Acom Co Ltd

TSE:8572

Earnings Call Transcript 2020-Q2

[Shigeyoshi Kinoshita, executive]

I'd first like to extend my heartfelt appreciation to all of you for your kind support to and understanding of our company. I would also like to extend my sincere thanks to you all for taking the time out of your busy schedules to attend this presentation.

In my presentation, I will touch on item numbers 1 to 4, business environment, trend of the personal card loan market, financial results summary, segment breakdown. Item #5, loan and credit card business. Item #7, guarantee business. Item #9, target markets of overseas financial business. And lastly, item #15, dividend policy and forecast.

Later, Mr. Okamoto, Chief PR and IR Officer, will go over some of the highlights of the parent company ACOM, together with offshore financial operations, interest repayment, credit cost and financial expenses.

Please go to Page 3 of the presentation. In the first half of the current fiscal year, the Japanese economy continued to show a gradual recovery with improved employment and personal income as well as a recovery in consumer spending, thanks in part to some government policies.

While the Japanese economy is expected to continue to post a modest recovery, it still could be adversely affected by uncertainty over economic trends and policies outside Japan and volatility in international and capital markets as well as a sales tax hike. In addition to such factors, given a series of natural disasters, which recently hit Japan, we should also be mindful of a potential impact they could have on our economy.

In Thailand, where we have operations, with improving employment and income and a low interest rate, personal spending remains strong, helped by better consumer sentiment.

On the trade front, however, impacted by the U.S. China trade friction and a slowdown of the Chinese economy, Thai's export environment is deteriorating with its real GDP growth slowing down to below 3%. We need to closely monitor an economic trend of that country.

In the Philippines, on the other hand, driven by the expansion of personal consumption, its economy has posted strong real GDP growth of over 5%. Just like Thailand, with the deterioration of the export environment, real GDP growth of the Philippine economy slowed down in the first half of 2019. The economy is expected to recover, however, in the second half of the year. We'll try to cautiously seize opportunities for our business in that nation.

In Japan, as is shown at the bottom left, the nature of competition in the consumer loan market is that it's not just confined to competition among players within their own traditional bank and nonbank categories. The market served by banks has continued to post negative growth as they adopt voluntary measures to follow the Japanese Bankers Association's new guideline.

The nonbank market, on the other hand, has experienced a steady decrease of requests for interest payment. However, as they are susceptible to changes to an external environment, we need to continue to closely monitor their trends.

In Thailand, with strong personal consumption, the personal loan market continued to show steady growth as is shown at the bottom right. Market environment, on the other hand, is changing as Thai Central Bank introduced new regulations for consumer lending and credit cards back in September 2017, amid concern about growing household debt.

As an operating environment changes both at home and abroad, we'll continue with the effort to grow receivables in that 3 core businesses and gain a market share in the consumer card loan market, while at the same time trying to contribute to the healthy development of the overall market.

Please go to Page 4. On this page, you can find the past evolution of the size of the personal card loan market in Japan. As the left graph shows, according to preliminary data from June, the total market continued to shrink with 0.4% year-on-year contraction to JPY 10.580 trillion as the market served by banks posted negative growth.

Looking at subsegments of the market. The bank market, shown at the top right, continued to post negative growth, with year-on-year contraction of 1.9% to JPY 6.260 trillion in June. One of the factors behind this contraction is bank's warranty measures to follow the Japanese Bankers Association's new guideline. We, however, hope the market will start to show a modest recovery going forward.

As is shown at the bottom right, the nonbank market on the other hand has continued to post moderate growth since March 2018 with a 2% year-on-year growth to JPY 4.320 trillion in June, showing steady expansion of the market. The market served by consumer finance companies within the nonbank market grew to JPY 2.610 trillion in June, showing steady expansion with a magnitude of impact from interest repayment becoming less significant, this market is expected to post sustainable growth down the road.

While the personal card loan market is currently on a declining trend, we hope it will recover and start to post moderate growth as an impact from the new guideline of the Japanese Bankers Association becomes less significant.

