Bridge Report:（4767）TOW fiscal year ended June 2021

Michihiro Akimoto President and CEO	Muratsu Kenichi Vice President and COO	TOW Co., Ltd.(4767)

Company Information

Stock Information

*Share price as of closing on October 18, 2021. Number of shares issued at the end of the most recent quarter excluding treasury shares. DPS and EPS are results from FY 6/22.

Consolidated Earnings

*Unit: million yen, yen. Estimates are those of the Company. The definition for net income has been changed to net income attributable to parent company shareholders (Abbreviated hereafter as parent net income).
* On April 1, 2020, the company implemented a 2-for-1 stock split, which is reflected in EPS and DPS.

We present this Bridge Report reviewing the fiscal year ended June 2021 earnings results and the outlook for the fiscal year ending June 2022 for TOW.

Table of Contents

Key Points
1. Company Overview
2. Business Growth Vision
3. Fiscal Year ended June 2021 Earnings Results
4. Fiscal Year ending June 2022 Earnings Forecasts
5.Conclusions
<Reference: Regarding Corporate Governance>

Key Points

• In FY June 2021, sales dropped 36.8% year on year and ordinary income decreased 70.0% year on year. The company plans to establish TOW Experience Design Model, which will help increase new customers and develop and energize existing customers through the planning and production based on experience value. Through this, the company set a new company vision, a production for optimizing results with the experience value. Although the large-scale transactions with governmental offices and groups contributed and business inquiries for online promotion measures increased, their business was significantly affected by the decrease of real events caused by the spread of the novel coronavirus. Regarding profit, gross profit margin declined, but SG&A was reduced from the previous term through appropriate control according to business performance. For dividends, the company paid a term-end dividend of 6.80 yen/share as forecasted, for an annual dividend of 12.90 yen/share.

   

• For FY June 2022, sales and ordinary income are expected to grow 1.1% and 43.1%, respectively, year on year. There are no longer large-scale transactions with governmental offices or groups, which were recorded in the previous term, but sales are projected to rise slightly, as the company will take advantage of the growth of the online domain and the recovery of real events. While large-scale transactions with governmental offices and groups are forecasted to decrease from the previous term, the company will strive to increase ordinary transactions, monetize the value provided by specialized personnel and so on, so gross profit margin is expected to increase. SG&A is projected to augment, through the active recruitment of new graduates, the investment in development of experience design engines, etc.

   

• In FY June 2021, sales and profit dropped considerably, but the company can be highly evaluated, because it earned a profit amid the coronavirus pandemic. This can be considered as the company’s instantaneous effort on online promotion had succeeded. For FY June 2022, there is a possibility that the coronavirus will spread, although vaccination is progressing, and the recovery of real events will be delayed. Still, the company is considered the most advanced in the field of online promotion, currently. Amid the coronavirus pandemic, the company fortified its financial foundation. As the company earned a profit and improved its financial foundation, it may win the trust of clients and expand its market share.

   

1. Company Overview

TOW is the largest independent company in the field of events and promotion of the advertising industry and is listed on the first section of the Tokyo Stock Exchange. They have expanded the scale of their business with the planning, production, and operation of press conferences, promotional events, exhibitions, and cultural and sport events as their forte. In addition to the production capabilities cultivated through real events, they have engaged in business in the digital field since the early 2000s and have been successful in acquiring new customers, fostering the relationship with and bringing new stimulation to their existing customers by making full use of their planning and production capabilities centered on experience value* and exerting the capability to create catching content and the capability to revitalize platforms in regard to their offline and online activities.
TOW have been engaging in the development of TOW Experience Design Model, which will contribute to the growth of their clients, realizing the improvement of the value they provide and business growth, and sets their new corporate image as to be a production for designing outcomes centered on experience value.
In addition to TOW, the Group also comprises one consolidated subsidiary (as of the end of June 2021), T2 Creative Co., Ltd. (hereinafter referred to as “T2C”), which manages the production, operation, and staging of events as well as the production and online streaming of videos.

