Marui Group Co., Ltd. (8252) Earnings Call Transcript & Summary

We'd like to start the financial results briefing for the 6 months ended September 30, 2023. 25 minutes will be spent for presentation followed by Q&A. Let me introduce our presenters. First, Mr. Kato, Director, Managing Executive Officer and CFO, will give you a presentation about our results and business status. And our CEO, Mr. Aoi will discuss the outlook of our business and progress to achieve our midterm business plan. And to answer your questions, we have Saito-san, President and Representative Director, Epos Card; and Mr. Aono, President and Representative Director, Marui Corporation Limited; and Ms. Kutsukake, General Manager, Investor Relations department. Those will answer your questions. So first, CFO, Mr. Kato will give you the overview of our financial results over the second quarter of fiscal year 2024 March.

I am Kato. I'll be talking about the financial results and overview of each segment for Q2 of the year ending March 2024. First, the consolidated results. There are four major points. The total transaction volume exceeded JPY 2 trillion for the first half for the first time. And operating income was JPY 18.7 billion, down 17% or JPY 3.7 billion year-on-year. Excluding liquidated accounts receivable, actual operating income was down JPY 1.2 billion. Net income was down 14% at JPY 11.5 billion or JPY 1.9 billion lower year-on-year. Full year plan is now revised based on the progress in FinTech, I'll explain more when I get to the FinTech. This is the main financial indicators. Group total transaction was JPY 2,172.5 billion, setting a new record high again. FinTech transaction increase made a great contribution. Operating income exceeded the previous year by JPY 3.7 billion at JPY 18.7 billion. And from this fiscal year, we changed the timing of funding through liquidation of account receivable, which led to JPY 2.5 billion drop in the first half. And excluding that impact, it was JPY 1.2 billion drop and factors for the drop will be explained at FinTech segment. Net income was JPY 11.5 billion, down JPY 1.9 billion year-on-year. If you had this current receivable liquidation at the same time as the previous year, net income would have been on par with the previous fiscal year. I will explain the factors affecting operating income. The operating income is JPY 18.7 billion, down JPY 3.7 billion year-on-year. Excluding negative JPY 2.5 billion impact of liquidated accounts receivable, actual drop was JPY 1.2 billion. In breakdown, Retailing saw JPY 800 million increase, while FinTech saw a drop of JPY 1.3 billion. Corporate eliminations were negative JPY 700 million due to granting of stock to employees and other increase in human capital. Delay in the liquid -- liquidation of accounts receivable is now explained from this fiscal year in order to improve capital efficiency and even out gain on transfer, we decided to do this liquidation every quarter instead of once in first half. Therefore, in this first half, it resulted in JPY 2.5 billion drop for the full year. It will be done in Q3 and Q4. And in -- when in last year, it was not in total gain on transfer equivalent to the write-off scale, so hardly any P&L impact is expected. And this is a segment income and revenue and operating income in retail due to the end of directly managed private fund, revenue dropped by JPY 600 million. Operating income went up by JPY 800 million due to increase in revenue from tenants and FinTech revenue increased by 9%, steady progress was done and -- but there was an increase in expenses. And due to the extraordinary factors, even considering the liquidated accounts receivable, there was a drop of JPY 1.3 billion. And Retailing business and factors affecting operating income. Despite the negative JPY 900 million impact in revenue due to the foundry PB withdrawal, fixed-term tenant revenue increase and personnel expense decline resulted in JPY 800 million increase in operating income to reach JPY 2 billion. Factors affecting revenue from fixed-term rental contract tenants in the fiscal year. Now operating flows is decreased and average monthly [indiscernible] rent increased year-on-year, resulting in JPY 900 million in closing revenue. And this is a specific non-retailing flow segment. It is now [ 8,700 ] [indiscernible] way down from the [ JPY 10,200 ], and average for the full year is expected to be reduced to [ 8,400 ]. And there's a progress in stores that don't sell, non-retailing tenant flow area composition went up by 2%. And so there has been steady progress in category conversion toward the plan of bringing up this flow composition to 7% in March 2026. Fixed-term rental contract tenant monthly used prices going up in line with the plan. This is a trend in the number of customers coming to the doors. It was 88 million or 109% year-on-year, 88% vis-a-vis pre-pandemic year of 2019. With the increase of non-retail tenants, the number gradually recovered from fiscal 2019, and in this fiscal year is expected to reach 180 million or 92% of pre-pandemic year of 2019. E-commerce transfer. We have increased hiring of professional talent further and enhanced efforts to increase the site visits and we will continue to grow the business. And with this, the Retail segment is in the second half forecast is shown here. The first half, we had a growth