Nihon M&A Center Holdings Inc. (2127) Earnings Call Transcript & Summary

Good morning, everybody. I very much appreciate everyone's attendance. It seems like we're joined by New York, London and others. So thank you so much. Let me now go ahead and explain our financial results for the third quarter this fiscal year. I would first like to give an overview of the results, and that can be followed by Q&A. Page 3, please. I'm not particularly happy about the third quarter results myself. Every situation is upward. Everything is starting to be positive. That being said, the only loss that we had to see was the number of transactions closed. That's why I'm not particularly happy about. And that obviously has hit sales as well, which is a composite of the number of transactions closed and unit price. However, leading indicators, they're very, very strong continuously from the second quarter. Let me go ahead and dig a little bit more on those numbers. Sales were JPY 29.8 billion, down 4.2% year-on-year. Ordinary profit stood at JPY 10.7 billion, down 8.3% year-over-year. Ordinary profit has been [ deferred ] because of the fixed cost, which essentially stays the same regardless of earnings. And again, the biggest critical thing for us was the number of transactions closed. It decreased to 738, down 7.3% year-over-year. M&A sales per transaction stood at JPY 39 million. It was an uplift of 4% year-over-year. For M&A sales transactions, I feel that it's in the ideal state because that's in line with the target of JPY 39 million, plus or minus JPY 10 million or so. Moving on to the number of new sell-side mandates, one of the leading indicators that we have, we hit 1,029, which is a whopping upward uplift of 19% year-over-year. On that we had a good rate of matchings. We were able to conduct, which translated into a great number of new transaction negotiations that we did. It was 951 or increase of 8.7% year-over. Even if you look at the third quarter stand-alone, the number of new negotiation meetings were 340, which was a historic number for us. And these 2 leading indicators are very, very important for our business. There are 2 meanings related to that. One of them is the fact that our employees are more engaged, more motivated, and that has equated to more traction in terms of their actions. And the other is those mandates, those projects in the pipeline are going to directly have a positive impact on April and onward earnings. Go to the next page. In terms of the sales progress that we have done so far, it was 61% to the full year forecast. Our guidance can be broken down into 40% for first half of the year and 60% for latter half of the year, which means that we would have had to achieve 70% as of the end of the third quarter. So again, it's really unfortunate that we only did 60% or a little more for both sales and ordinary profit, apologies for that. We also conducted some analysis as to why we could not see more growth in terms of the number of transactions closed. I feel that there are 3 reasons behind it. One is that we have less number of mandates that we got about a year ago. For us, when it comes to M&A transaction, it takes about a year from the mandate receipt to the closing of the transaction. Number two is because we have higher level of guidance, we have to take on a lot of actions and that to take a lot of time on our consultants. Those so-called guidance that come out of small to midsized companies, agencies, self-controlled body, they are not that really difficult ones in and of themselves for us. Many of those are basically the ones that we had already taken care of ourselves. However, we need to make sure that those guidance are being implemented into our operation as we're trying to be compliant to the guidance. And for that to happen, again, we had to spend a fairly good amount of time on the administration, managerial staff, trying to explain to the customer. So that is one other factor. However, this is also about a familiarization, so this can get better as we go. The next one, the third one is actually the most important challenge for us. And that is the buyers' awareness and knowledge. We have seen it heightened -- sorry, sellers knowledge. In 2024, we had a lot of news coverage talking about the issues in that industry, [ Russian ] problem, for example. And that has led to, again, those seller companies being more wary of the transactions. They will go and investigate in each step of the transaction. They would go and talk to their lawyers, talk to their accounting experts to get more knowledge to make sure that they are okay. We have obviously done this, being there before in terms of those sellers' anxieties and questions. That means that if we can successfully take lead on the questions and anxieties and proactively clarify those, then we will not see much long time that we need for the lead time. However, that was not something that we could see happen this time. In other words, we were a little more receptive, passive. We could only answer those questions, answers as they came along, not being very proactive. And that turned into negotiation meetings takes longer than expected. Some are slipping into the next quarter, customers got anxiety, still not clarified and the deals got to break down halfway through and so forth. Going to the next page. As for the first issue that I talked about, the less number of mandates that we had that we got a year ago, we have seen, as you can see on the screen, quite a bit of improvement on that front. So I feel that this problem has been more or less solved at this point. And again, for the problem number two, we are able to resolve that as well as we are trying to make sure that we bring those guidance and information into our steps, meetings so that we can get better on