Acom Co Ltd

TSE:8572

Earnings Call Transcript 2021-Q2

[Shigeyoshi Kinoshita, executive]

I'd like to extend my heartfelt appreciation to all of you for your kind support to and understanding of the company. We have decided not to host a presentation on-site to prevent the spread of the coronavirus. But to keep the level of communication with the market, we have decided to do it online this time again. We ask for your kind understanding.

In my presentation, I will touch on item numbers 1 to 5, business environment, trend of the personal card loan market, annual forecast for the year ended March 2021, financial results summary, composition by segment, and lastly, item #16, dividend status.

Later, Mr. Okamoto, Chief PR and IR Officer, will go over the impact from the coronavirus, an overview of the 3 core businesses in the first half, interest repayment, provision for bad debt and financial expenses.

Please go to Page 4 of the presentation. While social and economic activities continued in the first half in Japan, with preventive measures in place against COVID-19, the situation remains unpredictable, with the possibility of another surge in cases of infection. With a sign of recovery more recently, thanks to various government policies, consumer sentiment is expected to post some moderate growth going forward. Since the situation is likely to remain uncertain because of the coronavirus, we'll continue to closely monitor the situation.

In 2 countries outside Japan where we operate, an adverse impact on the economy from the virus has emerged. First, in Thailand, its economy is in a difficult situation. The country experiences a significant drop of an economic growth rate as activities are severely restricted with a stay-home order and lockdowns following the declaration of a state of emergency. But just like in Japan, with a sign of recovery of consumer sentiment more recently, the economy is expected to post moderate growth.

In the Philippines, with restrictions of activities imposed by the government, the local economy posted the lowest growth rate ever between April and June.

Turning to the market in Japan and the competitive environment, shown at the bottom left. With the deterioration of consumer sentiment due to COVID-19, the personal card loan market shrunk. With consumer sentiment expected to moderately recover going forward, however, the personal card loan market is expected to be on a recovery path. Since the nonbank market is susceptible to changes to an external environment, despite a steady decrease of claims for interest repayment, we need to closely monitor a trend.

Turning to the bottom right. In Thailand, the personal card loan market contracted with a decrease of personal consumption due to COVID-19. Moreover, the maximum lending rate was reduced on August 1 to help customers hit by the coronavirus, following a notice issued by the Thai Central Bank. We need to carefully monitor its impact on operating revenue.

In the Philippines, while the personal card loan market continues to expand, a special act took effect on September 15 as part of economic restoration measures, making 60-day extension repayment mandatory.

While economy remains difficult, both at home and abroad, our group will take preventive measures for the safety of our customers and employees, and try to answer questions about borrowing and repayment from our customers with flexibility and kindness.

Please go to Page 5. On this page, you can find the past evolution of the size of the personal card loan market. As the left graph shows, according to preliminary data from June, the total market shrunk 5.3% to JPY 10.020 trillion. With the rapid deterioration of consumer sentiment due to the coronavirus, both the market served banks and the market served by nonbanks have continued to contract.

Looking at subsegments of the market, the bank market, shown at the top right, shrunk by 6.8% year-on-year to JPY 5.830 trillion in June. Factors behind this contraction include bank's voluntary measures in response to the Japanese Bankers Association's policy issued back in March 2017, and the deterioration of consumer sentiment due to COVID-19.

The nonbank market shown at the bottom right, which had continued to post moderate growth in recent years, shrunk by 3.1% to JPY 4.190 trillion in June as consumer sentiment deteriorated. While the situation is likely to remain uncertain due to the coronavirus, we hope the personal card loan market to start to post moderate growth again as we see some sign of improvement of consumer sentiment more recently.

Please turn to Page 6. Next, I would like to walk you through the full year guidance we announced on October 23. While we expect the situation will remain uncertain both at home and abroad due to COVID-19, we have produced a full-year plan based on recent trends and information available to our group.

First, while loan demand will remain weak in both loan and credit card and guarantee businesses, we anticipate the pace of contraction receivables will become more moderate and that receivables will be on a recovery trend towards the end of the fiscal year as consumer sentiment shows a sign of improvement more recently.