of JPY 800 million from second half. We expect revenue from tenants to increase further. And also facility and other assets related to expense drop and the posting of sales [indiscernible] and expenses to be carried over. So we expect to accomplish the plan, JPY 7 billion. Next is [indiscernible] Breakdown. Revenue and expenses were categorized into those linked to the transactions, those that are not, thanks to transaction growth, linked to transaction with up by JPY 2.6 billion. Those that are not linked to the volume went up by JPY 4 billion. Total revenue went up by JPY 6.6 billion, but expenses went up by JPY 7.6 billion. Therefore, operating profit, excluding the liquidity, receivables impact, the number went down by JPY 1.3 billion to [ JPY 293.5 billion ]. There are some one-off factors such as margin fee and point expenses, which I will elaborate more later. First, with margin fee. First half commission rate was 1.21%, down by 0.04 percentage point year-on-year, generating the impact of JPY 500 million [indiscernible] variance in the first half, out of which 0.02% is attributable to some merchants rate cut, which was not baked into our midterm business plan. Therefore, the impact is not expected to linger and also companies trying to expand the share of household finances that will continue to give impact on our business. And remaining 0.02% comes from travel entertainment recovery as well as prepaid charge and we reviewed the point program system. So prepaid charge impact is not going to repeat in the coming quarters. And regarding point expenses, we review the calculation method provision. As a result, expense went up by JPY 800 million in the first half of this fiscal year. And this impact is not going to be repeated in the second half. And also prepaid card charge increase in order to gain points. As a result, point expenses went up by JPY 200 million. So to respond to that, the company reviewed our point program in September, therefore there will be no impact in the second half. Excluding those one-off factors, it's fair to say that point expenses have been controlled with expectation. Lastly, I'd like to touch on commission fee and labor costs. In the first half, because of weaker yen, commission rate over traction increased by JPY 200 million year-on-year. And this FX impact is [indiscernible] linger in the second half. Regarding labor cost, we reviewed our retail format and strategic reallocation has led to increase of 100 head counts. And in the first half of this fiscal year, we increased the headcount by 80 people for the new businesses. And as a result, cost went up by JPY 300 million, but there will be no more impact in the second half. And here are one-off factors summary. The -- margin fee [ count ] will linger to a certain extent. But there are other measures that would not be repeated. Excluding one-off factors, profit would increase by JPY 2.9 billion, which is almost over with pre-COVID level of JPY 3 billion. Therefore, in midterm business plan, we were expecting FinTech's contribution to profit, and this trend will remain the same [indiscernible] on change with our expectation. And full year profit outlook is shown on this slide. Given the margin fee revenue, we decided to lower the guidance down to JPY 43 billion, down by [ 3 bps. ] Next is about co-creative investment. In March 2025, JPY 100 million was invested to startups. Another JPY 100 million went to fund the total JPY 200 million worth of investment was made. Accumulated investment amount has now reached JPY 27.2 billion since 2017 March. And as for co-creative will contribute to the core business, JPY 1.2 billion, out of which JPY 700 million went to telling, JPY 500 million went to FinTech. And 2023, margin, we are expecting JPY 5.5 billion. Next is of a balance [indiscernible] operating receivable increased by JPY 32.5 billion in March 2023 with that total asset to JPY 1,021.7 billion. Next is capital allocation. Basic operating cash flow stood at [ JPY 14.5 billion ], out of which JPY 7 billion was allocated to growth investment, JPY 5.7 billion was allocated to dividend. Regarding expenses, company invested JPY 4.7 billion in human capital, representing JPY 800 million increase year-on-year or 26% of the total labor cost. Profit outlook by segment retailing profit is JPY 7 billion in line with [ APA ]. FinTech profit is down by JPY 3 billion from an original guidance down to JPY 43 billion. Total company expenses JPY 8 billion, showing JPY 500 million negative variance due to the expansion of capital -- human capital investment, consolidating OP will be revised down to JPY 42 billion by JPY 3.5 billion. Although 3 KPIs are likely to be behind our original plan, we are aiming at top line, bottom line growth. Regarding dividend, the OE stays at 8%, so DPS will stay the same at JPY 101. Lastly, I'd like to talk about full year 2026. March is the last fiscal year midterm business plan. Again, for some merchants, lower commission rate is expected. I mean, it will linger and new impacts will be reviewed. Therefore, we are expecting a negative JPY 3 billion variance against the original expectation. However, we believe that we can catch up with the following measures. So we are not going to change the guidance. Now future reductions and medium-term management plan achievement prospect will be given by President, Mr. Aoi.

