Seven Bank Ltd

TSE:8410

Earnings Call Transcript 2018-Q3

[Hiroshi Takeuchi, executive]

Good afternoon. This is Takeuchi from Seven Bank. Thank you for attending our results announcement today. Using the presentation materials, I would like to explain our results of the third quarter for the fiscal year ending March 2018.

We would like to start with Page 2, which shows our consolidated income statement. As noted, we were able to book a year-on-year increase in both income and profit in the third quarter. As shown, we posted JPY 94.7 billion of ordinary income, up JPY 2.4 billion year-on-year; JPY 30 billion of ordinary profit, up JPY 1.1 billion year-on-year; and JPY 20.5 billion of net income, up JPY 0.9 billion year-on-year.

As we are in the first year of the medium-term management plan, there are some areas which were below expectations or not meeting our plan, but we had a steady progress overall in terms of our initiatives. One more thing to note in this slide is that we revised our forecast for fiscal year 2017. Details are under the column Fiscal Year 2017 Revised Plan, where we made downward revisions for the following: ordinary income by JPY 4.1 billion to JPY 126.7 billion, ordinary profit by JPY 1.2 billion to JPY 37.4 billion and net income by JPY 1.1 billion to JPY 25.3 billion. We will cover more details later, but in short, Seven Bank on a parent basis had a steady performance.

Regarding FCTI, which ended its fiscal year in December, we have a certain clarity on the results and those were reflected on the latest revisions.

Next, moving to Page 3. I will explain the nonconsolidated results. As shown in the income statement for Seven Bank on a parent basis, we recorded an increase in both income and profit year-on-year. The ordinary income went up by JPY 2.4 billion to end the third quarter with JPY 88.2 billion, of which ATM-related fee income posted an increase of JPY 1.4 billion to JPY 80.3 billion. The ordinary profit was up JPY 2.2 billion to JPY 32.6 billion, and the net income was up JPY 1.5 billion to JPY 22.4 billion.

On the right side, we have the FY '17 initial plan, which is unchanged on a parent basis. According to the current progress, we believe the full year results will be in line with the initial plan, at least on the profit basis.

On the other hand, the ordinary income is a different situation due to the number of transactions, which details will be covered later. We were unable to meet around 103% or 3% increase in the number of transactions, which we set in the medium-term management plan. For this reason, the ordinary income is slightly below expectation.

As for the expenses, they were up only by JPY 0.2 billion year-on-year to JPY 55.6 billion. As we have explained throughout the year, the amount of depreciation has dropped significantly versus the previous fiscal year, which is the reason why expenses increased by only JPY 0.2 billion.

If you look at the breakdown of expenses, there were delays in installment of ATMs, which is partly the reason why the expenses went down. Simultaneously, we are also putting our efforts in reducing the amount of spending. The advertisement costs, on the other hand, has increased year-on-year. In particular, we injected TV commercials and aggressively spent for advertisement, which is why these expenses went up compared to the previous fiscal year.

From Page 4 onwards, I would like to cover some business figures. First, on Page 4, we have the ATM usage. As this slide explains, we usually have a seasonal downtrend in the period between January to March, and looking at the performance up to the third quarter, we believe it is steadily progressing and in line with our expectation. In terms of total number of transactions, as mentioned, we have not reached the target 103% year-on-year, but are at a little over 102% at this moment. With regards to the daily average transactions, we have not reached 100% yet, as we are still in the negative range.

Nevertheless, we are slightly growing more and increasing the number of transactions in November and December. The current figure is 99.5% or so, and we hope to continue, so we can get closer to these figures from January to March.

Regarding the number of ATMs, this is in line with the full year forecast. We will be opening more 7-Eleven stores towards February. Thus, we will continue our efforts to achieve the target. Although this is not shown in the slide, the average ATM-related fee income was revised at the end of second quarter to JPY 133 billion, and we are mostly in line with the revised figure. Overall, there are no factors for a significant change as of today.

