Bridge Report：（6537）WASHHOUSE Co., Ltd.

Yasutaka Kodama　President	WASHHOUSE Co., Ltd.（6537）

Company Information

Stock Information

*The share price is the closing price on December 3. Shares Outstanding, ROE and BPS are the values at the end of the previous term.

Earnings Trend

* Estimates are those of the Company.。Consolidated values have been used from the term ended December 2018.
*The Company conducted a 100-for-1 share split on April 2, 2016, a 2-for-1 share split on April 1, 2017. EPS and DPS have been revised retroactively.

This Bridge Report presents the earnings results of WASHHOUSE Co., Ltd.

Table of Contents

Key Points
1．Company Overview
2．Fiscal Year ended December 2018 Earnings Results
3．Fiscal Year ending December 2019 Earnings Forecasts
4．Conclusions
＜Reference: Regarding Corporate Governance＞

Key Points

• The sales for the term ended Dec. 2018 were 2,749 million yen, down 18.5% year on year. The number of new franchised shops was 86, smaller than the previous term’s numbe 105. SG&A expenses was 927 million yen, nearly unchanged from the previous term, but it was not offset, and operating income dropped 94.9% year on year to 12 million yen. Neither sales nor profit reached the estimated amount. This is mainly because the opening of new franchised shops was delayed due to the shortage of managers in charge of development of urban shops and disasters, such as the torrential rain in western Japan and the typhoons hindered the further cultivation of the existing territories; so the company opened only 86 franchised shops, while it first planned to open 130 shops. However, its non-consolidated performance was almost as mentioned in the revised forecast.

   

• The sales for the term ending Dec. 2019 are projected to be 3,675 million yen, up 33.7% year on year, while operating income is estimated to rise significantly from the previous term to 200 million yen. The number of new franchised shops is forecasted to increase significantly from 86 in the previous term to 116. As Washhouse Financial started the moneylending business and the urban shop model was completed, it became possible to open shops more swiftly in a broader range of sites in addition to suburban areas. Therefore, the company will actively open urban shops in the Kanto and Kansai areas. The dividend is to be 8.00 yen/share like in the previous term. The estimated payout ratio is 45.4%.

   

• Unfortunately, the company revised its earnings forecast downwardly and saw profits dropping considerably for two consecutive terms, but the company reaped some results in the term ended Dec. 2018, as the full-scale operation of Washhouse Financial already showed some effects. In addition, the construction of a factory for detergents and overseas business expansion, which had been envisioned, came in sight. Since the company needs to bear the costs for investment, depreciation, etc., it will take some time to earn profits, but it is noteworthy that the company is proceeding to a totally different stage from competitors’ in the laundromat industry, by utilizing its abilities to design a concept and take action. In the short term, we would like to pay attention to whether the company can open the target number of shops in this term, especially 65 urban shops, which will account for a majority of 116 new franchised shops.

   

   

１．Company Overview

WASHHOUSE operates laundromats mainly based on the franchise system, with the aim of creating the global standard in the self-service laundry industry.
The company has developed an unprecedented franchise chain (FC) business system, which unifies the quality of stores by managing and operating all stores concurrently, so that both the FC headquarters and franchised shops can thrive. As a great advantage, the company has a stable earning structure with recurring revenue.
It made inroads into Osaka and Tokyo, embarking on nationwide business on a full-scale basis. It also plans to expand its business outside Japan.
As of the end of December 2018, 583 laundromats (551 franchised ones and 32 directly managed ones) are in operation in Tokyo, Osaka and 20 other prefectures.

1-1 Corporate History

When starting up this business, President Kodama pondered over how to keep increasing sales and profit eternally in the age that will certainly witness the decreased birthrate and aging and declining population, whether the business has social meanings, whether there are any forerunners, whether the company can survive competitions, whether the business can be imitated easily, whether it is possible to achieve recurring revenue, and so on from various aspects, and decided to do the laundromat business.

For expanding the scale of business, the FC system is effective, but the FC business is accompanied by the problem of the conflict between the FC headquarters and franchised stores. In order to solve this problem, the company immediately introduced a call center that is in operation 24 hours a day all year round and the “system for managing and operating all stores at the same time,” which is composed of the swift support based on management webcams and remote control, etc. and reduced the burdens of franchised stores considerably. Its business grew steadily, partially thanks to the expansion of needs due to the increase in the number of working females.
From the Kyushu area, including Miyazaki Prefecture, where the business was launched, the company expanded its sales territory, entering Osaka in Dec. 2015 and Tokyo in Jul. 2016.

