Bridge Report:（6537）WASHHOUSE the Fiscal Year ended December 2022

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

Company Information

Stock Information

*The share price is the closing price on March 10. Each number are from the financial report for the fiscal year ended December 2022

Earnings Trend

*Unit: million yen, yen. Consolidated values have been used from the term ended December 2018.

This Bridge Report presents earnings results for the Fiscal Year ended December 2022 of WASHHOUSE Co., Ltd

Table of Contents

Key Points
1. Company Overview
2. Fiscal Year ended December 2022 Earnings Results
3. Fiscal Year ending December 2023 Earnings Forecasts
4. Topics
5. Conclusions
<Reference: Regarding Corporate Governance>

Key Points

• In the term ended Dec. 2022, sales decreased 9.9% year on year to 1,921 million yen. Six new laundromats were opened in the FC business. Gross profit increased 6.7% year on year due to the improved profit margin of the “WASHHOUSE Coin-operated Laundry System” as the company adopted laundry-integrated equipment, despite a decrease of franchise and managed laundromats. SG&A expenses decreased 5.7% due to the effects of cost control and the in-house production of some advertisements. Although operating loss was 54 million yen, it improved by 86 million yen year on year. Ordinary income was in the black at 61 million yen due to the recording of a gain on sale of laundromats and an income from subsidies.

   

• In the term ending Dec. 2023, sales are expected to increase 29.1% year on year to 2,481 million yen, and operating income is expected to turn positive as it will increase 108 million yen to 54 million yen. The FC business plans to open 35 new laundromats, mainly in Kyushu. The company will continue to focus on improving the profit structure by strengthening the “coin-operated laundry business platform,” such as the advertising business on the WASHHOUSE app and the in-house production of detergents. Dividends will not be paid as in the previous term.

   

• The company still views the term ended Dec. 2022 as the year in which its earning structure will change through the WASHHOUSE app, so we will continue to keep an eye on it. By March 2023, the number of downloads of the WASHHOUSE app exceeded 340,000, so the app advertisements that utilize the waiting time at a laundromat are beginning to show results. Coupon usage rate is as high as 80.3%. The company also expects to improve profitability through the “WASHHOUSE Package” and major improvements in laundromat designs.

   

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 2022, 614 laundromats (553 franchised ones and 61 directly managed ones) are in operation in Tokyo, Osaka and 23 other prefectures.

【1-1 Corporate History Until listing】

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. The company moved to the TSE Growth Market in April 2022.

【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, Labor 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:
*Women’s needs for “the reduction in cleaning time” due to the increase of dual-earner households,
*Measures against allergies, such as the allergy to pollen,
*Decrease in the use of cleaning services due to the increase of low-priced high-quality clothes,
*Enhancement of awareness of cleanliness, 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
In the term ending Dec. 2022, the number of divisions will change from three (FC Division, Store Management Division, and Directly Managed Division, etc.) to two ((1) FC Division (former FC Division) and (2) Store Operation Division (Former Store Management Division + former Directly Managed 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.”

(2) Store operation division
The company is entrusted with store management for all FC stores and reports the operational status, including store income and expenditure, to the FC owners monthly. The company operates the former store management division, which receives coin laundry management income from FC owners by deducting it from monthly sales, and the coin laundry "Wash House" as directly managed stores and receives a fee from store users for the use of washing machines and dryers. This division also includes the revenue from the Wash House Application.

●Former 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.

●Former Directly Managed 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.
Income from WASH House application, etc.

2. Store operation
As of December 2022, WASHHOUSE operates 553 franchised stores and 61 directly managed stores, that is, a total of 614 stores in Tokyo, Osaka and 23 other prefectures.
The company will continue nationwide business operations.

【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, offer know-how to them and supply products to them, but 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. ”As mentioned above, the company conducts all the necessary tasks for operating and managing franchised stores: As mentioned above, 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 fully managing stores and the capability of cultivating profitable real estate, the satisfaction level of franchisees is very high, contributing to outstanding results of no closing stores caused by poor performance up until the current 18th term.

(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)

(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.

In addition, in April 2020, the company released the WASH House App, a smartphone payment application for coin laundries.
The app is aimed at strengthening the coin laundry business as a platform and is equipped with cashless payment functions and information distribution functions such as special coupons, and it was installed in all WASH House stores at the end of May 2020.
The company has also incorporated functions to create collaborations with a wide variety of other industries, and will continue to work to create stores that are needed by users by providing them with meaningful information and highly convenient services that are closely related to their daily lives.

