Nihon M&A Center Holdings Inc

TSE:2127

Earnings Call Transcript 2022-Q3

[Suguru Miyake, executive]

So good morning, everyone. So today, I would like to report on the financial results for the third quarter of the fiscal year ending in March 2022. And so before we go into the financial reports, I would like to, first of all, apologize for the recent incident, where, due to inappropriate internal reporting, there were some mistakes in terms of apportion of the sales in terms of the accounting periods. And so as a result of that, we have had to delay the financial reporting that was planned for January 28 this year. And so with that, we're very much sorry that we have caused some concerns and troubles to investors. So I would like to express my sincere apologies around that.

So before we go into the financial reports of the third quarter of this fiscal year, I would like to, first of all, explain the outline of the investigation report and also explain the measures that we intend to take in order to prevent the reoccurrence of such incidents. Today, we have Mr. Naraki, who is the Head of the Administration division to participate as well. And so what happened is that there were some mistakes in terms of the apportioned preparation of the sales to wrong periods because of the inappropriate reporting of the deals. And so as a result of that, what we disclosed was on the 20th of December, 2021, we announced that we would start an investigation based on the research committee. And then on the 24th of January, we announced that we would delay the announcement for the third quarter financial results that were planned for the 28th. And then yesterday, on the 14th of February, we released the investigation report.

We also released the numbers in terms of the restated financial statements. And also, we reported on the third quarter earnings for the current fiscal period. And also we reported on the sort of actions to be taken by the directors and also the measures that will be taken in order to avoid recurrence. So between the period from December 20, 2021, and February 14, 2022, the share price at close came down from JPY 3,025 to JPY 1,833 and the market capitalization came down from JPY 1.018 trillion to JPY 616.9 billion. So that has been the impact, and we have caused great concern and trouble to investors. I apologize sincerely for the situation.

So here, I would like to introduce the members of the research committee. So we, first of all, have our attorney-at-law, Mr. Yamagishi, who chaired this committee; and then Mr. Inoue, who is from the same law office. Also, we have the certified public accountant and Mr. Kume; and also another certified public accountant, Mr. Ikegawa. These are the outside members of the committee from the outside. And then we also had Mr. Kinoshita, who is an outside director and also the member of the Audit and Supervisory Committee, attorney-at-law participate; and also Mr. Yamada as well, who is also an outside director and a member of the Audit and Supervisory Committee.

But in fact, in this investigation, many other attorneys at law as well as public accountants participated in the investigation. And so this is what happened. So the accounting for sales were done in the wrong period due to inappropriate internal reporting. And so what happened is that, internally, when we account for sales, there is a system where the determined contract, the final contract has to be registered. So we have this internal system. But what happened was that this contract, the final contract was falsified and that has led to the sales being accounted for in the wrong period. Having said that, this is the -- an internal registration system, register system, and this does not have any impact on outside clients. So my understanding is that there are 2 major issues around this event. And so first of all, there has been a financial impact where the sales have been reported in the wrong period. Also, this is a compliance issue.

And in terms of the cases, so the Research Committee looked back 5 years, 5 fiscal years, plus the current fiscal year. So a total of 5.5 years was investigated, and as a result of that, we found that there were 0 cases in the fiscal year that ended in March 2017 as well as in fiscal year ended in March 2018. However, in the fiscal year ended in March 2019, there were 2 cases. So this is when the small spark happened around this event. And then in March -- fiscal year ended March 2019 -- excuse me, 2020, there were 7 cases. So the fire expanded a little bit. And then in the fiscal year ended in March 2021, there are 35 cases. So it became much larger and in the current fiscal year, up to the second quarter, there were 39 cases. So we will look into the actual impact on the financial results. So we will start on Page 8.

