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 our company, and attending the presentation on our financial results, our busy schedules. First of all, regarding the incidents we disclosed in the press release in October. We regret to confirm that an employee of ACOM, who is the conduit to Hachijuni Bank, sent to ACOM personal information of customers of a card loan of Nagano Bank and personal information of customers of Hachijuni Bank without their consent. Through our investigation, we have confirmed that there is no information leakage from ACOM to outside parties and that ACOM has not used the information for any other purposes. We have also confirmed that there are no similar incidents at other partner banks. We sincerely apologize to our customers, business partners and other stakeholders for any inconvenience and concerns that these incidents may cause. We take these incidents seriously and we strive to restore trust in our company. Now please go to Page 3 of the presentation for financial results for the first half of fiscal year ending March 2025. I will go over Item #1 and give you a summary of our financial results for the first half. Later, Mr. Tanaka, Chief PR and IR Officer, will go over Item #2 and give you supplementary information on the interest repayment, provision for bad debt and financial expenses. Please go to Page 4. Firstly, talking of the operating environment in Japan. With an improving employment and income environment, coupled with government policies, our moderate economic recovery continues. Having said that, as the downturn in overseas economy triggered by economic and financial market volatility could dampen the Japanese economy, we need to closely monitor how this might impact personal consumption and financial marketing in Japan. Moving on to the third bullet point. While loan demand remains strong in the nonbank industry, we need to closely monitor its trend as it is highly susceptible to personal consumption. Let's turn to the bottom half of the slide for international operations. The Thai economy has continued to post moderate growth, helped by expansion of inbound demand, despite sluggish personal consumption due to a higher level of household debt. The Thai Central Bank, on the other hand, introduced responsible lending requirements on advertisements and promotion and customer relief. While they are aimed at addressing household debt problems, we need to closely monitor their implications as they might impact future loan expectations and revenue. Moving on to the third bullet point. The Philippine economy has continued to post moderate growth as unemployment rate declines, with an improving employment environment. Last but not least, the Malaysian economy is expected to remain solid with the recovery of inbound demand and personal consumption. Next, please turn to Page 5 for a financial summary. Consolidated receivables, as the bar on the very right shows, grew 3.7% or around JPY 90 billion compared to where they were at the end of last fiscal year, to JPY 2,624.8 billion as of the end of September, thanks to strong loan demand among both new and existing customers and the weaker yen against the Thai baht. While we initially targeted 6.6% growth for the current fiscal year compared to 7.5% growth last fiscal year, given the recent trend, consolidated receivables might top JPY 2.7 trillion for the full year. I will give you a breakdown of receivables by business line later in the presentation. Please move on to Page 6. Consolidated operating revenue, shown on the left, grew to JPY 156.2 billion, exceeding the first half target by 1.6%, thanks mainly to receivables growth. Having achieved 49.9% of the full year target, with receivables growth in the first half, we might be able to beat the full year guidance. Operating profit, shown on the right, was JPY 48 billion and 13% higher than the first half target. Having achieved 55.1% of full year target, we are on track. Profit attributable to the owners of the parent, shown at the bottom right, was JPY 29.8 billion, 15.7% greater than the original first half target and 53.7% of the full year projection. I will go over receivables, revenue and profit by business segment in the next page and beyond. Please go to Page 7. Firstly, in the Loan and Credit Card business, receivables outstanding, as shown on the left, grew 8.6% year-on-year to JPY 1,040.6 billion, thanks to strong loan demand among both new and existing customers. Operating revenue, as shown in the center, increased 9.6% to JPY 83.6 billion, thanks mainly to receivables growth. While operating profit, shown on the right, grew 30.9% to JPY 26.1 billion. Operating profit grew because revenue increased more than operating expenses. Please turn to Page 8. Next, in the Guarantee Business. Guaranteed receivables, shown on the left, grew 6.3% to JPY 1,320.2 billion, thanks to strong loan demand among both new and existing customers. Operating revenue, shown in the center, increased 7.2% to JPY 37.3 billion, thanks to receivables growth and regular review of guarantee fees. On the other hand, operating profit, shown on the right, dropped 4.8% to JPY 10.9 billion due to an increase in provision for bad debt. With the recovery of new customer acquisition, the proportion of newer borrowers increased. It will take some time before transactions with these customers become more stable. In the meantime, provision for bad debt rises temporarily. Last, please go to Page 9 for International Financial Operations. Here I will touch on EASY BUY in Thailand. Receivables outstanding, shown on the left, grew 0.9% to THB 57.7 billion. Operating revenue, shown in the center, increased 0.5% to THB 7.4 billion. Operating profit, on the other hand, dropped 29.7% to THB 2.5 billion, as shown on the right, mainly due to an increase in provision for