Marui Group Co Ltd Ord

We'd like to start Marui Group's financial results briefing for the second quarter of the fiscal year ending March 2022. Today's materials can be downloaded from our corporate website. Please refer to the document titled Financial Results Briefing for the 6th month ended September 30, 2021 and Future Outlook. Today's session will begin with a 25-minute explanation of our financial results followed by a Q&A session. We'll take your questions using the conference call system. Please note that the video of the presentation will be uploaded on our website at a later date. Presenters for today are Mr. Aoi, President and Representative Director, and Mr. Kato, Managing Executive Officer and CFO. They'll present the financial results for the second quarter of the fiscal year ending March 2022. In addition to these two presenters, we have Mr. Saito, managing executive officer and president of EposCard, Mr. Aono, senior executive officer and president of Marui, and Mr. Ogura, general manager of IR department, to answer your questions. We have three topics on our agenda for today. First, Mr. Kato, Managing Executive Officer and CFO, will provide an overview of financial results for the second quarter of the fiscal year ending March 2022 and the full year outlook. I am Kato. I'd like to explain the financial summary and the full year forecast. Thank you very much. First, these are the three highlights for the financial results. NPS, a key indicator, increased 39% to 57.8 yen. Even with the impact of COVID-19 in this fiscal year, it recovered to 90% over the 2019 pre-COVID level. The fintech segment was the driver for the recovery, with total transactions up 18%, a record high for the first half. Consolidated operating income rose 2% to 21.1 billion yen, and excluding special factors such as liquidated accounts receivable, actual operating income was up 7%. Let me explain the details. As for the consolidated results, EPS grew significantly, up 39% to 57.8 yen due to the increase in profit and the effect of capital optimization. EPS recovered to 90% over the pre-COVID-19 level. Consolidated operating income was up 2% to 21.1 billion yen, recovering to 94% over the pre-COVID level of 2019. As for the net income, due to a significant decrease in infection-related expense such as fixed costs during the store closures recorded as extraordinary losses, we saw a big rise in net income up 37% to 12.2 billion yen. In terms of operating income by segment, the retailing segment was down 65% to 0.4 billion yen, while the fintech segment was up 5% to 23.8 billion yen, a 13% increase compared to 2019, which is 14th consecutive increase for the first half. I will explain the factors. Here are the factors affecting our consolidated operating income. In the retailing, the rent exemptions and the transfer of fixed costs to extraordinary losses during the stock closures accounted for negative 1.3 billion yen, while in the fintech, due to the liquidated accounts receivable and the interest repayment provisions, net impact was plus 200 million yen. These totaled negative 1.1 billion yen. Excluding those factors, income increased by 1.5 billion yen, up 70% increase in both retailing and fintech. This is our balance sheet. While cash advance declined, card credit grew, and total operating receivables increased by 5.4 billion yen. The liquidity ratio was 25%, the same level as last year. Shareholders' equity decreased by 6.9 billion yen, mainly due to the share buybacks for capital optimization, and the shareholders' equity ratio was 31.4%. The total assets were almost the same as last year. This is the status of cash flow. Core operating cash flow, which excludes the increase in operating receivables, increased by 12.5 billion yen year-on-year, mainly due to the increase in income. Investment cash flow was 8.4 billion yen of cash outflow, 1.7 billion yen less than last year due to a decrease in tangible fixed asset investment. Financial cash flow was an outflow of 3.3 billion yen due to the share buyback and other factors. The recurring revenue, which is our LTV management index, was up 6% to 63.2 billion yen. Due to an increase in retailing's fixed-term rent revenue, the ratio to the gross profit increased 2.2 points to 67.5%. This is the full-year forecast. Based on the first half results, we recalculated our full-year forecast. However, there is no change from the previous forecast announced earlier. EPS an increase of 69 yen to 79.6 yen, ROE 5.9% and ROIC 3.2%. Total transaction volume is 3.41 trillion yen, reaching 3 trillion yen for the first time. Operating income 36.5 billion yen and net income 16.5 billion yen. This is the forecast by segment. No change from the initial forecast. The retailing segment's operating income will be up 35% to 2 billion yen, and the fintech segment will increase by 103% to 41 billion yen due to the large amount of provision recorded last year for loss on interest repayment. Please refer to the assumptions on this page. That's all for me. Thank you very much. I am Aoi. I'd like to start with the second topic, which is the review of our first half, About the retail situation, due to the two emergency declarations, number of customers visiting our stores was sluggish, and the pace of recovery from COVID-19 slowed down. In reaction to the store closures in the previous fiscal year, the transaction grew 116% year-on-year but remained at 69% against the pre-COVID level of 2019. Under the severe situation of COVID-19, nationwide