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

Hello. Thank you very much for joining us today. We would like to begin the financial results presentation for the first quarter of the fiscal year ending March 2027. Today, we are broadcasting this presentation with simultaneous interpretation to audience of the entire world. I believe that there are some people who are listening to this presentation early in the morning or at midnight. Thank you very much for joining this session despite time difference. Please present our resume for the session. Nihon M&A Center Holdings has a purpose. It's to bring best-in-class M&A ever closer. We have been running our business with this purpose. Many investors, I believe, are already aware that in this first quarter, this has been a very important quarter for us. It's in the sense that in FY 2022, we had to announce our incident in appropriate accounting incident. It's been 4 years after that. 2022, '23, '24 and '25, for these 4 years, we implemented improvement measures, and we have recovered. And in the fiscal year that ended in March 2026, we had our record sales and ordinary profit. We achieved record high in both of them. A full-fledged recovery was made, we believe. And finally, starting from the current fiscal year, we are founding our company once again, and we are starting Vision 300, Next Genesis. And the first quarter that we are announcing our results today is the very first quarter under this new Vision 300. That's why the first quarter has been a very important quarter for us. So we are announcing and explaining the results of that very important first quarter for us. Starting with the overall summary. I believe that the results this time was very satisfactory for us. Three reasons for that. The first reason, we had very solid growth in sales and profit. And the second reason is the other pillar, which is the fund business, we recorded enough and solid gains from the fund business. And the third one is the most important one. This is related to leading indicators, leading indicators that shows the prospect for Q2 to Q4. We had very strong leading indicators. These are the 3 factors that have led to the satisfactory results in Q1. Starting with sales, JPY 9.1 billion, up 0.9% year-on-year and 188 transactions were closed. This count was down by 11.3%, but ordinary profit was JPY 2.252 billion, down by 11.1% year-on-year and pretax profit was JPY 3.156 billion, up by 24.6% year-on-year. However, we sold an investment target from AtoG Capital, which is our fund business, and that was JPY 780 million, almost JPY 800 million. And this gain on sale of investment was recorded as extraordinary gain. And we had to handle this as extraordinary gain due to accounting principles. But as a business, this is almost equal to recording sales -- additional sales. Therefore, if we could have recorded this as part of our total sales, then the actual sales, JPY 9.1 billion would have been JPY 9.891 billion, up by 9.7% and ordinary profit was JPY 3.390 billion, up by 20% and pretax profit would have been JPY 3.156 billion, up by 24.6%. So we would have been -- we would have been able to grow more strongly in both sales and profit if we could account this as part of our sales, et cetera. And one factor that led to this is that from April, J-Capital has been our intermediate holding company, and there's a contribution from this fund sector, more specifically from J-Capital. This has been the -- or the AtoG Capital that makes investment mainly in overseas projects, and that generated a profit of about JPY 800 million. And I believe that the fund business made quite a big contribution this time that captures people's attention. And the third factor, once again, is leading indicators that were solid this time. Starting with new sell-side mandates, that was 347, up by 20.1% compared to the same time last year. This, as the first quarter was the best in our history and of which mid-cap mandates were 76. The 76 mid-cap mandates acquired was up by 31% year-on-year. So keeping M&A sales per deal, I believe, is quite possible at solid level. And also, we have transactions under negotiation. And that stock is at record high level. As of the end of June, such stock or the negotiations or the transactions under negotiation was 17% up compared to the same month last year, 17% increase. And in the first quarter, we had interim fee received and interim fee received in Q1 was 17% higher compared to the same time last year. So transactions under negotiations are the transactions that are experiencing negotiations that are in pipeline. These are the transactions that are going to be closed and will be impacting our sales and profit. And so we will have the second quarter up to September and the third quarter up to December. We believe that the solid number of transactions under negotiations are going to lead to solid results in Q2 and Q3. And new sell-side mandates that I mentioned at the beginning of the session. So for the third quarter results up to December and the fourth quarter results to March, I believe that these 2 quarters are going to benefit significantly from the new sell-side mandates. And we have had really good leading indicators. And that's the summary. In the previous fiscal year, we had the record high sales and profit. So in March, we have kind of felt that we have done all the best that we could because we had best-in-class sales and profit. But I believe that the -- putting ourselves in a good business cycle in the previous fiscal year didn't drag us in the first quarter this time. We believe that we made good preparation for achieving our target this fiscal year because we have enough pipelines and enough mandates. So we're going to use them fully, so we can leave good results in the second and the third quarter, and we're going to reach a peak in progress acceleration. And this is how we plan to get us back to the customary cycle of performance achievement. Now we will move on to balance sheet and income statement. And I will hand over to Mr. Naraki for the explanation.