Then, in Nov. 2016, WASHHOUSE got listed on Mothers of Tokyo Stock Exchange and Q-Board of Fukuoka Stock Exchange.

1-2 Management Philosophy

The ethos of WASHHOUSE is “to think about all matters from the viewpoint of customers and keep being demanded by society.”
Under this ethos, the company is working on “creation of global standards in the laundromat industry” with the aim of continuously offering satisfactory services to users on behalf of store owners by fully managing laundromats after the opening of the store rather than “just selling self-service laundry equipment and instructing owners to operate it.”

1-3 Market Environment

◎ Growing laundromat market
According to the “Survey on coin-operated cleaning facilities” by the Ministry of Health, Labour and Welfare, although it is somewhat out of date, the number of laundromats in Japan in fiscal year 2013 was 16,693, and that in fiscal 1996 was 10,228, indicating a compound annual growth rate (CAGR) of 2.9%. If it keeps growing at a rate of 3%, it will exceed 18,000 stores in fiscal year 2016, which also exceeds the number of the stores (17,656) of FamilyMart ranking second in the convenience store field (as of the end of Nov. 2017), and is approaching the number of stores (19,970) of Seven-Eleven, which ranks first (as of the end of Nov. 2017).

◎ Growth factors
In the background of such growth, there are:

and so on.

In addition to these external factors, enterprises, including WASHHOUSE, started offering a variety of services considering the convenience for users, and so “users have increased” and then “the number of laundromats has grown.”
According to president Kodama, “rate of utilization,” which indicates how many households use laundromats among all households living within 2 km from a store, was about 3% on national average 10 years ago, but it is now 5-8%, and expected to increase further.

◎ Market players
It is difficult to obtain detailed information, but the number of main players in the self-service laundry market is said to be 4 to 5. WASHHOUSE has the largest number of laundromats with the same brand, and is the only listed company in this field.
Although many enterprises carry out the FC business for growth (increasing in the number of stores), WASHHOUSE possesses an unparalleled “system for managing and operating all stores at the same time,” which was developed in pursuing the streamlining of business operation and unification of quality. (For details, see “1-5 Characteristics and Strengths.”)

1-4 Business Description

1. Composition
WASHHOUSE conducts the three kinds of business division: (1) FC division, (2) store management division, and (3) direct management division, etc.

(1) FC division
WASHHOUSE created a unique operation-supported FC division.
The company selects candidate places for opening laundromats, sells “a set of WASHHOUSE laundromat systems,” which contains the design, interior finish work, equipment installation, etc. in a WASHHOUSE brand store, to franchisees, and receives the preparation fees for opening store, including advertisements, and fees for franchise rights.

For increasing franchisees, the company adopts the division system where sales staff visit possible franchisees, with which telephone staff set up an appointment, so that sales staff can concentrate on more active sales activities without the mental burden of sales calls. In addition, business simulation, contract production, etc. are conducted by other staff, so that sales staff can devote themselves to “footwork.”
Furthermore, by concluding business matching contracts with financial institutions, etc., the company is accumulating information on sites for building laundromats and candidate owners, and developing a “system” for increasing laundromats.

WASHHOUSE designs a plan to open new laundromats for each term based on the accumulated data on correlative relations of “the number of years of career of sales staff and achievements of opening franchised stores.”
Therefore, the company can achieve the target values set at the beginning of each term with overwhelming probability.

(2) Store management division
In order to keep each store “reliable, safe, and clean,” WASHHOUSE provides franchisees with such services as
・ 24/7 Call centers
・ Swift support based on management webcams and remote control
・ Daily inspection and cleaning
・ Replenishment of detergents
・ Maintenance patrol
・ Advertisement
Sales are composed of the fees for store management and system maintenance, sales of detergents, cleaning fees, advertising charges, etc.

Since franchisees need not manage their laundromats, if they can bear initial investment costs, they can own multiple stores, increase revenue, and reduce the risk of revenue fluctuation with stores being operated in different regions.