As for international financial operations, since the impact from a lockdown on loan demand is unlikely to be as significant in Thailand as in Japan, where most of our offshore receivables are located, we expect receivables to grow on a local currency basis. Given the recent trend, however, we expect an impact from the appreciation of the yen against the Thai baht to be large, and hence, receivables to shrink in yen tens.

As a result, we project a 5.7% contraction of combined consolidated receivables to JPY 2,225.3 billion, with a loan and credit card business shrinking 5.3%, the guarantee business decreasing 5.8% and offshore operations contracting by 6.8%, with EASY BUY's receivables shrinking by 7% due to the appreciation of yen against the Thai baht.

We project a 5.9% decrease in consolidated operating revenue to JPY 263 billion, with a loan and credit card business shrinking 3.8% due mainly to the contraction of receivables, the guarantee business decreasing by 7% due to the contraction of guaranteed receivables and lower guarantee fees, and offshore operations shrinking by 10.1% due to the lowering of the maximum lending rate in Thailand and the stronger yen against the Thai baht in addition to the deconsolidation of Bank BNP.

On the cost front, we expect financial expenses to drop by 27.1%, resulting from the deconsolidation of Bank BNP and the decrease of outstanding debt. We, on the other hand, project provision for bad debt to come down by 12%, thanks mainly to a drop of reserve for loan loss at ACOM, resulting from the contraction receivables and improved quality of loan assets.

We expect other operating expenses to increase by 1.5% due to an increase in ACOM's computer expenses and labor cost. We plan no additional provision for loss on interest repayment and forecast the total operating expenses to drop by 14.9% to JPY 173.5 billion. As a result, we project JPY 89.5 billion of consolidated operating profit, JPY 90.5 billion of ordinary profit and JPY 70.3 billion of net income attributable to the shareholders of the parent company.

Please turn to Page 7 for overview of financial results. The total receivables on a consolidated basis, shown at the top, contracted by 3.4% to JPY 2,247.9 billion. Receivables in the loan and credit business shrunk by 4% to JPY 870.3 billion because loan demand decreased as people stayed home. Guaranteed receivables dropped by 3.7% to JPY 1,178.7 billion. Receivables of our offshore financial operations, on the other hand, increased by 1.5% to JPY 190.4 billion because EASY BUY had grown its receivables before an impact from the coronavirus emerged.

Operating revenue on a consolidated basis dropped by 3.1% to JPY 134.9 billion. Operating revenue in the loan and credit card business decreased by 2% to JPY 72.9 billion. Operating revenue in the guarantee business came down by 4.1% to JPY 32.7 billion. Operating revenue in overseas financial business, on the other hand, declined by 4.1% to JPY 26.9 billion due to the deconsolidation of Bank BNP, despite 2.5% growth of EASY BUY's revenue, thanks mainly to expansion of its receivables. Consolidated operating expenses came down by 9.1% to JPY 80.4 billion.

Looking at operating expenses by cost item, financial expenses dropped by 31.1%, thanks to a decrease of outstanding debt and the deconsolidation of Bank BNP. Provision for bad debt came down by 15.9%, largely due to a decrease in reserve for loan losses at ACOM. Other operating expenses shrunk by 0.9% because of the deconsolidation of Bank BNP despite an increase in computer-related expenses and labor costs at ACOM.

This resulted in consolidated operating profit of JPY 54.4 billion, ordinary profit of JPY 55.4 billion and profitable -- and profit attributable to the shareholders of parent company of JPY 43.5 billion. Later, Mr. Okamoto will talk about factors behind the drop in financial expenses and provision for bad debt.

Next, please go to Page 8 for a breakdown by segments. Looking at a breakdown of receivables among different business segments, as is illustrated by the graph at the top left, the loan and credit card business accounted for 38.7%, the guarantee business representing 52.4% and overseas operations 8.5%. The split of operating revenue illustrated by the graph at the top right, on the other hand, is the loan and credit card business accounting for 54.1%, while the guarantee business representing 24.3% and offshore operations 20%.

Please find the operating profit by segment at the bottom right. The loan and credit card business accounted for 54.2% with JPY 29.5 billion, with the guarantee business and overseas operations representing 45% and 20%, with JPY 13.6 billion and JPY 10.9 billion each.

Please go to Page 19. Last but not least, I will talk about dividends. Our basic dividend policy is the one where we try to have stable and sustainable return to our shareholders and further improve it while looking at our financial results, our equity and operating environment.