Next, please turn to Page 5 for an overview of our financial results. Firstly, receivables in the loan and credit card business, shown at the top, grew by 4% to JPY 906.5 billion, thanks to growth both in loan and credit card receivables. Guarantee receivables increased by 1.4% to JPY 1,223.9 billion. Receivables of our offshore financial businesses, on the other hand, shrunk by 12.1% to JPY 187.7 billion, while EASY BUY's receivables steadily grew by 12.3%. There was a negative impact from deconsolidation of Bank BNP. As a result, the total consolidated receivables grew by 1.1% to JPY 2,327.7 billion.

Operating revenue in the loan and credit card business grew by 3.1% to JPY 74.4 billion, thanks mainly to the growth of interest income in the loan business and credit card revenue.

Operating revenue in the guarantee business dropped by 0.7% to JPY 34.1 billion due to a revenue decrease resulting from a regular review of guarantee fees despite moderate growth of guaranteed receivables.

Operating revenue of our overseas financial businesses increased by 1% to JPY 28.1 billion, thanks to the fact that an impact from deconsolidation of Bank BNP was offset by the growth of EASY BUY's receivables. As a result, the total operating revenue increased by 1.4% to JPY 139.2 billion.

On the cost front, the financial expenses dropped 23.4%, thanks to ACOM's stable funding environment and deconsolidation of Bank BNP. Provision for bad debt increased by 1.5%, due mainly to the fact that a change in reserve for loan losses was an increase at ACOM. Other operating expenses, on the other hand, dropped by 0.2%, resulting from a reduction and better control of various expenses through improved operational efficiency. As a result, the total operating expenses declined by 1% to JPY 88.4 billion. This resulted in consolidated operating profit of JPY 50.8 billion, ordinary profit of JPY 50.1 billion and profit attributable to shareholders of the parent company of JPY 45 billion.

As is mentioned at the very bottom of the page, we booked JPY 7.4 billion and JPY 9.9 billion of gain on sale of shares of Bank B&P on a consolidated basis and a nonconsolidated basis, respectively, associated with its merger with MUFG's consolidated subsidiary, Bank Danamon.

Where there is no reference to this in the presentation, we booked impairment loss on some [ parents ] that we own in the second quarter. We made good progress towards meeting the full year consolidated targets by achieving 50.6% of the operating revenue target, 58% of the operating profit target, 57% of the ordinary profit target and 59.7% of the target for net income attributable to the shareholders of the parent company.

We, however, kept our initial projections intact since these numbers for the first half do not warrant timely disclosure of revisions to our original guidance.

Next, please turn to Page 6 for a breakdown by segment. Firstly, looking at a breakdown of receivables among different business segments. As is illustrated by the chart at the top left, the loan on credit card business accounted for 38.9%, the guarantee business representing 52.6% and overseas operations, 8.1%. The split of operating revenue illustrated by the chart at the top right on the other hand, was a loan and credit card business accounting for 53.5%, the guarantee business representing 24.5% and offshore operations, 20.2%.

Please find operating profit before interest payment expenses by segment at the bottom right. The loan and credit card business accounted for 51.5% with JPY 26.1 billion, where the guarantee business and overseas operations represented 26% and 21.8% with JPY 13.1 billion and JPY 11 billion each, with all the 3 core businesses achieving profit growth.

Please go to Page 7 for an overview of the loan and credit card business. As is shown on the top left, the combined receivables of the loan and credit card business grew steadily by 4% to JPY 906.5 billion, with a loan business representing JPY 836.9 billion, and the credit card business accounting for JPY 69.6 billion. Operating revenue, shown at the top center, grew by 3.1% to JPY 74.4 billion, largely because of the growth of interest income in the loan business and revenue from the credit card business. Operating profit, shown at the top right, grew 1.9% to JPY 26.1 billion.

The average yield shown on the bottom center stood at 15.11% in the combined loan and credit card business, while it improved by 3 basis points to 15.24% in the loan business. The ratio of bad debt expenses, shown at the bottom right, on the other hand, declined by 5 basis points to 3.18%.