And if you can see, at the very bottom of this page, so this is the first quarter of the 30th period. You can see on the right-hand side of this table that the sales has been adjusted by JPY 221 million, a downward adjustment. And this is because the sales that were inappropriately accounted for during this period by JPY 221 million, so we deducted that or adjusted for that amount. And so that JPY 221 million that was recorded in advance, actually did was realized in the following quarter, so the portion on top of the bottom line. But there were additional contracts that were accounted for in advance. So on a net basis, the impact is JPY 418 million. So we have made a downward adjustment by JPY 418 million. And for the full fiscal year, the amount that was inappropriately accounted for is the yellow highlighted portion. So that is JPY 1.335 billion.

So please turn back to Page 7. Page 7 shows the impact on the figures for the current period. Please refer to the part that is highlighted in yellow. As of the end of the third quarter, we had resolved the issue of deals being recorded as sales in the wrong period. Therefore, the positive impact is JPY 1.335 billion. Next, please look at the total asset and net asset figures at the bottom of the third quarter. On the very right-hand side, you can see that the impact on total assets and net assets is shown as 0. This implies that, although there were sales recorded in the inappropriate period, there were no fictitious transactions recorded.

So next, I would like to discuss why this happened. And so I would like to, first of all, start by explaining the background of this event, which is the operating environment. And so this year is the 30th anniversary for our company. And so we put out a massive campaign around exceeding what we have done historically. And so that is what we call the EXCEED 30 campaign. And so in the fourth quarter of last fiscal year, we had pushed our employees and staff because this fourth quarter was the last quarter of the 30-year history of the company. And so we put out this EXCEED 30 campaign, and we were pushing our sales to achieve numbers or sales performance. And then in the first quarter of this fiscal year, basically, this was the first quarter of the EXCEED 30 campaign. So we wanted to start off on a rocket start, so we had put pressure on our staff as a result of that. And in November -- on the 5th of November, we had a very large event for internal as well as external stakeholders.

And as we had approached that event, we wanted to make sure that we have numbers that are stretched for the fiscal period or the second quarter ending in September 2021. And so we wanted to reach or approach the 5th of November with strong results. And so as a result of that, during these 3 quarters, the fourth quarter of last year, the first quarter of this year and second quarter of this year, we had put a lot of pressure on the salespeople to achieve a strong performance. And also, we had faced the COVID-19 situation. So in that environment, it was very difficult to approach our customers to do sales. We could not meet our customers face-to-face. And, at the same time, in terms of the financial industry because the first priority for the financial institution was to provide the emergency loans to the companies.

There were some delays in terms of the loans for M&A deals. And another sort of pressure that was placed on the sales was the fact that in terms of monitoring or managing the performance of the sales teams, we had a concept of commitment. And so specifically for the individual sales as well as the sales divisions, there's obviously an annual budget that we set for these individuals and divisions. And we do monitor the lapse, meaning the quarterly progress against this budget. But of course, for M&A deals, there are deals that can close in 1 month, but others close in 8 months or so. So while we had placed importance on above the lapse is the commitment that the sales individuals as well as divisions can make in terms of how much performance you can achieve, that person or that division can achieve in a specific quarter.

And so these commitments, unlike the budgets announced is something that is reported by the each individual. And so basically, every quarter, each salesperson would show or commit to a number, a minimum number that he or she will achieve. And so this is something that obviously needs to be achieved by that individual or if the individual would feel like that. And so that ended up becoming a big pressure on the sales teams.

Another cause may potentially be the fact that, with the COVID-19 situation, we could not train appropriately the new individuals that became general managers. Also, there was an environment that allowed for inappropriate reporting. And so basically, the workflow -- operational workflow to report on sales was rather weak. So what was done was to enter the deals into sales force and to register the final -- the copy of the final contract, and that would suffice to achieve a conclusion of a contract. And so that was one issue. And secondly, the standard or conditions to record sales was quite ambiguous. So basically, having the final contract and also the other condition aside from the final contract was to have no deal breaker for that specific deal, but the decision around whether a deal had a potential deal break or not was different depending on the deal as well as the manager. So that was another cause of this situation.

