Strike Group Co., Ltd. (6196) Earnings Call Transcript & Summary

My name is Kunihiko Arai, President and CEO of Strike. I would like to start today's presentation covering the results for the first 6 months of the fiscal year ending September 30, 2023. First is a general summary, starting with the external environment. The market for M&As in Japan remains strong, and it was against this backdrop that Strike was able to grow net sales by 16% year-on-year in the first half of the fiscal year. Strike's main target is the market of M&A involving SMEs, and we didn't register any significant changes in this market as it remains strong. Naturally, we believe there is a need for us to continue keeping a close eye on the trend in interest rates and how things develop overseas. With that being said, as it stands, things have been going well in recent months. Next is Strike's operating performance. Net sales came to JPY 6 billion in the first half of the fiscal year and fell slightly short of the initial target, requiring us to revise the target downward. Nevertheless, this is still a year-on-year increase of 16%. The number of deals closed increased by 5 year-on-year, corresponding approximately to a 5% increase. Additionally, a slight increase in average sales generated per deal closed translated into an increase in sales. Average sales generated per deal closed stood at approximately JPY 58 million, and this increase drove results. While operating profit through to the end of the first half of the fiscal year exceeded JPY 2 billion, the percentage increase was low compared to the percentage increase for sales. With that being said, this decrease in profit margin was something we expected given that we aired TV commercials and carried out head office expansion in the second quarter. As such, this decrease in profit margin was the result of upfront investment. So we don't view this as problematic. Regarding our having fallen behind on our target, this happened against the backdrop of an increase in deals that take longer to close and complete. Delays in terms of paperwork and additional paperwork requirements in the second quarter translated into approximately JPY 1 billion in sales falling into the third quarter. With that being said, we expect these to be completed during the second half of the fiscal year. Next, I would like to discuss the topic of recruiting. Things have been going well on this front as well as the company added 21 consultants in the first half versus its full year target of a net increase of 40. As such, we are on track to meet the full year target. Additionally, over 20 mid-career professionals and new graduates joined the company in April in the third quarter, so there is a possibility we will exceed the full year target. Naturally, we don't expect newly hired consultants to start making a contribution straight away as this process takes around 2 to 3 years. We, therefore, expect these hiring efforts to start making a contribution approximately 3 years from now. As I have mentioned on previous occasions, we prioritize the quality of the talent we hire. Consequently, even if this means recruitment numbers below the target, we will not be hiring just for the sake of hiring if we are faced with a paucity of qualified candidates. In other words, there is a possibility that target recruiting numbers will not be met or that conversely that we will exceed the target should the opportunity present itself for us to hire high-quality candidates. Such as the recruiting policy we continue to uphold, and while we formulate targets, our stance is to prioritize quality when it comes to recruiting talent. I would now like to discuss the performance results. Strike registered JPY 6.082 billion in net sales and JPY 2.025 billion in operating profit. Additionally, we closed 104 deals and went above 100 deals closed in the first half for the first time. On a year-on-year comparison, net sales increased by 16%. Additionally, SG&A expenses increased as a result of head office expansion and an increase in the airing of TV commercials. This, in turn, translated into a decrease in operating profit margin, but this is something we expected in our plan. The breakdown of the cost of sales and SG&A expenses is as shown on Page 7. Next is the balance sheet. Total assets now approach JPY 15 billion, of which cash and deposits account for JPY 11 billion. We, therefore, believe putting this to good use to be indispensable for future growth in the form of, for example, Strike itself carrying out mergers and acquisitions. We are considering this option as well as investment in new businesses and in some cases, have already moved into the execution phase. Shown here is the quarterly trend in net sales. As I mentioned during the company's financial results presentation for the first quarter, we view the large variance on a quarter-by-quarter basis as a challenge Strike needs to address. Some of this variance is an inevitable part of the business and industry we operate in. But nevertheless, we believe this variance is probably a bit too pronounced. As such, as I mentioned during the financial results presentation for the first quarter, it is our intention to reduce this variance and further incentivize investors to hold shares in Strike. Furthermore, in the second quarter, we implemented concrete measures towards this end. We analyzed the reason behind this quarter-by-quarter variance. Strike receives 2 types of fees, memorandum of understanding signing fees and success fees received at the time the deal is closed. Success fees account for the majority of sales. But naturally, we must first receive memorandum of understanding fees as an intermediary step in closing deals. Therefore, structurally speaking, an increase in sales from success fees lags an increase in sales from memorandum of understanding fees. Looking at past data, quarters delivering an increase in sales are preceded by an increase in memorandum of understanding fees. Conversely, quarters following quarters with lower sales from memorandum of understanding fees are usually followed by lower sales from success fees as a way to alleviate this trend in the second quarter. In the process of focusing our efforts on closing deals, we enhanced our activities towards securing memorandum of understanding fees for deals in the third quarter and beyond as a way to limit the drop in success fees. The third quarter is currently ongoing, and we believe that we will be securing success fees from deals for which we received a memorandum of understanding fees in the