Avex Inc

TSE:7860

Earnings Call Transcript 2023-Q2

[Katsumi Kuroiwa, executive]

Hello, everyone. Today, I would like to tell you about the key topics for the first half of the fiscal year ending March 31, 2023, as well as the progress we have made with our medium-term management plan, Avex Vision 2027. Firstly, an overview of our financial performance in the first half of the fiscal year. Due to upfront investments in line with our medium-term management plan and impacts of the COVID-19 pandemic, in our full year forecast, we initially projected JPY 1.0 billion in operating profit. However, thanks to strong sales in our music package and internationally even subsegments, predominantly from live concerts for which audience numbers were much higher than expected at JPY 3.6 billion. We have already far exceeded our full year forecast in the first half of the fiscal year. As shown here, Snow Man's Album, AAA's live concert releases, concert tours by MCT 127 and Da-iCE, the live-action movie adaptation of Osomatsu-san and our Paradox live event, amongst others, contributed to these favorable results.

Results were also boosted by the Anime Village event we produced in Saudi Arabia. Based on those strong results, we have revised our full year forecast upwards from JPY 1.0 billion in operating profit to JPY 4.0 billion. We also anticipate an increase in net profit through gain on sales of investment securities. In the second half of the fiscal year, however, we expect a decrease in sales from live concerts and packages compared to the first half. And as we begin to accelerate IP investments to achieve medium- to long-term growth, we also anticipate a comparative reduction in profit. This slide details our plans for capital allocation as explained in our medium-term management plan. Although our projected operating cash flow will change as a result of revising our full year financial performance forecast, we have left our plans for capital allocation unchanged. We plan to review the situation with the aim of improving shareholder value over the medium to long term. Moving on, I will now share our progress with Avex Vision 2027, the medium-term management plan we announced in May of this year. This slide is also taken from our medium-term management plan presentation. As shown here, for us to make proactive investments, we must seek to discover and develop beloved intellectual property in many different regions and fields. One of our first initiatives to develop in-house IP is Avex Youth, which we announced in the press release earlier this month. By launching Avex Youth, we now have a streamlined system in place through which we can discover and develop talent, driving the entire process from their debut to super start-up. To date, as well as holding various additions and scouting for talent ourselves, we have approached more than 25,000 candidates through our in-house academy and partner schools. We have selected around 100 individuals as the first generation of Avex Youth talent, who will begin their activities in April of next year. We believe that this talent discovery network is one of our strengths. Moving forward, we will continue our search and aim to discover around 20,000 candidates each year. For us to produce talent who can succeed on the global stage, it is essential that we train them to have a global perspective from the outset. We have, therefore, come up with several new training methods. In addition to offering lessons from producers who have developed their own global IPs, vocal coaches and dance teachers, we have created dormitory so that trainees can focus on these lessons and are providing various learning opportunities so they can acquire skills such as new languages and social media marketing know-how. Our XGALX and WARPs Projects are already underway. And in addition to dance and vocal groups, we are preparing plans to debut a diverse range of female singers, singer-song writers, television personalities, actors, voice factors, artists and more in the future. By spearheading talent development projects that will produce concrete results, we aim to ensure rapid continuous development of IP, creating the next generation of Stars will help us attract even more talented people who admire and look up to them. We believe that creating this ecosystem is paramount for our future. And so we plan to invest JPY 5.0 billion in these activities over the next 5 years. One of our priority projects for in-house IP development has been the XGALX project.