commercial facilities' vacancy rate, which is the percentage of a closed section of their floors, worsened from 5% to 8%. Even under such situation, our vacancy rate did not deteriorate and stayed at 3%, which is the level before COVID. There are two reasons. One reason is the rebalancing of categories, which we carried out in parallel with the fixed-term rental contracts. Apparel has been largely affected by COVID-19. Store closing rate for apparel tenants was 5% for the first half, which is more than double that of our other categories. On the other hand, apparel tenants' floor space has declined by half since we shifted to fixed-term rental contracts. They declined to about 20% of the total space, and that is contributing to the stable vacancy rate. Another reason is the stronger partnerships. As we did in the previous term, we continued to provide rent exemptions during the store closures and provided support for their subsidy applications. In addition, we shared information with tenant employees regarding their health conditions as we do with our own employees so that Marui and our tenants could work together to prevent infection. We accepted shops to be closed when they had someone ill, even when the infection was not confirmed. These flexible measures helped us to control the number of infections. As a result, while many commercial facilities had to be closed due to the outbreak of more than 100 positive cases, we had no outbreak of clusters and were able to continue our business, which made our partners very happy. Next is about the progress of stores that don't sell. We were able to have over 100 new tenants even during the pandemic. 85% of them are experience-based, non-merchandise sales tenants. If we continue at this pace, we will achieve our goal of becoming stores that do not sell in 5 years with 70% of them being experiential and event-based. These are some examples of new tenants that opened a store in the first half. This is the first real store of our co-investment partner, Barkom. This is the flagship store for their global expansion. This is Dai Nippon Printing's Tokyo Anime Center. We are consigned to operate the store, and we aim to become the center of Japan's anime culture. And this is Tsurugaya's Purchasing Center, another co-investment partner. This is not only a store that does not sell, but also a store that buys products from customers.

Next is the status of fintech. Transactions slowed down due to the fifth wave, but for the full year, it was 118% exceeding the pre-COVID level. This is a breakdown of transactions. Rent, e-commerce, and regular payment continue to perform well. Travel and entertainment, commercial facilities, and dining, which had struggled in the previous fiscal year, also recovered. This is the status of revolving and installment payments. With the recovery in transactions, the balance of revolving and installment payments, which had been stagnant, is expected to increase and reach a record high in the fiscal year ending March 2022. Here is the status of new cardholders. The number of new cardholders, which had been concerning, increased by 40,000 year over year due to the recovery in commercial facilities and online shopping. Next is the status of co-creative investments. In the first half of the year, we invested 700 million yen in four startups despite COVID. This brings our total investment in startups to 31 companies and 13.4 billion yen. The IRR, which we use as a guideline for investment discipline, is 35% and continues to exceed the hurdle rate of 10%. The co-creation team, which was established to promote collaboration with investment partners, had added three new teams, Campfire, Bulk Home, and Dinette. We have also increased the number of employees involved in collaboration by 90, bringing a total to 24 teams with 212 people. We will accelerate our co-creation efforts with this further strengthened structure. Now let's move on to Chapter 3, Future Direction. I will explain this based on our dialogues with shareholders and investors. The following is an explanation of items number one through number three, based on the opinions and questions we have received from shareholders and investors since the announcement of our mid-term management plan in May. As for fall impact of BNPL on fintech, we are currently conducting a study and will provide a detailed explanation at IR Day in December. Let me begin with the strategy of stores that don't sell. Since the beginning of this year, we have seen cases of department stores and commercial facilities following our stores that don't sell strategy and imitating it. In response to this situation, we have received questions about our strategy such as, isn't your competitive advantage low because it can be easily imitated? I would like to explain our strategy in this regard. First, our strategy of stores that don't sell consists of three layers, retailing, fintech, and co-creative investment. The corresponding revenue is rent for retailing, card LTV for fintech, and financial return for co-creative investment. And the revenue structure is an inverted triangle shape that gets larger as you go from the bottom to the top. If we focus only on the retailing layer, we can say that imitation is indeed easy and barriers to entry are low. However, the second layer of retailing and fintech cannot be easily imitated because it is based on an integrated retail and financial business model that we have cultivated since our inception. Furthermore, when we reach the third