that as well. And again, the third theme is the biggest for us. It really comes down to the proactive approach that we can do. We must shift to that more and more so that our consultants can go talk to them before our customers have anxieties, questions, so the problems can be solved earlier rather than later. And for that to happen, we actually conduct kickoff meetings for every deal that's come to the table. In those kickoff meetings, we have this list of expected challenges that may pop up in the minds of sellers and buyers, and we try to answer those questions. We also try to make sure that we list up stakeholders of sellers and buyers and make some explanation, engagement to those stakeholders. And we create thorough detailed time line schedule for the transactions, and we make sure that can get shared to sellers and buyers. By implementing that sort of approach, we're trying to resolve this problem number three as well. Let's go to the Page 7. I'll skip to Page 6. About the leading indicators as nuanced at the onset, these are really great. Let me explain that looking at the deal flow. New sell-side mandates stood at 330, up 15%. And the quality content of those new sell-side mandates were also great. For one, we could see growth in the number of mid-cap mandates. As you can see in the bottom left, we had 65 for the mid-cap mandates, 140.7% growth. And if you could also look at the yellow at the bottom, we had higher number of mandates that we got out of central areas. For those mandates that are from local regional areas, in its nature they are lower average M&A sales per transaction and also they're not easier to close. I would then like to go to the third indicator here, registration for matching. We had a growth by 7 -- sorry, 18.4%. Obviously, just working on the matching doesn't go anywhere, which means the next indicator means really a lot. The proposals to buyers, we marked all-time high for this one. This means that we had approvals from the sellers, and we went and talked to the buyers with the proposals. And that resulted in the record high number of new transaction negotiation meetings at the further right, we had at 340 or 14.1% growth. Our intention is that we're going to be thoroughly working on the kickoff meetings, as mentioned just earlier, to make sure that those negotiation meetings in the pipeline can get closed. Let me go and talk to Page 11. In terms of the number of employees, we have seen steady growth in the number of consultants. However, there's a slight chance that we will not be able to hit the net increase of the consultants by 120, which is something that we had in mind at the beginning of the year. We also have seen fairly good improvement in terms of the direct ratio, the portion of the consultants relative to the total. Going to the Page 17. Again, we have got really strong leading indicators. We have got highly engaged, highly motivated employees. For that reason, we remain unchanged with the guidance for this year and also the mid-range plan. We would still like to aim for achieving those. I'm going to jump over to 29. From an industrial landscape perspective, this past year -- this fiscal year that we are running has been very, very impactful. One of the impacts was the revision of the SMIDs agency guideline. Alongside of that, we have also seen our own subcontrol body guidance revised. I would describe those revisions as quite timely here. In 2024, we had for the first time in the history of M&A intermediaries industry, malicious, fraudulent buyers. Those were something that we have never seen before. And in that perspective, we were able to implement measures against those malicious buyers as an industry. Going to the Page 30. Obviously, we are working on things even more stringently than what guideline expects. We are conducting various checks for each point of the deal process. We have 3 checks. One is anti-social force check and the other is the buyers' financial state check and the third is the scheme itself. In Japan, we had a quite shocking announcement come out this week. And that was the news about the company called M&A DX who were not following through those checks being compliant to the guideline. They actually got removed by name off from the registration of small to midsized companies agency. It was announced by the head official at the agency himself. So it had a really significant impact. Going into the next page. We have changed the name of association ourselves. So we changed the name of the association as an industry, and we also strengthened the governance. And this one that I'm holding right now is about the advertisement that were put out this week. Initially, the Board of the association used to constitute only M&A intermediaries. From this time and onward, we are also bringing on board regional banks associations, accounting officials associations, financial advisers association. So there's more kinds of people that we have constituting the Board. Next page, please. Amid such environment, we are taking point on making sure the industry is really a safe place, healthier place by accelerating the collaboration between government companies and academia. And with academia, we are planning to launch Japan's M&A Conference Board this come April. We ourselves overcame quite a bit of hardships, challenge following the scandals. And because of that, we are almost complete with the compliance check at this point. And that has also translated into the higher motivation, the engagement for the employees and the record situation with the leading indicators. That has, I feel, put us the better structure, the better people, better indicators, they really have put us the new starting point for the growth to come. This is the end of my presentation. So let's go to Q&A. Thank you.

