Avex Inc

TSE:7860

Earnings Call Transcript 2022-Q2

[Katsumi Kuroiwa, executive]

Hello, everyone. As a measure to prevent the spread of COVID-19, we are streaming today's earnings results briefing. The pandemic had a significant impact in the previous fiscal year and performance suffered as a result. However, in fiscal 2021, the fiscal year ended March 31, 2022, business activities resumed, and we posted an increase in both net sales and operating income for the first half, mainly due to strong performance in the music business.

We subsequently revised the full year forecast upward. Corporate Executive, Seiichi Hatamoto, will go into more detail shortly. After that, I will cover this year's key topics and our medium- to long-term vision. In addition to the announcement of earnings results, I would like to mention that we have selected and applied for a transfer listing to the new prime market segment of the Tokyo Stock Exchange. Please see the Japanese language press release for further details. Next is Seiichi Hatamoto with earnings for the first half of fiscal 2021.

[Seiichi Hatamoto, executive]

Hello, everyone. My name is Seiichi Hatamoto. I would like to cover earnings for the first half of fiscal 2021. Fiscal 2020 was incredibly challenging because of the COVID-19 pandemic. In particular, the initial state of emergency announced in the first half of that year restricted our business activities, and we posted a significant loss as a result. In the first half of fiscal 2021, although there were some limits on attendance at live events, the restarted business activities, mainly in the music business, led to significant increases in net sales to JPY 46.3 billion, operating income to JPY 2.6 billion and net income attributable to owners of parent to JPY 1.6 billion.

By segment, net sales increased in the resurging music business, mainly due to growing sales in the Music Package and Live subsegments. In operating income by segment, there was a significant increase in the Music business, which returned to profit this year as a result of increased sales and improved gross profit margin, thereby boosting overall performance.

Net income attributable to owners of parent saw a significant rise due to increased operating income and reduced extraordinary losses from the pandemic, which impacted last year's results significantly. Next, the consolidated income statement. As I mentioned, net sales increased compared with the same period of the previous year due mainly to growth in the Music business. Gross profit margin also increased due to rising sales and improved gross profit.

In fiscal 2020, personnel expenses were lower due to the implementation of a voluntary early retirement program and the treatment of leave allowances due to the close of certain businesses in the first half as extraordinary losses. However, in fiscal 2021, the absence of the above treatment, coupled with an increase in performance linked bonuses in conjunction with increased operating income and net income, resulted in increased personnel expenses. Consolidated sales promotion and advertising expenses rose due to an increase in execution costs, mainly in the Digital Platform business. General expenses also increased due in part to rising sales costs in tandem with growing sales and rising costs relating to business activities.

For operating income and the other remaining items, extraordinary losses caused by the pandemic decreased, as I mentioned earlier. Now results by segment. The Music business saw substantial growth on the back of strong sales in large music packages and the restart of live events. In particular, we sold a significant volume of large music packages, some of which are shown on Page 25 of the materials, which led to a major increase in net sales and operating income. Both the Live and Music Package subsegment saw major increases in net sales compared with the same period of the previous year.

In the Anime & Visual Content business, although net sales were about the same as last year, operating income increased due to an improved gross profit margin in packaged products. In the Digital Platform business, net sales were on par with the same period of the previous year, but operating income decreased due to increased cost of sales for measures to enhance digital streaming content and greater execution costs in digital streaming sales and promotion. By subsegment, in digital streaming, a slight decrease in the number of subscribers caused net sales to fall.

In the Fan Club subsegment, a change in management at some of our fan clubs caused the number of members to fall, which led to reduced net sales. Meanwhile, in e-commerce, which handles packaged products and artist merchandise, net sales increased due to an increase in packaged product volumes. In other businesses, net sales increased compared with the same period of the previous year due to rising sales overseas, predominantly in Asian markets and an increase in sales related to management of virtual artists and live streamers, which is one of our new businesses.