Aoi speaking. I will be talking about future directions and the forecast for medium term management plan. We are halfway through in the second quarter through the current medium term management plan. In the first half, the result was challenging, but we still have a remaining half to go. So we want to have a solid recovery to [ achieve ] the original plan. So going forward, we will partially revise the plan and move up the execution of new growth strategies. There are three following points: first one, personnel client review and improvement of human productivity. Second, cost sale to each individual interest as a new growth strategy. And third, a review of new business co-creative reinvestment. First, personnel plan review and the improvement of human productivity. [indiscernible] capita productivity through the business structure transformation from the Retailing focus to FinTech focus since year ended March 2015, still increased by 1.5x for the past 10 years. However, on the other hand, FinTech project productivity during the same period, despite a transaction going up [indiscernible] from JPY 1.1 trillion to JPY 4.3 trillion remained only 1x only, a slight improvement. One of the factors we have stored growth in FinTech productivity was reallocation of talent associated with the business structure transformation. The headcount in FinTech was 1,300 as of April 2014. But for the subsequent 10 years, every year, about 140 people were reallocated from Retail to FinTech resulting in the total expected headcount of 2,700 in March 2024. Reallocation of personnel was done in the form of upfront investment faster than increasing the scale of business in FinTech. However, in the previous fiscal year, group business structure transformation was completed and so was the reallocation of personnel. Therefore, going forward, personnel assigned in an upfront investment manner can now contribute to revenue and thus expected to significantly improve productivity. Therefore, we will review the personnel plan. In medium-term management plan, originally, we had expected increase of 100 people every year in FinTech with business expansion. After March 2025, but this will be revised to plus/minus 0. So the impact on the cost of the final year of medium-term management plan is expected to be about JPY 1 billion. With efficiency improvement by DX, projected productivity and expected to be increased to 47 or rather JPY 36 million in March 2026 and JPY 47 million of 1.6x in March 2029. Now the cards tailored to each individual interest as a new growth strategy. In FinTech, so far, Gold Card with no annual membership fee, a unique business model has been growth engine to achieve annual growth rate of 16%, which is quite high. Following the Gold Cards, in recent years, the potential second growth engine, new cards have emerged. That is card sale to each individual interest. And number of holders of cards tailored to each individual interest among new sign-ups has been increasing year-by-year and expected to reach 40% in March 2024. And LTV, of course, tailored to each individual interest is 2 to 7-folds higher than general cards, approaching LTV of Gold Cards potentially. And currently, 60 different types have been issued. Membership has reached 780,000 and members for plan is 110,000 at the largest and 600 at the smallest. The number of plans has increased dramatically over the past few years. Back in 2015 to '20, we used to have 2 to 3 plans per year. But with the introduction of print on demand in 2022, last year, we had 16. This year, we are expecting to enjoy 23 plans. There are reasons behind the increase of number of plans. First this is not just the FinTech, but also Retailing and Co-creating investment group as a whole is engaged in development. In reality, Retailing came up with 26 and FinTech came up with 27 almost on par. Probably because [indiscernible] business was included in Retailing, the e-commerce and stores are involved in development and also co-creating investment business partners and Marui are working together to develop collaboration card. So we are going beyond business boundaries to develop different types of cards. And second is to [indiscernible] by employees. If we