Macromill, Inc. (3978) Earnings Call Transcript & Summary

Thank you for joining us. I'm Sasaki, Representative Executive Officer, CEO. Today's agenda has 3 points. Firstly, I will provide a summary of the financial results for the year ended June 2024, and for the full year, followed by the presentation of financial and business update by segment from our CFO, Hashimoto. Finally, I will explain the progress of the current medium-term business plan and the guidance for the year ending in June 2025. Please turn to Page 3. In fiscal year June 2024, the strong trend continued for the full year with an 8% increase in revenue and a 13% increase in business profit year-on-year. We are particularly pleased to report that the operating profit of our Japan business increased significantly by more than 20%. Operating profit was almost flat due to the equity method losses on our investment in Toluna. But as it has no impact on cash flows, the year-end dividend forecast was revised up by JPY 6 to JPY 27 per share. EPS increased by 34% year-on-year to JPY 60. These are the results for the year ended in June 2024. The first year of the medium-term business plan has ended, and we are thinking positively about the results and we believe that we have made a good start. Let us now look at some details about the results. Please look at Page 4. As you can see, the strong trend continued throughout the year with revenue growth of 8%. Please look at Page 5. Business profit increased by 13% year-on-year, driven by a significant increase in profit from Japan business, which rose by more than 20% with a particularly strong result in the third quarter. Please look at Page 6 for total employee expenses and outsourcing expenses. Total employee expenses increased by double digits due to new hires in the previous year and increased efforts to raise retention of the existing employees. Full year outsourcing expenses were held below the previous year's level due to the increased in-house production through rebuilt research capacity in Japan. Together with control the turnover and improved individual proficiency and organizational power, in other words, improved performance of existing employees. We believe it is important to raise retention of existing employees for further enhancement of productivity. Let's move on to summary by business segment. Please look at Page 7. The revenue of focus business increased by 6% year-over-year, slightly above the guidance at the beginning of the period. The revenue growth of future business was lower than the guidance, but still achieved a double-digit 13% growth. The revenue of Foundation Business grew by 8%, surpassing the guidance. Korea business was affected by the macro economy, but the foreign exchange had a positive effect and revenue grew by 7%, exceeding the guidance. Although there are areas where challenges remain, we believe that overall business performed well as planned at the beginning of the period. This concludes the full year performance summary for the year ended in June 2024. Now Hashimoto, CFO, will present financial and business update by segment.

Thank you, Sasaki. I will now present financial and business update by segment. Please look at Page 9. Revenue made strong in the fourth quarter, full year revenue of JPY 43.86 billion, up 8% year-on-year or by JPY 3.24 billion. Business profit was JPY 5.62 billion, up 13% year-on-year or by JPY 616 million, partly as a result of productivity improvements. Operating profit was at the same level as the previous year due to the equity method loss on our investment in Toluna, but net profit from continued business was up 29% year-on-year or by JPY 510 billion. Page 10 shows the breakdown of operating expenses. At the bottom of the page, operating expenses total was JPY 38.17 billion, up 6% year-on-year, which is just on the growth rate of revenue. Panel costs were up 7% year-on-year. Outsourcing expenses were down 1% year-on-year, and depreciation and amortization and other expenses were at the same level as last year. On the other hand, total employee expenses, which have the biggest weight in operating expenses increased by 12% year-on-year due to the increase in the number of stops since the second half of last year and increased investment in human resources, including bonuses this year. That said, the control of outsourcing expenses through productivity improvements throughout the year had a particularly positive effect. Next using the waterfall chart on Page 11, I will explain the factors behind the fluctuations in profit in Japan business. In addition to the effect of increased revenues, the reduction in the outsourcing ratio has had a significant effect, assuming the increase in total employee and other expenses resulting in an increase in business profit. On the other hand, Korea business saw a decline in profit due to increased total employee expenses and outsourcing expenses resulting from new businesses and M&A. On a consolidated basis as a whole, business profit was in line with the initial plan, thanks to steady improvements in productivity and flexible cost control. Page 12 shows the trend of revenue and business profit of Japan business. Full year revenue was JPY 37.7 billion, up 8% year-on-year. And the full year business profit was JPY 5.4 billion, up 22% year-on-year. There is a seasonality in Japan business with revenue peaking in March. So every year, revenues in the second and the third quarter as a high in FY 2024, the trend was similar. But revenue in the third quarter, our business period was the highest quarterly sales ever. Revenue in the fourth quarter increased by 5% year-on-year, as shown in the graph on the left. The business profit showed a positive year-on-year growth in the second quarter as well as in the fourth quarter