Thank you for joining J Trust s first quarter earning presentation for FY2017. I am Hidehiko Hombu as moderator. Today s session will be available later as on-demand steaming on our website. Now, let me introduce the speakers. Mr. Nobuiku Chiba, Representative Director, Senior Managing Executive Officer in charge of Financial Business in South Korea and Public Relations & Investor Relations Div. Mr. Taiji Hitachi, Director, Executive Officer, General Manager of General Accounting Dept. 1
I will show you today s schedule. Mr. Chiba gives you the overview of 1Q and current initiatives. Following our presentations, we will open a Q&A session. The whole presentation meeting will be finished by 11:00. 2
As mentioned in the disclaimer here, figures in the Appendix are not audited. They are carried for reference purposes only. Now, Mr. Chiba will begin his presentation. 3
First of all, I would like to appreciate the support of our shareholders, partnered financial institutions and stakeholders. Now let me provide an overview of 1Q FY2017 and the current initiatives. 4
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We booked a record operating revenue of 20.5 billion yen thanks to employees efforts. We consider operating revenue as a barometer of business basics. 1Q was affected by the exchange rate with sharp appreciation of yen. For the business in South Korea, while the fluctuations reduced operating revenue and profit by 16% to 20%, compared with FY2016, operating revenue reached the highest level. Operating profit steadily rose by 3.0 billion yen year-on-year. 6
Domestic Financial Business is bullish. Our basic idea is how much we can add figures against our targets. Financial Business in South Korea is growing. For a large gap between K-GAAP and J-GAAP, negative goodwill is getting reduced. Looking at this trend, we are close to achieving a sustainable surplus or further growth. Financial Business in Southeast Asia recorded a single-month surplus, but not regularly. We are making utmost efforts for stabilizing a monthly surplus. Investment Business contributed greatly to our consolidated results in 1Q. It will continue fueling our growth for FY2017 on a full-year basis. 7
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You can see our quarterly performance from FY2016 onward. Operating revenue grew steadily. Operating profit stood at 1.1 billion yen, despite unfavorable foreign exchange rates. We are truly pleased with the achievement. 9
EBITDA after adjustment increased by 2.9 billion yen to 2.2 billion yen. This figure is disclosed from this quarter. As an enterprise group with overseas businesses, we would like you to pay attention to EBITDA from this quarter onward. 10
This shows operating revenue by business segment. In conclusion, Financial Business in South Korea and Financial Business in Southeast Asia were affected by foreign exchange rates. Nonetheless, we delivered a record revenue of 20.5 billion yen in total. 11
South Korean and Indonesian businesses felt the impacts of foreign exchange rates. Here, their operating revenue is shown in local currencies. Financial Business in South Korea rose steadily to 76.2 billion won, from 66.9 billion won. Financial Business in Southeast Asia (performance of Bank JTrust Indonesia) grew remarkably. 12
For operating profit by segment, Domestic Financial Business shows constant growth. Financial Business in South Korea maintains a surplus. For various opinions and suggestions on South Korean segment, I will explain later. Financial Business in Southeast Asia posted operating loss of 600 million yen. However, it improved by 1.9 billion yen from the previous quarter. J Trust Group posted operating profit of 1.1 billion yen, a remarkable increase of 3.0 billion. 13
These graphs show operating profit in local currencies. In fact, the figures under J-GAAP are simply converted. Financial Business in South Korea made solid progress. Financial Business in Southeast Asia showed improvement from FY2016. 14
Negative goodwill is attributable to a difference in accounting system. This is an issue carried over from FY2016. We booked operating profit of 1.1 billion yen and decreased 600 million yen in negative goodwill. Meanwhile, we had as much as 9.5 billion yen in negative goodwill as of FY2015. Could you go to the detailed slide? 15
We acquired Standard Chartered Capital and Standard Chartered Savings Bank. This resulted in negative goodwill of 9.5 billion yen under J-GAAP. FY2016 saw a deficit as a group, with 8.0 billion yen deducted from operating profit. The initial balance of negative goodwill for FY2017 was 1.5 billion yen. Since we already reduced 600 million yen in 1Q, the remaining balance is 900 million yen. Once we eliminate the negative goodwill, our real earning power will be reflected under J-GAAP. 16
As an enterprise group with overseas businesses, accounting figures are important. We are also closely paying attention to the real earning power. We are confident that our real earning power is solid and will drive J Trust s further growth. 17
Then, let me give you details by segment. 18