layer, the trinity of retailing, fintech, and co-creative investment, It is not easy to acquire the capability, and we need to take the risk of investing in startups. Thus, while the barriers to entry are low in the first layer, the barriers to entry increase dramatically toward the third layer, where multiple capabilities are combined. We believe that our strategy of stores that don't sell is a comprehensive strategy that combines the three layers, and its superiority is not something that can be easily imitated by other companies. Next is our efforts to promote DX. During the five years of the previous midterm plan, fintech's business scale doubled while e-commerce was not able to grow. Both businesses depend on the use of IT and digital technology. But the question arises as to why fintech was able to take advantage of this while e-commerce was not. For more than half a century since we introduced the industry's first computer in 1966, we have been developing our core credit card systems in-house, training human resources, and accumulating know-how. Thanks to these efforts, fintech has been able to realize high ROI and achieve high growth without any serious accidents, such as system shutdowns or personal information leaks. Based on this track record, we thought that the human resources and know-how we have cultivated for core systems could be applied to e-commerce web systems. However, in reality, the transfer of human resources and know-how to the web system did not go as well as expected, and we were not able to achieve the same results in e-commerce as in fintech. We are embarrassed to say that we have finally come to understand that core systems and web systems are completely different worlds, even though they both are systems. Core systems emphasize accurate, efficient, and stable processing of a larger amount of routine data, while web systems require speedy updates of UI and UX in response to changes in custom needs and environment. They require different talents and know-how. We believe that the failure to respond to these differences has been one of the reasons why e-commerce has been sluggish. Human resources for web systems will also be essential for the success of new businesses and co-creative investments in the future. This is the future direction based on these lessons. Traditionally, our core system-related talents have supported our growth through the integrated business model of retailing and fintech. Going forward, we will increase our web system-related talents to realize the Trinity business model, which includes retail and fintech plus investment for the future. By strengthening mid-career hiring and talent development of existing employees, we plan to increase the number of web system-related personnel to more than 250 in five years in addition to the 200 core system personnel. Lastly, this is about impact. We have received some questions about impact goals set out in the mid-term management plan and also about the governance structure related to these goals, so I would like to explain them to you. First, let me explain what impact is. The diagram on the left is based on the famous Ikigai diagram. Impact is the area where the four rings overlap. They are what we want to do, what we can do, what we can earn, and what our stakeholders want. The diagram on the right, on the other hand, represents our definition of corporate value, which is harmony between stakeholder interests and happiness. Putting the two diagrams together, we can conclude that the value created by impact is stakeholder value, which is the very corporate value we are aiming for. Therefore, we will continue to enhance stakeholder value and improve corporate value through the realization of impact. This is the progress of the initiative. Impact is comprised of three themes and six priority items. Work together with future generations to create a future, work together to bring happiness to individuals, and build a co-creation platform. Each of the groups operating company and department is currently working on putting together the specific details and the goals of these initiatives by the end of this fiscal year, especially the value creation story to balance impact with profit and capital efficiency. Next is governance. In order to build a governance structure that will enable us to realize impact, in June this year, we welcomed Mr. Yasunori Nakagami of Misaki Capital as a representative of our shareholders and Mr. Peter Peterson as an expert in sustainability as an outside director. In November, the Strategy Study Committee was newly established as an advisory committee to the Board of Directors, and Mr. Nakagami will assume the chairmanship of the committee. At the same time, Mr. Peterson will assume the chairmanship of the Sustainability Committee. Through this new governance structure, we will practice the stakeholder management that we aim to achieve. The future generation is an important stakeholder for us. In order to incorporate their opinions into our management, we have invited Ms. Kyoko Ozawa, former chief future officer of Euglena, and Mr. Sota Watanabe, CEO of Stake Technologies, a leader in public blockchain and Web 3.0, to represent Generation Z as advisors. Ms. Ozawa will also be a member of the Sustainability Committee. Ms. Ozawa is currently 19 years old and Mr. Watanabe is 26 years old. We will accelerate the creation of value for the future through co-creation with future generations. That's all from me. Thank you very much for your attention.