*Experience value: Implied to emotional, sensational and rational values that appeal to customer’s experience

Business Description

Planning to Implementation of Events and Promotion
A transaction concerning events and promotion arises as soon as an organizer or a promoter thinks of any objective (intention to get information across to their audience).
TOW receives an explanation on this objective from the organizer or promoter, and after analysis and research, they formulate a strategy or plan. Then, they proceed into each stage, developing the initial plan into a basic scheme, an implementation scheme, and a detailed scheme based on numerous meetings, which in the end become deliverables matching the respective method. TOW proceeds with the preparations according to reference material and conducts events and promotion.

Scope of TOW’s Business
TOW receives orders for the whole abovementioned process from planning to implementation. They undertake analysis and research, devising a strategy and formulating the concept, project proposal, actual production, effectiveness verification, and other work incidental to the above processes, employing a number of methods tailored for each task.
TOW’s work lies in conveying the intention of an organizer or a promoter to consumers by taking on the comprehensive production and direction of the overall promotion, while outsourcing respective tasks to companies specialized in respective fields including real events, online events, video creation, SNS-based campaigns, digital advertising operation, digital media operation, SNS account operation, user experience design of digital services, promotion, and sales promotion and so on.T2 Creative Co., Ltd. mainly undertakes the production and operation of these events.

2．Business Growth Vision

Ⅰ．Initiatives in FY June 2021
FY 6/2021 = Turning point for TOW

(Taken from the reference material of the company)

Production that designs achievements centered on experience value
TOW aims to grow to be a unique production which will help companies acquire customers and foster the relationships with customers through the “one-time and linked” experience design.

◎Accelerating the shift to the online
The goal of raising the ratio of online transactions (based on gross profit) to 60%, which was set at the beginning of the term, has been achieved for the most part.

(Taken from the reference material of the company)

The shift to the online has steadily progressed, and it is reflected in the results.

Expanding the scope of business operations through the “one-time and linked” experience design

(Taken from the reference material of the company)

Ⅱ．Action Plan for FY 6/2022
◎ Overview of the Societal and Industrial Environments and Opportunities for TOW’s Growth

◎ Policies for FY 6/2022

(Taken from the reference material of the company)

Aiming for the expansion of business domains and the recovery of performance through “growth based on two pillars”

◎ Actions in FY 6/2022 (① Establishment of organizations for each function for expanding their business domain)

(Taken from the reference material of the company)

Actions in FY 6/2022 (② Development of TOW’s original solutions)

(Taken from the reference material of the company)

3. Fiscal Year ended June 2021 Earnings Results

(1) Consolidated Earnings

*Unit: million yen. Figures include reference figures calculated by Investment Bridge Co., Ltd. and actual results may differ (applies to all tables in this report)

Sales and ordinary income decreased 36.8% and 70.0%, respectively, year on year.
Sales dropped 36.8% year on year to 12,209 million yen. As mentioned above, the company plans to establish TOW Experience Design Model, which will help increase new customers and develop and energize existing customers by exerting the ability to create attractive contents and the ability to activate the platform through the planning and production based on experience value. Then, the company aims to improve the value provided by the corporate group and to grow its business, and envisions to become a production for designing outcomes based on experience value.
Although the large-scale transactions with governmental offices and groups contributed and business inquiries for online promotion measures increased, their business was significantly affected by the decrease of real events caused by the spread of the novel coronavirus.
Operating income dropped 71.7% year on year to 655 million yen. Gross profit margin declined from 16.8% in the previous term to 12.0%, but SG&A was reduced from the previous term through appropriate control according to business performance. Regarding non-operating performance, the revenue from subsidies was posted, ordinary income decreased 70.0% year on year to 698 million yen, and net income attributable to owners of parent dropped 71.2% year on year to 455 million yen.
Both sales and profits exceeded the company’s estimates.
For dividends, the company paid a term-end dividend of 6.80 yen/share as forecasted, for an annual dividend of 12.90 yen/share.

