Acom Co Ltd

TSE:8572

Earnings Call Transcript 2022-Q2

[Unknown Executive]

[Interpreted] This is [indiscernible] speaking from Public Relations and Investor Relations. First of all, let me thank you very much for taking the time out of your busy schedule to attend this web presentation.

I'd also like to take this opportunity to extend our heartfelt appreciation to all of you for your kind support to our firm. There's a request that we'll have to make before we get started. We will control the mute function. So please do not touch the mute function yourselves, please.

We would like to spend the next 50 minutes or so, including the time needed for translation to give you a overview of our first half for the year ending March 2022. Mr. Okamoto, Chief PR and IR Officer, will use the presentation, and then we'd like to entertain questions from the participants after the presentation.

So now let's get started.

[Takashi Okamoto, executive]

[Interpreted] This is Okamoto speaking from Public Relations and Investor Relations. Thank you for your kind participation. First, I would like to give you a overview of the financial results summary. For that, please go to Page 5 of the presentation. The total receivables on a consolidated basis shown on the top contracted by 0.8% year-on-year to JPY 2.2305 trillion. With the state of extended to September 30, loan demand for such activities as entertainment, leisure and dining out remained sluggish. Looking at receivables by business, receivables in the loan and credit card business shrunk by 0.8% to JPY 863.1 billion, while guaranteed receivables contracted by 1.1% to JPY 1.1657 trillion.

Receivables of offshore financial operations on the other hand grew by 1.7% to JPY 193.8 billion as EASY BUY's receivables were on a recovery trend with lower demand coming back to a pre-pandemic level between the third quarter and fourth quarter of last fiscal year.

Operating revenue on a consolidated basis dropped by 2.6% to JPY 131.4 billion, largely due to a decrease in interest income and guarantee fees, which resulted from the contraction of receivables.

Looking at our operating revenue by business segment. Operating revenue in the loan and credit card business decreased by 2.1% to JPY 71.4 billion. Operating revenue in the guarantee business came down by 4.9% to JPY 31.1 billion. Operating revenue in overseas financial business, on the other hand, declined by 3.9% to JPY 25.9 billion due mainly to the lowering of the maximum lending rate in Thailand.

Consolidated operating expenses increased by 3.2% to JPY 83 billion. Looking at operating expenses by cost item. Financial expenses dropped 7.6%, thanks largely to a decrease in outstanding debt at ACOM. Provision for bad debt increased by 3.5% because while bad debt expenses decreased significantly at ACOM, its reserve for loan losses jumped. Other operating expenses on the other hand increased 3.8% due mainly to an increase in advertising and promotional expenses at ACOM.

This resulted in consolidated operating profit of JPY 48.3 billion, ordinary profit of JPY 48.8 billion and profit attributable to shareholders of the parent company of JPY 39.1 billion. With this result, we are on track with 50.4% of the full year consolidated operating revenue target, 60.5% of the operating profit target, 61% of the ordinary profit target and 64.2% of the target for profitable attributable to shareholders of the parent company achieved in the first half.

We, however, have kept our initial guidance intact since with the pandemic, the future remains uncertain. There is a greater chance now that we need to top up the reserve for loss on interest repayment.

Please go to Page 7 of the presentation for loan and credit card operations. The combined receivables shown at the top left, shrunk by 0.8% to JPY 863.1 billion with loan receivables of JPY 780.5 billion and credit card receivables of JPY 82.6 billion. Hit by COVID-19, additional borrowings did not recover to a pre-pandemic level as loan demand for such activities as leisure, travel and dining out remain sluggish.

Operating revenue, shown on the top center, dropped by 2.1% to JPY 71.4 billion, mainly due to a decrease in interest income. The reason why operating revenue decreased by 2.1%, while receivables dropped by 0.8% is because the average interest rate came down. Average interest rate came down by -- average loan balance came down by 3%.

Operating profit shown at the top right, on the other hand, dropped by 14.9% to JPY 25.1 billion, largely due to an increase in reserve for loan losses and advertising and promotional expenses. Advertising and promotion expenses increased for 3 reasons.

Firstly, the proportion of loan applications by the Internet, which carries higher acquisition cost per customer, increased. Secondly, our loan demand for such activities as leisure, travel and dining out remain sluggish due to the pandemic. Competition over fewer borrowers intensified, which in turn resulted in higher acquisition cost per customer for Internet advertising, including affiliate apps. Thirdly, we currently have a rather aggressive advertising program to achieve the full year target of 230,000 new accounts and to maintain and gain market share among new customers.