XG, the girl group born from this project, released their second single MASCARA in June. Within 2 months of its release, the music video has been viewed 30 million times in the group's YouTube channel. The reaction has been unprecedented with 80% of those views coming from outside Japan. In roughly 6 months since the group debut, 500,000 people had subscribed to their YouTube channel, and this number is expected to surpass 700,000 soon. The group also has a huge presence on music streaming services and is steadily gaining global recognition. Compared to Tippy Toes, the group's first single initial playback figures for their second single were around 7x higher entering Spotify's viral 50 ranking in 21 countries and regions. In recognition of this success, XG became the first Japanese girl group to appear on a Spotify signboard in New York's Times Square. We will continue to invest in XG as we aim to develop IP that can succeed on the global stage. Now for our music business. By strengthening the creative and marketing functions of our labels, our various music endeavors have achieved excellent results. Both of the Snow Man's Album are performing strongly, with our debut album becoming the first in the 2020s to reach 1 million copies sold. In addition, Da-iCE single CITRUS has been streamed a total of 300 million times across music streaming services, setting a new record for a male Japanese dance and vocal group. Looking ahead, we will continue to reinforce our creative marketing functions in response to changes in our business environment. Elsewhere, through our labels functions, we are working with many different production companies and creators. In addition to LDH, who are launching a new group at the start of next year. We are starting a variety of new initiatives with major production companies such as HoriPro and Muse, who we haven't worked with for some time as well as other creators. Keep your eyes peeled for our IP developments in partnership with numerous production companies during next year. Through projects like this, that only will we continue developing our own artists, but we will also seek to discover other artists, create new music and produce hit singles. Next, our Anime and Visual Content business. In our medium-term management plan, we announced our aim to strengthen our 360-degree development approach to acquire strong IPs. We are currently working to increase the value of our IP through various formats such as live action movies, live viewings, mixed media products and anime streaming. For example, the live-action adaptation of Osomatsu-san, which was released at the end of March and features members of Snow Man in the leading roles has taken JPY 1.6 billion in box office revenue and has been seen by more than 1.1 million people. We believe this is down to both existing Osomatsu-san fans and fans of Snow Man. Home video releases for the movie went on sale last month and with 84,000 Blu-ray discs and 50,000 DVDs sold in the first week, we achieved #1 in the Oricon weekly rankings for both categories. This is the perfect example of how collaborations between our artists and influential IPs can improve the overall value of IP. We have also achieved excellent results in a wide range of other areas, including our mixed media production, Paradox life, live viewings and Anime Times, a YouTube channel dedicated to Anime. These are all examples of our diverse strengths as a company by applying the 360-degree development approach to popular original works, we believe we can acquire powerful IPs that lead to hit products, and the results of this approach are slowly beginning to show. We will continue to strengthen our efforts in this area. Furthermore, based on our record of achievements to date, we are strengthening our work with international IP holders and platform creators who can reach overseas markets so that we can acquire more products. At the same time, we are reinforcing our collaborations with overseas production companies who are increasing the quality of their output. For example, we are currently preparing specific projects with several Korean production studios with plans to announce these new collaborative works next year. While we believe initiatives such as these can help strengthen our development of in-house IPs in the anime and visual content business, we will also continue to strengthen our relationships with external studios through investments and other means as a means of enhancing our own production capabilities. We will continue to make use of our strengths to acquire and develop IPs in the anime and visual content business that can achieve long-term global popularity. Now for our overseas events. In May of this year, Avex Asia brought together 12 different anime shows and produced the Anime Village event in Saudi Arabia. Sales and profits from this event both helped to ensure that our overseas operations are on track to be profitable overall this fiscal year. Saudi Arabia has relaxed restrictions on entertainment in recent years, and there is clear demand for Japanese content in this market. We will, therefore, build a system to strengthen our business in the Middle East. Meanwhile, at the end of this year, we will host our island in Singapore for the first time in 3 years. In addition to receiving support from the Singaporean government, we are also steadily acquiring event sponsors. With the current conditions in Japan, we have yet to make any major plans, but the COVID-19 pandemic is gradually being overcome in other countries and large-scale in-person events such as this are increasing in line with the growing demand for entertainment. We naturally anticipate being able to host even more in-person events in Japan soon, and we aim to host our island in Japan next year. Next, I'd like to talk about our initiatives at Avex USA, which achieved a profit for the last fiscal year. We are making smooth progress in expanding our creative networks and business foundations in the U.S. And as a result, we are suddenly building our position and developing global IPs in the world's largest music market. We have signed exclusive music production contracts with regional creators, including the producer behind one of Justin Bieber's best-selling singles and many of their songs have become global hits, nominated for Grammy awards. These creators are producing more and more songs for artists signed to our labels, which go on to rank highly in the charts. These initiatives have been reported on by billboard and other influential regional media outlets. We are also engaged in various other activities at Avex USA and will report our major plans when they become more concrete. Moving on, we have also reviewed our personnel policies to help achieve the goals in our medium-term management plan. One is the introduction of our new experts program through which we offer flexible remuneration to highly skilled personnel, such as those working in A&R and video producers. Through this program, we can now negotiate more openly with personnel, who we found it difficult to agree to terms with under previous hiring criteria. We have already hired several outstanding people through the expert program. Adoption of this program has also created career paths for those aiming to make a name for themselves within the company, preventing any drain on human resources. Secondly, we have also introduced an incentive program. In addition to company-wide bonuses, this program provides incentive pay to those who exceed their targets at subsidiary and divisional levels. With the program in place, each company and division is highly motivated and committed to achieving the targets in our medium-term management plan. We believe that outstanding people are important assets in the entertainment industry, and as such, we will continue to invest in human capital and build relevant programs. In addition to the policies mentioned in our medium-term management plan, we are also making progress with other initiatives. At Avex USA, we have started full-scale operation of our corporate venture capital business and are investing in digital transformation at head office to automate data collection and other processes. We plan to make investments of around JPY 1.0 billion in each of these areas over several years. We believe these investments are essential for achieving the goals in our medium-term management plan and beyond. In addition, separately to business developments, but in line with the corporate philosophy announced in our medium-term management plan, we believe that as an entertainment company, it is important for us to make unique contributions to sustainability. We have therefore identified material issues and put together a sustainability policy. As announced in today's press release, we look forward to a prosperous future built with diverse talent and excitement. And so as an entertainment company, we will strive to build a new value creation model that can contribute to a sustainable society. Finally, although we have revised our full year forecast for the year ending March 31, 2023, the numerical targets in the medium-term management plan we announced in May remain unchanged. Although this year, we have been able to exceed initial performance forecasts, thanks to an improved business environment for us to continue generating even bigger hit products and sustaining growth over the long term as an entertainment company, it is essential that we make further investments in IP. Through more proactive investment activities and the early development of global IPs, we aim to achieve JPY 15.0 billion in operating profit by the year ending March 31, 2027. That concludes my briefing on the first half of the fiscal year and on Avex Vision 2027. Thank you for listening.