Sales by Industry

*Excluding the sales of planning
*Unit: million yen

*The sales in the field of governments and organizations include those from projects related to the Tokyo 2020 Olympic and Paralympic Games.

Number of transactions in each price range

*Excluding the sales of planning

(2) Financial Condition & Cash Flow

Financial Condition

*Unit: million yen. Accounts Receivable: Uncollected Sales/Loans transferred using the factoring methods

As of the end of FY June 2021, total assets stood at 13,423 million yen, down 2,770 million yen from the end of the previous term.
Current assets decreased 3,114 million yen from the end of the previous term to 11,325 million yen. This is mainly because accounts receivable, notes and accounts receivable-trade, and electronically recorded monetary claims decreased 2,141 million yen, 2,071 million yen, and 1,318 million yen, respectively from the end of the previous term, although cash and equivalents increased 2,524 million yen from the end of the previous term.
Noncurrent assets stood at 2,098 million yen, up 343 million yen from the end of the previous term. Tangible noncurrent assets were 229 million yen, up 40 million yen from the end of the previous term. This is mainly due to the layout change, etc. Intangible noncurrent assets were 28 million yen, up 4 million yen from the end of the previous term. This is mainly due to the upgrade of the order receipt management system, etc. Investments and other assets grew 298 million yen from the end of the previous term to 1,840 million yen. This is mainly because investment securities increased 361 million yen from the end of the previous term, although deferred tax assets decreased 62 million yen from the end of the previous term.
Current liabilities decreased 2,960 million yen from the end of the previous term to 2,528 million yen. This is mainly because accounts payable, other liabilities, and taxes payable decreased 1,810 million yen, 716 million yen, and 358 million yen, respectively from the end of the previous term.
Fixed liabilities augmented 121 million yen from the end of the previous term to 570 million yen. This is mainly because deferred tax liabilities increased 124 million yen from the end of the previous term.
Net assets grew 67 million yen from the end of the previous term to 10,324 million yen. This is mainly because valuation difference on available-for-sale securities increased 247 million yen from the end of the previous term, although retained earnings decreased 200 million yen from the end of the previous term.
Capital-to-asset ratio rose 13.4 points from the end of the previous term to 76.5%.

Cash Flow

*Unit: million yen

The balance of cash and cash equivalents as of the end of FY June 2021 stood at 7,580 million yen, up 2,524 million yen from the end of the previous term.
The company posted a cash inflow of 3,388 million yen from operating activities (a cash inflow of 1,142 million yen in the previous term). This is mainly because trade accounts receivable decreased 3,389 million yen and accounts receivable dropped 2,396 million yen, while trade accounts payable declined 1,805 million yen.
The company posted a cash outflow of 206 million yen from investment activities (a cash outflow of 110 million yen in the previous term). This is mainly because 191 million yen was spent for acquiring tangible noncurrent assets.
The company posted a cash outflow of 657 million yen from financial activities (a cash outflow of 731 million yen in the previous term). This is mainly because the expenditure for dividends was 656 million yen.

