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

I would now like to take the opportunity to answer a number of frequently asked questions from investors. Allow me to read the first question. Please comment on the first half results and the full year outlook. As I mentioned during my presentation, first half results exceeded the forecast, leading us to raise guidance through to the end of the second quarter. More specifically, net sales grew by over 50% year-on-year, and operating profit grew by over 80%, while the number of deals closed also exceeded the forecast, and we secured new contracts at a strong clip. We therefore, posted a strong performance in the first half. While we haven't raised guidance for the full fiscal year, we do expect our efforts thus far to translate into strong results in the second half as well. And furthermore, we will be working toward a guidance raise for the full fiscal year as well through active sales operations. Allow me to read the next question. Please share your thoughts on how sales activities have changed since the M&A Intermediaries Association implemented itself regulatory rules, and discuss how these rules will develop in the future? Our M&A brokerage services serve a valuable role in supporting business succession efforts on the part of SMEs. And furthermore, we view our services as also being indispensable to companies leveraging acquisitions as growth opportunities, scaling up small companies into medium-sized companies and medium-sized companies into large companies. That said, a number of bad actors have brought some degree of scrutiny upon the M&A brokerage services industry, leading to the creation of the M&A Intermediaries Association and of self-regulatory rules with which industry players are expected to comply. Personally, I view this development as a great benefit for the industry, because leaving these issues to fester would only result in a loss of confidence in the M&A brokerage industry as a whole, therefore, impeding our sales activities. Looking at the actual self-regulatory rules, this call for M&A brokers to explain to prospective buyers and sellers the relevant aspects of the M&A process, and prohibit certain types of sales tactics. Within this scope, Strike established the operations review department for the purpose of regulating sales practices. Naturally, a consequence of greater compliance are delays in the execution of sales activities, but we view putting these guardrails in place as being a necessary step toward ensuring quality service. As such, we view regulation as an overall net positive. It should be noted that simply complying with these new self-regulatory rules isn't enough. So we expect other types of regulatory frameworks to emerge. And furthermore, for many industry players, current self-regulatory efforts are starting from a baseline consisting of the bare minimum. So we expect these to grow in breadth and scope. We also expect the market will require greater compliance by M&A brokers. The M&A Intermediaries Association currently consists of 93 participating organizations, among which a number of Japan's regional banks. We believe this number needs to increase beyond its current scope of 93 organizations so that our industry can better align with government policy and directives. Naturally, participating organizations follow the self-regulatory rules, ensuring reliability and quality of service for the SMEs that use our M&A brokerage services, and catalyzing the further development of the M&A market in Japan, and consequently, of the M&A brokerage industry. In summary, I think the self-regulatory rules are a net positive for the industry. Allow me to read the next question. Please comment on the full year outlook for the consultants recruitment plan. As of the end of the second quarter, the consultant headcount had increased by 15, putting us slightly behind schedule versus our full year target of 40 consultants. That said, I would like to switch any fears stakeholders might have on this front as we believe we can fully make up for this in the third and fourth quarters. Strike welcomed 17 new graduates in the month of April alone. So we believe our hiring target to be achievable, although I once again reiterate that Strike issues a policy of hiring merely for the sake of hiring. Allow me to read the next question. How might the establishment of tax incentives designed to encourage SMEs to engage in multiple M&A affect future M&A activity? This question touches upon a very relevant topic. First, allow me to give you an idea of what this system of tax incentives is about. Under the previous management resource aggregation tax system, SMEs could benefit from an income deduction of up to 70% of the acquisition value of an M&A deal over a period of 5 years. This tax system has since then been revised, and a new category was added corresponding to medium-sized companies, which are defined as being larger than small-scale companies, but with an employee headcount of 2,000 and under. The purpose behind this is to encourage these companies to grow further to become large-scale companies through, for example, the use of M&A within the scope. And while certain specific conditions apply, this is a very beneficial revision to the tax law, giving SMEs an income deduction of up to JPY 10 billion per deal to be broken down over 5 years after an initial period of 10 years. This new tax law won't go into effect right away, but I believe this revision to the tax code sends a message underscoring Japan's commitment to giving birth to growth companies and leveraging M&A to deliver further growth. Naturally, Strike intends to recommend the effective use of these tax incentives as a tool benefiting M&A and allowing our clients to deliver growth. This system will help scale small companies into medium-sized companies and medium-sized companies into large companies, and we believe part of Strike's mission is helping achieve this. In summary, I think this is a tremendous tailwind. And I think the Japanese government's policy is to use various tax incentive programs such as the management resource aggregation tax system, which is still in place. And an open innovation tax incentive that provides tax breaks to companies acquiring start-ups, which is an incentive that even large companies can use to encourage companies to use M&A to catalyze corporate growth. We, therefore, view this development as a net positive. Allow me to read the next question. Could you share your plans on how you will use your cash on hand going forward? Looking at Strike's balance sheet, cash and deposits represent a large proportion of the company's assets. So a common suggestion is for us to return value by raising dividends and/or carrying out share buybacks. That said, Strike is a growth company. So we believe the majority opinion is that these funds should be used for growth investment. We want to utilize our assets to carry out business investment, including investment in start-ups and also for Strike to carry out M&A deals of our own. Within this, while no deal has yet been seen to fruition, a number of deals have progressed to the proposal stage. We will, therefore, like to allocate resources toward the execution of M&A in the interest of catalyzing Strike's growth. Of course, once we have executed on these types of initiatives and secured a strong cash position after doing so, we will then consider returning monetary value to shareholders by raising dividends and carrying out share buybacks. Over the short term, we are focusing on allocating these resources to growth investment. We are not yet at liberty to discuss the details, but we are eyeing several deals in this area. This concludes our answers to frequently asked questions from investors. Thank you for your time.