We are getting into Q&A session from here on. [Operator Instructions]. Okay. Let's get started. Any questions? While we're waiting for the question to write up his or her questions, I would like to start referring to some of the questions that we had from yesterday at the earnings call. And that was, please provide with the number of new negotiation open meetings as of the end of December.

In terms of the number of meetings, first of all, what we had last fiscal year was 374, but that we have seen good growth to 405 this fiscal year. Again, with the growth in the number in place, our job is that we make sure to get those mandates in the pipeline, those meetings in the pipeline to be closed in time. So they're not to break down halfway through. So it's a job to make sure that we increase the ratio of closing out of those mandates in pipeline.

The question is about the negotiation meetings and the number of transactions closed. The person said, last year, it didn't seem like you had so many breakdowns between negotiations and number of transactions closed. However, this year, is it correct to understand that, first of all, do you see significant gap between the number of negotiations and the number of transactions closed? That's question number one. And also in relation to the breaking down of the negotiations halfway through, do you see the quality of those negotiations themselves kind of deteriorate this year? And that's why you have seen more breakdowns happening this year.

That's a really sharp question. In fact, it's exactly as you said. We have seen an increase in the number of negotiations open. And there's a couple of reasons why then those negotiations are not leading to transactions closed directly. One is the slippage of the transactions because of the longer time needed for the transaction. And the other is breakdown of the negotiations. It just -- it gets gone. This, however, is not necessarily driven by deteriorated quality of the negotiations themselves. It is, however, because of us not being proactive. Again, those sellers have had higher level of awareness and knowledge. That was primarily driven by those news coverage about malicious buyers. Again, they would go and search themselves online. They would go to lawyers and accountants to get more information. And because of that, as we were not very proactive in terms of the necessary actions and engagement with sellers -- companies, we had breakdown, higher number of breakdowns in terms of the negotiation meetings, and they're sometimes spilling into the next period. We also have seen our rate of closing the deal down by about a few percentage points. This again is a testament to the fact that we were not able to address those anxieties from the sellers in a timely and quickly manner. And we have, for that reason, set in place the structure to accommodate and address this problem that I'm talking about at this point. So I feel that we are able to now solve the issue.

Next question is about the new managers. I feel that there's a higher number of new managers that may have impact in terms of not being able to always control the lead time as you talked about. What is the state of the developing those new managers?

Thank you for the question. Again, you really pointed out correctly here. We increased the number of new managers quite greatly. We had growth in the number of directors by more than 15. We also appointed 40 or so group leaders newly. There were 2 benefits that come out of those appointments. One is about the retention that we're seeing the higher rate of people staying at the company because of the thorough -- more thorough and careful trainings that can be conducted with the higher number of managers. We also had a better bond as groups of the consultants that led to higher number of mandates. This is a result of higher traction in terms of our actions. In the meantime, in the context of deal management, training is still ongoing. That being said, we have had really enhanced trainings running. And for those group leaders, Takeuchi is conducting the management training every month. And for those who have been through those monthly trainings for more than 2 years can become directors. So these people have the higher level of the deals management themselves. But when it comes to actually putting those knowledge into practice in the field, it's a different story. And I wouldn't deny the fact for that perspective that we're seeing those rather still inexperienced new managers are somewhat leading to the delay or longer time needed for the deals to be closed. On the other hand, however, these people are growing on a daily basis as well. I feel that we're going to see a great amount of improvement as we go.

Next question is about the number of consultants as of the end of December last year, who are specifically above 3 years in terms of the tenure. So can you give me the number? And can you also touch on whether you see improvement year-over-year for that number?