4. Fiscal Year ending June 2022 Earnings Forecasts

(1) Consolidated Earnings

*Unit: million yen

For FY 6/22, sales are projected to grow 1.1% and ordinary income is forecasted to rise 43.1%.
For FY June 2022, it is expected that sales will grow 1.1% year on year to 12,339 million yen, operating income will rise 47.6% year on year to 967 million yen, ordinary income will increase 43.1% year on year to 1 billion yen, and net income attributable to the shareholders of the parent company will grow 36.5% year on year to 622 million yen. The business environment remains uncertain due to the extension of the state of emergency, the expansion of target regions of the state of emergency, etc., so it is difficult to forecast earnings. However, the company decided to forecast and announce earnings based on available information, forecasts, etc. because the number of orders received has been recovering from the same period of the previous year. According to situations, the company will consider revising the earnings forecasts and announce the revised forecasts when necessary.
There are no longer large-scale transactions with governmental offices or groups, which were recorded in the previous term, but sales are projected to rise slightly, as the company will take advantage of the growth of the online domain and the recovery of real events despite the lingering impact of the novel coronavirus. While large-scale transactions with governmental offices and groups are forecasted to decrease from the previous term, the company will strive to increase ordinary transactions and monetize the value provided by specialized personnel, so gross profit margin is expected to increase. SG&A is projected to augment, through the active recruitment of new graduates, the investment in development of an experience design engine, which is a database of outcomes, etc. Accordingly, it is expected that operating income, ordinary income, and net income attributable to the shareholders of the parent company will increase year on year.

Summary

Regarding dividends, the company temporarily abolished the policy of setting the upper limit of consolidated payout ratio at 50% like in the previous term, and plans to pay a dividend of at least 14 yen/share, which was calculated by multiplying the closing price on August 6, 2021, which is the day before the announcement of financial results, by a dividend yield of 4.5%. Accordingly, the company plans to pay an interim dividend of 7.00 yen/share and a term-end dividend of 7.00 yen/share for an annual dividend of 14.00 yen/share.

Progress of business in FY 6/22

* Unit: million yen

*Backlog of orders: This means the recent progress of order receipt.

5. Conclusions

Due to the strong impact from the spread of the novel coronavirus, sales and profit dropped considerably in FY June 2021. While many enterprises fell into the red in various field, the company earned a profit. For this, the company can be highly evaluated. This can be considered as the company’s instantaneous effort on online promotion had succeeded. For FY June 2022, there is a possibility that the coronavirus will spread although vaccination is progressing, and the recovery of real events will be delayed. However, the company is considered the most advanced in the field of online promotion, and in anyway, profit is expected to grow from the previous term, which was considered the worst period.
At the end of FY June 2021 amid the coronavirus pandemic, free CF was 3,182 million yen, up 208.2% from the previous term, cash and cash equivalents stood at 7,580 million yen, up 49.9%, capital-to-asset ratio was 76.5%, up 13.4 points, and the amount of debts was small. The financial foundation of the company has been fortified, although it was originally good. It can be inferred that the financial foundations of many small and medium-sized enterprises, etc. will falter due to the novel coronavirus, but TOW, which is a leading company in the field and possesses a robust financial foundation earning a profit, may win the trust of clients and expand its market share.

<Reference: Regarding Corporate Governance>

◎ Organization type, and the composition of directors and auditors

◎ Corporate Governance Report Updated on October 8, 2021
Basic Policy
Our company recognizes corporate governance as "building and operating a structure that achieves appropriate and efficient decision making and business execution by the management, prompt result reports to stakeholders, and soundness, fairness and high transparency of business administration in order to continuously improve the corporate value." In order to achieve sustainable growth and improve our medium and long-term corporate value while fulfilling our responsibility to shareholders, customers, employees and other stakeholders, our company will achieve effective corporate governance in accordance with the basic policy stated below.

1． Respect the rights of shareholders and ensure equality.
2． Consider the interests of stakeholders including shareholders and cooperate properly.
3． Disclose company information properly and ensure the transparency.
4． Improve the effectiveness of the supervisory function for business execution by the board of directors.
5． Have constructive dialogue with shareholders who have an investment policy that matches the interests of shareholders over the medium to long term.

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
Supplementary Principle 1-2-4 The introduction of a platform for electronic exercise of voting rights and the English translation of the notice of convocation
We will consider the introduction of a platform for electronically exercising voting right and the English translation of the notice of convocation in light of trends of ratios of institutional investors and foreign investors among the company’s shareholders.

Supplementary Principle 3-1-2 Disclosure and provision of information in EnglishWe prepare an English version of business reports and also disclose analyst reports in English semi-annually on our website. In the future, we will consider provision of the materials for results briefing and contents of the convocation notice, etc. in English in light of trends of ratios of institutional investors and foreign investors among the company’s shareholders.

