Nihon M&A Center Holdings Inc

TSE:2127

Earnings Call Transcript

[Suguru Miyake, executive]

Good afternoon, everybody. Thank you very much for joining our earnings announcements for the second quarter of the fiscal year 2024. I appreciate your attendance. This is Suguru Miyake, President and Representative Director of Nihon M&A Center Holdings. For today's presentation, I am also joined by Naraki, our Senior Managing Director.

[Takamaro Naraki, executive]

Hello. This is Naraki. Thank you for your time.

[Suguru Miyake, executive]

As for the earnings announcements today, because we are at the end of the second quarter, I would like to skip the announcements that we made for the first quarter, but I'd like to focus on the results at the end of the first half of the year and also the topics as well as some of the malicious buyers situation that's been challenging in industry. So these are the 3 main focuses that I would like to talk about today for the next 30 minutes or so for this presentation. And that can be followed by a Q&A session. Thank you very much in advance for your time.

Now I'd like to get into the first half of the year results for the fiscal year 2024. Also like to look at the comparison versus last year, starting off of sales. We posted JPY 18.591 billion, down 3% from the previous year. And ordinary profit stood at JPY 5.990 billion, down from JPY 6.109 billion last year, down 1.9% versus last year. And these are negatives for sales and ordinary profit. So this is comparison to the guidance figures. Sales came down by slightly -- we missed the slight -- we missed the guidance slightly at 95.3%.

Ordinary profit, however, we outperformed quite significantly the guidance figure at 133.1% of the percentage reached. Ordinary profit stood at 32.2%, a slight increase. However, if you look at the number of transactions closed, that stood at 454, which is down 8.5% year-over-year. In terms of M&A sales per transaction, this is still at an ideal state within the target that I try to shoot for, which stood at JPY 39.6 million, uptick by 7.0% versus prior year. So this is good news. And the number of sell-side mandates grew significantly from the same period last year to 699, up 20.9% year-over-year, which is significant growth.

And in terms of 6 months, we have had this as a record 6-month figure, which is very encouraging leading indicator that we have been able to achieve. Now I would also like to look at the second quarter stand-alone. Starting off of sales, we booked JPY 10.953 billion. This is a plus of 0.3% versus last year. Ordinary profit stood at JPY 4.444 billion, which is down 0.6% year-over-year. Ordinary profit margin totaled 40.6%, quite similar to what we had last year.

So in terms of second quarter stand-alone, we are more or less similar versus last year. Number of transactions closed was 263 versus 266. And M&A sales per transaction was 40.4 million versus 40 last year. But if you look at the number of new sell-side mandates, we had a record number of 378, which is an increase by 26.8% versus last year. So again, even if you look at the 3 months, this is a historic number for the new sell-side mandates that we have achieved.

Now I would like to get some review with the first half of the year results. And in terms of the number of transactions closed, it's down 8.5% versus last year. This is due to the fact that about a year ago -- since about a year ago, we have used Batonz, our group company to introduce some of the small-sized mandates to the company. So we have made that shift since about a year ago. And that led to the drop in the number of sell-side mandates. So that affected the mandates closed this year for us. And also, we've had an impact from delayed mandates, which were caused by things like late receipt of success fees and documentations not set in place in time.

So even if the mandates were almost complete, we could not get to fully close them. That also affected the number of transactions closed. And SG&A saw improvement. This is something that we have been working on since before, improving P&L structure. And we have seen steady improvement in the proportion of the consultants versus admin staff. And this has contributed to the improvement with the SG&A.

Let's look at the leading indicators. These are going really great in an unprecedented level. Every leading indicator is hitting a record high literally. As we are starting the second half of the year, I have made a message towards every employee, which is on your left-hand side, you have optimism. And on the right-hand side, you have sense of urgency. And numbers weren't particularly great in the first half of the year. Number of mandates closed came down that also has affected the sales. We could not underperform -- we underperformed. And ordinary profit, we achieved it versus last year, the number came down.