bad debt. Provision for bad debt increased mainly due to the reversal of reserves recorded last fiscal year following the introduction of a more sophisticated provisioning model. Please move on to Page 10. Next, I would like to touch on dividends. As shown at the top, our basic capital policy is to maintain and improve financial health and offer good shareholder return. Our basic dividend policy is to improve shareholder return supported by higher profitability and our profit shareholders' equity. As shown on the left, we target around 10% return on equity, equity to asset of around 25%, and a dividend payout ratio of about 35% in the fiscal year ending March 2025 in the current midterm business plan. Turning to the right-hand side of the page. Please find where those numbers were at the end of September 2024. As shown at the top, return on equity, which is a metric for profitability, stood at 9.3%. As shown in the center, equity to asset, which stood at 23.7%, is on track to get to the target of 25%. As for shareholder return shown at the bottom, we have kept a JPY 7 per share dividend for the first half and another JPY 7 for the second half intact, which works out to a dividend payout ratio of 39.4% for the full year. Strong receivables growth and new customer acquisition are behind our decision. Please turn to Page 11. Now I would like to touch on some of the more frequent questions we receive from investors. Please go to Page 12. Firstly, I will talk about the number of new accounts. Please find the target for this year on the very right. Given that we are projecting 375,000 compared to 430,000 last year, some investors wonder if this means we are driving less customer traffic. Last fiscal year, we gained more new customers than we expected, thanks to pent-up demand. As is illustrated by the gray arrow, we, in fact, acquired more new customers than we did pre-pandemic. For this reason, we project 375,000 for this fiscal year as we assume the impact of pent-up demand will gradually diminish. With 202,000 new accounts as of September, we are on track to achieve the full year target. On top of that, acquisition cost per account, as illustrated by the solid line, came down to around JPY 42,000, which means we drove customer traffic with good efficiency. If this trend continues, we might be able to beat the full year target. Please turn to Page 13. Next, I will touch on bad debt expenses in the Loan and Credit Card Business. Turning to the second bar from the right. Bad debt expenses in the first half stood at JPY 19.6 billion and were higher than the pre-pandemic level. This is mainly because, with strong new customer acquisition, the proportion of newer borrowers, who are more likely to default, increased. As shown on the very right, we forecast a year-on-year increase of bad debt expenses to JPY 40.1 billion for the full year as we assume defaults among the 430,000 borrowers we gained last fiscal year. With stronger-than-expected new customer acquisition in the first half, we anticipate the current trend of bad debt expenses will continue. While the ratio of bad debt expenses increased temporarily, as illustrated by the solid line, it is within our expectation. Because we focus on lifetime value, or LTV, in new customer acquisition, we should be able to expect future revenue growth in the long run, although bad debt expenses are likely to be higher than before. Moreover, given where they are now, you can rest assured that we have good control over these numbers. Please go to Page 14. Bad debt expenses in the Guarantee Business, as illustrated by the second bar from the right, stood at JPY 14.9 billion in the first half, with an increase in the ratio of bad debt expenses. This is due to strong customer acquisition at our partner banks. While the ratio of bad debt expenses is rising temporarily, it is within our expectation. Please turn to Page 15 for bad debt expenses at EASY BUY. Please find the evolution of the NPL ratio in Thailand on the left-hand side of the slide. As the solid line shows, it came down to 3.77% recently in the nonbank market. Moreover, the NPL ratio at EASY BUY has remained low. Turning to the right-hand side of the slide. Bad debt expenses increased 14.1% year-on-year to THB 2.8 billion in the first half. With the deterioration of the NPL ratio in the nonbank market, bad debt increased temporarily at EASY BUY. With the improving NPL ratio in the nonbank market, however, we expect bad debt expenses to gradually decrease going forward. Please go to Page 16. Next, I would like to touch on request for interest repayment. Please find the annual evolution of requests on the left. The number of requests in the first half, shown on the very right, declined 30.7% year-on-year to 5,200. The rate of decrease is faster than around 25%, which we initially expected for the full year. We anticipate this trend will continue towards the end of the fiscal year. The graph on the right shows the quarterly evolution of requests. You can see the rate of decline accelerate over time. We expect the number of requests to further come down. Please move on to Page 17. Next, regarding embedded finance. Our consolidated subsidiary, GeNiE, launched its service back in June. GeNiE offers embedded finance service, Money Lamp, to nonfinancial businesses, which provide services on our website or via app. With Money Lamp, they can now offer lending functions as part of their existing services under their brand name. We concluded business lines agreement with Kyash in October. This is the first case in Japan where money transfer operator serves as an agency for money lender. Money Lamp is now embedded in Kyash's digital wallet app. This enables money transfer to their digital wallet through borrowing from GeNiE. We have been receiving more applications than we expected. We are