Last fiscal year, on the other hand, we expect lower loan demand with the spread of virus and reduced advertising. Advertising and promotional expenses were higher than planned. Since they are likely to stay at the current level in the second half, we continue to reduce and control computer and various other expenses.

The ratio of bad debt expenses shown on the bottom right came down by 65 basis points to 3.03%, with bad debt expenses decreasing by JPY 2.9 billion. Three factors are responsible for the decreases. First with the state of emergency extended to September 30, which led to weak loan demand, borrowers used extra cash on hand to pay down their debt. Second, during last fiscal year because of reduced on-site work with the first state of emergency in place, we could not contact borrowers for collection as we usually do, which in turn resulted in a increase in bad debt. And thirdly, the proportion of newer customers who are more likely to default continued to decrease.

Please turn to Page 8. Please find an overview of non-consolidated loan business of ACOM on this page. The trend of its receivables, revenue and profit is similar to that of consolidated loan and credit card business. The number of new customers shown on the bottom center grew 49.7% to 112,718. With the spread of the virus, loan demand dropped significantly in the first half last fiscal year. We're likely -- we're slightly above the target and do our utmost to achieve the full year target of 230,000 new, new accounts.

With the lifting of the state of emergency on September 30, we hope loan demand will come back for such activities as leisure, travel and dining out. We'll make sure we'll continue to meet loan demand for our customers -- of our customers, rather, as we believe our financial services play a important role supporting the Japanese economy.

Please turn to Page 9 for an overview of the guarantee business on a consolidated basis. As is shown on the top left, guaranteed receivables ACOM and MU Credit Guarantee were JPY 1.0065 trillion and JPY 159.1 billion respectively, with a 1.1% contraction of combined receivables to JPY 1.1657 trillion.

Operating revenue shown on the top center was JPY 25.8 billion for ACOM and JPY 5.2 billion for MU Credit Guarantee with a 4.9% decrease of combined revenue to JPY 31.1 billion. On the other hand, operating profit shown to its right came down by 15.1% to JPY 11.5 billion. The 2 reasons why operating revenue decreased 4.9% were guaranteed receivables contracted 1.1%. Firstly, guarantee fees came down due to regular review. Secondly, average receivables during the period under review contracted due to sluggish loan demand. Operating profit decreased because of higher provision for bad debt, which I will come back to later in the presentation.

Please turn to Page 10. Please find an overview of ACOM's non-consolidated guaranteed business on this page. The trend of its receivables, revenue and profit is very similar to that of consolidated guaranteed business. Receivables for claim shown at the bottom center increased 1.3% to JPY 53.7 billion. Two factors are behind this increase. Firstly, delinquent loans we had to acquire from some partner banks increased. Secondly, we accommodated a request for our long-term installment repayment from borrowers whose loans became receivables for claim.

The ratio of bad debt expenses shown at the bottom right, dropped by 55 basis points to 1.87%, with bad debt expenses decreasing by JPY 3.1 billion. Three factors are responsible for the decrease in bad debt expenses. First, borrowers used extra cash generated as they stayed home to repay their debt. Second, we succeeded in controlling loan losses by accommodating a request for long-term installment repayment from borrowers whose loans became receivables for claim. And third, with sluggish loan demand, the proportion of newer customers who were more likely to default decreased.

Please turn to Page 11. On this page, please find target markets for our offshore financial operations and overview of our activities in each country. I'm going to focus on Malaysia this time.

As we announced in the news release on November 9, we set up a low-cost subsidiary in Malaysia in July. [indiscernible] application for moneylenders license in late November to start car loan business in that country. We chose Malaysia for 3 reasons. First of all, judging from license issuance status, it is the only country among Asian nations which we can enter as a moneylender. Secondly, while there are restrictions and regulations, including maximum lending rate that can be charged, we believe we can leverage our expertise and build a revenue base. Lastly, we can start business fully owned by a foreign firm and play a leading role in managing and running the business.

Going forward, depending on how application review process goes, we look at different possibilities in trying to start business in the near future.