as shown in the graph on the right, improving profit margin. For the results by business area, please refer to the appendix for details. Now please look at Page 13 for Korea business. Full year revenue was JPY 6.1 billion, up 7% year-on-year and full year business profit was JPY 0.2 billion, down 62% year-on-year. Unlike Japan business, Korea business is using the second quarter and relatively quiet in other quarters. As shown in the graph on the left, fourth quarter revenue was up 22% year-on-year or up 11%, excluding currency effects, rebounding from somewhat weak performance of the previous year. The increase in the revenue was driven by currency effects and the M&A carried out at the end of the second quarter. Business profit was down from last year, as shown in the graph on the right, due to accelerated total employee expenses and one-off costs such as office relocation, but recovered to breakeven risking house cost control. Next, on Page 14, I'll explain the balance sheet. The major change from the end of the previous year is that assets and liabilities have both decreased by JPY 10 billion due to the redemption of bonds in July 2023 and June 2024. In addition, goodwill has increased by several hundred million yen as a result of the consolidation of monitors in Japan business and M&A advertising business in Korea business. The net debt-to-EBITDA multiple is in a recovery trend since the end of the previous year and the previous quarter. Due to the leverage buyout or LBO in the past, our own goodwill is on the balance sheet, which is rather unique and has affected various financial KPIs. Therefore, since the announcement of the previous quarter's results, started to show the amount of own goodwill here for your reference. As we use Page 15 to explain further the breakdown of our balance sheet and capital efficiency. ROIC, return on invested capital, is calculated from the assets related to our business, excluding the impact of our own goodwill, which, as I mentioned earlier, is not seen in companies that had not had LBOs in the past. ROIC calculated from business profit after tax and invested capital, excluding our own goodwill, is more than 25%, and we believe that we have achieved good capital efficiency in operations. Sasaki will explain our future capital allocation policy later. But this is the end of the fiscal year. I have updated you on our situation based on the balance sheet at the end of the fiscal year. On Page 16, you will find the cash flow statement. Free cash flow has improved significantly due to strong and growing business profits. Cash flow from operating activities has improved compared to last year due to good conditions of business and the timing of expense payments and the impact of the corporate tax refund. Cash flow from financing activities has decreased compared to last year, mainly due to the reduction of loans and acquisition of additional shares in subsidiaries. As the cash flow is not affected by the equity method investment loss of Toluna in the business profit, which shows the performance of business is expected to remain strong. The annual dividend forecast has been revised up from an increase JPY 4 to JPY 6 compared to the previous year. That's all I have. Sasaki will now explain the progress of the medium-term business plan and the guidance for the fiscal year ending in June 2025.

Thank you, Hashimoto. I will now explain the progress of the current midterm business plan and at the end, cover the financial targets for the fiscal year ending in June 2025. Please turn to Page 18. We have shared this slide before, illustrating the high-level direction under the current midterm business plan, exactly 1 year ago when we announced our financial results. We stated that we would focus on the recovery of online research, an improvement of profit margins and that we would continue to pursue that challenge of business model transformation with a medium to long-term perspective. [indiscernible] initiatives made 3 progress. And in the first year of the mid-term business plan ending in June 2024, we achieved steady growth in both revenue and profit. Please turn to Page 19 for specific steps taken to achieve this. First, we addressed the priority challenge and resolve the capacity shortage in the online research service. We also resumed active outbound sales activities. From 2024, measures such as strengthening proposals at clients contact points prove to be successful, leading to winning back lost clients, expanding market share and identifying potential needs. As a result, online research revenue returned to a growth trajectory, achieving steady growth. In addition, we were able to curtail a talent turnover rate, which has led to improved proficiency of our personnel and organizational strength. This productivity improvements enabled us to reduce outsourcing costs for growing revenue, and we intend to continue to sell for it in the ongoing fiscal year. As a result, for the first year under the midterm business plan ending in June 2024, we achieved growth outperforming the market and our competitors. Next, I will discuss the changes in the market, which are important to the sustainability of our business growth. Please turn to Page 20. The definition of the market has changed as the marketing research market in peripheral areas such as marketing consulting are being integrated from the insight industry. Macromill Group has been benchmarking this insight industry as a target market from the period under the previous metro business plan. In addition to the already established and stable marketing research market, we expect a newly integrated marketing consulting segment and technology-driven areas to expand strongly, propelling the overall market growth with further progress in market integration. On