In Domestic Financial Business, operating revenue was flat and operating profit grew. The growth since last year was partially due to effective corporate restructuring. Besides, steady and growing performance in credit guarantee business in tieup with regional banks and successful purchases of NPLs in Japan are indispensable. Our servicer business is delivering a success. Seeds we planted are taking shape earlier than expected, helping boost operating profit. 19
The amount of credit guarantee has grown steadily to 57.0 billion yen. Above all, Apartment Loans, started two years ago, have accumulated with consistent growth in apartment construction and loan execution. The right-hand chart shows approved Apartment Loans from April to June this year. It usually takes 6 to 8 months to book the credit guarantee balance after approval of the loans. This means the amounts will appear as the credit guarantee balance in 6 months time. 20
This is our servicer business. The amount of receivables soared at the end of 1Q, already reaching 687.9 billion yen. This reflects our strong capability of purchasing receivables to date. In fact, the amount already exceeded the target under the Medium-Term Business plan. This strength is a key to such striking results in Domestic Financial Business. The segment performance is solid. 21
Next is Financial Business in South Korea. 22
Foreign exchange rates affected the segment results. The average yen-won exchange rate stood at 0.1107 won in 1Q FY2016. However, it became 0.0930 won at the end of FY2016. The impact is estimated at 17%. 23
In South Korea, we operate 4 business entities. These figures are consolidated results under K-GAAP, local accounting standards. The significant growth is not reflected in our consolidated results under J- GAAP. However, the momentum gives J Trust a reason to take a strong stance. Their consolidated operating revenue and profit were 87.6 billion won and 13.6 billion won. By multiplying the latter figure by four, we can obtain 55.0 billion won, which is almost equivalent to FY2017 s target of about 5.0 billion yen. We would like our investors to keep paying attention to the figures. 24
The balance shows new loan disbursed per month. The average of monthly disbursement almost doubled in 1Q from 2Q FY2016. The success derives from Japanese business quality as well as 2 decades of our experiences in the financial industry including sales, marketing and credit screening capabilities. Doubling the amount year-on-year is a feat that no competitors can match. 25
This page shows the loan balance, which exceeded 2,137.6 billion won. We used to run a nonbank and now operate banking business. Generating profits from banking business is not easy because banks have to set aside huge reserves to protect depositors. This is a model to ensure sound business operation. I have been involved in banking business in South Korea for almost 4 years and our operating assets are growing rapidly. Even if we increase high-quality receivables, we must set aside a good amount of reserve compared to the non-bank sector. Nonetheless, the asset accumulation will surely make significant returns on a cash flow basis. We are seeking for larger assets to win as many customers as possible in South Korea. In 1Q, we successfully purchased receivables from a capital company. We will continue to take in such kind of transactions as well as increasing new loan from 2Q onward. 26
We have built up loan disbursement by our own credit screening, with a default ratio not exceeding 3%. The delinquency ratio plummeted to a record low of 5.64%, from nearly 50% at the beginning of start-up. It is very important for us to operate the business at this level. We may have trouble attributable to various regulations and problems. However, it is possible to foresee it based on what we experienced 10 to 15 years ago in Japan. With our expertise with insight into the market, we would like to gain more market share in South Korea going forward. 27
Negative goodwill had an impact on Financial Business in South Korea. The effects were 600 million yen under J-GAAP. Without considering the impact, operating profit in 1Q was 800 million yen. 28
For negative goodwill, we are decreasing the remaining 900 million yen for FY2017. This means that the gap between J-GAAP and K-GAAP will be eliminated within a year. Last year, we recorded a surplus in South Korean business while reducing the negative goodwill by 8.0 billion yen. Operating profit without negative goodwill is estimated at 8.0 billion yen at least. Our potential earning power is enormous. South Korean business is now a main pillar. 29
Next, let me move on to Financial Business in Southeast Asia. 30
Financial Business in Southeast Asia has a 3-month timing difference, given a consolidation under J-GAAP. 1Q FY2017 reflects the figures of Financial Business in Southeast Asia from January to March 2016. We recorded operating loss of 600 million yen, which included the amortization of goodwill. 31
Operating revenue showed a slight increase. On the other hand, we tried to make operating profit much better. In fact, however, it ended in a loss. 32
Then, what is going on with the actual business operations there? We are making steady efforts to improve average lending interest rate, average deposit interest rate and net interest income. 33
The reinforced sales team led to an accumulation of operating assets and a reduction in NPL ratio. 34