And in terms of the motivation, so the Research Committee did interview or do surveys to the general managers that were involved in this incident. And many of them said that the reason why they had done this was because they didn't want to -- they did not want to cause problems for the firm or departments, and they wanted to meet expectations. And so one feature of this event is the fact that the people that were involved were actually people -- many of them were people that had already met or reached their budget. And given that -- from the perspective of the sort of general managers as well as the salesperson, these deals were not fictitious transactions, and therefore, they felt that it would not have any problems for the customers. And so that was another reason behind the motivation.

And so next, why could not we discover the situation? And so first of all, it was because this was an unpredictable method that was used, meaning that internal accounting was falsified and this is a means, which was absolutely unpredictable. And the second is the fact that we had a dysfunctional internal reporting system. And so if this reporting system, or whistle blowing system had worked, then we would have been able to detect the situation earlier, but this system was rarely used. So that was another cost. And also the reports that were wrongly reported were deals that had advanced in terms of negotiations. So they were close to closing, and that is why it was difficult for us to detect this issue. And also the motive of these people who engaged in the actions was for the sake of the company. So even if the general manager was aware of the situation, it was difficult for them to report because, again, these people who took these actions were doing this for the company. So there was a sense of betrayal if the general managers would report this. And so that was another cause of the delay of the reporting.

And so in terms of preventing such situations from reoccurring, we think it is, first of all, very important for us to achieve a management culture or policy that places emphasis on compliance consciousness. And so in terms of the compliance consciousness of the company, so basically this is an internal issue of when -- the timing of when the sales is reported. But, basically, we do feel that this is a serious issue because there were false reports regarding very important definitive agreements. Also 10 sales departments, or over 10 sales departments and 80 employees were involved in the situation. And also, over the last 2 years, there have been severe increase or a rapid increase of such cases. So we believe this is an important event that cannot be ignored. And so basically, if we think about our alliance partners, such as the large financial institutions, the regional financial institutions, the government-related financial institutions as well as ourselves, investors both in domestic as well as international. We believe that we do need to meet the compliance standards or compliance management standards that our stakeholders are looking for. And so with that situation, we believe that the current -- this event is a very serious situation. And so we would like to make sure that we meet the expectations of our stakeholders in terms of compliance-based management policies as well as management structures, and we intend to make the changes necessary.

So in terms of preventing reoccurrence, we have 3 large initiatives. And the first is to shift to a more stringent compliance management. Second is for us to structure a proper or more stringent internal control mechanism. And lastly, to make changes to the corporate culture. So in terms of the more stringent compliance management, we will first like to formulate the management principles on compliance priorities and announce the related management policies. So -- and the second initiative will be for us to establish a compliance department and the role of Chief Compliance Officer, CCO, and we have already started our efforts to recruit a CCO. And lastly, the third initiative will be for us to inaugurate an effective compliance training education system for our employees in order to change the consciousness of our employees.

And next, or fourth, we would like to adopt methods of a 360-degree employee evaluation. So we will not just look at the sales performance, but we will have a balanced human resources system or evaluation system, where we will look at the ethics and the morale of the individual as well. And we intend to implement this new human resources system from April this year. And we would also like to take measures to enhance and enforce our whistleblowing system or internal reporting system. And we would like to also have our outside employees enforce the audit and supervisory functionality and also have our outside directors meet regularly with the key salespeople in order to understand what is happening and to listen to what the sales -- the frontline salespeople have to say.

And so we would like to rebuild the internal controls, and we would like to strengthen our efforts around the supervisory audit and internal control system. And lastly, we would like to identify these -- the people who have been responsible when we say -- so the managers as well as the directors that are responsible for the situation to clarify the responsibilities and to take necessary measures in terms of penalties, if necessary. And this is a very important part, which is, for us, to restructure the operational flow around reporting of sales as well as the timing of the accounting for sales.

And so in terms of clarifying the timing of the accounting for sales, for example, if we are speaking about the end of March, the fiscal period or the reporting period ending on the 31st of March, we would, first, on the first of April require the contract copy as well as the original copy of the confirmation of the final or definitive agreement to be recorded -- to be registered. And these will be provided by both the seller as well as the buyer for that specific transaction. So that will be a requirement. And in terms of the recording of sales -- accounting for sales, that will be -- the cutoff date will be the 7th of April. So the deals or the transactions that will see the actual flow of the payment by the 7th of April will be recorded as sales for that specific reporting period. So that is the clarification we would like to make in terms of the standards or the conditions to record sales. And we will take this opportunity to also implement a process where the documents will be managed and -- including contracts.