This is a sense of urgency that I mentioned earlier on the right-hand side. Whereas if you look at the leading indicators, they are the strongest ever. This is the optimism on the left-hand side. So with the sense of urgency, you need to gain traction in actions and leveraging optimism to make sure that they are going to be converted into results. That's the theme for the second half of the year. And to be more precise, let's look at the new sell-side mandates. This grew from 298 last year to 378, uptick by 26.8%, which is a record high number for the second quarter. Mandates with those large fees, it also grew from 49 same period last year to 67, historic number. So we are seeing the sign of increased average deal price.

And on the right-hand side, these are also good news. The new buy-side mandates. So after matching and we received advisory mandates from the buyers, the count of which grew from 307 to 372, plus of 21.2%, a significant increase. And as a result of that, we also have seen increase in our pipeline as a form of new deals meetings from 282 to 312 this year, uptick by 10.6%. And these are contributing to earnings results.

And I would like to use M&A deal flow as I speak about leading indicators. So this is a flow from receiving mandates to execution of the deal, closing of the deal. Again, new sell-side mandates hit record high with a growth of 26.8%. And we had large deals, which also hit the record high number, 67 mandates, which are large. And we also increased the number of central area mandates, which is record high. And our mission is to rejuvenate, revitalize regional areas. So we are focused on different regions as well in a country.

But from the perspective of earning results, we need to focus on metropolitan areas from Tokyo, Osaka, Nagoya, Fukuoka, where it's easier for finding buyers and also higher fee, which means that they are more likely to contribute to the earnings results. This is what we had a record number for. And after receiving mandates, we need to work on the preparation, which means that working on the valuation, creating the outlook of the seller, making analysis and the number of mandates that are complete with the preparation also hit the record number by 46.2% growth.

And this has primarily been driven by the shortening of the lead time for the preparation period. It used to take 95 days before, but we have successfully shortened it to 59 days, improvement by 37.9%. And as I have talked about this before, spending 3 months for preparation, another 3 months for matching, another 3 months for meetings, total 9 months was what it used to take. And we have now made it 2 months, 2 months and 3 months, total 7 months will be the first phase target that we set forth. And in relation to this preparation, we have more or less accomplished the target.

And also for matching, we have set up a dedicated team for the process, and that has contributed to a record number of growth by 51.1%, which essentially means that we had 15 matchings registered for mandate now, up 5 from the previous 10. And out of those mandates registered for matching, we are making proposals to buyers number, which also hit the record high at 63.1% plus. And this brought up the number of buy-side mandates at 21.2% of the plus. And the number of deal meetings -- new deal meetings also grew by 10.6%. The point here is that every leading indicator has marked record high, which are very prospective. So we are really left with making sure that we manage these, control these thoroughly to make sure that they are going to be converted into closing of the deals.

And this is an outlook of key metrics that we have been always talking about. The trend of the numbers. And this is the income statement key data followed by balance sheet. And as usual, we have maintained our healthy balance sheet. As our business is people dependent, recruitment is the integral part for us. And this year, we are going to increase -- we are targeting to increase 120 consultants net growth that we are in line with plan. We have successfully increased consultants to 724. And in addition to that, we have 23 people who have received a tentative acceptance. At the top of this right-hand chart, you see these numbers. So we have made a very steady growth in the number of consultants.

Now shareholder return contribution, shareholder breakdown. Not much change is made here. So dividend policy remains the same. The interim dividend is going to be done at JPY 14 and ROE is moving in a very stable manner. And shareholders' composition between individuals, holders, financial institutions and foreign investors are well balanced. However, if you look at the market capitalization, it has been very sluggish. And in November, we are going to go to IR roadshow to meet about 25 companies and investors. So not just about increasing the business performance, we also will be very active in IR road show so that we'll be able to improve or bring back our market capitalization.

And in terms of mid-range plan, we remain unchanged, more or less. We are still aiming for increase in both sales and profit. This is intact. And also in relation to the mid-range plan, we have not made any changes. But I would like to highlight here that in the year ending March 2025, so this fiscal year, we are going to outperform the guidance with sales. And also, the guidance of JPY 17 billion of the ordinary profit should be outperformed, must be outperformed. These are keys towards achieving the mid-range plan going forward. So we are committed to pour everything that we have into achieving these goals.