Hello. This is Naraki. I'm going to first touch on income statement, more specifically sales. As was mentioned by Mr. Miyake, we have all the figures listed on this page. And as you can see, increasing M&A sales per transaction and decreasing number of transactions closed are the 2 major points. But in the second row, you can see the number of transactions closed, and I have to talk about this. There was a postponement of the closure timing. Therefore, the number of transactions under negotiation at the end of June was at record high level. And according to our internal document, transactions under negotiation that are big to a certain extent grew by 17% compared to the same time last year. And in the first quarter, we received interim fee, and that was JPY 1.358 billion compared to JPY 112 million recorded last year, there was an increase of 17%. So we have that many active mandates this time. And you can find the same detail in our tanshin report. Next page, please. Now on to expense and profit. Starting with personnel cost. So personnel cost as part of cost of sales, this is the personnel fee for M&A consultants and front office staff that was JPY 2.2 billion, up by 6.5% year-on-year. And in the second box, there is a different type of personnel cost. This includes support people that includes sales staff, and that was down by 3% at JPY 1.051 billion. And as you can see at the top about referral fees and outsourcing expenses, compared to the same time last year, this was down by 16.1%, so ratio of direct mandates out of total transactions closed increased. Therefore, referral fee ratio out of sales went down by 2.2 points from 13% to 10.8%. There was a decline of 2.2 points of referral fee ratio. And as you can see under the section of SG&A expenses, there was IT-related expense of JPY 314 million. This was up by 22.5%. And also, we spent advertising expense of JPY 259 million, which was up by 62.5% year-on-year. So you can -- you may feel that this is quite a big increase year-on-year. However, compared to the budget, these are actually on pace with our budget. And also, you can see ordinary profit of JPY 2.252 billion. As we explained, we have the AtoG Capital-related contribution of JPY 787 million included in extraordinary gain of JPY 903 million that's included in pretax profit. And this is from our fund business, which is considered to be our main business. So that's how we could have interpreted this. However, we had to focus on formalities, and this was considered to be the gain on sales of an investment from the company that we fully own. So we have to treat this as extraordinary gain. And about P&L summary, there's a -- this is going to be a repetition of what I've explained already, so I'm going to skip this page. And finally, on balance sheet, we've been keeping healthy balance sheet. In the top row, we have asset data as of the end of the first quarter, JPY 54.442 billion total assets we had and net assets was JPY 47.732 billion, and the ratio of net assets was 87.7%. That indicates that we are maintaining a healthy balance sheet.

