CFO

Accomplishment of Initial Targets for All KPIs

In the fiscal year ended March 31, 2019, the third year of the medium-term management plan, we were able to achieve our initial third-year targets for all KPIs (EPS, ROE, and ROIC). Over this year, we moved forward with the principal strategies of the plan, namely improving the earnings capacity of the Retailing segment through business structure reforms and expanding earnings scale in the FinTech segment. At the same time, our financial strategies for achieving our target balance sheet and capital measures produced benefits. As a result, earnings per share (EPS) increased by 1.6 times over the past three years, to ¥116; return on equity (ROE) rose 3.1 percentage points, to 9.1%; and return on invested capital (ROIC) grew 0.4 percentage point, to 3.7%.

Furthermore, an average annual growth rate of 18% was seen over the past three years for EPS, which reached a record high in the fiscal year ended March 31, 2019, I might add, and the average annual rate of increase in dividends was 31%. In this manner, we have continued to achieve high growth coupled with high returns.

From the perspective of corporate value creation, ROIC exceeded weighted average cost of capital (WACC) in the fiscal year ended March 31, 2017, the first year of the medium-term management plan, leading to a positive economic value added spread. However, our equity spread swung into the positive in the fiscal year ended March 31, 2019, as ROE climbed to 9.1% and cost of shareholders' equity was 6.8% following a decline in the beta value. We are committed to continuously creating corporate value in line with the expectations of our shareholders in the future.

Improvement of Capital Efficiency Not Dependent on the Balance Sheet

To achieve our target balance sheet, we have been working to maintain a sufficient level of financial soundness and efficiency as represented by an equity ratio of approximately 30% and level of interest-bearing debt that is equivalent to around 90% of operating receivables. Meanwhile, operating receivables grew to a degree that exceeded our initial expectations, leading to a similar increase in interest-bearing debt. We sought to curb this increase by liquidating revolving payment receivables from card shopping transactions and cash advance receivables. The amount of liquidated receivables on March 31, 2019, was ¥119.3 billion, representing 17.4% of operating receivables (ratio of liquidation). Operating receivables are expected to continue to increase above the projected levels, and the ratio of liquidation is forecast to reach around 25% by March 31, 2021. Our receivable liquidation scheme has been highly regarded as contributing to debt safety due to it embodying the co-creation of creditability, MARUI GROUP's core value. Accordingly, procurement costs are at low levels on par with those of borrowings from banks or corporate bonds. For this reason, the majority of earnings, such as those from finance charges on revolving transactions, return directly to the Company, enabling us to maintain high profitability without depending on our balance sheet. Our rent guarantee business, which is in the process of expanding the scope of its operations, is also realizing high profitability without depending on its balance sheet through the co-creation of creditability. Looking ahead, MARUI GROUP will pursue further improvements in capital efficiency by proactively expanding businesses with high levels of LTV and low dependence on balance sheets, whether new or existing businesses.

Dramatic Changes in Earnings Structure

Over the period encompassing the previous medium-term management plan, which began with the fiscal year ended March 31, 2015, and the current medium-term management plan, which was launched in the fiscal year ended March 31, 2017, we have proceeded to pursue increases in LTV. These increases were accomplished through various strategies and measures aimed at transforming all flow-type businesses into stock-type businesses, regardless of segment, and at strengthening stock-based businesses. As a result, MARUI GROUP's earnings structure has been transformed dramatically when compared to the fiscal year ended March 31, 2014, prior to the establishment of the previous medium-term management plan. LTV itself is an estimated figure dependent on future predictions. Recurring revenue, however, is an important component of LTV that can be tracked numerically with a relatively high degree of financial accuracy. Recurring revenue is defined as the revenue that is generated on a recurring basis through contracts with customers or business models and includes finance charges on revolving and installment payments and sales floor rent revenues. Accordingly, recurring revenue could be seen as a quantitative measurement of our core value of the co-creation of creditability.

High Growth Coupled with High Returns

The most noteworthy change to MARUI GROUP's earnings structure is large increases in recurring revenue and in the portion of total revenue that it represents. For example, recurring gross profit in the fiscal year ended March 31, 2019, represented 63% of total gross profit, double the level from five years ago. By segment, recurring gross profit accounted for 54% of total gross profit in the Retailing segment and 69% in the FinTech segment, a majority in both segments. On April 1, 2019, contracted recurring revenue, which will translate to revenue in the future, amounted to ¥357.2 billion, 2.6 times higher than the amount of recurring revenue in the fiscal year ended March 31, 2019, and 1.4 times higher than total revenue in this year. One way of measuring corporate value is a methodology using future cash flows. Recurring revenue contributes to higher and more reliable future cash flows. For this reason, the growth in recurring revenue to date could be seen to have made significant contributions to improved corporate value.

Due to these factors, MARUI GROUP's ability to achieve stable profit growth has increased. In addition, we have put forth a policy of raising the consolidated payout ratio to 55% by the fiscal year ending March 31, 2024, while targeting a total return ratio of 70%. I therefore think it is entirely possible that we will be seeing high growth coupled with high returns in the future with EPS growth rates of 10% and average annual dividend increases of 15%.