Operating income decreased due to a rise in SG&A expenses. This concludes our review of the earnings results for the first half of fiscal 2021. Next is the full year financial forecast. In line with results from the first half of fiscal 2021, as well as our forecast for the second half, we have revised the full year forecast announced in May to operating income of JPY 3 billion, up from JPY 1 billion and net income of JPY 1.8 billion, up from 0 net income. We plan to continue working to generate profit in the second half of the year as we did in the first, and we'll make every effort to achieve the figures in the revised full year forecast. The remaining pages of the materials cover information provided for your later reference. This concludes our review of earnings results and our revision to the full year forecast.

[Katsumi Kuroiwa, executive]

I will now cover key topics for this year, as well as our medium- to long-term vision. Our policy for this fiscal year consists of 2 missions: establishing a profit structure that is independent of the recovery of the live concert market and taking on specific challenges in global markets and new technology markets. Having made progress with these missions, we posted operating income of JPY 2.6 billion in the first half. This is the first time in 3 years that we have posted a profit for this period.

We also made the decision to revise the full year forecast upward in line with these achievements. Again, please see press releases and other materials for more details. Now for this year's key topics. The Avex label is performing strongly on the back of continued demand in subscription services, including music from DICE, Dai Hirai and Awesome City Club. The launch of Kis-My-Ft2's music to subscription services and BE:FIRST hit single have also played a part. This shows how enhancing our music subscription service offerings has been gradually bearing fruit.

Furthermore, Snowman's first album scored a #1 in the Oricon album's chart, achieving the highest number of first week sales seen in the last 3 years and becoming a major profit driver. In Performing Arts Management, as I mentioned in our previous earnings briefing, our actresses and female television personalities are seeing great success in various fields. Among others, Rina Kawaei appeared in NHK's annual historical drama. Marie Iitoyo played her first leading role in a terrestrial TV drama.

Meru Nukumi came in second in the television personality category for most TV commercial appearances in the first half of the fiscal year. And singer Hitomi Kaji has also gained wide recognition for her content on improving intestinal health. With regard to our global activities, I would first like to talk about INTO1, who debuted the popular Chinese edition program, Chuang 2021. INTO1 includes members of Avex artists, WARPs Up and Intersection. Since their debut review in April 2021, INTO1 have rapidly grown into a global Asian Boy Group, featuring in major tie-ups with 20 companies, including international brands.

And one of their songs being chosen as a supporter's theme song in Tencent's broadcast of the Tokyo 2020 Olympic games. Meanwhile, INTERSECTION's Caelan, who took part in CHUANG 2021 but did not win a place in INTO1 despite receiving more than 12 million votes has used his [ men's ] public profile among Chinese audiences to find international success centering on China.

Caelan has featured in numerous advertisements for global brands and received awards in both current trend and pop idol categories, establishing a solid popularity base for himself in the process. All eyes are on his future success. Finally, the Anime & Visual Content business. Zombieland Saga Revenge, the follow-up to our hit show, Zombieland Saga was broadcast in April. The blu-ray release shortly after took top spot in sales among our anime packages originally broadcast in a similar period, showing the continued success of the show following the initial series.

Furthermore, the Anime Times Company, in which a total of 14 companies, including Avex Pictures, Kodansha, Shueisha and Shogakukan, our shareholders, launched its new anime channel and Anime Times in August. Available as a paid subscription channel on Amazon Prime, Anime Times features an extensive library of around 500 hit anime shows, both current and classic.

Since its launch, the number of subscribers has been growing as planned, and the channel will continue to add popular shows to provide a service in line with viewer needs, as it aims to boost subscriber numbers. Moving on to key topics for the second half of the year. In Music Publishing, V6 recently released their greatest hits album, which entered the Oricon albums chart in Pole Position. This marks their fourth consecutive #1 album, and they're 14th in total.