In the fiscal year under review, while lower loan demand due to COVID-19 still affects the 3 core businesses, receivables will be on a recovery path towards the end of the fiscal year as consumer sentiment shows a sign of improvement more recently. Due largely to the contraction of receivables, we project operating revenue will drop while operating profit will grow, as financial expenses and provision for bad debt come down with no additional provision for loss on interest repayment planned.

Having said that, as we anticipate there will still be an impact from COVID-19 in the year ending March 2022, it has become extremely difficult to achieve a total JPY 2.5 trillion of receivables in the 3 core businesses, the target for the final year of the current midterm business plan. We, however, will try our best to respond to a changing environment with great speed, enhanced sustainable growth and corporate value and create services beyond customer expectations in accordance with the midterm plan.

The equity-to-asset with guaranteed asset included in the total consolidated asset is 18.9% due to the contraction of receivables and guaranteed receivables.

Last but not least, as for interest repayment, the number of claims continues to come down, and we anticipate the drawdown from reserve will decrease as we planned. Given the situation, we plan to pay JPY 3 in each half with a total annual dividend of JPY 6 for the year ending March 2021.

This will do for an overview of the financial results for the first half for the year ending March 2021. 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 partnership with MUFG.

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

[Takashi Okamoto, executive]

I'm going to spend the next 20 minutes or so to talk about the impact from COVID-19, and then to go over loan business, guarantee business, international financial operations, interest repayment, provision for bad debt and financial expenses.

Please go to Page 21 of the presentation. First of all, I would like to touch on the impact from COVID-19. Following the declaration of state of emergency back in April, on April 13 and afterwards we put in place steps to prevent the spread of the virus. We significantly reduced the number of employees who came to the office, temporary closed branches and shortened operating hours of our automated loan contract machines. Since June 8, we have resumed normal operation while taking preventive measures for the safety of our customers and employees.

Next, I would like to touch on the impact on receivables from the coronavirus. Looking at our month-to-month trend of loan and credit card receivables compared to a year earlier shown at the bottom left, back in April and May, when Japan was under a state of emergency, negative month-on-month growth increased. With the lifting of the state of emergency, however, the magnitude of impact has become less significant since June.

As consumer sentiment shows a sign of improvement, thanks to various government measures, receivables in September, in fact, grew month-on-month. As for the number of new applications and new customers in the loan business, shown on the right, the number of applications has been gradually recovering after it hit the bottom when it posted a 57% year-on-year drop in May to a 21.6% drop in September.

From these trends, we expect while an impact on loan demand from COVID-19 will remain in the loan and credit card business, receivables will be on a recovery path, with more moderate contraction of receivables towards the end of the fiscal year. We'll continue to try to answer questions from our customers about borrowing and repayment with flexibility and kindness.

Please go to Page 22. Next, I would like to touch on the impact on the guarantee business. Looking at the month-on-month trend of guaranteed receivables, shown on the left, its trend is similar to that of receivables in the loan and credit card business. Between April and June, negative month-on-month growth increased. Since July, however, the magnitude of negative growth has become more moderate. In fact, guaranteed receivables grow -- grew month-on-month in September. We expect, while impact from weaker demand will also remain in the guarantee business, it will be on a recovery path towards the end of the fiscal year.

On the right-hand side of the page, please find the quarterly trend of receivables of EASY BUY in local currency, which represents most of the offshore receivables. Since EASY BUY has a December year-end, its first quarter is the March quarter while its Q2 is the June quarter. The magnitude or impact on its receivables from the coronavirus was limited during the first quarter. In the second quarter, however, its receivables shrunk by THB 1.1 billion Q-on-Q with a stay-home order and other restrictions on activities following the declaration of state of emergency.

Going forward, we don't think a decrease of loan demand in Thailand will be as significant as Japan. Moreover, as personal consumption shows a sign of improvement more recently, we anticipate its receivable will grow year-on-year on a local currency basis at the end of the year. While another surge in cases of infection is a possibility amid uncertainty, we'll continue to closely monitor the situation.