second quarter. We, therefore, believe we will be seeing improvements in the third quarter and beyond. Strike is dedicating great efforts to achieving deal closings, not just in the second quarter, but also in the third and fourth quarters and in the first quarter of next fiscal year and beyond. Additionally, we continue activities in order to secure memorandums of understanding in the following quarter. Next, our past results strengths and the progress versus the forecast. We posted a record first half net sales performance, with the progress rate versus the forecast currently standing at around 40%. As such, we intend to make up for this in the third and fourth quarters as we are a little behind. I would now like to discuss the trend in new contracts and in the new contract backlog. In July 2021, Strike stopped charging a mobilization fee, and this has translated into a robust increase in new contract acquisitions. On the other hand, while this made it very easy for us to acquire new deals, it also meant us taking on deals with a low probability of closing, Ultimately, this reduced our productivity. Consequently, recently, we are more selective in what deals we take after assessing the probability of a successful close. We don't take in deals at the pace we did last fiscal year, but rather assess the probability of a successful close and focus on those deals. Some stakeholders might perhaps worry about a slowdown in the number of new contracts. But to put it succinctly, there is no reason whatsoever for concern as things have been progressing according to plan, we, therefore, continue making robust progress in new contract acquisitions. Shown here is the trend in recruiting. As I mentioned earlier, we have been making strong progress in this area. This fiscal year, the company is aiming for a net increase of 40 consultants, a target we believe that we will be able to achieve. Naturally, this depends upon recruiting numbers in the third and fourth quarters and on the number of employee resignations. But as it stands, we believe we will be able to achieve our target. I would now like to discuss a number of topics. Strike launched television commercials in what was the first for the company. The purpose behind this comes from the fact that it is difficult for people to associate the name Strike with mergers and acquisitions. Most of our competitors have the words M&A as part of their company name making it easier for the public to relate their name to mergers and acquisitions. Only Strike doesn't have the words M&A in our company name, meaning we would sometimes lose out in terms of brand recognition. We, therefore, seek to increase the number of opportunities for clients to identify Strike as the leading company in the M&A space. And to this end, decided to start airing TV commercials. We don't expect immediate results, but these commercials have translated into tangible results, such as an increase in website page views, and we believe these effects will gradually be felt in the third quarter and beyond. Second, we formed a business alliance with the Hyogo West Certified Public Tax Accountants' Association. Starting even before last year, we have entered business alliances with numerous certified public tax accountants' associations. And the number of regions we don't yet cover has dwindled significantly. We seek to continue growing the number of deals introduced to us through this network of public tax accountants. So going forward, we will increase the number of associations we partner with and also carry out promotions directed at our partners with the objective of improving brand recognition and secure client referrals from our certified public tax accountant partners. This concludes our 2 discussion topics for today. Next, I would like to discuss the forecast for the fiscal year ending September 2023. Unfortunately, we had to revise the first half forecast lower, but the initial forecast for the full fiscal year remains unchanged. Additionally, while profit margins will be lower than last fiscal years, we are aiming for a profit increase in terms of the absolute monetary amount. We invite you to produce these numbers at your convenience later on. Strike is aiming for a dividend payout ratio of 25%. Over the medium to long term, should there be no prospects for us to use our capital or carry out investment, then we could possibly consider raising the payout ratio. With that being said, the dividend payout ratio for the current fiscal year is 25%. Our policy is to grow dividends by growing profits. Next is the medium- to long-term management policy. There are no changes to this area as well. We are aiming for JPY 21.8 billion in net sales and JPY 8.4 billion in operating profit for the fiscal year ending September 2025. Additionally, our consultant headcount target of 300 people remains unchanged. In terms of individual activities, we will work to enhance team membership and the capabilities of our consultants. There are no significant changes to our organizational structure. Here, too, as I mentioned earlier, we will work to build a structure of 300 consultants by the end of the fiscal year ending September 2025. This target remains unchanged. Next is our future growth strategy. In addition to business succession M&A, we will be creating a new strategic pillar in the form of the promotion of innovation M&A. Business succession M&A involves, for example, making sure a company with a 30-year history will survive for another 30 years and is very valuable work from a social point of view. With that being said, this does not involve the creation of new economic value. At its core, business succession M&A is social contribution in the form of avoiding negative outcomes. Companies without anyone to take over the business request Strike's services. And if we do everything perfectly, this means a neutral effect on the economy in the sense that it neither adds nor subtracts economic value. If our work is 90% perfect, that results in negative economic value, such as the nature of business succession mergers and acquisitions. In contrast to this, we have innovation M&A. The Japanese government has started its start-up development 5-year plan toward increasing the number of start-ups. Against this backdrop, an avenue for start-ups to exit and sell their business through M&A becomes indispensable, and we refer to this mechanism as innovation M&A. Without this, the market for start-up investment won't grow, and furthermore, investors tended to avoid ventures without sufficient liquidity. There are limits