Acom Co Ltd

TSE:8572

Earnings Call Transcript 2023-Q2

[Unknown Executive]

Thank you very much for waiting. This is Mr. [ Fujisawa ], Chief Manager of Public Relations and Investor Relations of ACOM. Thank you very much for taking the time out of the busy schedules to attend this online presentation on our financial results.

I'll have to take this opportunity to extend our heartfelt appreciation to all of you for your kind support to our group. Before we get started, there's one request that I would like to make to you.

We will control the mute function button. So please do not touch the mute function button yourselves. Mr. Okamoto, Chief PR and IR Officer, will spend the next 50 minutes or so. Speaking through a translator to share with you our first half results for the fiscal year ending March 2023.

I'll also give you supplementary information using the presentation.

And later, I would like to entertain questions from the participants.

[Takashi Okamoto, executive]

This is Okamoto speaking from a Public Relations and Investor Relations. First, please go to Page 5 of the presentation for an overview of our financial results.

Firstly, the total receivables on a consolidated basis shown at the top right grew 3.2% to JPY 2.302 trillion. 2 factors are behind the receivable growth, a recovery of domestic personal consumption and the weaker yen against the Thai baht.

Looking at receivables by business, receivables in the loan and credit card business grew 2.7% to JPY 886.6 billion while guaranteed receivables increased 2% to JPY 1.185 trillion. Receivables of the overseas financial business grew 12.4% to JPY 217.8 billion.

Turning to Page 6. Consolidated operating revenues as shown in the first line grew 2.8% to JPY 135 billion. Looking at operating revenue by business. Operating revenue in the loan and credit card business increased by 1.1% to JPY 72.2 billion, thanks mainly to revenue growth in the credit card business.

Operating revenue in the guarantee business benefited from receivable growth and a regular fee review and grew 4.8% to JPY 32.6 billion. With a weaker yen against the Thai baht, operating revenue in the overseas financial business increased 4.6% to JPY 27.1 billion.

Next, consolidated operating expenses. As shown in the fifth line, increased by 3.9% to JPY 86.2 billion. Looking at operating expenses by cost item, financial expenses dropped by 29.4% to JPY 2 billion. Provision for bad debt increased by 8.9% to JPY 36.9 billion. Other operating expenses increased 2.2% to JPY 47.2 billion, due mainly to the increase in advertising and promotional expenses at ACOM.

This resulted in operating profit growth of 0.9% to JPY 48.7 billion, as shown in the 10th line. Flat ordinary profit of JPY 48.8 billion and a 15.7% decrease of profit attributable to shareholders of the parent company to JPY 33 billion due mainly to an increase in deferred income tax.

Please go to Page 7. Here, I'm going to go over what's new in the first half, starting from the left. We introduced Apple Pay on Google Pay in April and May, respectively. With this service, customers can use their smartphones to make payments for their balances on ACOM's MasterCard. To coincide with the launch of the service, we conducted a campaign to promote customer usage.

We have confirmed customers registered for mobile payment have higher credit card usage with greater value of purchase than non-registered customers. We will continue to further boost outstanding balances by analyzing user profile and their card usage.

Moving on to the center of slide. With weak loan demand, we struggled to gain new customers during the pandemic, but at long last, the number of new customers recovered to a pre-pandemic level in the first half, and we are on track to achieve the full year target of 260,000. Although the per customer acquisition cost, which is higher than a pre-pandemic level remains a challenge. We will try our best to gain new customers while trying to control costs.

Turning to the right-hand side of the page. Please find receivables, we guarantee for regional banks. While these receivables were slow to recover during the pandemic, we finally started to grow again -- they finally started to grow again, rather. With consolidated guaranteed receivables growing faster than we initially expected. We'll continue to do our best.

Please turn to Page 8. Now I would like to walk you through the progress we have made in the mid-term management plan. 1/6 of the duration of the mid-term plan which started this fiscal year is behind us.

Turning to the left-hand side of the page for business strategy. At the earnings presentation in May, I walked you through 3 components illustrated in red. Creation of new businesses and services for future growth, partnerships with nonfinancial companies in the guarantee business and expansion into new countries.

Here, I would like to touch on the progress we have made in these programs and our initiative to build a solid talent base through hiring, training and retention, which you can please find on the right.