Please turn to Page 9 for an overview of the loan and credit card business. The total receivables, shown on the top left, shrunk by 4% to JPY 870.3 billion, with loan receivables of JPY 794.6 billion and credit card receivables of JPY 75.6 billion. Operating revenue, shown at the top center, decreased by 2% to JPY 72.9 billion, mainly due to the contraction of receivables. Operating profit, shown to its right, on the other hand, grew by 13% to JPY 29.5 billion, thanks to lower financial expenses and provision for bad debt.

The average loan yield, shown at the bottom center, stood at 14.81% for the combined loan and credit card business, while it came down by 27 basis points to 14.97% for the loan business.

There are 3 factors behind the average yield compression in the loan business. First, a decrease of the proportion of loan asset represented by the 18% interest rate segment, resulting from fewer new customers. Second, an impact from the across-the-board rate cut that we introduced in September of last year. Third, average loan yield expanded, thanks to leap year.

The ratio of bad debt expenses, shown at the bottom right, increased by 50 basis points to 3.68%. Two factors are responsible for this. First, receivables contracted on the back of less demand for loans. Second, the proportion of newer customers who are more likely to default increased as receivables had continued to grow until last fiscal year. While the ratio of bad debt expenses has gone up temporarily, we expect it to gradually come down once receivables start to grow after the impact from the coronavirus peaks out.

Please move on to Page 10. Please find an overview of nonconsolidated loan business of ACOM on this page. The trend of its receivables revenue profit is similar to that of consolidated loan and credit card business. The number of new customers, shown at the bottom center, dropped by 44.1% to 75,273, mainly due to less demand for loans as people stayed home. Given a sign of improvement of consumer sentiment in more recent months, thanks to various government policies, we expect loan demand to gradually recover. Going forward, we plan to spend on advertising and promotion efficiently and effectively to drive new customer traffic while looking at the loan demand situation.

Please go to Page 11 for an overview of the guarantee business on a consolidated basis. As is shown at the top left, guaranteed receivables ACOM and MU Credit Guarantee were JPY 1,021.7 billion and JPY 156.9 billion, respectively, with a 3.7% contraction of combined receivables to JPY 1,178.7 billion. Operating revenue shown at the top center was JPY 27.2 billion for ACOM and JPY 5.4 billion for MU Credit Guarantee, with a 4.1% decrease of combined revenue to JPY 32.7 billion. On the other hand, operating profit, shown to its right, grew by 3.1% to JPY 13.6 billion, thanks to lower provision for bad debt.

Please go to Page 12. Please find an overview of ACOM's nonconsolidated guarantee business on this page. The trend of its receivables, revenue and profit is similar to that of consolidated guarantee business. Receivables for claims, shown at the bottom center, decreased by 2.3% to JPY 53 billion.

Please turn to Page 14. Here, I would like to give you 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 grew by 1.5% to JPY 190.4 billion, thanks to growth of receivables of EASY BUY. You can find the magnitude currency impact below the bar graph, the appreciation of the yen against the Thai baht depressed EASY BUY's receivables by JPY 500 million.

As is shown at the top center, the total operating revenue dropped 4.1% to JPY 26.9 billion due to the deconsolidation of Bank BNP in the first quarter of last fiscal year. Operating profit, shown to the right, decreased by 1.6% to JPY 10.9 billion. Please find EASY BUY's receivables, operating revenue and operating profit in local currency at the bottom of the page.

Its receivables outstanding, shown at the bottom left, grew by 1.6% year-on-year to THB 54.4 billion. Operating revenue, shown at the bottom center, grew 4.3% to THB 7.8 billion; while operating profit, shown at the bottom right, decreased by 0.1% to THB 3.2 billion due to higher provision for bad debt.

In Thailand, the maximum lending rate was lowered from 28% to 25% effective on August 1, following the issuance of a notice by the central bank to help customers, including existing borrowers hit by COVID-19. We anticipate this will have an approximate 2% impact on EASY BUY's operating revenue. And we'll try to minimize the impact on its operating profit through a reduction of various expenses.

Next, please go to Page 15 for claims for interest repayment. As is shown on the right, the number of claims for interest repayment in the first half decreased by 9.4% to 11,600. We believe this is attributable to a law firm which launched ad activities using flyers and increased TV commercials. We anticipate that once the impact from the ad activities peaks out, the pace of a decrease of claims will start to accelerate and move closer to the 20% reduction that we anticipate at the start of the fiscal year.

