debts. Please turn to Page 37. Outstanding debt shown on the left, increased by JPY 8.1 billion to JPY 505.1 billion, with average borrowing cost coming down by 13 basis points to 0.52%, as is illustrated by the line graph. The pie chart on the right shows funding sources and their proportions. The split between direct and indirect funding is 25.7% and 74.3% with funding from MUFG representing 39.5%. While market rates remain unstable, given that 91.2% of our debt is at fixed rates and that 93.1% is long term, the magnitude of impact from future rate hikes is immaterial. For your reference, Page 39 and the following pages show the trend of the size of the personal card loan market, the trend of interest repayment and the impact from COVID-19 and the midterm management plan. This will do for supplementary information on financial results for the year ended March 2023. I would like to conclude my presentation by asking for your continued support and guidance to our company. Thank you very much.