Prestige International Inc. (4290) Earnings Call Transcript & Summary

Thank you for participating in our results briefing. I am Katsuya Nakayama, Senior General Manager of Corporate Management Department at Prestige International. Before starting, please note we have chosen to present our fiscal 2020 results by video this time in order to prevent the spread of COVID-19. We are grateful for your understanding. With regard to today's briefing, I will present our results for the fiscal year ended March 2020. This will be followed by a discussion of the outlook going forward and key topics by Shinichi Tamagami, CEO of Prestige International. Let us begin. I will start with the results for the fiscal year ended March 2020. At the outset, please note that as a result of the COVID-19 outbreak, the auditor's review of our Singapore entity was delayed. This pushed back the completion of the [ Tanshin Report ]. As a result, the related procedures were delayed by approximately 1 month relative to our typical timing to date. We recognize that this delay may have caused concern or inconvenience. We humbly ask for your understanding of the circumstances. Please turn to Page 3 of the presentation materials. We show here our consolidated results for the fiscal year ended March 2020. We reported year-on-year improvements for sales and all levels of profit. However, we were unable to achieve the full year profit forecast announced in May 2019. In particular, we fell short of our profit forecast in Q4. There are several reasons for the profit shortfall. Q4 is typically busy season for Prestige. Our forecast had assumed that the growth trends up to Q2 in the assistance-related businesses such as roadside assistance and property assistance would continue. However, on the back of the increase in confirmed cases of COVID-19 from January 2020, activity levels were not as high as expected, hence the shortfall. As well, with regard to the compliance initiatives announced in October 2019, while the relevant regional authorities have yet to make specific decisions, we chose to make some provisions in Q4. We believe this also contributed to lower-than-forecast profits. Please turn to Slide 4. Here, we show the breakdown of sales and operating profit for the domestic and overseas group companies. We did not see a significant change in the composition of either sales or operating profit, either for the domestic or overseas groups. However, we expect that the COVID-19 outbreak will have an impact, in particular, on our overseas group companies going forward. Next, please turn to Slide 5 for a discussion of the assets side of the balance sheet. There was no significant change in the composition of assets. The key development during the fiscal year in terms of tangible assets was the completion of the Akita BPO Yokote Campus. Next, on Slide 6, we look at liabilities and net assets. Similar to the assets side of the balance sheet, there were no major changes to the composition of liabilities and net assets. Please turn to Slide 7 and cash flows. Investment cash flow was a relatively sizable negative at JPY 2.796 billion but was within operating cash flow. As a result, free cash flow was a positive JPY 3.137 billion, of which JPY 893 million was allocated to the payment of dividends. Next, Slide 8. This shows the breakdown of sales by segment. Roadside assistance sales grew strongly, reflecting full year contributions from new clients. The other mainstay businesses also each reported solid growth in existing operations. As such, we were able to exceed our full year forecast in these businesses. Please turn to Slide 9, which covers the breakdown of operating profit by segment. On a year-on-year basis, the key drivers were the roadside assistance and warranty segments. However, as noted at the outset, relative to our full year plan, the pace of overall profit generation in Q4 was slower than expected. As a result, the roadside assistance, property assistance and insurance BPO businesses fell short of our forecast. With regard to temporary workers and others, subsegment losses were impacted by accounting measures with losses widening by JPY 402 million year-on-year. However, this was offset by growth resulting from project inspections and validations for the IT Solutions business for overall segment losses of JPY 329 million. This completes the overview of the results for the fiscal year ended March 2020. I will now hand over to CEO Tamagami.