(3) Direct management division, etc.
The company directly manages some of “WASHHOUSE” laundromats, receiving the charges for washing and drying machines from users. A directly managed store is opened mainly when entering a new area. It takes the roles as an antenna shop, such as popularizing the “WASHHOUSE” brand as a “reliable, safe, and clean” laundromat, promoting possible users to use it, and offering a store model to franchisees and land owners (individuals and corporations that are thinking of utilizing their real estate).
In addition, the company receives commission fees related to the calculation of expenses for laundromat operation, etc. from enterprises.

2. Store operation
As of December 2018, WASHHOUSE operates 583 franchised stores and 32 directly managed stores, that is, a total of 551 stores in Tokyo, Osaka and 20 other prefectures. In 2018, the company opened laundromats in the Tohoku area (Aomori Pref.), Chiba, Saitama, and Mie Prefectures, for the first time. The company plans to continue nationwide development.

1-5 Characteristics and strengths

(1) Creation of a new FC business system
WASHHOUSE can be characterized most by its unique FC business model.
In ordinary FC business, a conflict between the FC headquarters and franchisees tends to emerge.
While franchisees pay franchise fees and royalties to the FC headquarters, the FC headquarters permit them to use a brand name, offers know-how to them, supply products to them, store operation, staffing, etc. must be carried out by franchisees on their own responsibility.
For franchisees, the operation and management of stores are significant burdens. If their business performance is favorable, there are no problems, but if sales are sluggish, the franchisee complains, “the system of the headquarters is poor,” while the FC headquarters blames, “the education in the franchisee is poor,” and these complaints lead to a lawsuit in many cases.
Meanwhile, WASHHOUSE introduced the “system for managing and operating all stores at the same time.” The company conducts necessary tasks for operating and managing franchised stores:
・ 24/7 Call centers
・ Swift support based on management webcams and remote control
・ Daily inspection and cleaning
・ Replenishment of detergents
・ Maintenance patrol
・ Advertisement
As a consequence, franchisees are free from the burdens of store operation.

In addition, since the company targets real estate that would have sales of over 1 million yen, it has meticulously surveyed the market, including local population, age distribution, income state, etc. and accumulated know-how for cultivating profitable property.
Thanks to the combination of the system for managing stores fully and the capability of cultivating profitable real estate, the satisfaction level of franchisees is very high, and up until the 18th term (ended Dec. 2018), no laundromats have been closed down due to poor performance. This is an unrivaled record in this industry.
(2) Bright, clean, easy-to-use stores
A laundromat generally reminds us of a “dimly-lit, eerie and dirty” place, but WASHHOUSE operates “reliable, safe, and clean” stores with the unified brand targeting women and families including children.

(Taken from the website of WASHHOUSE )

In the past, using a laundromat was considered as one of “sloppy acts in homemaking.” However, there is a growing interest in laundromats, which can wash and dry a larger amount of clothes in a shorter period of time than household washing machines, as the employment rate for women rose, high-rise condominiums increased, and the life-work balance changed. Especially, the washing of large items, such as futons and carpets, for removing ticks and allergens is attracting attention, due to the rising health consciousness.
In addition, the needs for laundromats mounted with equipment for washing and drying kids’ sneakers are getting stronger.

In these circumstances, the company installs the following equipment for meeting the needs of consumers:
・ Washing machines with a capacity of 22 kg, which can wash a full-sized futon, and dryers with a capacity of 25 kg (in standard stores),
・ Sneaker laundry equipment, which can wash sporting shoes, sneakers for commuting to school, etc.
・ Devices for removing stains free of charge (Spot remover)

Furthermore, all stores are monitored by management webcams 24 hours a day, and mounted with IoT laundry equipment, which can be controlled remotely by the headquarters, so as to offer real-time support like manned stores, although the laundromats are unmanned. Like this, the company has established a system that can be used by users without worry.

(Taken from the website of WASHHOUSE )
The company also indicates the components of detergents and the temperature in each dryer, to dispel the worries of consumers. In order to keep stores clean, the company cleans stores every day, including the cleaning of the filters of dryers and the sterilization of washing machines.