leverage individuals and interest, employee motivation will increase. And as a result, if they see their work are resonant with what customers' interest, they think that it's rewarding and drive development. And also, we have a corporate culture to encourage people to take a challenge in the past because of the higher printing cost, 5,000 was a lower limit to print per card. But thanks to print on demand, there is no such restriction for employees. The risk to fail became lower. So it's easier for them to make a proposal and take a challenge. And for our target, we do like to nurture a culture to allow people to make a mistake and promote to take challenges. If 5,000 people can leverage their interest and develop their individual cards, we may be able to come up with 5,000 different types of cards. But even if you have more plans, we need to acquire members. Otherwise, it does not make sense. So we do have a unique strength and resources that other companies cannot copy. That is events that can be held in our stores to attract traffic. And also, we do have capability to attract members, which we nurtured in the Retailing business. We develop eventful stores that are generating synergy. As a result, 70% of new applicants choose cards tailored to each individual's interest. And also customers who participate in events talk about us with social media. The green online new application from an area where there are no stores. Next is our cards tailored to individual interests, converting them in main card. In the past or presently we encourage existing cardholders to switch to Gold Card. But tailored cards have strong in to use their tailor card as main card. So a lot of people decided not to convert into Gold Card user mix stays the same. So their tailored cards cannot be used as main cards. But moving forward without shifting to Gold Card, we allow customers to use their tailored card as main card. We allow them to increase the upper limit of usage. So again, cards tailored to each individual interest would bring JPY 2 billion to JPY 3 billion worth of profit contribution by the last year REIT term business line. Next is about co-creative investment and new businesses. First, about new businesses. Last year, we decided to take another [indiscernible] What we have instead of [ lira from scratch approach ], we introduced so-called entrepreneurship business development approach. As a result, some businesses were canceled and some businesses were integrated. So the number of new businesses went down from 11 to 6. So contribution coming from new business to our midterm business plan will go down from JPY 2 billion to JPY 1 billion. An entrepreneurship business development status will be explained more in detail when we host IR day. Next is about co-creative investment. So far, we having going after profit contribution to our core business and financial return policy will remain the same. However, in terms of operation, we are trying to increase probability of our success. First, in the initial investment phase. We place more importance on potentials for collaboration. So to that end, it is useful or practical to make an early investment in sheet or early stage, but the risk is high. So investment amount is likely to be small. But once enterprise value goes up and see possibility of exit, it's reasonable to make a bigger investment expecting higher financial returns. So in the past, we used to wait for higher enterprise value to make an investment as a result, investment amount is likely to be big and incur higher impairment loss. But moving forward, we would like to control the initial spending, controlling the amount around JPY 50 million, and to invest JPY 100 million or more as a result of the collaboration, we will spend money once we see a bigger possibility of exit. And as a result, investment amount will go down from JPY 12 billion to JPY 5 billion after the revision of our policy. And with that impairment loss is likely to go down by JPY 1.5 billion. So with that, profit contribution in terms will be by March 2026 will be JPY 3 billion to JPY 4 billion and extraordinary loss will be down by JPY 1.5 billion. And with that, we believe that we can achieve our midterm business plan.