And going on to the cultural change, we will first make -- take the initiative in order to place priority on not just performance and growth, but also on ethics. And in order to change the sales culture, we would like to change the organization around sales. And also, I would like to foster a culture where reporting is more easily done. So we would like to make sure that we have an open culture where people will be able to voice something if they feel something is wrong. And at the moment, we have a meeting where all the senior managing directors come together, but we would like to change this to a management committee or an executive management committee, where the members of the Advisory and Supervisory Board will be able to participate and also the CCO. And we would like to basically have a more open discussion to -- in order to make decisions around the company. And then preventing reoccurrence, we think it's very important to do proper monitoring to make sure that the initiatives have been executed and have been effective. And so we will do proper monitoring to confirm those points.

And next, I will discuss the director's actions. So myself Suguru Miyake, the President and Representative Director; as well as Mr. Naraki who Vice President and Director and also the Head of Administration Division; and also Mr. Takeuchi, who is the Managing Director and Head of Sales divisions. These 3 individuals are management members, we believe, have a very heavy -- or responsibility around this incident. And from my perspective, I will have a 50% reduction in terms of my monthly remuneration. And in terms of the remaining amount, I will voluntarily return that amount in full, and I will do this for the remainder of my term. And also Mr. Naraki and Mr. Takeuchi will be facing severe penalties as well. And also all of the directors of the company will be faced with actions and so the details are here. Please refer to them later.

And I will now explain the fundamentals, so the scope of the impact of the irregularities. I would like to emphasize that this irregularity has been impacting the internal reporting of sales. And so the impact is limited to the wrong sort of period in which the sales was accounted for. And in terms of the impact on our alliance partners, I would like to make sure that I sincerely explain the situation personally, and so I would like to minimize the impact. In terms of the impact on our customers or clients, so this event has -- is not related to a fraudulent sort of actions for our -- against our customers, and it has not been a negative impact on the profits of the customers either. So we don't think that there will be a decrease in terms of the transactions that come through from our customers as a result of this incident.

And in terms of the impact on our employees, so there have been people that have taken responsibility for the situation. So we will see a decrease in terms of the managers within the company, but we don't see any impact in terms of the promotions of the potential managers, the people that we are training to become managers. And in terms of employees leaving us because of this incident, there may be a few of them. But most of our employees are working enthusiastically on their work so we do not feel that there will be a big impact on that front.

And regarding the impact on the M&A market, so the environment has not changed and that there continues to be 1.27 million companies that are in need of a successor. And also, this event has not caused any negative implications on clients or the business environment for our clients. And so we believe that there will be no impact on the market as a result of this incident.

And regarding the equity story, so there will be no change in the fact that we will continue to strive to achieve rapid growth or strong growth, and there will be no change in terms of the fact that there are still 600,000 profitable companies, which lack a successor, and there will be no change in terms of our efforts to enhance the staff and to train them and to motivate them. And there will be no change in terms of our management -- of our effort to transform into an integrated M&A company, and we will continue to strive to satisfy our customers and to achieve successful M&A deals. And with this incident, we would like to take this opportunity to further accelerate our efforts around ESG and in particularly G, so we will focus and strengthen our efforts around G.

So basically, this time around, we will have -- with this incident, we will have to make changes to the internal control system. Also, we would need to change the culture of our company. However, -- so in light of that, we believe that we need to promote further to enhance the productivity of our operations. And so we will push forward with our DX efforts as well as PR efforts. So -- and also, there is no change in terms of our efforts around EXCEED 30 and so we will continue to make the efforts to mark a new chapter in our history. And so we will make sure that we take the initiatives and -- to push forward with our growth strategy as well as our action plans.