(3) Stable earning structure with recurring revenue
The sales from the store management business are composed of the monthly store management fee (50,000 yen per store), the fee for system maintenance (10,000 yen), ad charge (30,000 yen), cleaning charge (about 40,000 yen), etc., that is, a total of about 130,000 yen/month.
As of the end of Dec. 2017, the number of franchised stores of WASHHOUSE was 466. Accordingly, the sales from store management in the term ended Dec. 2018 can be calculated by adding the sales from existing stores (466 stores × 130,000 yen/store/month × 12 months = 726 million yen) and the sales from 85 new stores opened in the term ended Dec. 2018 (sales vary according to the date of opening).
The sales from store management in the term ending Dec. 2018 can be obtained by adding the sales from existing stores (563 million yen), the sales from new stores opened in the term ended Dec. 2017 (105 stores × 130,000 yen/store/month × 12 months = 164 million yen), and the sales from 133 new stores(estimated) opened in the term ending Dec. 2018.
The sales for the term ending Dec. 2019 are composed of the sales from existing stores (726 million yen), the sales from new stores opened in the term ended Dec. 2018 (85 stores × 130,000 yen/store/month × 12 months = 132 million yen), and the sales from 116 new stores(estimated) opened in the term ending Dec. 2019, and also the revenue from collection of loans by Washhouse Financial Co., Ltd., which is a 100% subsidiary and started its business in the term ended Dec. 2018.

(Taken from the reference material of WASHHOUSE )

Like this, sales from the store management business grow steadily, as the sales from new stores are added to those from existing stores, year by year.
On the other hand, the satisfaction level of franchisees is very high, which can be represented by the fact that no stores have been closed because of poor performance up until the 18th term, and so there is a low possibility that the number of stores will decrease.
The revenue from Washhouse Financial is stable and recurring. This fortifies the stable revenue structure of the company.

(4) Efforts for improving the soundness of the self-service laundry market
Although the laundromat market is growing, president Kodama mentioned that there remain a lot of problems, including the issue of compliance with the law.

For example, the dryers in a laundromat consume a large volume of gas, and so the Fire Service Act, the Building Standards Act, etc. specify the materials for exhaust ducts, how to install them, etc. in detail, for safety reasons. However, there are many illegal installations.
Some laundromat operators try to reel in users by offering to wash clothes on behalf of customers as a measure for differentiating their services from competitors, but they are very likely to be violating the dry cleaning business law.

The dry cleaning business law enforced in 1950 set forth the following provisions from the viewpoint of maintaining public health.

（Excerpt from the dry cleaning business law）

In a nutshell,

Despite the existence of these laws, in order to avoid the guidance from a public health center, some business operators set a counter inside their stores, install washing machines, explain “We use this washing machine,” but actually they wash the laundry of users with unregistered laundromat equipment outside the counter (not installed ones), and fold up the laundry.

In this situation, president Kodama considered that in order to promote the use of laundromats, it is indispensable to develop “reliable, safe, and clean” laundromats inside his company and improve the soundness of the self-service laundry industry, therefore established the National Association of Laundromat Operators in Dec. 2003.

This association specified the operation standards for equipment and hygienic management complying with laws, regulations, etc. At present, the directly managed stores and franchised laundromats of WASHHOUSE belong to this association, which takes the roles of improving the soundness of this industry and educating general consumers (about the usefulness of laundromats, etc.).

２．Fiscal Year ended December 2018 Earnings Results

(1) Business Results

*Unit: million yen
*Non-consolidated values have been used from the term ended December 2017.Consolidated values have been used from the term ended December 2018.
*YoY is reference value

Sales and profit dropped.
The sales were 2,749 million yen, down 18.5% year on year. The number of new franchised shops was 86, smaller than the previous term’s numbe 105. Gross profit also dropped 19.6％ year on year. SG&A expenses was 927 million yen, nearly unchanged from the previous term, but it was not offset, and operating income dropped 94.9% year on year to 12 million yen.
Neither sales nor profit reached the estimated amount. This is mainly because the opening of new franchised shops was delayed due to the shortage of managers in charge of development of urban shops and disasters, such as the torrential rain in western Japan and the typhoons hindered the further cultivation of the existing territories; so the company opened only 86 franchised shops, while it first planned to open 130 shops. However, its non-consolidated performance was almost as mentioned in the revised forecast.