Moving on to the Settlement and Account business on Page 5. We have steadily grown the number of individual accounts and balance of deposits by end of December. The FY '17 plan shown in the gray dotted line may seem to have a decline, but we are currently expecting to secure the number of accounts above this plan. As for the personal loan services, based on the notice, including that from JBA, Japanese Bankers Association, there are tighter examinations being placed in the industry, but in terms of our company, we have relatively made a steady progress. For the international money transfer and debit services, we are also working to achieve the plan for fiscal year '17.

Next is Page 6, where we have the review of our domestic business. Details are shown on the slide, but I would like to highlight a few points around the ATM Platform business. First, regarding the initiative to create new styles of ATM usage, which was hammered in the medium-term management plan, we are making a solid start so far. In specific, we started the LINE Pay service in October, and these new alliances with other companies are progressing well. The total volume is not material to impact the whole company, but we are seeing a steady boost to our business. At present, we have connected services with only 2 companies, but we believe there are more rooms to expand going forward. Also, there are more recent articles on the newspaper regarding settlement, and there are a partly increasing number of companies participating in this market. The move towards cashless payment is a definite trend, and we believe there are more opportunities to grow ATM usage with other settlement companies by connecting real transactions through the ATM. Based on this circumstance, we will continue exploiting new companies and take measures to increase the number of ATM transactions.

Secondly, as we recently announced in the press release on setting up a company for cash receipt service, we are in the preparation in order to start the service from April 2018. The initial target of the business was, for example, the returns of products in mail-ordering services or refund of purchased tickets, and we were doing the preparatory work targeting those transactions. Having said that, we are recently seeing other unexpected needs from customers through our sales activities and have signed contracts as well. We are not at the stage to give details today, but there are apparently more companies using Internet as their main source of operation, which is leading to a solid demand for a real cash receipt service. We would like to prepare so that we can smoothly commence the service in April, and we have a certain degree of confidence in making a good start. When the time comes, we will disclose details to our investors and we hope to meet your expectations upon the event.

Regarding the stance of conventional financial institutions, including regional banks, we have not seen or felt any changes so far. As some articles show, there are trends in the industry of streamlining operations, including closure of branches, and naturally, we believe they are reviewing the use of ATMs.

As we have a good communication with these financial institutions, we would like to support them proactively whenever possible, based on our ATM business going forward. With Japan Post, FamilyMart and other operators using E-net ATMs, they started providing free commission services during the daytime from the middle of January. And it has only been a few weeks since the start, the impact to our business has been limited in terms of the number of ATM transactions in January.

Hard to estimate the future trend of free commissions at this moment, but it is a fact that such trend is appearing among financial institutions and some mega banks are even removing restrictions for the maximum use of ATMs with free commissions.

2 month ago in December, we launched some TV commercials after a long time. In terms of the number of transaction in December and January, which were already disclosed, we achieved our 3% year-on-year growth target for the 2 consecutive month. Of course, launching advertisement does not simply guarantee the growth for itself, but we believe it made some contribution, together with our [ relationship ], to improve the in-store usage environment which had already been implemented. By closely working and sharing information with financial institutions, we will continue to promote ATM usage wherever possible. On the other hand, if there's any area for further improvement of the usage environment, we will continue to make our utmost efforts.

Now I have covered those 2 major points. Trend for going cashless has been covered by mass media very often recently. Knowing such trend, we intend to enhance new roles to be played by our ATMs and to expand our business.

Please see Page 7 to discuss our Overseas business. This slide shows the results of FCTI. In the third quarter of FY '17, income and profit decreased year-on-year. Ordinary income recorded USD 56.7 million. Increase in ordinary expenses resulted in ordinary profit being negative $13.3 million. Net income was also negative $8.5 million. Already at Q3 end, both ordinary profit and net income were worse than the full year loss forecast in initial plan at start of FY '17.

Starting from August last year, FCTI has been replacing ATMs in SEI stores. As of end of Q3 in September, units installed at SEI have reached about 2,100, as shown in the table on the right-hand side. Having said that, however, the total number of transactions during the period, as shown in the bottom of the table, marked negative growth year-on-year. We are struggling in increasing the number of transactions, not just for SEI, but in fact for the entire existing portfolio. The pushback of the installation schedule for SEI from July to late August was one of the reasons the planned profit and income were not attained. Knowing about such delay in the middle of the period, we made our utmost efforts to catch up as much as possible. However, such endeavor failed to bear fruit at FCTI. Even though these are the Q3 figures, it is already past December and their new fiscal year has already started. Regarding the results for FY '17, I presented the revised plan in the beginning. Unfortunately, it is rather difficult to cover the shortfall even by the current basis for Seven Bank.