if start-ups are to rely solely on IPOs as an exit avenue. So we believe there is a need for us to work toward further increasing the M&A of start-ups. Within the M&A intermediaries industry in which Strike operates, we would like to carry out operations toward helping create new industries and companies. In concrete terms, we hold pitch events almost on a monthly basis as we continue gradual efforts to bring together start-ups and large companies. We believe we are at a stage where we will soon be able to report results on this front to stakeholders. We invite you to purview the company overview at our convenience later on. This information remains mostly unchanged. Regarding our sourcing routes, there have been no major changes here as well. Strike's internal database now contains over 15,000 companies with acquisition needs as we continued carrying out sales activities. I would now like to discuss market trends. In recent years, the market for M&A has seen high levels of interest and activity. This has led to many new companies entering this market. The presence of new companies serves to add further vitality to the market and new people bring new ideas. So I view these as indispensable for the industry as a whole. However, these new entries also lead to some challenges, an increase in ultra-competitive M&A intermediaries leads to an increase in lower-quality intermediaries. And this is a problem recognized by administrative bodies within the Japanese government. Mergers and acquisitions are for the benefit of society and not exclusively for M&A intermediaries to derive a profit. There is an element of social responsibility, so we believe there is a need to increase service quality and secure an environment allowing clients who truly require M&As to pursue these with a sense of security and peace of mind. I am the Representative Director of the M&A Intermediaries Association, an organization co-founded by Strike. We have the presidents of other companies in the same industry as directors at M&A Intermediaries Association, and we all work together for the benefit and development of the M&A Intermediaries Industry. There is a need to dedicate efforts to these activities to make a contribution to the further healthy development of this industry. And most importantly, to the development of the economy and of society, we should be aware of this need in executing our corporate activities. This concludes today's financial results presentation for the first 6 months of the fiscal year ending September 30, 2023. Thank you for your time. I would now like to take the opportunity to answer questions from investors.

Allow me to read the first question. What are your thoughts on first half earnings? To be frank with you, I feel we let investors down somewhat. And that is something we regret and we'll be reflecting upon. I believe our having revised downwards in the first half of the fiscal year forecast came as a very negative shock to investors. We are currently doing our utmost so that something similar doesn't happen in the second half and so that we can meet the full year targets. Allow me to read the next question. What are the recent and future industry trends in the M&A brokerage industry? As I mentioned earlier, the market for M&A in Japan is on a very strong growth trend, not usually seen in many industries. Against this backdrop, many new companies are entering this market. Within these companies newly entering the market, some offer very poor service quality and some have very little experience. As it stands, the M&A industry doesn't require any certifications, which means this industry is open to everyone. With that being said, this situation shouldn't be allowed to continue unchecked. M&A Intermediaries Association was established in 2021 by 5 publicly listed companies with the intention of raising the level of the industry overall. The purpose of this association is to raise the level of the M&A Intermediaries Industry and standardize quality. Creating this type of association was done with the objective of creating an environment in which the owners and operators of SMEs and companies requiring M&A can engage in M&A and request the services of intermediaries with a feeling of security and peace of mind. This environment is indispensable to the further development of Japan's economy and to an increase in mergers and acquisitions. Japan's population is expected to decrease further going forward, and there are no guarantees regarding the maintenance of the current number of companies as the number of successors is expected to decrease alongside the decrease in population. In light of this, we expect to see an increase in demand for consolidation amongst these businesses. These issues needed to be addressed. Otherwise, Japan's industry will fall into a disastrous situation. It is because of this that we view M&A as vital infrastructure to be used with a sense of safety and peace of mind for the sake of Japan's industry. And so there is a need to work toward putting this infrastructure in place. As such, we would like to leverage this industry association to raise the level of the overall industry. I believe interest will shift towards the idea of gradually raising the level and quality of the industry. Allow me to read the next question. Could you comment on the economic outlook and its impact on M&A? As I mentioned at the beginning, the market for M&A in Japan has been growing at a very strong clip. And we don't really see any significant factors that can potentially hamper this growth. With that being said, we do not believe that this situation will continue into the future. There is, therefore, a need to keep a close eye on how things develop overseas and on interest rate trends. For example, companies obtained financing from lending institutions to carry out acquisitions. So an increase in interest rates means a decrease in absolute credit facility amounts and consequently, a decrease in the share price. It can also be expected that obtaining financing will become harder in the first place. Currently, business succession M&A accounts for approximately 60% of our business, and the need to find successors for one's business is present regardless of trends in interest rates, the state of the economy, et cetera. We, therefore, believe that of crucial importance is how skillfully we can guide sellers. This concludes our answers to questions from investors as well as the financial results presentation for the first 6 months of the fiscal year ending September 30, 2023. Thank you for your time.