And regarding future commitments, so with the sales being accounted in the wrong period, there has been a delay in terms of the reporting of our financial statements. And so we sincerely apologize that we have caused a concern and inconveniences on the part of investors. And in order to avoid any reoccurrence in the future, the management team will work together in order to enforce compliance and governance. And with this event, we would like to take this opportunity to change the corporate culture and to drive growth that is backed by a transparency of purpose and high code of ethics. And we will continue to push forward with entering or approaching -- realizing a second chapter in terms of our business. We will push forward with that, and we would like to again clarify the equity story in order for us to grow the business even larger and in order to enhance the enterprise value of our company. And so we would like to also push forward with our social mission, which is to revitalize the regions as well as the Japan as a whole. And in the next financial reporting meeting, I would like to report on the progress we have around measures to avoid reoccurrence of such incidents.

And I would like to promise all of what I have mentioned today, and I would like to ask you sincerely to continue to support us. So next, I would like to go on to discuss the results of the third quarter of the fiscal year ending in March 2022.

First of all, sales for the 9 months up to the December 2021 was JPY 34.273 billion, up by 23% year-on-year. And ordinary profits were JPY 15.643 billion, which was 14.6% up year-on-year. And in terms of the total number of employees, you can see that we have enforced our manpower. So we were at 949 employees up by 23% from the same period last year. And in terms of transactions closed, this was 820, up by 17%, 1-7 percent from the same period last year. So you can see that overall, we have been making steady progress.

And on Page 28, you can see that against the full year accounts for ordinary profit, which is JPY 17.2 billion, the progress rate is 90.9%. So you can see that we have been making steady progress. And mandates, the number of mandates is the key to forecasting the future of our business. And you can see that, as of the third quarter, the number of sell-side mandates was up by 32% compared to the same period last year. So you can see that we are making extremely strong progress, and that is shedding a light in terms of the future of our business.

And on Page 32, this is the other sort of metric, which is important in forecasting the future in addition to the number of mandates, and this is specifically the number of employees. And you can see that we have made steady progress towards the hiring of consultants. And as of the -- as of January 1, 2022, we were at 577 consultants. And so we have made strong progress in the hiring process as well. And the other sort of highlight regarding performance is the other sales. This has grown significantly by 150% on a year-on-year basis. And this growth has been driven by our efforts in terms of IPO support for the listing on TPM and also the Batonz business, which is the Internet matching service.

And regarding TPM, Tokyo PRO Market, this is like London AIM. And as of the end of January, we had achieved 94 mandates. And by the end of the current fiscal period, we believe we will achieve 100. And this Batonz business is doing extremely well as well. The number of user registrations has reached 136,000, which is up by 130% on a year-on-year basis. And also in terms of the number of transactions closed, this has gone up 80% from 800 to 1,446.

In terms of dividends to be paid to shareholders, we will execute on what we have promised. And so we will be providing a -- paying a commemorative dividend to -- regarding our 30th anniversary. So in addition to the regular payout ratio, we will provide or pay that commemorative dividend. In terms of our share ownership, you can see that 53% of our shareholders are foreign, and we also have a large proportion which are institutional investors here in Japan. And thank you to these shareholders, we have been able to continue with our trajectory of growth. And so we would like to ask the investors to continue to support us.

And going on to Page 43. So with the 30th anniversary, we will be second -- starting the second phase of our founding. And in terms of the medium-term plan, which spans from the fiscal year ending in March 2022 through to the fiscal year ending in March 2024, there are no changes to this medium-term plan. And so we will continue to make the effort to achieve a strong growth. So that would be all in terms of the financial reporting for the third quarter of the fiscal year ending in March 2022.

So thank you very much to the many investors that participated in this meeting for the financial reporting of the third quarter of fiscal year ending in March 2022. And again, I'm sincerely sorry that we did cause inconveniences and concerns to many investors around this incident. And again, we will take the measures necessary in order to avoid any reoccurrences of such events, and we will continue to manage the company to meet the expectations of our stakeholders. So I would like to ask you to continue to support our company. Thank you very much.

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