Now we'll start the Q&A session. We'll take your questions via the conference call system. If you have no question, please continue to watch the live streaming. This is about fintech. About the interest repayment, could you give us an update? I'm sure you'd be fine since you have a sufficient amount of allowance. But I'd like to know the trend, including the number of claims. and you reduced your allowance for bad debt significantly, and how should I look at this going forward? Will you be able to maintain this low level of provisions and achieve healthier level against the balance? Is there any possibility of raising the provisions again if the balance increases? Thank you for your question. This is Saito. Regarding our actual results, amount of interest repayment for the first half was 2.8 billion yen, which is generally in line with our plan. Now about the amount of lawyer acceptances, which is the leading indicator. In the first half of last year, many judicial scrivener's offices and law firms were closed due to COVID-19. So it doesn't make sense to compare ear on ear. Based on our actual results, the accepted amount in the first half this fiscal year was down 100 million yen from the second half of last year. The amount has been declining month by month. That is the status for loss on interest repayment. Is it fair to say the amount to decline gradually from now on? As I mentioned before, many of the cases will expire from now onwards. We project those claims to decrease year by year. Along with that, we expect that the loss on interest repayment will decline. Considering the current level of provisions, can I expect that there is no need for additional provisions within this medium-term management plan? As long as we see no deviation to the assumptions used when we recorded our provisions, we have no need. However, due to the uncertainties these days, we are carefully watching the situation. Thank you, understood. Next, I'd like to explain about the allowance for BAT debt. In the first half, expense for the BAT debt allowance was 70% against the same period last year. we saw a major decline. During the last fiscal year, due to COVID-19, amount of transactions did not grow. As a result, the number of customers who have not paid their credit has decreased due to the declined usage. And this is what I have explained last year. As a result of this leading indicator, the delinquent loans are trending lower than previous year. Because there are less delinquent receivables, delinquent balance is declining, leading to a decrease in provision for bad debt. I assume that you make your projections based on the average of previous year's results. Am I right to understand that even when the balance increases, provision for the next two fiscal years will be lower than that? Well, provision for bad debt is basically regarded as variable cost. When we see an increase in transaction volume, the balance of receivables will also rise. And along with that, the provision will increase at a certain rate. Going forward, along with the growth in transaction volume, the liquid receivables may rise. That means the amount increases only relative to the denominator growth. Yes, you're correct. It doesn't mean that the things will deteriorate. Understood. Thank you. Thank you very much. Let's move to the next person. I am Takahashi from Mizuho Securities. Thank you for the explanation. I have three questions. First is about the retailing business. This question is for Mr. Awono. Even under the tough environment in the first half, we were able to generate sufficient profit without going into the red. How are you going to achieve your full-year forecast? What should be the focus? Should we simply expect to see a recovery due to the end of the emergency declaration and the return of the number of customers to your stores? Or you have been continuing to replace your stores. Are you expecting to generate profit from those new stores and from the new contents? Are there any different factors? What is your strategy for the second half to achieve the full-year forecast? Could you elaborate on that? I am Aono. I will explain. Against our full-year forecast that we have announced, the transactions are the biggest factor for our second half. Since our income fluctuates in line with the amount of transactions, the biggest factor is the change in transactions depending on the COVID-19 situation. We do have two other risks. One is the vacancy rate that we mentioned earlier. Second is the decline in rents. Those are the two major risks. But as we explained earlier, vacancy rates and rents did not worsen in the first half, and we project that they will not happen in the second half or during the fiscal year. So if the impact of COVID-19's sixth wave on the transactions is not too large, we can achieve our full-year forecast. Thank you. You've already disclosed your October results. Well, it was only late October when the weather really changed and people started moving. So from the late October, did you start to see any changes in your total number of customers? Well, apparel still accounts for 20%. And do you see any change in the situation with apparel? What kind of changes have you noticed recently? Thank you. Since the State of Emergency Declaration was lifted on October 1st, a gradual recovery trend has continued. Of course, we cannot return fully to the pre-COVID-19 level right away, but we saw an increase in trend by 15% in October. And in November, a half of our stores are able to achieve the same level against the previous year. So if the situation of COVID-19 subsides going forward, we believe we can fully achieve our forecast. Understood. Thank you very much. My second question is about fintech. This question is for Mr. Saito. In the presentation, you explained about the growth in rent, travel, and entertainment businesses, and I do understand those numbers. This question is basically the same with the questions I asked for retailing business. With regard to the transactions, can we expect a further growth in the second half? Is there a future growth, and what will be the main driver? Could you elaborate on that? I assume that you are seeing a fast recovery and in your balance. And is there any particular usage by customers? Thank you for the question. I think your question was about the outlook of transactions for the second half. Revenues in the strategic areas of rent, e-commerce, and recurring payment grew steadily. And the travel and entertainment and commercial facility in the lower part also saw a firm growth year on year. However, we are still far from making a full-fledged recovery. One of our main business, travel and entertainment, was still only 60% level against the fiscal 2019. Well, in this second half, now that the state of emergency declaration was lifted and people are going out and becoming more active, if we can see a good recovery in travel and entertainment and food and beverage businesses, we believe that our card shopping transactions can further rise to the next level. But at this point, my personal view is that the situation is not ready for a full-scale recovery yet. Is it correct to say that rather than focusing on your past mainstay business, where customers are borrowing money and paying back immediately, you need to further work on recurring payment business, which has been your strategic focus for a long time, in order to grow your profit? Yes, the focus is the regular payment and e-commerce, which contributes to the continued usage. By growing those areas steadily, we are able to stabilize our revenue. We are determined to achieve that growth. Thank you. My last question goes to Mr. Aoi.