Thank you for the explanation. Now we will move on to the topic about which we receive a lot of questions from investors. And this is about leading indicators. This is -- these are important to understand or estimate our future results. And as we've explained before, along the flow of our deal process, we're going to take you through our leading indicators, starting with the number of new sell-side mandates that was 347, up by 20.1% and of which mid-cap mandates were 76, up by 31% year-on-year. And new buy-side mandates. The count was 351, up by 4.8%. And of sell-side mandates, there were mandates in central areas, more urban areas. And the central area ratio was 61%. I believe this is a favorable trend for us. And even after we acquire mandates, if we cannot do enough pre-due diligence for those mandates, we cannot do good matching. So our company puts focus on solid pre-due diligence in what we call a preparatory phase. So we have to do preparation before matching. And the process of preparation used to take 90 days previously, but we shortened that to -- or we have been trying to shorten that to 60 days. This has been a major project for us. And as a result, our preparatory phase is less than 60 days at 56 days. Lead time is now shorter, which means that we can handle more transactions, more mandates now. So the number of transactions closed and other financial performance will improve with the shortened lead time. The next point is on the number of transactions closed and the number of mandates acquired. At the bottom, we have the number of new sell-side mandates. Please pay attention to this number. In the first quarter, from March 2024, 280, 327 and then 289. And this time, this first quarter, we acquired 347 new sell-side mandates. So this 347 was the record high of the first quarter results. For the second, third and the fourth quarter, I believe that we made good preparation. And there's another important leading indicator, which is the number of employees. M&A consultants, we had 626 consultants at the end of the previous fiscal year. And the most recent number is 635. There was an increase. And also, there are people who already joined our company after or the number of people who accepted our offer and those people are 55 in count. And going forward, we're going to accelerate our recruiting efforts. And please pay attention to corporate staff. From 201 to 236, there was an increase in corporate staff. In the past few years, we reduced corporate staff and we had a project of improving direct and indirect divisions. Despite such project, we had an increase in corporate staff count. And I have to explain this. This is because -- we used to do operation management that was done by M&A support department previously. And this team is now escalated to an operation management department and this is now included in the corporate segment. And we have more than 20 people that do the work. So that led to the meaningful increase in corporate staff. And to explain what this work is about for the past few years, we started to take more responsibility about our results, what we do, outcome of generating best-in-class M&A. That has been the focus of our management. Focus of our target of accountability. It's because Lucian, MJG and other similar inappropriate buyer issues have been uncovered. Fraudulent buyer issues have been uncovered in the past few years. And also due to risky scheme, there were some M&As that broke off, and we saw many of such transactions. So we accepted the facts, and we decided to take more responsibility about the outcome of what we do to realize best-in-class M&A. And what we decided to do is to do enough examination at the time of accepting mandates. And after that, there is negotiation process. And in that negotiation process, we've decided to do more confirmation of whether we have done enough due diligence and whether we have taken enough processes and enough steps. We also started to examine more about the scheme, et cetera. And we also have been checking more thoroughly about whether seller owners' guarantee is released, et cetera. These work are done by the people of the operation management, and these people are going to be part of the headquarter going forward.

Next, let us move into our midterm management plan. This fiscal year's first half and second half, when you look at the sales balance, it's 45% against 55%. First half, we want to overachieve this in terms of performance. Fortunately, pipeline, we have many deals that are currently in discussion. So we will continue to properly manage our business. Last fiscal year, the midterm management plan up to fiscal year '27, we were able to achieve JPY 19 billion ordinary profit against the original target of JPY 17 billion in fiscal year '25. With that momentum, in fiscal year 2026, we aim to deliver upside results in a very solid manner. And Next Genesis Vision 300 to achieve ordinary profit of JPY 30 billion in fiscal year 2032. In order to achieve that, we will continue to accelerate our efforts. Now what exactly is Next Genesis? I would like to explain this. Our company from this fiscal year, we have started our second founding. Our second founding means 2 things. One, it is about succession, passing on things to the next generation. But the larger meaning and significance. Our company has reached its 35th anniversary in this year. We are celebrating our 35th anniversary. Compared against 35 years ago or even compared against 5 years ago, 10 years ago, the world has greatly changed. M&A has transformed from a B2B job. It's now transferring into a B2C type job. M&A has not been that special. And it is -- we are now moving into an age of AI. We are trying to properly handle this and create a new business model. This is Vision 300 Next Genesis and our second founding. Now in order to achieve this, the entire company needs to unite together. And in order to do that, we have started a trust-type stock compensation plan. Shareholders, investors and management and employees. We all get on the same ship. We all make efforts towards the same purpose. That is what we want to achieve. And as a symbol of that, we will also relocate our head office. We are planning to relocate our head office. This current head office is split across 4 different floors. It is difficult to have real physical communication with each other. We are now planning to relocate to a building where a single floor is very wide. And the consultant team, the sales team will be consolidated into one single floor, and we will maximize real communication. And that is how we will do our succession, but also create innovation at the same time. So we can achieve that will become the symbol to achieve the true purpose of our second founding. And the background is our mission framework that has been redesigned. Vision, starting with regional revitalization, driving the renewal of Japan and ultimately become the world's #1 integrated M&A company. In order to achieve that, we have core values via professional, that is our core value. And our sales organization has greatly transformed too. In the past, we have been mainly focusing on small SMEs, but it's not just SMEs. In listed companies, too, there's a lot of business reorganization carve-outs, attempts to focus on where you can win. And in order to handle that situation, IB coverage division, strategy division, we have created those divisions, so we can respond to the needs of listed companies too. Next, let us move on to shareholder, equity shareholder breakdown. Naraki will explain.