Page 8, once again, provides a review of the status. The ATM installations at SEI is considered as important infrastructure in order to conduct business going forward. It is true on the one hand that there was delay in starting the replacement. On the other hand, we are making good progress in action today. Despite our initial concern over utilization rate in the new environment, it was actually over 99%, achieving a very stable operation after replacement. The most important agenda for us is to sustain such stable operation of the infrastructure. The operation cost in FY '17 has been running higher than originally anticipated. Interest rate hike had already been in place in America; therefore the factor had already been incorporated to some extent.

As stable operation was heavily emphasized, cash allocation to ATMs was slightly in excess, for example. Consequently, the volume of financing increased and also the cost of interest. While ATM installations were underway, various unexpected events happened, and so unexpected costs were incurred as well. After all those elements, costs ended up high overall, and adjustments were not fast enough to catch up during FY '17. Another important factor was the number of transactions during ATM replacements. Originally, the number of transaction per ATM used by the previous operator was approximately 60, including the number for cash withdrawal and balance inquiry. However, in comparison to this assumptive number, 60 per ATM, it was, in fact, just about 40 during FY '17.

We believe the following was a reason. While the replacement was underway, we switched the surcharge-free network used by the previous ATM operator to a different network. Even though in reality the costs that could be accepted were not so different between those 2 networks, the previous network sent out a notice that their cards could not -- could no longer be accepted by ATMs at 7-Eleven. As a result, despite the fact that the cards could still be accepted, the existing users stopped using our ATM. We already have discussed this matter with the new network and agreed that, upon completion of the installation, proper notice is going to be issued. After reviewing what happened in FY '17, measures have been implemented during the ongoing FY '18. However, promotion for better awareness can be started only after ATM installation is done at all the 7-Eleven stores. Also, we need to accommodate a certain time lag when it comes to revisiting operating cost. We suspect that the first half of FY '18 will remain tough, but the measures that I described should start bearing fruit in the second half.

Our headquarters in Tokyo will make sure to provide support, so that all those efforts will make steady progress. It was our understanding from the outset that the business in America was not extremely profitable; however, in light of the balance between the expected revenues as of today and the spending, including the installation costs, we hold the view that the business model still makes sense. We believe we can further identify opportunities for ATM replacements and expansion in ATM usage. We are going to identify what are the missing pieces.

Finally, please see Page 9 on shareholder returns, i.e., dividends. Dividend forecast at year-end has been revised. Initial forecast for dividend per share was JPY 4.75 for the second half. However, we revised up by JPY 0.5 to JPY 5.25. On annual base, the DPS is scheduled to be JPY 10. As in the midterm business plan, basic shareholder policy has been amended and the minimum consolidated payout ratio was raised from 35% to 40%. In line with this policy, we believe that Seven Bank itself is making steady progress. We know what the issues are when it comes to FCTI. By addressing them, we believe that sustainable growth is possible. This is at the background for the dividend increase we plan to implement.

This concludes my presentation. Seven Bank will continue to endeavor to meet your expectations going forward. Thank you for your kind attention. Now we will move to the Q&A session.

[Unknown Analyst]

I have 2 questions, one is a positive and the other is a negative question. Let me start with the negative side. Regarding your U.S. operation, you have revised down the consolidated forecast of ordinary profit by JPY 1.2 billion. I think this is mostly related to FCTI, if my understanding is correct. Can you give us your views of the extent of decline in FCTI compared to the initial forecast of top line and ordinary expenses, if possible? Also, is there a potential downward revision for the profit forecast in the next fiscal year as well as the medium-term management plan? This is my first question.