(2) Sales trend in each business segment

*Unit: million yen
*A ratio of Gross profit to sales is gross margin ratio
*YoY is reference value because Consolidated values have been used from the term ended December 2018

① FC division
The number of newly opened franchised shops in each prefecture is as follows: [Kanto area (28)] Tokyo (26), Saitama(1), Chiba(1), [Chubu area (6)] Aichi (5),Mie(1), [Kansai area (9)] Osaka (5), Nara (2), Hyogo (2), [Chugoku area (6)] Okayama (2), Hiroshima (2), Yamaguchi (2), [Shikoku area (7)] Kagawa (5), Ehime (2), [Kyushu area (30)] Fukuoka (17), Nagasaki (2), Kumamoto (3), Miyazaki (4), Kagoshima (2), Saga(2) for a total of 86 stores. (The number of new store openings in Kyushu area was 20, but as one of the existing stores closed due to redevelopment of a neighboring commercial facility, the number of franchised stores increased by 85 during the term).
As a result, the number of FC stores as of the end of December 2018 was 551
The number of shops opened by using Washhouse Financial was 16, much larger than the estimate: 3 to 7.

② Store management division
Sales grew due to the increase of management-entrusted laundromats.

③ Direct management division, etc.
As directly managed laundromats, the company opened one shop in each of Aomori, Tokyo, Chiba, and Miyazaki Prefectures, that is, a total of 4 shops. The company did not purchase any franchised stores.
The number of directly operated stores is 32 at the end of December 2018

(3) Financial standing and cash flows

◎Main BS

*Unit: million yen
*Non-consolidated values have been used from the term ended December 2017.Consolidated values have been used from the term ended December 2018.
*Increase/decrease is reference value in sentences.

Current assets declined 99 million yen from the end of the previous term, due to the decrease in cash and deposits, etc. Noncurrent assets grew 189 million yen from the end of the previous term due to the increase in property, plant and equipment (such as directly managed laundromats) and investments and other assets, and total assets rose 90 million yen from the end of the previous term to 4,128 million yen.
Total liabilities augmented 139 million yen from the end of the previous term to 1,911 million yen, due to the increase in deposits and guarantee deposits received.
Net assets declined 49 million yen from the end of the previous term to 2,217 million yen.
Consequently, equity ratio was 53.7%.

◎Cash Flow

*Unit: million yen
*Non-consolidated values have been used from the term ended December 2017.Consolidated values have been used from the term ended December 2018.
*Increase/decrease is reference value in sentences.

Free CF turned negative. The cash position degraded.

(4) Topics

◎ The company acquired land for enriching its business base, including a site for manufacturing detergents.
In Feb. 2019, the board of directors resolved to obtain a piece of land (about 2,000 tsubo ≒ 6,600 m2) owned by Miyazaki Prefecture.
Its purpose is to fortify the business base by constructing a production site for detergents to be consumed in the laundromat business as the company had planned, developing a logistic center for the future, etc. The acquisition price was 182 million yen. We heard that the total investment amount for constructing factories, installing equipment, etc. for future business is about 1 billion yen, but it is being examined and calculated. The operation of the production site is scheduled to be started in fiscal 2020.

3. Fiscal Year December 2019 Earnings Estimates

(1) Earnings Forecasts

*Unit: million yen
*The estimated values are from the company.

To significant performance recovery
It is estimated that sales will rise 33.7% year on year to 3,675 million yen and operating income will increase considerably to 200 million yen.
The number of new franchised laundromats is projected to be 116, much larger than that in the previous term: 86.
As Washhouse Financial started the moneylending business and the urban shop model was completed, it became possible to open shops more swiftly in a broader range of sites in addition to suburban areas. Therefore, the company will actively open urban shops in the Kanto and Kansai areas. The dividend is to be 8.00 yen/share like in the previous term. The estimated payout ratio is 45.4%.

(Future efforts)

４．Conclusions

Unfortunately, the company revised its earnings forecast downwardly and saw profits dropping considerably for two consecutive terms, but the company reaped some results in the term ended Dec. 2018, as the full-scale operation of Washhouse Financial already showed some effects.
In addition, the construction of a factory for detergents and overseas business expansion, which had been envisioned, came in sight. Since the company needs to bear the costs for investment, depreciation, etc., it will take some time to earn profits, but it is noteworthy that the company is proceeding to a totally different stage from competitors’ in the laundromat industry, by utilizing its abilities to design a concept and take action. In the short term, we would like to pay attention to whether the company can open the target number of shops in this term, especially 65 urban shops, which will account for a majority of 116 new franchised shops.

＜Reference: Regarding Corporate Governance＞

◎ Organization type and the composition of directors and auditors

◎ Corporate Governance Report
Last update date: Apr. 5, 2019

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
The company mentioned, “We will implement all of the basic principles.”