I will explain the pages on shareholder equity and shareholder breakdown. Just like in the previous year, we plan to continue the dividend payment of JPY 29 that includes JPY 4 of extraordinary or special dividend. And as you see at the bottom of this page, during the period of midterm plan, so up to March 2028, we are going to have more than 60% dividend payout ratio. This has been upheld as our basic policy of shareholder returns. And if you look at the right-hand side of the top, we have the forecast for March 2027, the current fiscal year, total JPY 29 and special dividend is JPY 4. So ordinary dividend is JPY 25 accordingly. So at the profit level of our current guidance, so if we do a calculation based on that current guidance level, the dividend payout ratio has become 60% based on the JPY 25. And we're going to avoid cutting dividend. So for March 2027, we have added special dividend of JPY 4. So total is JPY 29, which will be the same as the year before, March 2026 in terms of the absolute amount of dividend. And as a result, as you see at the top of this page, for FY 2026, the expected dividend on payout ratio will be 71.3%, including the JPY 4 special dividend. Next page. This is about our ROE. It has been above 20%. In the current fiscal year, March 2027, this is expected to be 24.4%. Under the current midterm plan period, so about March 2028, the next fiscal year, we are planning to keep at least 24% ROE between 24% to 25%. The page after, this page shows shareholder structure and the transition of our market cap. That's it. Thank you.

Now we will move on to related activities. I'm going to share with you some important topics. TOKYO PRO Market, the number of IPO support for TOKYO PRO Market has reached 60. And from TOKYO PRO Market to growth and standard such general market, there have been companies that step up to those general markets, and that led to -- and it's not just the TOKYO PRO Market, Sapporo, Fukuoka, they have started a similar market. And regarding this, we have also got certification as an adviser. And what is notable is PMI, PMI consulting, the SME agency, the FSA, they want to drive successful M&As. They want PMIs to be more solid. That is what they have instructed to us. But out of various boutiques, we are the only company that really is dedicated to PMI. There is a lot of need, track record of providing PMI 55, 66, and now it's at 132, but we want to turn it to 200, 250, 300. That is what we aspire for. And we want to do even more advanced PMIs. We need to do joint research with academia to do this. We now have launched joint research with Kwansei Gakuin University. And when you look at our overseas activities, this year, finally, we have achieved our 10th anniversary. Very happy to achieve this. We are smoothly growing our business and a larger portion -- this will be a larger portion of our business into the future. We will continue to grow this business. And we announced this other day, with Generational in United States, we also signed a strategic alliance with this company, 5 countries in ASEAN and Korea. And America, we will kind of spread this sort of a network. And over to the right, you see we were able to do an M&A with a U.K. company. That is another very notable topic. And when you look into our fund business, this is something that we want to make a pillar that stands along with M&A, and we have established J-Capital as an intermediate holding company. And underneath J-Capital, we have the AtoG search funds. So we can do kind of comprehensive fund businesses under J-Capital in this way. And when you look into some other topics, AI is a big topic nowadays. I believe this is very critically important. In order to utilize AI, you need to have -- it's about how much you can accumulate unique data. You really need data-driven business management. And in order to do that, in terms of data collection, that's something that we have been focusing on in a very full manner, sellers, potential buyers, the interviews, business interviews. With agreement from customers, we have been recording those conversations, and we are now turning that into a database. We also have real marketing, marketing roadshows. Seminars are something that we are very good at. We are doing seminars throughout the entire country. And in terms of regional marketing, we are also doing seminars. This photo is a radio broadcast in Ibaraki Prefecture. I was doing a radio broadcast program that features me. And in terms of direct marketing, we have a regional focus and industry specialization, an industry kind of strategy. So regional industry strategy. With that matrix for the structure, we will also continue to grow direct marketing in a very solid way. And this year is our 35th anniversary. It's a great opportunity. So we want to utilize this for our sales, so we can do many promotional activities. That is what we aspire to do. And through those efforts, the Guinness World Records for 5 consecutive years have recognized us the Best-selling mergers and acquisitions company. That is how we have been recognized. And when you go into industry trends, there's just one item I would like to explain. That's the latest information. There was a qualification system that starts from 2027. This is going to be implemented as a law and regulation. And not just that, supporting agencies are now registered to SME agency. And that registration system is also going to be legalized. And so more strict registration system will be in place going forward. So we have examination system and registration system that's going to be codified in laws and regulations. And I believe that this is going to put us in a more favorable or advantageous position. And that's the end of our presentation, and we will start taking your questions with the 3 of us. We will welcome your questions.