[Hiroshi Takeuchi, executive]

First is the extent of impact by the downward revision as a whole. Your understanding is correct in that the revision is mostly reflecting the FCTI business. As for the top line forecast in the next fiscal year, we are expecting to achieve the initial plan. In the final year of the medium-term management plan, we target an increase of JPY 20 billion ordinary profit versus fiscal year 2016. As we are seeing a smooth progress of the installment in SEI, we believe we can more or less achieve the target as well. As for the expenses, as mentioned, due to more-than-expected costs as well as the lack of operational experience, the question remains on how much adjustment we can make to the current situation. As I touched earlier on the fiscal year 2018, we are expecting that some difficulty will continue in the first half. As for fiscal year 2019, we don't have any plan to change the initial target, but we will watch our business carefully and take necessary measures accordingly. As for the target set for the final year in the medium-term management plan, we are not at the stage to change the target at this moment, and we will continue our efforts in order to achieve them. So that is the answer to your first question.

[Unknown Analyst]

So that means that the target for the final year will be kept, but in the next fiscal year ending March 2019, you might have difficulty in achieving the target in the U.S. operation, is that the right image?

[Hiroshi Takeuchi, executive]

Yes. We believe that, at least in the first half of the next fiscal year, we may have some difficulty and that is our recognition.

[Unknown Analyst]

My next question is regarding the new styles of ATM usage. Apparently, there is an increase of the total number of ATM transactions by around 3% since the month of November, which is attributable to services such as LINE Pay, SoftBank Payment or consumer finances. Can you give us the image breakdown of the 3% by services? Also, how is this momentum like in the next fiscal year and beyond? With regards to the cash receipt services, which is scheduled to start from April, could you give us your expectation of this business in the next fiscal year? Or how much contracts are signed or booked?

[Hiroshi Takeuchi, executive]

First, regarding the new category for ATM usage, you may figure out from your own calculation, but the number of transactions in the next fiscal year is expected to grow by 0.2% or 0.3% versus this fiscal year. As we observed from December to January, the transactions with financial institutions had a fluctuation, but in the new service, the volatility was relatively smaller. Therefore, the contribution from those services was larger in January. Regarding the future outlook, although it is hard to mention in specific, we are seeing an expansion of demand by mobile phone carriers and others. With our ATM service, where you can charge using your mobile phones, we are gradually receiving more inquiries from companies. It is hard to give a detailed number, but we are expecting this business to expand further in the next fiscal year and the year after. Thus, a certain degree of contribution to the ordinary profit is factored in the medium-term management plan. As for the cash receipt service, we are in the preparation phase towards the launch in April. Although we have signed contracts with several companies and we will put our utmost efforts, we are not expecting to have a significant contribution from the beginning due to uncertainties in the future. The key is whether we can sign contracts with major companies, targeting the refund based on product returns by mail ordering companies or refund of paid tickets. We have to increase the awareness at the same time since it is a new business. The market itself is actually growing more than our expectation, but we think it is also important to raise awareness among the users. As the fiscal year 2018 will begin shortly in April, we will make sure of a solid start, so that in fiscal year 2019 we will have a certain contribution to our top line and profit. Since we are increasing contracts with the customers in areas we did not initially planned, I personally have a certain expectation. However, we have to also work hard in order to expand the business.

[Unknown Analyst]

Can I just clarify one more thing? I believe your initial expectation of the cash receipt business was around JPY 5 billion in the final year of the medium-term management plan. I know it is hard to forecast the future, but can you give us your latest thoughts around achieving that JPY 5 billion, whether it has become more realistic compared to the very start, where you had no clarity around this business?

[Hiroshi Takeuchi, executive]

Well, the current impression is that we can set a relatively high ASP through this service, so I believe we can manage to get closer to that target. We are not fully confident in achieving them yet, but we are starting to see more confirmation at this moment. That is where we stand today.

[Unknown Analyst]

I have 2 questions. My first question is about advertisement. TV commercial was launched in December and you failed to tell us positive impact. From now on, how often do you plan to launch advertisements? In the current Q4, do you plan to do some as well? During the topic of cash receipt service, promotional awareness was also mentioned. Will there be more advertisement cost, such as TV commercials, to be incurred in addition to the cost for advertising conventional ATM business?