And we have made steady progress in strategic investments. Some of them are direct marketing efforts doing seminars across the country. We have been working on them quite intensively. And actually, I myself have attended those seminars calling them last live seminars since I have stepped down from the role of President at Nihon M&A Center, our subsidiary, I am now Chairman there. So I am saying that these are last live seminars that I do going across the country, meeting many people. And I believe these are going to create a pool of mandates towards next year and beyond.

And recruitment and development, these are quite promising. And especially on the mid-career recruitment, we have strengthened referrals. We have been able to acquire talent. And in relation to new grads hiring, we are becoming popular more and more nowadays. We have been ranked second in the internship ranking towards the self-development growth, and we have had 496 internship attendants, and we have had 67 who we have sent offer letters for those new grads, which suggests that we are going great with hiring. We are creating traction towards not only the quantity, but also the quality of the talent acquisition.

And let me speak to some of the topics. I have -- we have set up AtoG Capital the fund business. When Japanese companies acquire ASEAN emerging countries companies, there are a lot of hurdles that they need to overcome. And one of them is compliance, which is a significantly different level that you see over there. To be frank, they sometimes work on some fabrication of the numbers. And because there's a difference in business customs, they may work on rebate programs.

So there are a number of things, hurdles that need to be overcome. Therefore, the hurdle is quite high for Japanese companies to acquire. So using AtoG Capital, we have acquired the company first, and we collaborate with a collective of experts to improve the governance and compliance of the company in ASEAN countries and let them be bought by Japanese companies. This has gotten really great attention in ASEAN countries. We have had 40 media outlets covering what we are doing.

Also in relation to regional rejuvenation, we have set up the J-Search, which is focused on regional search fund. This is a collaboration effort that we do with regional banks to set up search funds across the country. We have gotten a lot of queries for the search fund. And especially going forward, our mother markets, which are small to midsized companies, we want to establish something like this to receive those small to midsized companies, we're doing M&A today only. But going forward, if we are to have the J-Searchers established, then they can be another vehicles to receive those companies.

And again, we were recognized by Guinness World Records for 4 consecutive years. And in addition to that we held this World M&A Alliance Conference in Tokyo. And now we operate in 5 different countries in ASEAN countries, and we are very active in cross-border M&As in this region. And sometimes the Western companies are interested in acquiring ASEAN companies. So we became a member of this World M&A Alliance. And we held the annual conference of this alliance in Tokyo. And at this very venue, we had this conference, and it was supported by a very open discussion and candid discussion.

And we issued Integrated Report 2024, both in Japanese and in English at the same time. And I think the book it will be able to be distributed after the 9th of November. And we also created a brand book. This is the brand book, and it's a stylish book. Our -- we described in this book how we differentiate ourselves in our business and operation. So we would appreciate it if you could take time to look at these materials.

Now moving to industry trends. There are 2 major themes that concerns you probably. One is that, of course, we call the intermediaries as a boutique, and there is a significant increase in the number of small boutiques in the market. And according to my hunch, 4 to 5 years ago, probably there were only 30 companies in market. But currently, there are 650 registered companies and of that, 450 boutiques are operating. It's good to have more players because going forward in Japan, 1.27 companies are prone to go under over the next 10 years. So we cannot really take care of them by ourselves. So it's good to have more boutiques.

But because the speed of increase was too fast, the morale and quality are deteriorating. And for this situation, SME agency as well as the M&A intermediaries associations have issued different guidelines to give instructions to players to have a better morale and quality. And another theme, which was surprising to us, but the malicious buyers or fraudulent buyers for the first time emerged in this market. I've been -- we've been in this market for 33 years. And in the past, the buyers tend to bear risk burden. And over the past 33 years, we try to alleviate the burden on the buyer side.

These SMEs not necessarily have a robust financing or financial positions, so sometimes their statements do not reflect the reality. So we always try to introduce the proper evaluation or the audit, but sometimes short-term audit doesn't really reveal everything needed. So that's why we created a system called warranty and representation insurance, but there are many cases or items related to warranty and representation issues. So -- but if we just get involved too much of that, we can't really proceed with PMI. So that's why we introduced insurance and this warranty.