Thank you. This again, it's a very important challenge for us. Because those people who are above 3 years are the ones who bring results and develop other consultants. And the number of consultants who are above 3 years in the Q3 last year were 246 or 38% of the total. And -- so the Q3 last fiscal year was 246, which was 38%. But now we are seeing -- but now this year, it's grown to 320, which is 44% of the total. So we have seen growth in terms of the number. This is the plus of 74. So I feel that we have had success in growing the number.

The next question is what was the number of transactions spilling into the next quarter as of the end of the third quarter.

Yes, thank you for the question. That number was 35 mandates.

And following that, do you think that you'd be able to more successfully control the transaction so that you won't see higher or the same level of transactions slipping into the next fiscal year in the fourth quarter?

Yes, I definitely would like to see fewer amount of slippage that we're going to see in the fourth quarter as well as fewer number of breaks of the deals. And we also have taken on measures so that we can actually see those stably going. Kickoff meeting that I talked about is a testament to that. I also feel that the February that we're getting into is the most important month for that. Next week on Monday, I'm going to speak to all employees that we have for that matter. We're working on those various kinds of measures so that we'll be able to see minimized number of slippages and the breaks and maximize the number of transactions closed.

Next question is, can you tell us about the new sell-side mandates in the third quarter that were directly sourced and that were coming through the network?

Directly sourced sell-side mandates was 35% or 352, that's the count. And the ones that came through the network was 65% or 666. The rate and the number remains unchanged with what we had last year.

The other question that's related to the new sell-side mandate, it seems like that you have seen growth in terms of the mid-cap mandates of those new sell-side mandates starting this year. But what drives that?

One, we have strengthened the structure and support mechanism to increase the number of mid-cap mandates. In the case of small-sized companies, if they don't have anyone who can succeed their companies, then they are left with a couple of options. And that is they go bankrupt, they declare bankruptcy or they go a route of M&A to ask for help. Whereas for mid-cap companies, they have more number of avenues. Because they are mid-cap, the family of the company can also be attracted to the succession. Obviously, there's a head that they can approach to and have the person succeed the company as well. They can also approach to some fund to execute IPO. And what is important here is that as they have higher number of options and they choose one of those, we must be the best option for them to work on the M&A. And for that reason, again, we have set in place a new support mechanism or supporting department to facilitate and assist in those fronts. And every consultant, every other team can utilize this supporting department. And this has translated into more appropriate approaches, proposals that we can bring to those mid-cap companies. I'm thinking that we would like to further strengthen this point. Next week, I'm traveling to the United States. In America, I appreciate that there are some companies who have those mid-cap corporations and they take time to receive the mandates. I feel that there's a lot to learn from those companies as we try to increase the number of mid-caps further than what we have today. It doesn't mean, however, that we're shifting ourselves completely to mid-cap. Our intention is that we're going to continue expanding the pool of M&A opportunities in a healthier way. When I said healthier, I mean, as we expand the bottom section of the pyramid. It can also grow upwards to the top of the pyramid -- top part of the pyramid. By working on that, we are hopeful that we'll be able to secure the average M&A sales per transaction, too.

Next question is about the start of the new M&A Advisers Association in which you said that in January this year you're starting this self-control committee. So question is, what kind of revision of the rules do you expect to see from here onward?

Yes, thank you. One, I think, is about the morale. I appreciate that there are boutiques in today's industry that are putting out some violent advertisements that are working on phishing sort of sales approaches. So for one, we are setting in place more regulations against those approaches. The other is about compliance. We have problem of the conflict of interest in the context of using intermediaries. We have problem of insiders as we see involvement from listed companies. We are going to put in more regulations against those as well. And the biggest theme at the moment is, how we go about addressing those malicious buyers? We're going to enhance the checklist that enables us in finding those malicious buyers. We are creating contract templates to prevent those malicious buyers from taking on some bad acts. We are making sure that we'll be using escrow so that payment will come through with no problems. Those are challenges that we are facing today.

Next question is about an overall environment that you're in, including the recruitment. I took part in your peers' earnings call yesterday, and it struck me as weak overall. They said recruitment environment is becoming harder and harder, and there are more people leaving the company. That contrasted a bit to your earnings as well -- sorry, to your earnings where you said hiring is starting to sort of improve, although it's still underperforming your initial guidance potentially. So what are your thoughts in terms of what is really happening in the industry that are leading to those weakness? Comparatively speaking, how do you see your positives and negatives, tailwinds versus headwinds, if you can elaborate on that a little more?