[Hiroshi Takeuchi, executive]

We started to revisit our overall plan for advertisement from the second half of FY '17 in line with the medium-term business plan period. In order to promote basic awareness, in addition to TV commercial, we posted signage in train stations in metropolitan Tokyo area. We also did advertisements in trains and on the Internet to encourage our ATM usage as well. We also conducted area-specific promotion to increase ATM usage in regions such as Chukyo and Osaka/Kinki. In Osaka, after promotion in December, we saw better results compared to the average transaction and growth. Even though there may be many possible ways to suit regional characteristics, we intend to take meticulous approach for this kind of initiative. In this fiscal year, we plan to do the same in the metropolitan Tokyo area. About 40% of transactions happen in the Tokyo area, therefore it is most important to earn business in this region. We also do promotions together with our partners. Specifically, with LINE Pay, a joint effort is underway, starting from this month, as you may know, where points can be earned upon charging at our ATM. Conventionally, financial institutions were not very positive about increase in our ATM usage. But as I mentioned, with the new partners, we can enjoy a win-win situation by jointly promoting increase in ATM usage. So we do launch advertisement of this kind as well. While enhancing basic awareness, we also invest in advertising in more specific areas at the same time. In FY '18, we intend to invest in advertisement more than we did for the current fiscal year. It has to be in line with our overall plan, but we want to be as active as possible. As for cash receipt service, it will also be part of our effort to enhance awareness. The cash receipt point will be at 7-Eleven stores. So upon launch, collaboration with 7-Eleven is also considered very important. Of course, details will be elaborated from now on, but the benefit for 7-Eleven is to initiate traffic toward their stores. So expectations for this service are very high. Both companies are making preparations to do proper ceremony for the launch. Including this, we make sure to focus strongly on these 2 -- these new services.

[Unknown Analyst]

Here's my second question. In Page 6 of the presentation, where Settlement and Account business is described, there is a comment about a slight shortfall compared to the plan. It is partly due to the environment, when it comes to card loans, but what are the reasons for shortfalls for other businesses? And what countermeasures do you plan to implement?

[Hiroshi Takeuchi, executive]

As for the entire Settlement and Account business, the plan itself was not very aggressive. We rather take conservative approach. As for international money transfer business, we've launched a service for money transfer via smartphone apps for the Philippines from summer with low fees to enhance usage. But it seemed users found it unfamiliar to transfer money via smartphones. Therefore, this service is not widely penetrated today. In that sense, we are quite behind the initial plan in this particular service. For the entire international money transfer business, we secured growth from our conventional transfer service via ATM. In December, transactions exceeded 100,000, was record high growth, but we are still slightly in short of the initial plan. We are continuing to raise awareness for the smartphone service. Account and contract acquisitions are still underway and it will remain our focus as well. Debit services is quite self-explanatory in the presentation. Compared to the number of transactions in the plan, we have only reached half that as end of Q3, so we are significantly under our initial expectations. We announced this service together with 7-Eleven, and therefore, usage tended to be in small values. As we needed to increase the value per transactions, we started to focus this on 7-Eleven, but more on increasing the customers with higher usage amount. Accordingly, campaigns focused on the amount of money. To this date, unfortunately, we have not confirmed full-scale benefit from this effort. It's important to have users experience the service, so we'll first focus on campaigns to promote usage in 7-Eleven as well as to increase amount of money per transaction. After we see some result, we will start to work on the next steps. Currently, the result is not as strong as initially anticipated, partly because of the strong ties between Seven Bank and 7-Eleven. However, we know what the issues are, so we will continue to make improvement.

[Operator]

As there seems no more questions, we would like to close the Q&A session. Finally, I would like Mr. Takeuchi to give closing remarks.

[Hiroshi Takeuchi, executive]

Thank you all for your participation today. As was in my presentation, Seven Bank will continue to focus on new services. Seven Bank will provide a strong support the -- to the FCTI business in America, which caused concerns to you. SEI and Seven & i Holdings, we will also extend support to make sure that it will turn around strongly in the closest future possible. We will meet your expectations through robust measures in place. Thank you, once again, for your attendance.