confident that embedded finance, which leverages ACOM's credit screening and collection expertise, is a valuable service. We continue to look for new partners. Please turn to Page 18. It is our staff who run all of the businesses which I have talked about so far. For sustainable growth of our Group, we need to respect abilities, ideas and values of our diverse talent, and develop the kind of talent force capable of putting our corporate philosophy into practice. At the same time, we need to build a rewarding and worker-friendly environment. As shown on the left, we ranked #2 in popularity of companies ranking among new university graduates, winning a higher position than Rakuten Card, ORIX Group and Sumitomo Mitsui Card. As for employee welfare, shown on the right, to build a more rewarding environment, we raised base salaries in April. Combined with the regular pay hike, this actually amounts to a pay increase of 4.9%. This is a pay hike for 2 consecutive years following a 5.2% increase last year. In an effort to build a worker-friendly environment, we revisited our personnel management system to help employees with nursing care of their families. We'll build a more worker-friendly environment to accommodate diverse views on career building. Please go to Page 19. Turning to the right-hand side of the page, on the front of credit rating, JCR upgraded us by 1 notch to AA-, the same rating we already received from R&I. With AA grade rating, we are on par with Dentsu, Oriental Land and JCB. We believe it is our competitive advantage, our international operations and our partnership with MUFG, that have helped us receive the better rating. With rising interest rates, we will fully leverage the better rating to secure stable funding and control financial expenses. We will do our utmost to achieve 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.

I assumed the position of Chief PR and IR Officer on October 1. I'll do my best to help the company with its further advancement. I would like to ask you to continue to extend the support and guidance you offered to my predecessor. I'm going to spend the next 10 minutes or so to go over interest repayment, provision for bad debt and financial expenses for supplementary information. First, please go to Page 34 for claims for interest repayments. Turning to the right-hand side of the slide. As Mr. Kinoshita explained earlier, the number of claims for interest repayment in the first half decreased by 30.7% year-on-year to 5,200. We projected the number of claims to come down around 25% for the full year. The current rate of decline is faster than we expected. We anticipate this trend will continue towards the end of the fiscal year. Please turn to Page 35. As shown on the right, the total drawdown reserve for loss on interest repayment in the first half dropped 14.1% year-on-year to JPY 11.9 billion. As the third bullet point at the top indicates, this is in line with the initial forecast of a decrease of around 15% for the full year. While the number of claims dropped more than 30%, the drawdown of reserve decreased 14%. This is because actual repayment is made about 1 year after claims are made. We'll continue to examine the difference between our initial projection for reserve balance and actual balance every quarter to see we have a reasonable and sufficient level of reserve sitting on the balance sheet. Please move on to Page 36 for provision for bad debt. Consolidated provision for bad debt, shown on the left, increased 14.5% year-on-year to JPY 53.2 billion due to an increase at ACOM and EASY BUY. Please turn to Page 37. Provision for bad debt on a nonconsolidated basis at ACOM, shown on the left, increased by 8.8% to JPY 38.2 billion. While budget expenses increased JPY 4.9 billion, a change in allowance for doubtful accounts was a decrease of JPY 800 million, and a change in provision for loss on guarantees was a decrease of JPY 1 billion. Please go to Page 38. Lastly, I would like to touch on financial expenses. Consolidated financial expenses, shown on the left, increased by 23.3% year-on-year to JPY 2.7 billion due to an increase in financial expenses at ACOM and EASY BUY. EASY BUY's financial expenses increased mainly due to an increase in funding costs on the back of higher market rates. Nonconsolidated financial expenses at ACOM, shown on the right, increased 30.4% to JPY 1.8 billion. Two factors are responsible for the increase. Firstly, with the growth of receivables, outstanding debt increased. Secondly, funding costs increased on the back of higher market rates. With concern about rising rates, while maintaining long-term fixed-rate debt as basic funding, we will try to optimize the balance between long-term and short-term debt and debt at fixed rate and floating rates to focus on funding costs. Please turn to Page 39. Outstanding debt, shown on the left, increased by JPY 60.4 billion year-on-year to JPY 608.1 billion, with the average borrowing cost increasing by 8 basis points to 0.6%, as is illustrated by the solid line. The pie chart on the right shows funding sources and their proportions. The split between direct and indirect funding is 27.1% and 72.9%, with funding from MU Bank representing 38.9%. While there's concern about rising rates given that 80.8% of total debt is at fixed rate and that 95.9% is long term, the magnitude of impact from higher rates will be limited for some time to come. For your reference, Page 41 and following pages show the trend of the size of the personal card loan market and the midterm management plan. This will do for supplemental information and financial results for the first half of fiscal year ending March 2025. I would like to conclude my presentation by asking for your continued support and guidance to our Group. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]