Please turn to Page 9, next, for an overview of the guarantee business on a consolidated basis. In the first half, while our partner banks kept their voluntary measures in place to follow a new guideline issued by the Japanese Bankers Association, we continued with the effort to enhance our partnership with them through close communication. Guaranteed receivables, shown at the top left, were JPY 1,065.4 billion for ACOM and JPY 158.4 billion for MU Credit Guarantee with 1.4% year-on-year, a growth of combined guaranteed receivables to JPY 1,223.9 billion, showing a moderate recovery.

Combined operating revenue, shown at the top center, dropped by 0.7% to JPY 34.1 billion, JPY 28.7 billion for ACOM and JPY 5.4 billion for MU Credit Guarantee. While operating profit, shown at the top right, grew 7.7% to JPY 13.1 billion.

While guaranteed receivables grew 1.4%, operating revenue decreased. This is because of a regular review of guarantee fees. Operating profit, on the other hand, increased by 7.7% despite a revenue decline, thanks to a decrease in provision for bad debt and other operating expenses.

Please turn to Page 11. This page shows target markets for overseas financial business and an overview of our operations in different countries. In the second quarter, we continued to aggressively promote offshore financial business for further expansion. EASY BUY, which operates loan business in Thailand, has continued to steadily grow the number of new customers with aggressive promotion with Umay Plus brand in an effort to improve its brand equity and expand new customer acquisition. The company continues to enjoy the #1 position in the nonbank market in that country. And as a leading company, it has built a competitive advantage in brand equity and customer traffic.

While operating environment in Thailand is changing with a new lending regulation introduced back in September 2017, the company will leverage its competitive advantage it has built over the years and carry out the sales activities with flexibility to further expand its business.

In the Philippines, ACOM Consumer Finance Corporation, which was founded back in July 2017, started retail lending business in the Manila Metropolitan area in July of last year. With the 5 branches it has opened, the company is engaged in aggressive sales activities.

Drawing on the experiences we have built in personal loan business in Japan and in Thailand as well as in offshore operations, we will endeavor to contribute to further development of the rapidly growing nation through financial service to meet demand for personal loans. We will continue our market research activities mainly in Asian countries and explore business opportunities in other countries in that region.

Please go to Page 17. Last but not least, I would like to talk about dividends. Our basic dividend policy is the one where we try to have a stable and sustainable return to our shareholders and improve it, while we look at our current business condition, our equity and our operating environment.

In the first half, our operating revenue and operating profit steadily grew with the growth of receivables in the 3 core businesses. As for requests for interest repayment, while the number of claims has been actually coming down, that rate of decrease has slowed down more recently. We continue to closely monitor their trends.

Lastly, while the equity to -- including the asset we guarantee in the guaranteed business in the total consolidated asset has recovered to 16.2%., it is still below our target of 20%. Given this situation, we will pay JPY 2 per share for the first half as we initially expected and pay another JPY 2 for the second half, bringing the total dividend per share to JPY 4 annually. This will do for an overview of the financial results for the first half for the year ending March 2020.

In our effort to live up to expectation of investors, we will endeavor to become a corporate group, which maximizes its corporate value through sustainable growth and contributes to the society in various areas while keeping close communication with MUFG.

I'd like to end my presentation by asking for your continued support and guidance to our firm. Thank you for your kind attention.

[Takashi Okamoto, executive]

I'm going to spend the next 15 minutes to go over loan business, guaranteed business, international operations, interest repayment, provision for bad debt and lastly, financial expenses by focusing mainly on ACOM's receivables, the positive and negative contributing factors.

And please turn to Page 8 of the presentation. Firstly, I'm going to go over ACOM's loan business by focusing mainly on its receivables. Loan receivables, shown on the top left, grew by 2.9% to JPY 836.9 billion, many thanks to increase in the number of accounts driven by new customer growth. Receivables in the mainstay at unsecured lending business increased by 3% to JPY 832.1 billion. The number of accounts in the loan business, shown at the bottom left, grew by a steady 4% to JPY 1,574,000.