Now we'd like to move to question-and-answer session. So the first question, Mr. Kanamori from Okasan Securities.

Kanamori from Okasan Securities. So there's one question. There's one question. In FinTech, the downward revision for FinTech is what I'd like to ask about. You explained a lot. But in the first quarter, there was a forecast. And with that, the merchant commission reduction impact was a certain extent, taken into account. What you said back then is that the point policy would be reviewed and in various initiatives, there will be improvements done. So I don't think the direction has been changed. But in the first quarter, you had the forecast, but this revised forecast now on Page 25 in the FinTech water flow chart, what has changed how. Can you explain more about the change from the Q1? The revenue itself doesn't seem to have changed from the first quarter forecast. But expenses may have gone up from the initial forecast. So what are the reshuffling of the positive and negative factors coming to the conclusion of this downward vision?

Saito speaking. Thank you very much for your question. So to your question, Mr. Kanamori, from the first quarter forecast and the full year forecast has been changed from that, and what has changed. That was your question. And in terms of revenue and expenses, I'd like to explain. First, on revenue. As was explained earlier, in the first half, based on the actual results in the first half, as described in the fact book, the transaction expected has been changed slightly. Why? Because in the first half, the prepaid charge type transaction has rapidly increased, and the merchant commission rate has decreased and point expenses has increased. So there was a double whammy. So by reviewing this program, the transaction is expected to decline in the second half. That's what I had -- we had expected in this revision. And 116% was the plan in the original plan, but we are -- we ended up with 115%, 1 percentage point down. So in the second half, including second half, for the full year, [ JPY 550 billion ] revision was done. So compared to the forecast in the first quarter, there was some slight decline in the revenue expected. And as for expenses, as you said, in the first quarter, there are various factors or there was various cost reduction initiatives scheduled. And we have been steadily making -- executing those. But what has major -- mainly changed from the first quarter forecast, there are several fold. And the first one is point expenses. Compared to the end of first quarter, the prepaid point increase has not been taken into account in the first quarter forecast. So that was the increase in the point expense increase. And also in the foreign exchange expenses, we have thought that this would be the onetime effect in the first quarter, but now the yen is JPY 150 to the dollar or more. So the expenses forecast has to be increased slightly. So there is some expense increase that we have come up with from the first quarter. So JPY 3 billion decline was taken into account in the full year forecast.

Well, as for the prepaid cards, the expenses for the prepaid cards have not been taken account. But in the first quarter, there were signs that were seen as a layman, that's what I would assume. So what about your thoughts on that?

Well, as for the point expenses, if you can take a look at that page, as you can see, on the right bottom, if you can see the transaction for prepaid charge from the second half of last fiscal year, it has gradually going up. But in the second half of last fiscal year, there was no conspicuous, prominent increase. We had realized that there was an increase, but we didn't think that there would be some responses needed. But from the first quarter, there were some signs for a rapid increase. So based on the results of first quarter, have taken this action. So as of the first quarter, there was some uncertainty about potential responses, so this was not taken into account.

So the merchants, some merchant fees decline. I think this would be maintained or you said that this will be maintained to a certain duration. So in the continued impact, there was a minus JPY 100 million. Is this what we're talking about? Like for the next 2 to 3 years, there will be an impact of JPY 200 million, solely due to the merchant fee decline. Is that correct understanding?

In the large-scale merchants, the terms and conditions were changed. So the impact will be continued for the next fiscal year and after next. So that impact has been translated into this number.

Don't you think that this would also spread to other merchants?

If you look back for the past 10 years in historical terms, the terms and conditions change for merchants had never dropped or reduced the total merchant fee rate. So we cannot say for sure, but this was a quite unique event.

Next question comes from Takahashi san with Mizuho Securities.

This is Takahashi with Mizuho. Thank you so much for sharing detailed information. So I'd like to ask a question to both -- first with Retailing business. I know that our business in line with your expectation, all in all. But what is working really well? And where do you see some room for improvement or opportunities? And my question to Saito-san. As Aoi-san CEO mentioned, the company has to improve productivity. And because of a larger number of headcounts, the company struggled to improve the productivity, I assume. So why productivity has not improved? Maybe you did not put much focus on that. But looking back, I'm looking at Page 44, you are trying to improve productivity aggressively. So what kind of actions are you going to take to make that happen? And lastly, I'd like to ask our CEO. I know there were some challenges, but to achieve your midterm business plan, I know that the company has continued to fine-tune your plans to achieve your goal. Well, it's been -- still a few months since the previous IR Day. You don't -- you may not have a lot of update, but what's working well will Retailing and FinTech and Cooperative investment are enjoying bigger collaboration, I assume, but to achieve midterm business plan, what is working well? And you are saying that you are determined to achieve your new -- target of midterm business plan, but in coming -- years there may be some external factors. Anything that you are paying particular attention to? So that's all for my question.