But for the first time at this time, we started to see malicious buyers. So what they do is that they first purchase selling company at very low price, and they leave the sellers' owners' personal guarantee unattended. They simply disregard account payables while collecting account receivables and extracting cash. And when financing becomes tight, they make the acquired company go bankruptcy. Remaining liabilities will be put on the former owner as his personal guarantee was not removed, and he would end up with personal bankruptcy. The buyer who took away cash would not be held responsible. This often happens when an inexperienced intermediary is involved.

Such broker tends to make the release of personal guarantee and obligation to make the best efforts in the final contract instead of making it contractual obligation. So that could be one reason, but I believe that this is the whole problem for the industry. And [ Lucia ] is MAG were reported by Asahi newspaper. Both of the incidents were reported by Asahi newspaper and also Toyo Keizai reported on this matter, not to mention some broadcast on TV, such as a program titled [indiscernible].

The seller was seriously damaged by these actions. So we as an entire industry has to address this situation. And of course, for us as a company, is setting a structure and organization to avoid this situation at every process of the procedures of M&A, we check different points like criminal check and funding strength of the buyers and as well as the fairness of the scheme. So from all these viewpoints, we keep checking the whole process so that we'll be able to protect sellers.

As an association, we are now trying to take necessary actions. And first, we changed the name of the association from M&A intermediary association to Association of M&A Support institutions so that we'll be able to include the FAs and M&A platformers and consultants for regional banks as well. And fraudulent or malicious buyers will be published among the members of the association under the name of list of named buyers, and this activity started from October this year. And we also created a template of agreement so that people can use it to avoid this kind of malicious activities.

And as entire industry, we are making every effort to improve the reputation of the industry. And I think the collaboration between academia and industry and the administrative government are working very well. And this initiative started 3 years ago with my effort, and we are now conducting different initiatives. We also collaborate with SME agency with the guidance of the agency we, as an association, try to improve the morale and quality by introducing even stricter rules and regulations. Now we see the good outcomes from the collaboration with academia. With Kobe University, we created the small SME M&A white paper from this MAREC effort.

And from the Kyoto University, we have a joint research of SME M&A, and we have already started the collaboration to do this 5-year research together with Kyoto University. And last week, I gave a lecture to the students of Kyoto University and reading the survey from the students, I could see a very big interest from the students in the SME M&As. So I think this kind of a collaboration between these 3 parties will lead into the improvement of the industry as well as the improvement of hiring and recruitment for M&A industry. And in this area, we are determined to provide M&A -- optimal M&A services, and we try to differentiate ourselves.

So specifically speaking, the success rate, high success rate, probably we are way higher than other competitors in the industry. And that is because partially to the receipt of retainer fee as well as the very strong relationship with M&A information network, including regional banks as well as accounting firms. And if the matching can't really find the buyers, we have a dedicated team to prepare for the matching in order to achieve high success rate.

And M&A's whole purpose is not closing. The whole purpose of M&A is a success. So the most important thing for this is a PMI post-merger integration. And as a step -- first step for PMI, we hold a wonderful closing ceremony so that both sellers and buyers can be moved by this closing so that the synergy effect will be generated through this ceremony. And we also provide follow-up services after M&A completion. So one example is this is actually a President of the sellers' company. We published an owner's biography, so it's a legendary man biography.

And for buyers, we provide representation and warranty insurance so that they could go through very smooth PMI and transition. And as a result, we are being able to provide safe and secure optimal M&As. And I believe that this is the biggest differentiation point of ours from competitors.

Thank you very much for your attention. This ends my presentation on the results of the second quarter of fiscal year 2024. Again, I would like to extend my gratitude for your participation in this conference call. And on the right-hand side, I have a sense of urgency. And on the left-hand side, I have a sense of optimism. The transactions closed were down and the sales and ordinary profits were less than the previous year's numbers, and that is the cause of the sense of urgency. However, the leading indicators in every area has achieved the historical high. So that is the cause of my sense of optimism. So now we are in the phase to lead them into the results and outcome. And I am committed to drive for that. And I would like to make it as a closing remarks. And thanks again for joining in our conference call today.

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