(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.

(Taken from the website 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.
Meanwhile, the satisfaction level of franchisees is very high, as seen by the fact that no stores have been closed because of poor performance up until now. Therefore, 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,
＊Even if a laundromat operator obtains a dry cleaner’s license, he/she cannot offer services of handling and folding up the laundry, etc. at a laundromat, which is not a dry cleaning shop.
＊The washing machines and dryers inside a facility registered as a dry cleaning shop is exclusively for dry cleaning business operators, and so they cannot be used by others (users of laundromats) from the viewpoint of hygiene.

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 2022 Earnings Results

(1) Business Results (Cumulative)

*Unit: million yen.

Revenue decreased and deficit reduced
In the term ended Dec. 2022, sales decreased 9.9% year on year to 1,921 million yen. Six new laundromats were opened in the FC business. Gross profit increased 6.7% year on year due to the improved profit margin of the “WASHHOUSE Coin-operated Laundry System” as the company adopted laundry-integrated equipment, despite a decrease of franchise and managed laundromats. SG&A expenses decreased 5.7% due to the effects of cost control and the in-house production of some advertisements. Although operating loss was 54 million yen, it improved by 86 million yen year on year. Ordinary income was in the black at 61 million yen due to the recording of a gain on sale of laundromats and an income from subsidies.

(2) Sales trend in each business segment

*Unit: millions of yen. Composition of gross profit is gross profit ratio.

*This figure is created by Investment Bridge Co., Ltd. based on disclosed materials.

① FC division
The number of new franchise stores opened during the period decreased by 19, resulting in 553 franchise stores at the end of December 2022.
Although six new laundromats were opened, 25 were closed due to owners’ circumstances, expiration of contracts, and land expropriation, resulting in decreased sales and profits. Gross profit margin dropped 2.0 points due to the decrease in the number of laundromats.

②Store management division
The number of directly managed laundromats did not change during the term due to the sale of five laundromats, despite five franchise laundromats being converted to directly managed ones. Therefore, sales decreased 3.3% year on year due to the decline in the number of managed laundromats.
However, gross profit margin increased due to the effect of cost containment and the in-house production of some advertisements. Gross profit margin increased by 7.0 points.

(3) Financial standing and cash flows

◎Main BS

*Unit: million yen

*This figure is created by Investment Bridge Co., Ltd. based on disclosed materials.

Due to an increase in cash and deposits and operating loans, current assets rose 391 million yen year on year from the end of the previous term. Noncurrent assets decreased 65 million yen from the end of the previous term due to a decline in tangible assets due to a decrease of directly managed stores. However, total assets increased 325 million yen from the end of the previous term to 4,282 million yen.
Total liabilities augmented 73 million yen from the end of the previous term to 2,494 million yen due to an increase in the balance of borrowings.
Net assets rose 73 million yen from the end of the previous term to 1,788 million yen due to reducing the deficit of retained earnings.
As a result, the equity ratio was 40.0%, down 1.5 points from the end of the previous period.

◎Cash Flow

*Unit: million yen.

*This figure is created by Investment Bridge Co., Ltd. based on disclosed materials.

The deficits of the investing CF and free CF shrank due to the sale of tangible fixed assets and the decrease in the acquisition of tangible fixed assets. Financing CF increased due to an increase in long- and short-term borrowings. The cash position improved.

3. Fiscal Year ending December 2023 Earnings Forecasts

Forecasts of Consolidated Business Results

*Unit: million yen.

In the term ending Dec. 2023, sales are expected to increase 29.1% year on year to 2,481 million yen, and operating income is expected to turn positive as it will increase 108 million yen to 54 million yen. The FC business plans to open 35 new laundromats, mainly in Kyushu. The company will continue to focus on improving the profit structure by strengthening the “coin-operated laundry business platform,” such as the advertising business on the WASHHOUSE app and the in-house production of detergents. Dividends will not be paid as in the previous term.

4. Topics

◎ Looking back up to 2022
2019: Established WASHHOUSE (Thailand)
Established WASHHOUSE (Shandong)
2020: The first wave of COVID-19, which made it impossible to travel to China and Thailand
× Original washing machines/dryers
× Opening laundromats in Thailand and China
〇WASHHOUSE app released
〇Advertising business
2021: 〇Completion of a detergent factory
2023: Improvement in the possibility to travel to China in March

◎ Major theme: Aiming to complete original washing machines and dryers
What was not achieved due to COVID-19
・In-house manufacturing of original washing machines and dryers
・Increasing the number of advertisements by putting signages at all laundromats.
・COVID-19 did not only impact the business in China and Thailand, but also new laundromat opening strategies in Japan

(Based on the reference material of the company)

What was achieved:
・Application development (mobile phone payment, starting the advertising business!)
・Acquired the patent! Mission-critical system development!
・Detergent and softener factories
・Implementation of a charge-free experiment!