Please go to Page 12. Next turning to our financial business outside Japan, I would like to talk about EASY BUY's performance in local currency. Receivables outstanding shown at the bottom left, grew 2.8% to THB 55.9 billion. Operating revenue shown on the bottom center dropped 6.4% to THB 7.3 billion, while operating profit shown at the bottom right decreased 0.9% to THB 3.2 billion.

Its operating revenue dropped, while its receivables grew 2.8%. This is because EASY BUY lowered its maximal lending rate from 28% to 25% on August 1 last year, which in turn resulted in a decrease in interest income. Its operating profit came down since it could not fully offset the drop in operating revenue with cost reduction.

Next please turn to page 13 for claims for interest repayment. As is shown on the right, the number of claims for interest repayment decreased by 10.3% to 10,400, in line with the 10% to 15% decline we initially expected. Given a recent trend, we anticipate a 10% to 15% decline will continue towards the end of the fiscal year. I would expect the number of claims to continue to steadily come down. We'll closely monitor its trend since requests for interest repayment are highly susceptible to changing external environment, such as ad activities of some law firms.

Please go to Page 14. Let me now talk about the evolution of loss on interest repayment. As is shown on the right, interest repaid in the first half was JPY 13.5 billion while principal written off due to interest repayment claims was JPY 1.6 billion with a total of JPY 15.1 billion taken out from a reserve of JPY 56.7 billion from the end of the previous year, reducing the total outstanding reserve to JPY 41.5 billion. The drawdown in the first half increased 6.6% year-on-year. For the year ending March 2022, we expected a decrease in drawdown 20% year-on-year as a result of review of our assumptions we conducted when we topped up reserve at the end of March 2020.

This is because the proportion of cases which end up in court involving greater paid interest per claim increased. If this trend continues, the actual drawdown is likely to be more significant than initially anticipated, which suggests there is a greater chance that we need to add to the reserve at the end of the year under review.

Since claims for interest repayment are susceptible to changes in a external environment, we'll continue to examine the difference between initial projections for reserve balance, and actual balance every quarter to see if we have a reasonable and sufficient level of reserve sitting on our balance sheet.

Please turn to Page 15. Now I'd like to touch on provision for bad debts. Consolidated provision for bad debt shown on the top left increased 3.5% to JPY 33.9 billion, largely due to an increased ACOM. Provision for bad debt on nonconsolidated basis at ACOM shown on the top center increased 10.7% to JPY 25.2 billion. Bad debt expenses dropped by JPY 6 billion. A change in reserve for loan losses for loan and credit card operations was a increase of JPY 7 billion. A change in reserve for the guarantee business was a increase of JPY 1.4 billion.

Now I'd like to go over factors behind the increase in reserve for loan losses for loan and credit card operations. As is shown on the top right, in the first half under review, reserve for loan losses increased JPY 2.2 billion compared to what it was at the end of the previous year. This is mainly because as receivables claim increased, our reserve ratio also increased, which in turn resulted in a significant increase in reserve for loan losses for receivables for claim.

In the first half of last fiscal year on the other hand, reserve for loan losses decreased JPY 4.8 billion compared to what it was at the end of the previous fiscal year. Two factors are responsible for the decrease. Firstly, as receivables contracted due to a weak loan demand, a reserve ratio dropped with a increase in undrawn commitment. This, in turn, resulted in a significant decline in reserve for loan losses for loan receivables compared to what it was at the end of the previous fiscal year.

Secondly, as receivables were claimed, which we acquired from partner banks in the guarantee business decreased, our reserve ratio also came down. This, in turn, resulted in a significant decrease in reserve for loan losses with these receivables. For these reasons, a change in reserve for loan losses for loan and credit card operations, it was an increase of JPY 7 billion year-on-year.

Next I'll touch on the increase in reserve for loan -- for the guarantee business rather. As is shown on the top right, in the first half under review reserve for the guarantee business decreased by JPY 60 million compared to what it was at the end of the previous fiscal year. This is because our reserve ratio increased for guaranteed receivables, guaranteed receivables shrunk due to weak loan demand.

In the first half of the previous fiscal year on the other hand, as guaranteed receivables contracted due to weak loan demand, reserve ratio dropped with a increasing undrawn commitment. This in turn resulted in a decline of JPY 1.055 billion in reserve for the guarantee business compared to what it was at the end of the previous fiscal year. For this reason a change in reserve for the guarantee business was a increase of JPY 1.4 billion year-on-year.