Since the recent release of the debut single by BE:FIRST, a Boy Group created through an audition project on Nippon TV's infotainment program, Sukkiri, the track has gone on to reach the top end of various charts on music streaming services and continues to grow in popularity. Our near-term release schedule features many highly anticipated releases, including an album from J SOUL BROTHERS III and the Mini Album from Touhou Shinki. In Music Streaming, we are planning to release some energetic tracks, mainly by Dai Hirai and Awesome City Club. Expectations are also high for rising stars recently signed to our label, such as Atarayo and Chilli Beans, who have each found success in the Indie Music Scene.

In the Anime & Visual Content business, Muv-Luv, the first series to be produced entirely by the Avex Group launched in October. In addition to domestic terrestrial broadcast, Muv-Luv is also being distributed globally via the video streaming platform, Crunchyroll. Meanwhile, summer ghost, a short film directed by the young up and coming creator, Loundraw and produced by Flagship Line, the same anime production company responsible for Muv-Luv is to be released this month.

In movies, the film adaptation of the popular TV drama, What Did You Eat Yesterday? has just been released. The film has been favorably received and has had an excellent start. Moreover, Avex artist Snow Man will perform in the live action film adaptation of Mr. Osomatsu. Incorporating elements only possible in a live-action adaptation, the film is st to break new ground in the genre upon its theatrical release in March 2022.

The final key topic is live concerts. There were continued restrictions on large-scale concerts and events in the first half of fiscal 2021 due to the COVID-19 pandemic. However, by organizing concerts that are comparatively small-scale by Avex standards and by reexamining the profit structure for each event, we were able to post a profit in the live subsegment this half. As restrictions are gradually relaxed, we will provide fans with concerts and events at the largest safe scale possible while also looking into resuming domestic performances by overseas artists and link these efforts to the recovery of the live event market.

Now for a medium to long-term vision and the progress of our global strategies. An increasingly borderless business environment in the entertainment industry has enabled the creation and expansion of appealing new markets in terms of global IP. A representative example are artists, such as BTS and Blackpink and TV shows, such as Squid Game coming out of South Korea that have achieved global fame.

Avex has also made progress in this area under the theme, Entertainment, Times Tech, Times Global. Here are a number of specific initiatives. One initiative is the development of next-generation artists aiming for success on the global stage. One example is WARPs, a boy group project that contributed a member to INTO1. As part of the project, we are focused on promoting success in Asian markets, and we are planning to hold more auditions into the creation of a new boy group.

Another example is a girl group project set to make a global debut in the second half of the year. We have been building the project for 4 years and have made use of pioneering K-pop development expertise and world-leading teams of producers. We firmly believe the group has world-class talent and appeal. Please keep an eye out for them.

These 2 projects are an indication of our willingness to take on new challenges in the global market. While we cannot be sure how many artists emerging from these projects will go on to immediate success, the most important thing is that we continue to produce new talent. We have established a system that will enable us to do so, and we will continue our efforts to take on major new markets with a strong commitment to creating globally successful artists in the near future. In 2018, we established Avex USA in Los Angeles to reinforce our global music production capabilities. At Avex USA, centered on the Avex House creative studio, we have signed exclusive production agreements with next-generation up and coming producers, established producers and other world-class producers to produce new music.

Among our contracted producers is Bernard Harv Harvey, who worked on Justin Bieber's song, Peaches. Taking top spot on the Billboard, Spotify and Apple Music charts and with more than 400 million views on YouTube, Peaches has, without doubt, become a global hit. Producers other than Harv have contributed to more than 10 U.S. platinum and gold signals in 2021 alone for world famous artists, such as Justin Beber, Ariana Grande and Cardi B.

Moving forward, we believe our system at Avex House for ensuring that Avex artists have steady access to world-class producers shows our competitive edge in breaking into global markets, and we will do everything we can to increase the likelihood of our songs becoming global hits.

This concludes my report on this year's key topics and our medium- to long-term vision. Looking ahead, we will strive to achieve medium to long-term growth through steady success in domestic markets and by continuing to take on challenges in global markets. Thank you for your time.