President Miyake, thank you very much for the presentation. Now we will move on to Q&A. Please understand that we may not be able to answer all of your questions due to time constraints. We will start taking your questions. And before we start receiving your questions, we're going to share with you some of the questions that we receive often from investors together with our answers. First question. As a way of continuing to improve the qualities of the new sell-side mandates, the ratio of mandates acquired through our partners is growing year-on-year. But I believe that this means at the same time that the ratio of direct mandates where you don't have to be -- you don't have to pay referral fee is declining. Please talk about the advantages of growing the mandates that you acquire through partners that could be lower in gross margin.

Right. This is a great question. And this is also a question about a very important theme for us because we have been focusing on acquiring mandates from our network channels. One of the reasons for that is that the direct market is not stable because 10 years ago, in our industry of M&A intermediaries, there were only 30 to 40 players in the market. But currently, there are 450 to about 500 of such players. There was a significant increase in the number of players. And 85% of the current players were established in the recent 3 years or so. And those kind of new companies do not have their network. So they have to focus on direct marketing. They have to send a lot of direct mails. They have to make calls to acquire new mandates. And the outcome of their activities is that our potential sellers and buyers receive calls and approaches almost every day. And so our potential customers are set up with such approach. Therefore, even when we focus on such direct sales and marketing, the response rate has gone down by a single digit or even double-digit percent. And so we believe that at this point in time, it's better for us to focus on acquiring mandates that we gain from network partners. And another reason is because of such situation, mandates in the direct market has lower rate of eventual closing of transactions. In our network, we have accounting offices and banks. These companies have been looking at the financial results of the potential targets for many years, and our network partners have the long history of tens of years of working with the President. So our partners have not only quantitative information, but also qualitative information such as the character of the President and strength and weakness of the potential sellers and buyers. As a result, acquiring mandates through partners give us better successful closure rate. If we acquire mandates from direct market, as you said, we don't have to pay referral fee. That's true. However, the ratio of closing the direct mandate is lower. As a result, when we think about the productivity, productivity is better from network channel. However, we are not contended with that current situation. We have been thinking about how we can acquire more higher-quality mandates, and we've been thinking about how to improve the customer response rate. And that has been addressed by focus on some regions and having teams focused on some regions and teams focused on some industries. And these teams have been enjoying really good response rate because they have the strong trust from customers, and they've been doing consulting sales activities. So customers' response rate is very good. And also, they can talk about really specialized technical topics. And these teams are well penetrated in the target regions. So closure rate is very good with these departments. So we are going to implement -- continue to implement these 2 strategies as a metric.

Next question. You did mention that the closing of multiple deals was delayed to the next quarter or beyond. Does this mean that there were more delays compared to the usual years? Compared against the prior year first quarter, how much did these delays increase in this first quarter? Could you explain that using monetary value?

Thank you for this question. So these number of delays and how they go up and down. I don't think it's that much of an increase compared to the prior fiscal year. The deal delays, there were 25 last year, about JPY 290 million or so. This year, 16 and JPY 140 million. So that does not mean there are a lot of those delay deals in the pipeline. Last third quarter, fourth quarter, we did solid matching, and that has grown our pipeline compared to last year, pipeline has increased 17%. We have more transactions under negotiation, and that's because we were able to do solid matching. So these delays themselves have not increased that significantly.

Next question. At the end of June, the company had 635 M&A consultants. How many of them were new graduates? Do you have many turnover -- many people who left our company, although they're young. So does this -- so do you have the continued net decline in the number of consultants, excluding new graduates? And when can we expect to have net increase in the number of people planned to join the company after July? So when can we start to have a net increase?

Thank you. Recruiting and retention has been the most important item for us to improve, and we've been sincerely addressing this since last year. And this has been addressed by Takeuchi-san as a central figure, and he's going to share with us the actual reality as well.