【Supplementary Principle 4-1-2 Commitment to the mid-term management plan】 【Principle 5-2 Formulation and announcement of management strategies and plans】
The company considers that the most important is to attain performance goals for a single fiscal year, and currently refrains from formulating a mid-term management plan.
To achieve sustainable growth, the company believes that it is important to set a management vision and design strategies from the mid-term viewpoint, and makes an announcement when it has confirmed the trend of the business environment and the effects of measures.

Supplementary Principle 4-10-1 Involvement and advice of independent outside directors regarding nomination and compensation etc.
In order to strengthen the independence, objectivity and accountability of the functions of the Board of Directors in relation to the nomination and compensation, etc. of directors etc., when examining the nomination and compensation etc., we will examine the development of a system aimed at implementing more fair and transparent examinations and procedures, including deeper collaboration with independent external directors.
<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>
【Principle 1-4 Cross-holding shares】
The basic policy in making investments other than for pure investment purposes is to create synergy effects in the company’s integrated promotion business through business alliances and information sharing with companies that we invest in. In order to improve value in the medium- to long-term perspectives, we hold the minimum number of listed shares only when it is determined that holding the shares would be effective in consideration of strengthening relationships with business partners, etc.
With regard to the exercise of voting rights of cross-holding shares, in order to ensure appropriate responses, we examine each case from comprehensive viewpoints including the medium- to long-term improvement of the corporate value of the share issuing company as well as the medium- to long-term growth of economic benefits for us. For the major cross-holding shares, we will report the status of the exercise of voting rights to the Board of Directors.

【Principle 4-9 Independence Standards and Qualification for Independent External Directors】
We select external director candidates who meet the independence criteria set by the Tokyo Stock Exchange.

【Supplementary Principle 4-11-1 View on the balance, diversity and scale of knowledge, experience and capabilities as the entire Board of Directors】
The company stipulates the number of directors as 14 or less by the articles of incorporation, and as of September 24, 2021, the Board of Directors consists of 10 members (including 4 external directors). For the members of the Board of Directors, we take into consideration the diversity of experience, knowledge, capabilities, etc.

【Principle 5-1 　Policy for having constructive dialogue with shareholders】
We are convinced that the most important mission to fulfill our company's responsibility is to promote two-way constructive dialogue with shareholders and investors, and to realize effective corporate governance in order to achieve sustainable growth and improve our medium and long-term corporate value.
Based on this idea, our company will implement the following measures.

1. Designation of directors in charge of dialogue with shareholders
In our company, executives have dialogue with shareholders, and the managing director controls IR activities.

2. Measures for organic coordination of in-company departments
In our company, the general affair team, which is also in charge of IR activities, discusses and exchanges opinions on a daily basis with the accounting team and they also collaborate in preparing the disclosed materials and discuss the content with executives.

3. Efforts for enhancing dialogue methods other than individual interviews
Our company will conduct the general shareholders' meeting that earns shareholders' trust by valuing the general shareholders' meeting as an opportunity for important dialogue with shareholders and ensuring sufficient information disclosure of our business. In addition, our company will work on achieving closer communication with shareholders and investors by regularly holding financial results briefing.

4. Measures for feedback of opinions and concerns of shareholders
Our company will compile the opinions and concerns about our company heard in the dialogue with shareholders and investors at the department in charge and develop a system that reports this regularly to executives and the board of directors according to its importance and nature.

5. Measures for managing insider information
The basic policy of our company is to provide fair information disclosure in order to ensure substantive equality for shareholders and investors. Based on this policy, we will disclose important information about our company in a timely and fair manner, and strive to manage the information rigorously so that it will not be provided only to some shareholders and investors.

The back number of Bridge Reports (TOW Co., Ltd.:4767) and contents of Bridge Salon (IR seminars) can be seen at www.bridge-salon.jp/