Please go to Page 9. First of all, I'd like to touch on the creation of new businesses and services for future growth. GeNiE, our consolidated subsidiary in embedded finance is now registered as a money lender with a head office. While it has been in the process of coordination with its partners, it is now experiencing some delay in some processes. It is expected to start operating loan service sometime next fiscal year.

We are prepared for unexpected events and we'll look for new business opportunities for future growth. We now stand at a critical stage, and all the members are united in starting the business. As a first step, we'll explore opportunities to offer consultancy to start-ups on the operation of loan business by leveraging our expertise and hope to start operation sometime this fiscal year.

Turning to the center of the page for partnerships with nonfinancial companies in the guarantee business. We're now in the middle of a process of preparing for the start of new partnerships sometime this fiscal year. Please bear with us until the time we will announce our new partners.

Lastly, turning to the right-hand side of the page for expansion into new countries. After receiving a license as a money lender from Malaysian authorities in October, we now have an office and have moved ahead with IT system development. Here again, we are right in the middle process of preparing for the start of operations scheduled for the first half of next fiscal year.

Please turn to Page 10. Next, I'll touch on building a solid talent base. As is mentioned at the top box, talent is indispensable to developing new businesses and executing the mid-term plan. We believe without ES, Employee Satisfaction, there's no CS, Customer Satisfaction. Employee engagement is important in offering good services to customers.

On the left hand side of the page, please find HR initiatives we have to promote customer friendly services. For attracting good talent, and as shown at the top left, we focus on branding activities in hiring new graduates. As I mentioned at the last earnings presentation, we ranked #10 in a joint survey by Mynavi and Nikkei in popularity of companies ranking in 2021 among new university graduates, #4 in 2022, and #2 in 2023.

We also focus on the promotion of diversity. We have changed the mechanism of promotion and offer training programs for female and senior staff to help them perform even better.

For productivity improvement shown at the left center, we try to boost job satisfaction by sharing a vision throughout the organization. We're also focused on developing talent who can train and improve skills of their staff by promoting on-the-job development in addition to the traditional on-the-job training.

For encouraging innovation shown at the bottom left, we have personnel development programs, mainly using digital tools for the promotion of reskilling. As we already announced in a press release, we are relocating in December. The new office is 107 meters long with all the head office functions consolidated on a single floor. We hope this will naturally create an intellectual intersection, which in turn, will promote communication and encourage innovation. With these initiatives, we try to boost employee engagements.

At the bottom right, please find a voluntary termination ratio. It has stayed low. By keeping the best talent from leaving, we protect our intellectual property and control costs associated with new hirings and training. Next, I will touch to dividends.

Please turn to Page 11. Basic capital policy is to maintain and improve financial health and have good shareholder return. In fiscal year ending March 2025, which is the final year with the current mid-term plan, we target equity to asset of around 25%, including guaranteed receivables in the total consolidated asset, a dividend payout ratio of about 35% and return on equity of around 10%.

Next, our basic dividend policy is to improve shareholder returns, supported by high profitability and appropriate shareholders' equity. While receivables in the loan and credit card business did not recover as quickly as we initially expected, operating revenue in the first half was greater than the initial target of JPY 132.8 billion, thanks to the growth of the guarantee business and overseas operations.

Operating profit was also greater than the original target of JPY 44.3 billion, thanks to lower provision for bad debt than expected. Both ordinary profit and profit attributable to the shareholders of period were also greater than originally forecast, resulting in return on equity of 12% in the first half. This resulted in a return on equity of 12% in the first half.

Lastly, with 22.8% equity to asset in the first half, we are on track to achieve the target of 25%. With these results, we will pay a dividend of JPY 5 per share for the first half as we announced, which works out to a dividend payout ratio of 23.7%.

This do for overview of financial results. Now please go to page 13 for supplementary information. First of all, I would like to give you an overview of the loan and credit card business.

With a recovery of personal consumption for travel and leisure, thanks to easing participant numbers at events and reopening of borders for foreign tourists, the combined receivables, shown on the left, grew 2.7% to JPY 886.6 billion, with loan receivables of JPY 791.8 billion and credit card receivables of JPY 94.7 billion.

Please turn to Page 14. Operating revenue shown on the left increased 1.1% to JPY 72.2 billion, thanks mainly to revenue growth in the credit card business. On the other hand, operating profit shown on the right dropped by 4.4% to JPY 24 billion due to an increase in provision for bad debt and advertising and promotional expenses.