Operating revenue, shown at the top center, grew by 2.3% to JPY 69.8 billion, mainly thanks to an increase in interest income with the loan growth. The average loan yield, shown at the top right, in the overall loan business increased by 3 basis points to 15.24%, and it was 15.26% in the unsecured loan business. There are 2 factors behind the increase in yield. The proportion of loan asset represented by interest rates of between 15% and 18% increased, thanks in part to new customer growth. And the fiscal year ending March 2020 happens to be a leap year.

The number of new customers, shown at the bottom center, grew steadily by 7.7% to 134,700. What is behind this growth is our effort to promote strategic marketing initiatives, which include an app program, emphasizing our competitive advantage such as instant issuance of a credit card and improved Internet and website functions. Through continued efficient and effective advertising and promotional spending in the second half, we will try to beat the full year target of 255,000 new accounts. The ratio of bad debt expenses, shown on the bottom right, dropped by 10 basis points to 3.06%, which reflects stable quality of a loan asset.

Next, please go to Page 10 for an overview of the guarantee business. While this page shows an overview of guarantee business of ACOM, its receivables, revenue and profit, show a similar trend to that of guarantee business on a consolidated basis. Guaranteed receivables, shown at the top left, grew by a moderate 0.7% to JPY 1,065.4 billion. Operating revenue, shown at the top center, decreased by 1.4% to JPY 28.7 billion due to a regular review of guarantee fees. Operating profit, shown at the top right, on the other hand, grew 5.2% to JPY 11.2 billion.

While operating revenue dropped by 1.4%, operating profit grew 5.2%. This is because both provisions for bad debt and other operating expenses decreased. Receivables for claim, shown at the bottom center, increased 5.3% to JPY 54.3 billion. This is because the recovery period has lengthened as a result of long-dated installment payments, which we agreed to with customers in a settlement process.

With a slower growth of guaranteed receivables in recent months and a declining proportion of newer customers however, the rate of an increase in receivables for claim continues to slow down. The ratio of bad debt expenses, shown at the bottom right, dropped by 7 basis points to 2.39%. This is mainly because the proportion of newer customers who are more likely to default is coming down and also because we have controlled bad debt as we have agreed to long-dated installment payments with customers in a settlement process.

Please turn to Page 12. Here, I would like to give an overview of financial business outside Japan. Please find receivables, operating revenue and operating profit in Japanese yen in the top row. Receivables, shown at the top left, dropped by 12.1% to JPY 187.7 billion due to deconsolidation of Bank BNP. Please find the magnitude of currency impact below the bar graph, EASY BUY, enjoyed an JPY 8.5 billion benefit from the depreciation of the yen against the Thai baht.

Operating revenue, shown at the top center, grew by 1% to JPY 28.1 billion, thanks to the fact that the impact of deconsolidation of Bank BNP was offset by the growth of EASY BUY's receivables.

Operating profit, shown at the top right, increased 14.4% to JPY 11 billion.

In the bottom row, please find EASY BUY's receivables and revenue as well as operating profit on a local currency basis. Its receivables outstanding, shown on the left in the bottom row, grew by 6.9% to THB 53.5 billion while its operating revenue and operating profit, shown to the right, grew by 6.1% to THB 7.5 billion and 11.7% to THB 3.2 billion, respectively.

The growth of operating profit was more significant than the operating revenue growth of 6.1%. This is thanks to a drop in financial expenses and other operating expenses.

The company's marketing strategy, including its aggressive sales activities and advertising strategy as well as its brand strategy, is paying off with steady growth in new customer acquisition. Its loan growth, however, is expected to slow down due to a new lending regulation introduced in September 2017, we'll closely monitor its trends. The company will continue with its aggressive sales activities while placing its greatest emphasis on the improvement of the quality of its loan asset.