This is Aono, in charge of Retailing business. Thanks for your question. So two points. So we are in line with our plan, but what's working well and what are some opportunities to make further improvement. So regarding fixed-term rental contracts, I think that's working well. In order to achieve JPY 7 billion or JPY 12 billion, the engine for growth will be the increase of fixed-term rent. To achieve JPY 7 billion, more than JPY 2 billion revenue increase is expected coming from fixed term, and we believe that we can achieve this as of the first half. And as for opportunities, as mentioned in the second part, we do have cards tailored to each individual's interest. That's something that we are going to focus on strengthen, not just for Epos, but also for Retailing. I think that's a big opportunity for Retailing business cards. Tailored cards would help us to increase new customers for Retail business. Tailored card would bring new customers. And also thanks to event revenue will increase that would increase the value of stores and increase rent accordingly. So strategy of tailor card would bring bigger opportunities to return business.

This is Saito. Thanks for your question. About FinTech's productivity. Today, productivity is hovering at lower level. What's my view on that and how to improve the situation. So to answer your questions, as mentioned, Marui Group's FinTech, to streamline Retailing business, we allocated talents to higher productive business. FinTech has [indiscernible] a lot to make that happen. However, with that workplace, you cannot make the best use of time, so while transforming Retailing business, FinTech business is trying to strengthen the nationwide business and strengthen sales capabilities. Well, we do have 40 business partners today, external business partners. So we have developed workplaces where we can leverage our talents. Fortunately, even if our people are engaged in retailing, we are able to issue cards in retail stores. There are a lot of clients who are capable of Retailing and FinTech businesses. A lot of people are [indiscernible] from day 1, so we continue to develop. We don't have enough talent, so driven to nurture our talent. And also regarding processing department, we are trying to make the best use of IT technology, but the transaction increased by 4x. So we need talents for processing department, so we allocated people to back in as well. So how to improve the productivity from now, to be honest, in terms of operations, I know that we have a relatively large number of headcounts. So first, external card center operations. We are now dependent on our full-time employees, but shifting to external part-time operators, we can cut cost. And also regarding the [indiscernible] transformation, [indiscernible] back end, I think there is a room for improvement, we can make the better use of digital technology. As we -- our transaction, we don't have to increase the headcount. So with that, we would like to improve our productivity. And also, let me answer your question as well. So as since we developed our midterm business plan, half first phase was already completed. So we have a second phase to go what's working well, what's not working well. So to point out what's been working well. As Takahashi san mentioned, collaboration between Retailing and FinTech group is united to run the business. I think we are able to enjoy a collaboration between different businesses. Again, designing and issuance of cards tailored to individual's interest is an example. That is originally -- that was originally FinTech business. You may think that other businesses don't have to do anything. What we did not ask, but people started to really get involved in this project to design and develop tailored cards voluntarily. We are enjoying momentum. So as a group, we are united to really run our core business. I believe it's difficult for peers to copy. We are united to run our unique business. So I think that's an example that's working well. That makes me really happy. On the other hand, regarding challenges, there are, of course, a lot of challenges to address, particularly in terms of external environment, new competitors are making inroad into our domain, for example. When it comes to FinTech business, conventional competitors are large retailers, credit cards. On top of that, we have emerging e-commerce players. Some are marketers, some are retailers, some are telecommunication, code payment, credit card issuance, emerging fintech players. They may be small, but they may grow fast. So we are seeing new fintech players making new in-road into our market one after another. So we have to keep our eye closer on the situation. We have to stay alert so that we can come up with unique strategy that cannot be copied by others. So looking back, a lesson we learned is that we have new businesses, JPY 2 billion contribution was expected during midterm business plan term. So we were excited about new businesses, but we struggled. Our strengths and resources well, that should be maximized with what we call entrepreneurship business will be focused from now on. So the size was -- would be smaller, but we focus on businesses that are more likely to succeed. And regarding investment, we have a co-creative investment in. It's been seven years since we introduced this. We have gone through trials and errors. And as I mentioned, we now see some challenges. So we'd like to learn lessons from the past so that we can invest in area where we believe we can enjoy success, that's all.