[Seiichi Hatamoto, executive]

Hello, everyone. My name is Seiichi Hatamoto. I'm in charge of IR. Today, I will present our financial results for the second quarter of the year ending March 31, 2023. In the second quarter, as the impact of the COVID-19 pandemic was reduced compared to the previous year, the ability to host live concerts as normal, particularly helped to drive growth in the music business. Overseas events also contributed to our strong performance and sales, operating profit and net profit attributable to owners of the parent all increased from the previous year. We recorded JPY 54.0 billion in net sales, a year-on-year increase of JPY 7.7 billion. In other areas, operating profit was up JPY 0.9 billion year-on-year to JPY 3.6 billion and net profit attributable to owners of the parent grew significantly to JPY 3.2 billion, a JPY 1.5 billion increase. Now for sales by segment. Thanks to growth in the music business, driven by live concerts, increased sales in the anime and visual content business, thanks to movies and other productions and higher overseas sales in our other businesses, consolidated net sales also increased over the previous year. The increases in overseas sales across the music business and other businesses saw operating profit in each segment improved as a result, and consolidated operating profit also grew year-on-year. Net profit attributable to owners of the parent rose substantially, thanks to set increases in operating profit and gain on sale of investment securities. Next, our consolidated statements of income. As I mentioned, sales increased mainly thanks to positive results in the music business. Although the gross profit margin remains largely unchanged from the previous year, the amount of gross profit increased in line with the rise in sales. Overall personnel expenses, which come under a selling, general and administrative expenses increased due to a rise in performance-linked bonuses, a slightly larger number of employees and other factors. Sales promotion and advertising expenses also saw a year-on-year increase due to a rise in execution costs, which were mainly in the music business. General expenses increased due in part to sales costs rising in tandem with sales and higher costs related to business activities. Ultimately, in the face of numerous increases in our expenses, improved gross profit ensured a year-on-year rise in operating profit. We also recorded higher extraordinary gains than the previous year through a gain on the sale of some of our investment securities. This helped us to record a significant rise in net profit attributable to owners of the parent. Now for our results by segment, beginning with the music business. In terms of sales, the life management and new e-commerce subsegments performed strongly. And despite an increase in selling, general and administrative expenses, mainly sales promotion and advertising expenses, operating profit increased over the previous year. When looking at the subsegments, the live subsegment benefited from a rising sales due to larger and more frequent performances held as the impact of the COVID-19 pandemic decreases, including large-scale concerts by Korean artists. In the Management subsegment, sales grew year-on-year in line with a rise in the number of live concerts held by Avex artists and an increase in income related to virtual YouTubers and live streamers, both of which were transferred over from the other businesses subsegment. The e-commerce segment also recorded year-on-year growth, thanks to an increase in the amount of music packaged products sold via our website. Although music package net sales decreased compared to the previous year, this can be attributed to a rise in the ratio of goods on consignment for which only the commissions are recorded in overall sales. In total, sales numbers and average prices for music packages increased over the previous year. As for live concerts, no large-scale concerts were held last year due to the pandemic and attendance numbers were low as a result. This year, however, an increase in the number of performances at large venues, mainly at stadiums, led to a significant rise in attendance. Sales of music packages likewise increased in every format. In particular, sales numbers for DVDs and Blu-ray discs rose significantly. In the anime and visual content business, although net sales increased year-on-year, thanks in part to the Osomatsu-san movie, operating profit was on par with the previous year due to a decrease in gross profit margin and a rise in selling, general and administrative expenses. In the digital business, despite a decrease in net sales due to a drop in digital streaming subscription numbers, lower selling, general and administrative expenses ensured a year-on-year increase in operating profit. In other businesses, both sales and operating profit increased thanks to the anime event we produced and hosted in Saudi Arabia. That concludes our financial results for the second quarter of the fiscal year ending March 31, 2023. I would now like to talk about the revisions we have made to the full year financial forecast we announced in May. Initially, we planned for JPY 1.0 billion in operating profit and JPY 0.4 billion in net profit attributable to owners of the parent, but we have now revised these upwards to JPY 4.0 billion and JPY 3.3 billion, respectively. We made these revisions because of stronger performance in the first half of the year than initially expected. And because we now have a clear idea of timings for live events and sales of packaged products in the second half of the year. We expect a lower profit for the second half of the year than in the first due to an expected drop in the number of live concerts and music package sales. This forecast is also based on our decision to further accelerate IP investments as we aim to create popular IP as part of our medium-term management plan. The remaining pages of the materials have been provided for your reference. This concludes our announcements for the first half of the fiscal year. Thank you for listening. [Statements in English on this transcript were spoken by an interpreter present on the live call.]