Thank you for great question. This again is a very important theme. I feel that what may be happening in the industry is that we are in this transformation, transitionary period right now. I see there are different companies with different missions towards this M&A intermediary work. In Japan, the M&A industry is still relatively new. It's still not matured. My gut says that about 5 years back, the number of boutiques was only about 30 or so. But now we have seen it grown to 450. We have seen many entrants to become boutiques from various industries. And our company historically started M&A intermediaries work, specifically for the clients of the accounting officers. The accounting officers were shareholders of our company. And at the same time, those sellers that they introduced to us were the ones that those accounting firms have been forging the relationship for the past 30 years. So it was the culture that we were always sticking to, to make sure that we carefully, thoughtfully approach on the M&A transactions. What contrasts to that sort of culture, especially amongst those new boutiques is that some of them treat those companies as products. Those companies are only focused on efficiencies, turnaround as they run their firms. Obviously, as they do that, efficiency improves. But there's a biggest -- bigger problem behind it. One is that they're not able to adhere to the guideline and the other is that they're not able to come through with the customer satisfaction and PMI. And today, both SMEs agencies and also financial services agencies have said that it's important to encourage those M&As in a way that can be compliant to their guidelines and make sure that there will be M&As that can well include post-merger integrations as well. They're trying to activate in a healthy manner for the M&A intermediaries work. And I suspect that those boutiques, there are a number of those who have been -- had to make sure that they stick to what those agencies are saying today. I also think that employees are leading the firm who may have used to work on those efficient sales and earned great amount of incentives because if the companies, those boutiques are now having to be compliant to the guidance, they're not as efficient as anymore before. They're not giving out more incentives anymore before. Those employees at those firms get demotivated and they end up leaving the firm. For this, I do believe that we're going to see radical change in the industrial structure for the next 2 to 3 years. There will be a dynamic shift. That change for us is a positive tailwind for us. We were already working on our work to a level that needs to meet the guideline since before. Therefore, we do not need to change anything drastically in terms of how we do things, the culture as we try to be compliant to the guideline because we had already those cultures in places before. Equally, we have always been mission-driven, not the incentive-driven. So we're not seeing our employees quitting the firm because of those problems. We're also fairly underway. We're also on really -- things are also really underway for recruitment for us. Especially if you look at the new graduates pool of the talent, we ranked #5 in the context of consultants [ work ]. We also have gotten quite a bit of popularity for interns in the ranking of whether the intern was helpful with the growth, we actually ranked second in the chart, and we have received 5,000 applications from the interns. Moving forward, we are planning to increase the ratio of those new graduates hiring versus the mid-career recruitment. Therefore, again, I feel that there are a lot of tailwinds in front of us that we are experiencing right now. So we are more ready to regrow ourselves.

We are almost ending the session here. So just finally have Miyake-san say a closing word.

Thank you, everybody, for attending the Q&A sessions today. Some are really in early morning, some are really in late evening. So really appreciate your participation. We have overcome massive challenges ourselves since the scandal. And I feel that at this point, our employees are highly engaged. We have gotten stronger bond, and we have those motivations peaked for the people. We have seen lower number of people leaving the firm, and we are enjoying really strong leading indicators continuously. And those various kinds of regulations that are taking place in the industry are working out as a tailwind for us. We are at the starting line of the fee growth that we are capturing, I'm confidently saying this. There are many, many challenges, however, that we need to undertake. One, we need to strengthen our management so that those leading indicators are resulting into earnings numbers. As we are trying to engage and deliver our strength and advantages in the context of industrial guidance to the customers, branding is also key. We also need to improve productivity of the people per head as we're trying to achieve the mid-range plan. And for that matter, we would like to borrow the power of digital transformation. There are many challenges ahead of us still, but we have, at this point, successfully put ourselves at the right start line. So we're going to be making sure thoroughly to be taking on those various actions so that we can sustainably grow in mid-to-long term. I would very much appreciate your continuous support for that direction. Thank you again very much for your time today. Thank you very much.

This is the end of the session. Thank you, everybody, once again for your attendance today.

Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]