Next, I'll touch on provision for bad debt for EASY BUY. Next, I'll touch on provision for bad debt for EASY BUY. As is shown on the bottom right, provision for bad debt came down by 16.3% in local currency because the change in reserve was a decrease. There are 2 factors behind the decrease. Firstly, those loans which remain on the book -- loan book as NPLs in a skip payment scheme introduced the previous year, while they carried a full loss provisioning were written off in the first quarter. Secondly, as in Japan weak loan demand due to the pandemic helped improve the quality of the loan assets, which in turn, lowered our reserve ratio.

While provision for bad debt significantly came down year-on-year in the first half under review, the number of new COVID-19 cases increased in April in Thailand and further increased in July, which forced EASY BUY to shrink its call center operations in July. We'll closely monitor the situation. There is concern -- since there is a concern about a possible rise in delinquency and provision for bad debts.

The NPL ratio in the loan business shown at the bottom center increased by 49 basis points to 8.03% while the ratio of bad debt expenses, including principal written off associated with interest repayment came down by 62 basis points to 3.29%. Two factors are responsible for the increase in the NPL ratio. Firstly, loan demand remained weak as the state of emergency was extended till September 30. This in turn resulted in the contraction of receivables, which is a denominator. Secondly, with good progress made in settling cases of delinquency, restructured loans increased. While the NPL ratio increased, we believe we have good control over default since restructured loans carry a lower default ratio.

Please turn to Page 16. Next, I'd like to touch on financial expenses. Consolidated financial expenses shown on the top left came down by 7.6% to JPY 2.8 billion, thanks mainly to a reduction of financial expenses on the part of ACOM. Nonconsolidated financial expenses at ACOM shown at the top center dropped by 12.5% to JPY 1.7 billion as outstanding debt decreased as a result of contraction of receivables.

Outstanding debt shown on the top right, dropped by JPY 47.5 billion to JPY 497 billion with the average borrowing costs of 0.68% 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 33% and 67%, with funding from MUFG representing 38.2%. In a low interest rate environment, the proportion of fixed rate funding is 93.2%, while long-term funding is 99.2%.

Please turn to Page 17. Last but not least, I'll touch on dividends. In our basic dividend policy, we tried to have stable and sustainable return to our shareholders and further improve it while looking at our financial results, our equity and our operating environment. In the first half under review was sluggish loan demand due to the pandemic. Receivables and guaranteed receivables contracted year-on-year as is shown at the top left.

Our operating revenue was in line with the initial projection. Operating profit was better than expected, thanks to a large drop in bad debt expenses. The equity to asset with guaranteed asset included in the total consolidated assets mentioned at the top center is 21.9% due to the contraction of receivables.

Lastly as in operating environment, while the state of emergency was lifted across Japan on September 30, the future remains uncertain due to the pandemic. Additionally, a drawdown of reserve for loss on interest repayment is not greater than anticipated as a proportion of cases which end up in court involving greater repeat interest per claim has increased.

Given the situation, we plan to pay JPY 3 in each half as planned, with a total annual dividend of JPY 6.

This will do for an overview of financial results for the first half for the year ending March 2022. 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'd like to end my presentation by asking for your continued support and guidance to our firm. Thank you for your attention.

Now we'd like to entertain questions from the participants.

[Unknown Executive]

[Interpreted] Now let me try to explain how you can ask questions. [Operator Instructions] Now we'd like to entertain questions from the participants.

We are receiving your questions. Mr. Maeda, please ask your question.

[Hiro Maeda;Moon Capital, analyst]

[Foreign Language] This is Hiro Maeda from Moon Capital. I have one question about this Kabarai price increase. I know this is kind of sensitive information. But can you share with some image about how this Kabarai value per claim has been trending? Is this really trending high, getting accelerated? Or it's just a minor kind of difference if you compare to your initial plan? We want to have some kind of the image, how serious this Kabarai claim unit price increase is. And it's uncertain, I totally understand, but full potential image for the impact on this existing Kabarai provision, if we can get any comments.

[Unknown Executive]

[Foreign Language]

[Takashi Okamoto, executive]

[Interpreted] Mr. Maeda, thank you for your question. Let me try to answer your question as to whether this increase in repaid interest per claim, is it going up in a significant way? Or is it just a minor increase? Bottom line here is the magnitude of increase is not very significant. Yes.