We plan to announce the number of claims for October on day 12th of this month. Judging from the trend until mid-October, we expect it to be at a similar level to September. While we will expect the number of claims to continue to steadily come down, we will closely monitor their trend since requests for interest repayment are highly susceptible to a changing external environment, such as ad activities of some law firms.

Please turn to Page 16. 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 12.6 billion, while principal written off due to interest repayment claims was JPY 1.5 billion, with a total of JPY 14.2 billion taken out from a reserve of JPY 87.6 billion from the end of the previous year, reducing the total outstanding reserve to JPY 73.3 billion. The drawdown in the first half dropped 16.2% year-on-year and was within the 10% to 15% reduction we initially anticipated.

Since requests for interest repayment are susceptible to changes in our external environment, we will 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 17. Now I'd like to touch on provision for bad debt. Consolidated provision for bad debt, shown at the top left, dropped by 15.9% to JPY 32.7 billion, mainly thanks to a decrease at ACOM. Provision for bad debt on a nonconsolidated basis at ACOM, shown at the top center, decreased by 23.4% to JPY 22.7 billion, this is because we -- while bad debt expenses increased by JPY 1.3 billion, and a change in reserve for loan losses for loan and credit card operations was a decrease of JPY 7.4 billion and a change in reserve for the guarantee business was a decrease of JPY 900 million.

Now I'd like to explain factors behind the changes. Bad debt expenses, as shown at the bottom left, increased by JPY 1.6 billion, with the ratio of bad debt expenses up to 3.68% in the loan and credit card business, while they decreased by JPY 200 million with a ratio of bad debt expenses up 2.42% in the guarantee business. Bad debt expenses increased in the loan and credit card business mainly because the proportion of newer customers who are more likely to default increased as receivables had grown to last fiscal year.

Reserves for loan loss decreased, on the other hand, for 2 reasons. First, receivables shrunk mainly due to lower loan demand as people stayed home. Secondly, the quality of loan asset input, which in turn resulted in a lower reserve ratio as more people with less demand for loans pay back the debt.

Next, a reserve in the guarantee business decreased for 2 reasons. First, guaranteed receivables shrunk with lower demand loans. Second, the proportion of newer customers dropped as a result of fewer new customers. This intent helped to stabilize an asset portfolio with a lower reserve ratio.

The NPL ratio in the loan business, shown at the bottom center, increased by 47 basis points to 7.54%, while the ratio of bad debt expenses, including principal written off associated with interest repayment, increased by 40 basis points to 3.91% due to the contraction of receivables resulting from lower demand for loans. While the NPL ratio and the ratio of bad debt expenses have gone up temporarily, once COVID-19 peaks out and receivables start to grow again, those ratios will start to gradually come down.

Provision for bad debt for EASY BUY, shown at the bottom right, increased 18.7% in local currency for 2 major reasons. First, bad debt expenses increased with the growth of receivables. Secondly, bad debt expenses increased with the introduction of the revised loan collection law back in November 2019, which limits the number of times delinquent borrowers can be reached.

Please turn to Page 18. Last but not least, I would like to touch on financial expenses. Consolidated financial expenses, shown at the top left, came down by 31.1% to JPY 3.1 billion, thanks to a reduction of financial expenses on the part of ACOM and the deconsolidation of Bank BNP.

Nonconsolidated financial expenses at ACOM, shown at the top center, dropped by 16.4% to JPY 1.9 billion as borrowing costs came down, thanks to good progress made in refinancing in a low interest rate environment, while outstanding debt decreased.

Outstanding debt, shown at the top right, dropped by JPY 71.9 billion to JPY 544.5 billion, with average borrowing cost coming down by 10 basis points to 0.68%, as is illustrated by the line graph.

The pie chart on the bottom left shows funding sources and their proportions. The split between direct and indirect funding is 32.7% and 67.3%, with funding from MUFG representing 35.2%. In a low interest rate environment, the proportion of fixed rate funding is 88.2%, while long-term funding is 100% as we do not issue any commercial papers.

This will do for details of our financial results for the first half for the year ending March 2021. I would like to end my presentation by asking for your continued support and guidance to our company. Thank you for your attention.

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