I am CEO Tamagami. I will now present our forecast for the fiscal year ending March 2021. With regard to our forecast for the fiscal year ending March 2021, there are still many uncertainties as a result of the COVID-19 outbreak. We have chosen to make the following assumptions about the impact of COVID-19 for our full year forecast. We assume Q1 will be significantly impacted by COVID-19 and that there will be a lingering impact in Q2. However, we are assuming a return-to-normal operating conditions for Q3 and Q4. With regard to the impact of COVID-19 on group performance, we expect both our domestic and overseas businesses will be affected with the impact, particularly large for the overseas businesses. As such, we will need to take a more vigilant approach to our overseas businesses. With regard to initiatives going forward, we do not limit ourselves to simply responding to COVID-19, but believe it will be necessary to address changes to the operating environment resulting from the outbreak and to make appropriate changes in how we manage our businesses. Prestige's business foundation is soundly rooted in the regions, reflecting our many operational basis in regional cities. There are a number of functions currently being done from the Tokyo headquarters which could be equally well-managed at our regional bases. We are considering shifting some of these functions to our regional BPO sites. As well as a result of the current COVID-19 crisis, our clients are also facing challenges in risk management, such as the risks related to the concentration of operations in large urban centers which were significantly impacted by the outbreak. We aim to capture such demand by providing our clients with BCP solutions. At this time, we will also strategically focus on hiring superior human resources particularly in regional cities, where there have been significant job losses as a result of the downturn in inbound tourism. As an ongoing initiative, we will also consider measures to enhance operational efficiency, not only for our own sake, but also in response to client demand, including teleworking and other measures. I will now discuss our forecast for the fiscal year ending March 2021. In the fiscal year ended March 2020, we generated sales of JPY 42.3 billion and operating profit of JPY 4.959 billion. For the fiscal year ending March 2021, we forecast sales of JPY 43 billion and operating profit of JPY 5 billion. We recognize that the year-on-year growth rate is very modest, but we have factored in a negative impact of JPY 1.1 billion at the sales level and JPY 0.25 billion at the operating profit level from COVID-19 on the domestic business. For the overseas business, we have factored in negative impact of JPY 0.8 billion and JPY 0.45 billion on sales and operating profit, respectively. We expect the COVID-19 outbreak will have a negative impact on economic activity in Japan. We believe it will also have a significant impact on the core market for our overseas business, support services for Japanese in overseas postings as a result of restrictions on movement and a decline in economic activity. This slide is a summary of our earnings forecast. We are expecting both sales and operating profits to be largely in line with the March 2020 levels. We project ordinary profits to decline slightly year-on-year, reflecting an expected decline in equity method profits. We are guiding for net profits largely unchanged year-on-year. From this fiscal year, we have made changes to segmentation. As our business has developed, the range of services we provide has expanded. To better reflect the contents of our business portfolio, we have adjusted and renamed our segments. To date, our segmentation was based on service type, such as roadside assistance. We have regrouped our services to reflect the target markets such as automotive, which will incorporate our auto-related businesses, including roadside assistance services. We are experiencing strong growth in the automotive area. The development of advanced cutting-edge technologies and the emergence of new categories, such as EVs, are driving demand for a broad variety of solutions from our clients. We have been successful in developing new services, which have led to a wider range of products. As such, we felt it was appropriate to adjust our segmentation to reflect the markets we address. Please find here the segment breakdown for our sales and operating profit forecast, reflecting the new segmentation. To support the transition, we will also provide disclosures based on the old segmentation this fiscal year for the convenience of investors. With regard to progress under the currently running midterm business plan, the fiscal year ending March 2021 was to have been the culmination of the plan as the third and final year. However, as a result of the COVID-19 outbreak and uncertainty, we acknowledge that achieving our midterm targets may be very challenging. As such, in the second half of this fiscal year, we will shift our focus to developing a new mid-term business plan to start from April 2021. We expect that operating conditions will return to normal in 2021. In addition, the Olympic Games have been rescheduled to 2021. The next midterm plan will reflect these and other factors. With regard to capital expenditures and depreciation costs. While the operating environment remains challenging, we remain committed to executing on advanced investments for future growth. This fiscal year, we plan to invest JPY 700 million in the Toyama Training Field, a training facility focused on automotive-related services; roughly JPY 2 billion for the Yamagata #2 BPO Park; and an additional JPY 300 million for Uonuma Terrace, a call center. Major capital expenditures for March 2021 will be around JPY 3 billion. While we recognize that sales and operating profit growth for March 2021 will be modest, we believe there is significant potential and room to grow our business and demand from our clients continues to increase. As such, we feel it is important to