The cost of funds continues to decline and the loan-to-deposit ratio has grown steadily. The balance of deposit is well controlled and cost-cutting is implemented. The explanations sound too good to describe the whole business there. 35
Financial Business in Southeast Asia performed like this until March 2016. I went to Indonesia March and July this year. Also, any of our board members visit there every month to check relevant matters with, assist and encourage the local staff. In my opinion, Indonesia have some legal and cultural aspects that could prevent us from accelerating the local operation. A further period of time is required to ensure a profit-making structure, a goal for FY2017. 36
J Trust set up a joint venture with Group Lease, a company listed on the Stock Exchange of Thailand. It launched operation in July 2016 with a rocket start in Indonesia. In Asia, their operating bases called Point of Sales take a cost-conscious approach that requires only 2 deals a month to become profitable. Reportedly, they received 12 deal requests in the first week. That number is very large there, achieved by a single sales branch alone. Going forward, they will develop the Point of Sales throughout Indonesia, expecting funding from our Bank JTrust Indonesia. 37
The business structure is a combination of Group Lease s strong expertise in Asian business and J Trust s technology developed through consumer finance business in Japan. We will make every effort to keep abreast with the quick process flow of Group Lease. The most important challenge would be how we speed up our operation in tune with the strict banking regulations. Another thing I recognized on the spot was that Indonesia would be a very promising market from a medium- and long-term point of view. Meanwhile, the local economy remains rather stagnant since last year. In fact, we hold some receivables that could become delinquent. Facing some troubles with unexpected situations last year, we have now acquired expertise in preparing for certain contingencies. 38
We are not going to say only good things for future outlook. Instead, we will say honestly that it requires a little more time to meet targets. Then, we will consider and list best possible measures on our task sheets. I checked the status of progress during my visit to Indonesia last month. It is very true once we have finished tasks one by one, we can definitely resolve the issues, and thus we have a strong awareness of completing tasks quickly. When identifying any risk under our control, we will respond to it without hesitation. Group Lease deals in Kubota s products and runs businesses in Thailand, Laos and others countries. We seriously seek success in Indonesia together with booming Group Lease. President Fujisawa manages J Trust Group, saying from 3 years ago that we should set up at least 3 entities that would generate profits of 10.0 billion yen each. The Indonesian business is exactly one of them. To make this come true, J Trust as the parent company currently provides follow-ups, support and encouragement for them in earnest. 39
A partnered bank released the first-ever rupiah-linked deposit in Japan. The product actually helps lower our cost of funds. We are striving for lower fixed costs and better operational efficiency within FY2017. J Trust Group hired a top IT system person from a major Japanese bank, and also sent Nihon Hoshou s Managing Director to Indonesia to offer the Japanese quality and more. We will strive for further reinforcement of the business. 40
Next is Investment Business. 41
For Investment Business, we earned 1.4 billion yen by selling shares of Bank Mayapada, as announced in the early part of 1Q. In addition, our subscription of Group Lease s convertible bonds will boost revenue by about 0.8 billion yen in FY2017. 42
For convertible bonds of Group Lease, we exercised the conversion rights to obtain common shares on December 30, 2015. The share price, which was 18 baht at that time, rose to 36 baht as of June 30, 2016. The capital gains are worth 5.0 billion yen this time. 43
This is the one we disclosed in the Appendix to our latest financial results. Here is a valuation difference on available-for-sale securities of 4,865 million yen. This is a correct figure. Group Lease is enjoying an increase in share price from then on. 44
We have an eye on the future, which constitutes the J Trust Technology. In 2015, prior to other investors, President Fujisawa judged that Group Lease would deserve an investment in light of the synergy expected in our business expansion to Asia. We are very proud of the fact that consumers in developing countries are really pleased with automobile and agricultural equipment leasing, our finance or the funds invested by us. The fundamentals of business may lie in making people happy. 45
Let us move on to Non-financial Business. 46
Non-financial Business consists of various entertainment services. ADORES, one of them, posted a slight surplus as seen in its financial results. As a whole, Non-financial Business almost broke even with some losses in other businesses. A surplus is expected at year-end in light of sales planned for the latter half of the year. 47