Let me try to explain what's actually happening. The number of claims for interest repayment has been trending downwards, meaning that on the part of lawyers, they have less or fewer outstanding claims actually for interest repayment meaning that they actually -- those lawyers can get to spend more time per claim on a single case actually, which in turn has meant that we see more cases ending up in courts. This is the reason why we have seen this moderate increase in interest repaid per claim.

Let me try to answer the second part of the question as to the reserve that we have for interest repayment actually. Let me try to explain where we stand at the moment. Please go to Page 14 of the presentation. If you can go to the top box for our projected drawdown for the current year ending March 2022, we anticipate the revenue to draw down from the reserve, it's going to come down by 20% year-on-year.

If you can go to the very right column for the actual drawdown that we had in the first half. The drawdown actually increased by 6.6% year-on-year. So the bottom line here is that compared to initially projected 20% decline -- year-on-year decline in drawdown, we actually had a 6.6% increase year-on-year in drawdown from the reserve.

If you can go to the bottom left place for a image of addition of provision. This is the projection -- projected image that we had at the end of March 2020 when we actually added 20 -- about JPY 20 billion to the existing reserve. And this is how we thought things will evolve going forward. If you can first look at this dotted red line. This is a projected outstanding reserve balance. Well, if you can go to the dotted blue line this time, that's the projected floor, floor of the outstanding reserve balance. So what would happen is that if the outstanding reserve balance comes down to -- come down below the dotted blue line, then we have to add to the reserve so that the outstanding reserve will go up to the dotted red line.

So where do we stand now? Where we stand is somewhere between the dotted red line and the dotted blue line. So we have not added to the reserve because where we stand right now. So we currently stand somewhere between the dotted red line and dotted blue line, but always something -- if our existing reserve comes down below the dotted blue line, then we have to add to the existing reserve loss on interest repayment.

Every quarter we have to -- we need to examine to see if that we have a reasonable sufficient level reserve sitting in the balance sheet. The next time we conduct this review process is at the end of the third quarter and the time after that is the end of the fourth quarter. And that's the time when we'll revisit to see if we have a reasonable enough level reserves sitting in the balance sheet. Did I answer your question, Maeda-san?

[Hiro Maeda;Moon Capital, analyst]

Thank you very much for your detailed explanation. If I may, may I ask one more follow-up question regarding Kabarai...

[Unknown Executive]

Could you speak a bit closer to the microphone, please?

[Hiro Maeda;Moon Capital, analyst]

Yes. Can you hear me?

[Unknown Executive]

Yes, I can hear you, but it's okay. I'll do my best.

[Hiro Maeda;Moon Capital, analyst]

All right. Okay. If I may, may I ask one more follow-up question?

[Takashi Okamoto, executive]

[Interpreted] Please. Please.

[Hiro Maeda;Moon Capital, analyst]

So this kind of broken correlation between Kabarai claim as per request and a cash charge to be a little bit public, and you explained, this is caused by an increase in prices. I totally understood that part. So when would you think this cashout goes into declining trend again? We've been seeing monthly cash out went up for 4 months in a row. Maybe this is not going to continue as we saw, but we see the claim number is declining right now. When is the best case, this cash out, monthly cashouts are showing decline again?

[Unknown Executive]

[Foreign Language]

[Takashi Okamoto, executive]

[Interpreted] Maeda-san, you put me on the spot. That's a very difficult question to answer indeed. Because we have seen more cases which end up in court, we are seeing this increasing trend in actual cash-outs. Well, it's actually a combination of 2 things which actually determine the amount of cash-out. On the one hand, it's repaid interest per claim, that's one. And secondly, it's a number of claims where interest repayment actually. And also that will determine -- that will also be -- by how much the number of claims for interest repayment, how significantly it will come down will also determine when and if we see a decline in actual cash-outs. But when it comes to the timing of us seeing a decline in cash-out, it's not going to be there in the near future. It's going to be a bit further down the road.

Well, at the moment, we are seeing this monthly increase in cash-outs. But somewhere down the road, for sure, it's going to start trending downwards because after we have had this history of interest repayment for 14 to 15 years already now. So we believe time should come for us to say goodbye to this issue in somewhere down the road. So please bear with us for some time to come.

[Unknown Executive]

[Interpreted] Any more questions, please? Since there seem to be no more questions, we'd like to conclude this online presentation for the first half for the year ending March 2022. For any additional questions, please contact our PR and IR team. Thank you once again for your kind participation.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]