Please turn to Page 15. The number of new accounts shown on the left grew 19% to a pre-pandemic level of 134,000 and 146,000. We believe a recovery of personal consumption for travel and leisure, thanks to relaxation of restrictions on activities, is responsible for this growth.

Government policies to boost tourism demand, including the national travel subsidy program launched in October are expected to help to further grow loan demand for travel and leisure. We'll try to keep the level of growth in the first half in Q3 and beyond to achieve a full year target of 260,000 new accounts.

Advertising expenses shown on the right grew 10.2% to JPY 8.2 billion. The proportion of loan applications by the internet, which continues to increase, is behind the cost increase. We'll try to control per customer acquisition cost, which has remained high.

Please move on to Page 16. The average yield shown on the left stood at 14.71% for the combined loan and credit card business, with yield for the loan basis down 9 basis points to 14.89%. The average yield dropped, because we accommodated a request for long-term installment repayment from borrowers with lower mediated loans and long-term delinquent loans.

The ratio of bad debt expenses shown on the right increased 15 basis points to 3.18%, with bad debt expenses increasing by JPY 1 billion to JPY 14.1 billion. Last fiscal year, with weak loan demand, many borrowers used extra cash on hand to pay down their debt, which helped to control bad debt. Going forward, with the recovery of loan demand, the proportion of new borrowers who are more likely to default will increase, which we expect will push bad debt expenses up to a pre-pandemic level.

Please go to Page 17. NPL shown the left increased JPY 3.6 billion to JPY 66.2 billion, while the NPL ratio shown on the right increased by 34 basis points to 8.37%. NPLs increased because delinquent loans of 3 months or longer migrated to restructured loans. As we accommodated a request for long-term installment repayment from borrowers with lower mediated loans and long-term delinquent loans. Since restructured loans have a relatively low loss ratio and help to lower future bad debt, we believe we now have stable loan asset quality.

Next, please go to Page 18 for the guarantee business. As in the loan and credit card business, with the recovery of loan demand for travel and leisure, guaranteed receivables of ACOM and MU Credit Guarantee were JPY 1.025.4 trillion and JPY 164.1 billion, respectively, with 2% growth of combined receivables to JPY 1.189.5 trillion.

The next page shows results of non-consolidated ACOM's guaranteed business, which you can please review your per time.

Please turn to Page 20. Operating revenue shown on the left was JPY 27.1 billion for ACOM and JPY 5.4 billion for MU Credit Guarantee with 4.8% growth of combined revenue to JPY 32.6 billion. There are 2 reasons why operating revenue increased 4.8%, while guaranteed receivables grew 2%. Firstly, average receivables grew, and secondly, guarantee fees increased as a result of a regular fee review.

Operating profit shown on the right grew 13.6% to JPY 13.1 billion, thanks to revenue growth and lower provision for bad debt.

Please move on to Page 21 for receivables for claim and bad debt expenses. Receivables for claim shown on the left increased 4.6% to JPY 56.2 billion. 2 factors behind this increase. Firstly, the proportion of newer customers, the borrowers, increased our partner banks, mainly due to an increase in guaranteed receivables. This, in turn, resulted in an increase in delinquent loans we had to acquire.

Secondly, we accommodated a request for long-term installment repayment from borrowers whose loans became receivables for claim.

The ratio of bad debt expenses shown on the right increased by 12 basis points to 1.99%, with bad debt expenses increasing JPY 800 million to JPY 10.8 billion. Going forward, as in the loan business, with the recovery of loan demand, the proportion of new borrowers who are more likely to default will increase, which we expect will push bad debt expenses up to a pre-pandemic level.

Next, I'll have to give you an overview of our financial business outside Japan. Please skip the next page and go to Page 23. Since our overseas subsidiaries have a December year-end, their financials as of the end of June 2022 are reflected here. Receivables of our overseas financial business in Japanese yen, shown on the left, grew 12.4% to JPY 217.8 billion. The weaker yen boosted receivables by JPY 22.9 billion.

EASY BUY's receivables outstanding on a local currency basis, shown on the right, shrunk by 0.3% to THB 55.7 billion.