1. Reviewing WASHHOUSE packages and laundromat opening costs to respond to changes
The initial plan was designed to recoup the investment within seven years. However, due to differences in regions, soaring labor costs, and rising construction and equipment costs, the estimated cost of opening a new laundromat augmented to over 40 million yen, but the company reduced it to 31.5 million yen.

①Improving the line-up of washing and drying equipment
②Improving in-laundromat equipment
③Improving the interior and exterior of each laundromat → PR activities can be conducted using the inside of the laundromats, such as posters for products and campaigns. In addition, 3D PR campaigns can be conducted in the app and laundromats.

(Based on the reference material of the company)

2. The shift from ISDN and ADSL to the always-connected online environment and from regular mobile phones to smartphones and tablet terminals have changed the communication and payment environment significantly. The touch panel created a new medium.

(Based on the reference material of the company)

3. While promoting the spread of mobile payment, the company has taken the lead in using software.
It is available at all WASHHOUSE laundromats nationwide.
In addition to cashless payment, you can use multiple convenient functions such as coupons, app discounts, receipt issuance, remaining time display, and notification of the end of the washes.
Payment can be made cashless without using coins (currently, 11 methods are supported, including VISA, Master, PayPay, and mobile carrier payment)
A PUSH notification is sent when the wash is completed.

(Based on the reference material of the company)

The company sends information via the app screen that is always visible during the waiting time for washing and drying.
The company can deliver advertisements four times to users who use the WASHHOUSE app.
・It supports videos and still images.
・It can distribute multiple materials.
・It can change the link destination.
・Detailed segmentation, such as by area, age group, and gender, is possible.
The company has achieved a high click rate of 1.3% to 3.4%, compared to the click rate of 0.1% to 0.7%* for general display ads.

〇 Expansion of the purchasing behavior area
Due to changes in the times, such as women advancing their careers, more and more people are washing not only large bedding but also everyday laundry at laundromats.
In order to spend precious time meaningfully, a new behavioral pattern of "doing something while waiting for laundry" has emerged.
Example: "Shopping for a bit at the supermarket while waiting for laundry."
The company’s approach is based on the purchasing behavior of "doing something while waiting for laundry."
〇 Publication example
Various sponsors participate based on the lifestyles of laundromat users.

(Based on the reference material of the company)

〇PUSH notification advertisement
When used in conjunction with in-app advertising, it can increase user reach.
It is characterized by many users allowing their phones to receive notifications because it is an application that notifies the end of washing with a PUSH notification.
Example: In the case of food EC website measures: PUSH notification is used once per day.

(Based on the reference material of the company)

〇 Coupon delivery
The company has encouraged laundromat visits by utilizing the waiting time of the laundry.
Coupon advertisement can also be delivered. Typically, when you make an app payment, it will be delivered immediately → the company aims to increase the number of laundromat users.
Example: When the company implemented a joint project with a home improvement center, it resulted in coupon usage rate of 80.3%.

5．Conclusions

The company still views the term ended Dec. 2022 as the year in which its earning structure will change through the WASHHOUSE app, so we will continue to keep an eye on it. By March 2023, the number of downloads of the WASHHOUSE app exceeded 340,000, so the app advertisements that utilize the waiting time at a laundromat are beginning to show results. Coupon usage rate is as high as 80.3%. The company also expects to improve profitability through the “WASHHOUSE Package” and major improvements in laundromat designs.

＜Reference: Regarding Corporate Governance＞

◎ Organization type and the composition of directors and auditors

◎ Corporate Governance Report
Last update date: March. 30, 2023
<Basic policies>
Our company will comply with laws, carry out fair and transparent corporate activities, and contribute to the regional community by achieving growth. Additionally, we will strive to gain trust from all concerned stakeholders including shareholders, customers, clients, employees, and the regional community and plan to expand global corporate activities in the future.
Furthermore, we aim to maximize our corporate value by improving the management’s fairness and transparency, making agile adaptation to environmental changes, strengthening our competitiveness, and striving to build a corporate governance structure according to our company’s growth.

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