continue to invest in the business, which is our greatest strength at this time. I would like to devote the next section of my presentation to our ESG initiative. We expect the Toyama Training Field, as discussed earlier, will become a key base for Prestige. It will be instrumental in ensuring that we consistently provide high-quality services to users in need and maintain high levels of customer satisfaction. The facilities will be open to not only Prestige employees and group company employees, but franchisees and other operational partners as well. Our aim is to provide training for all service providers which will ensure that they uniformly understand and embody our spirit of hospitality and service philosophy in serving our clients. This is why we have chosen to build a new training center in Toyama. This is an important strategic first step for Prestige. Going forward, we may consider building more training facilities to improve technical skills in proximity to other BPO campuses as necessary. In addition, as a part of our initiatives in corporate social responsibility, Prestige is firmly committed to its mission to contribute to revitalizing regional communities. Prestige had already established women's sports teams in Akita, Yamagata and Toyama. We are proud to announce that our women's basketball team has been admitted to the Women's Japan Basketball League, the top league in Japan, for next season. Now all of our teams have been admitted to the top leagues for their sports. This reflects our strong commitment to revitalizing regional communities. We believe this has broadened the opportunities for our women employees to excel not only in the workplace, but on the court as well. The addition of the Akita women's basketball team to the WJBL is the first new addition to the league in 17 years. It is also the first time that a team from the Tohoku region has been admitted to the league, raising expectations across the region. We look forward to seeing the team display their ability. Finally, I would like to highlight our initiatives to promote women's careers. Our Women's Career Promotion Project has been a key mission for Prestige over the last 2 years. 2 years ago, we selected a director to be responsible for this project from amongst the employees. To further elevate our efforts, we have recently established a new project, the New Lifestyle Support Program, selecting yet another woman from amongst our employees as the director responsible for this project. This project includes a number of initiatives. Although the core focus of the program is on women in the workforce, we recognize that all of our employees face challenges in their lives, regardless of gender. Therefore, we are planning support programs that will be open to single parents, either female or male. We are also planning support initiatives for employees that are providing nursing care to elderly family members as well. In the final section of the presentation, I would like to provide some additional information on Prestige's operational status. With regard to employee numbers and our capacity rate relative to the number of seats, Akita is at virtually full capacity, while Yamagata's headcount exceeds the number of seats. Toyama is now over the 60% mark. Despite being in its first year of operations, Yokote is already over the 50% level in its first year of operation, while Nikaho is largely at full capacity. Our strategy, as reflected in the capital expenditure plan discussed earlier, is to expand our regional operations bases over time to continue to give our clients a sense of security in our capacity when awarding us with new projects. With regard to on-site field support dispatches, on-site services are an important part of our business. The number of roadside assistance dispatches rose a significant 16.3% year-on-year. Although roadside assistance is our largest segment, it continues to show strong growth, reflecting superior brand recognition and service quality. As a result of our strong reputation in this area, we continue to see demand from many clients for our service. Park assistance also showed strong growth, mitigating the flatter trend in overall home assist dispatch numbers. While total dispatch numbers for home assist are unchanged year-on-year, the proportion of in-house dispatches is increasing. One of our key objectives is to raise our share. However, given the sheer number of orders, there continues to be more to do in terms of expanding our network of service providers. We will continue to aim for a share of at least 50% in roadside assistance, a combination of in-house resources and franchisees. We will continue to invest in this business. Finally, I will discuss our dividend guidance. For the fiscal year ending March 2021, we guide for a JPY 1 reduction to the dividend per share relative to the previous fiscal year for both the interim and year-end dividend. Please note that this is a forecast and that we will do our utmost to respond to investors' expectations. We will concentrate our efforts on delivering a performance that will allow us to raise our dividend per share while also building the foundations for the future growth of our business. We are already 2.5 months into the current fiscal year, but we still do not have clarity with regard to the COVID-19 situation. This is reflected in our forecast for which we ask your understanding. This completes my presentation. Thank you. Thank you for participating in our results briefing. We apologize for the fact that the briefing consists of only our presentation and that we were unable to accommodate an interactive question-and-answer session. As indicated in the presentation materials, if you have questions, please contact us via e-mail at ir@prestigein.com. We will respond in a timely manner. In closing, please note that this is the first time we have used this format to present our results. We apologize for any inconvenience. [Statements in English on this transcript were spoken by an interpreter present on the live call.]