Please turn to Page 24. Operating revenue of the international financial business shown on the left grew 4.6% to JPY 27.1 billion. Thanks to the weaker yen, while operating revenue of EASY BUY on a local currency basis shown on the right dropped 1% to THB 7.2 billion.

EASY BUY's revenue came down because of collection fee for those loans which became delinquent on September 17, 2021 and beyond was lowered from THB 100 per borrower to THB 50 in accordance with the official gazette of the Interior Ministry.

Please go to Page 25. Operating profit of the overseas financial business decreased 1.8% to JPY 10.7 billion. Operating profit of EASY BUY on a local price basis shown on the right came down by 3.9% to THB 3 billion due to a drop in revenue and an increase in provision for bad debt. Later, I'll come back to the reason why EASY BUY's provision for bad debt increased.

Please go to Page 26 for requests for interest repayment. The number of claims for interest repayment in the first half decreased by 7.7% to 9,600. We expect this downward trend to continue towards the end of the fiscal year and the number of claims to decline around 10% for the full year.

While we expect the number of claims to continue to come down for structure limitations and other factors, we'll closely monitor its trend since it's highly susceptible to changes in external environment, such as ad activities of some law firms.

Please turn to Page 27. The drawdown of reserve for loss on interest repayment in the first half was JPY 14.8 billion or a year-on-year decrease of 2.4%. We expect a year-on-year decrease of around 5% in drawdown for the full year.

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

Please move on to Page 23 (sic) [ Page 28 ] for provisions of bad debt. Consolidated provision for bad debt shown on the left increased 8.9% to JPY 36.9 billion due to an increase at ACOM and EASY BUY.

Provision for bad debt at EASY BUY shown on the right increased JPY 1 billion to JPY 8 billion. With rapid spread of the pandemic in July and August of 2021, the company had to reduce its staff at its call center. This resulted in an increase in delinquent loans and bad debt expenses, which is a main reason behind the increase in provision for bad debt.

Please go to page 29. Provision for bad debt on a non-consolidated basis at ACOM increased by JPY 1.1 billion to JPY 26.3 billion. While bad debt expenses increased JPY 1.8 billion, a change in allowance for doubtful accounts was a decrease of JPY 700 million.

Now I'd like to explain what's behind the increase in bad debt expenses. In the first half of last fiscal year with weak loan demand, many borrowers used extra cash on hand to pay down their debt, which helped to control bad debt.

In the first of the current fiscal year, on the other hand, with an increase in the proportion of newer borrowers, bad debt expenses went back to a near pre-pandemic level with a year-on-year increase of JPY 1.8 billion.

Please turn to Page 30. Lastly, I would like to touch on financial expenses. Consolidated financial expenses shown on the left came down by 29.4% to JPY 2 billion, thanks to a reduction of financial expenses on the part of ACOM and EASY BUY.

Non-consolidated financial expenses at ACOM shown on the right dropped by 22.2% to JPY 1.3 billion for 2 reasons. Firstly, we made good progress in refinancing existing debt with cheaper debt. Secondly, we do not issue corporate box because of the market environment and turn to indirect financing and commercial paper instead.

Please go to Page 31. Outstanding debt shown on the left increased by JPY 19.6 billion to JPY 516.6 billion, with the average borrowing cost coming down by 14 basis points to 0.54%, as is illustrated by the line graph.

The pie chart on the right shows funding sources and their proportions. The split between direct and indirect funding is 31% and 69%, with funding from MUFG representing 38%.

While there is concern about a future rise in interest rates, given that 95.7% of our total debt is at fixed rates and that 90.3% is long term, the magnitude impact from future rate hikes will be immaterial for some time to come.

For your reference, Page 33 and following pages show the trend of the size of the personal card loan market, a trend of interest repayment and the impact from COVID-19 and the mid-term management plan. This will do for supplementary information on financial results for the first half of the fiscal year ending March 2023.

We will do our utmost to achieve the targets in the mid-term plan while securing stable growth of the 3 core businesses. I would like to conclude my presentation by asking for your continued support and guidance. Thank you very much.

Now we'd like to start entertaining questions for the participants.

[Unknown Executive]

Now let me explain how you can ask questions. [Operator Instructions]

Since there seems to be no questions from the participants, we'd like to conclude this online presentation on financial results for the first half of the fiscal year ending March 2023.

For questions, please do not hesitate to contact our public relations and the investor relations team. Thank you once again for your kind participation today.

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