We launched a Bitcoin exchange J-Bits in June 2016. Our application compatible with smartphones is the first-ever native apps in the industry. The tool is critically acclaimed as the most usable application. Since the service has just started, the number of users is not so large. However, Bitcoin is a promising service in light of competitiveness and financial balances. Steady growth is expected through affiliate advertising and other vehicles. 48
I have so far explained our performance by business segment. Then, let us move on to the results against the business plan for FY2017. 49
Operating revenue was 20.5 billion yen. The rate of achievement was 20.9%, almost as planned. If equally divided, the quarterly progress should be 25%. However, please note that asset business like us typically grows much more toward the latter half of the year in principle. 50
Operating profit was 1.1 billion yen with the achievement of 9.7%, rather weak. We feel no shame in that 1.1 billion yen, which resulted from our best effort. We think positively to grab a chance, free from negative thinking that hinders progress. The most important thing is how we examine an identified issue. We should think that this will be a giant step toward better results for 2Q. 51
Next is other events. 52
We bought back 6,250,000 own shares to enhance capital efficiency last year. After the release of the Medium-Term Business Plan, we keep our stance to act flexibly for better capital efficiency. To this end, we purchased about 6,000,000 own shares again on August 15. On the same day, I read a report of Credit Suisse on our company. It referred to the possibility of further buyback. This really impressed me because we coincidentally made a quick decision to buy back own shares again in light of the surrounding situation. The total number of shares to be acquired was 7,000,000 shares, 1,000,000 shares larger than the previous day. To make the prompt judgment, we shared the situation with other directors abroad via teleconference. That is why I pay enough respect to the Credit Suisse analyst. 53
I think such a quick decision is one of our striking aspects. As far as I know, no other listed companies have executed that large-scale share buyback for 2 successive days in the Japanese market. That was truly the best timing because we needed to avert a huge impact on our share price for the benefit of existing shareholders and obtain a certain amount of shares instantly in light of possible occurrence of M&As, a scope of our business. 54
With regard to the first share buyback on August 15, Taiyo Fund Management Company, the second largest shareholder, expressed understanding of our intention to enhance the capital efficiency and sold part of the shares they held. Next, we offered 7,000,000 shares for subscription on August 16. As a result, 3,180,000 shares were subscribed with the remainder of about 4,000,000 shares. This made us feel sorry, but relieved at the same time. We know our shareholders worry about the future of the share price. I do not think the price would continue a gradual decline. Since it hit bottom in general terms, we firmly believe our efforts for better business performance will be reflected in the share price going forward. 55
Furthermore, we focus on communicating to individual investors during FY2017. As part of this, we participate in the Nikkei IR Investment Fair 2016 on August 26 and 27. President Fujisawa will explain the actual state of the company to our shareholders there. 56
We have paid dividends for 8 successive years since our President Fujisawa became the top shareholder. We will maintain 12 yen for FY2017. Our dividends are on a steady rise. The 3 years under the Medium-Term Business Plan are a very important period when thinking of what the company will look like 10 years, 20 years and 50 years from now. We have explained to our shareholders on our policy of increasing the allocation of profits and cash flow to our business operation. We will do our level best for dividend payments. You will find our results under IFRS in the Appendix as reference figures. We recorded a surplus under IFRS in FY2016. Operating profit remains positive in 1Q FY2017. Again, using the different accounting standards, our results are less favorable under J-GAAP at this stage. What is really important to meet the target is business competitiveness. In this regard, we will continue to give clear explanations to our shareholders. 57
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Finally, Apollo successfully reached the moon because they had a goal to go, not because they enhanced the function of an aircraft. This is our way of thinking. Honestly speaking, our Medium-Term Business Plan has the highest possible hurdles. To overcome them, we have to do more than our best and then evolve in every respect. The set goals are well understood by our employees as unshakable guidelines. We are challengers with a strong will to exert our best efforts and then evolve to the full extent. We are really sorry to say that the challenging policy may cause our shareholders worry, in particular those who participated in the rights offering. On the other hand, it is true that we took a steady first step toward a huge surplus, as seen in our figures explained today. For this reason, let us take this opportunity with a can-do spirit. Your continued assistance for J Trust Group would be greatly appreciated. That is all my presentation. To all of our stakeholders, thank you very much indeed for your attention. 65