Page 21, I'd like to explain our commitment for a greater market presence within the insight industry. With remains the marketing research of the core, we aim to deliver high value-added consulting service with human engagement as shown on the right. The goal is to meet diverse needs of our extensive client base of over 4,000 companies by leveraging our strength in panel and data assets and the [indiscernible] human capital as a competitive education. At the same time, as noted on the left side of the page, we are also looking to expand resolution [indiscernible] driven approach. We believe this is necessary for sustainable market share gains within the insight industry and sustainable growth for the group, setting our eyes beyond achieving our target of the current midterm business plan. We have already started specific initiatives, including investments for this purpose, which I will describe using the next slide. Please turn to Page 22. The key investment in technology is a renewal of the core research system with 3 main objectives. One, to augment marketing solutions, two improve productivity, and three, accelerate the speed of business expansion. To augment the marketing solutions, we envision a subscription model that will allow us to acquire the data needed for marketing activities at the optimal timing. In order to fulfill the needs of more clients, development is progressing smoothly, and the service is scheduled for launch in the second half of the current fiscal year. GenAI will help to further improve productivity by reducing our power for internal operations. According to automation, aiming for a drastic efficiency improvement, different from efficiency gains currently achieved by improving the human operation. The impact will start to kick in gradually from next fiscal year. The last point is to accelerate the suite of business expansion. By rebuilding the system infrastructure, we aim to facilitate the speed of service provision as well as to enhance security and add value to the current services. In addition, the speed of overseas expansion will accelerate as the system architecture, which was previously [ suspect ] for domestic and overseas operations, will be unified. We will renew the core research system for the first time since the establishment of the Macromill group. We will carry this out with a strong results in order to expand our share in the insight industry and achieve further revenue and profit growth. I myself, am very excited about the new services that will take shape of the new system from the current fiscal year and beyond that, we believe that we will be able to operate more efficiently through the evolution of the operation and the way people work. Please turn to Page 23. In terms of debt repayment, we expect net debt to EBITDA to be within the target level of the midterm business plan in the current fiscal year. Therefore, we will augment both growth investments and shareholder returns. For growth investment, we will place priority on renewal of the core reset system, as explained earlier, in M&A mainly in the future areas. We revised our shareholder return policy, paying due consideration to the cost of capital and stock price. We will raise our dividend payout ratio target from 30% to 50% for the final year of our mid-term business plan ending in June 2026. In addition, we will conduct through buybacks nimbly with due consideration to stock price, business performance and balance sheet structure. Please turn to Page 24, regarding dividends. As you can see, we continue to raise dividend for 7 consecutive years since relisting. And for the fiscal year ending in June 2024, we revised up for year-end dividend by JPY 6 from the previous year. For the current fiscal year ending in June 2025, we intend to accelerate the dividend hike to a JPY 10 increase. We afford a progressive dividend policy in principle. And with steady profit growth, we aim to achieve 50% in payout and continue to hike dividends. Please turn to Page 25 for the full year earnings guidance for the fiscal year ending in June 2025. Maintaining the strong performance of FY June '24, we forecast a 9% revenue growth to JPY 48 billion and a 10% business profit growth to JPY 6.2 billion. While OP and net income conservatively factor in the impact of Toluna equity affiliate loss, that loss will be smaller compared to last year and we appreciate the consolidated OP to increase by 27% to JPY 5.7 billion, and net profit to go up by 35% to JPY 3.1 billion. EPS is expected to increase 36% to JPY 82 and dividend per share is expected to go up by 37% to JPY 27. On Page 26, let me elaborate on Toluna our equity method affiliate. I would like to make it clear that Toluna is an investment project for our company. For the current fiscal year, we expect revenue and profit to enter a growth phase as the negative business sentiment rates course, PMI costs and fixed costs are brought down a newly integrated organization begins full-fledged marketing activities. While the impact of Toluna is considerably factored into our guidance, we do not expect material impact on the group's performance, and we'll continue to prepare for the exit strategy. Last but not least, on Page 27, let me reiterate our targets for FY June '26, the final year of the major business plans. In order to achieve that target, we believe it is important to still deliver our business plan this fiscal year while making investments for the future and to continue to grow revenue and profit. Then we will move forward with initiatives such as launching new services, leveraging our technology and M&A strategy to achieve our goals before the final year under the midterm business plan. That would conclude my presentation. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]