Next, please go to Page 13 for claims for interest repayment. As is shown on the right, the number of claims for interest repayment decreased by 12% in the first quarter and by 7.5% in the second quarter with a 9.9% drop to 12,800 in the first half undershooting our initial expectation of a reduction of 20%.

Since ad activities using a flyer by one law firm are behind this, we expect they only have a limited impact. If the ad activities continue, however, we might miss the initial target of year-over-year decrease of 20%. We plan to announce a number of claims for October on the 13th of this month. Judging from a trend until mid-October, we expect it to be around 2,200.

While we expect requests for interest repayment will remain on a declining trend, we'll continue to closely monitor their trend since they are highly susceptible to a changing external environment, such as ad activities of some law firms.

Please go to Page 14 next. Let me now talk about the evolution of loss on interest repayment. As is shown on the right, in the first half, interest repaid was JPY 15.1 billion, while principal written off due to interest repayment claims was JPY 1.8 billion with a total of JPY 16.9 billion taken out from a reserve of JPY 102.3 billion from the end of the previous year.

After the drawdown, JPY 85.3 billion of reserve remains on our balance sheet.

The total drawdown in the first half decreased by 18.6% year-on-year, which was within our initial projection of reduction of between 15% and 20%. Since requests for interest repayment are susceptible to changes in an external environment, we'll continue to examine the difference between our initial projections and actual claims every quarter to see if we have a reasonable and sufficient level of reserve sitting on the balance sheet.

Please move on to Page 15. Now I'd like to touch on provision for bad debt. Consolidated provision for bad debt, shown at the top left, increased by 1.5% to JPY 38.9 billion, mainly due to an increase at ACOM. Provision for bad debt on a nonconsolidated basis at ACOM, shown at the top center, increased by 2.6% to JPY 29.7 billion. This is because a change in reserve for loan losses for loan and credit card operations was an increase of JPY 700 million. And a change in result for the guarantee business was an increase of JPY 100 million.

Two factors are responsible for the JPY 700 million increase in change and reserve for loss, loans and credit card operations. Firstly, with the growth of receivables, additional reserve booked increase. Secondly, we have a proportion of settled claims for which our reserve ratio is lower, reaching a certain level, the rate of increase in the proportion of settled claims slowed down.

The NPL ratio in the loan business, shown at the bottom center, came down by 7 basis points to 7.07% with a ratio of bad debt expenses, including principal written off due to interest repayment claims dropping by 20 basis points to a stable 3.51%.

Provision for bad debt at EASY BUY, show at the bottom right, increased by 7.3% on a local currency basis, which is illustrated below the bar chart, mainly because of change in reserve for bad debt was an increase on the back of the growth of receivables.

Please move on to Page 16. Last but not least, I will touch on financial expenses. In the first half, in a better funding and low interest environment, we continue to try to secure cheap and stable funding. Given BOJ's monetary policy and our operating environment, we tried to further control our financial expenses, bringing debt duration to an optimal level and realize evenly distributed maturity. As a result, consolidated financial expenses, shown at the top left, came down by 23.4% to JPY 4.5 billion, thanks to lower financial expenses at ACOM and deconsolidation of Bank BNP.

Nonconsolidated financial expenses at ACOM, shown at the top center, dropped by 20.2% to JPY 2.3 billion, thanks to a stable funding environment. While outstanding debt, shown at the top right, decreased by JPY 23.7 billion to JPY 616.5 billion. The average borrowing costs came down by 18 basis points to a stable 0.78% as is illustrated by the line graph.

The pie chart at the bottom left shows funding sources and their proportions. The split between direct and indirect funding is 35.8% and 64.2% with the funding from MUFG representing 34.2%.

In a low interest rate environment, the proportion of fixed rate funding is 84.5%, while long-term funding is 95.2%.

For your reference, Page 19 and following pages show full year projections for the year ending March 2020, a summary of segment income and midterm management policy, midterm business plan and the capital policy.

This will do for details of our financial results for the first half for the year ending March 2020. I would like to conclude my presentation by asking for your continued support and guidance to offer. Thank you for your kind attention.

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