[edit] Financial Summary

[edit] Recent Updates

[edit] Highlights

On August 23, 2010, the company announced the completion of a share buyback.

The buyback was conducted off-exchange, through ToSTNeT-3 (Tokyo Stock Exchange) on August 23 2010. The buyback price was 1,409 yen per share, the closing price of August 20 2010. The number of shares acquired was 200,000, equivalent to 1.87% of shares outstanding excluding treasury shares. The amount of buyback was 281.8 million yen.

The company announced Q3 FY09/10 results on July 30, 2010.

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[edit] Trends & Outlook

Quarterly Trends

Q3 Results FY09/10

Art Corporation announced Q3 FY09/10 results on July 30, 2010 (see table above). As a percentage of the full year company forecast, the cumulative Q3 numbers were as follows:

• Sales: 73.2% (50.7 billion yen vs. full year forecast of 69.3 billion yen)
• Operating profit: 79.7% (2.6 billion yen vs. full year forecast of 3.3 billion yen)
• Recurring profit: 83.2% (2.6 billion yen vs. full year forecast of 3.1 billion yen)
• Net Income: 86.9% (1.2 billion yen vs. full year forecast of 1.4 billion yen)

Cumulative results by segment are as follows:

• Moving segment: sales 35.0 billion yen (-4.0% YoY), operating profit 3.2 billion yen (-17.3% YoY; OPM 9.2% vs. 10.6% the previous year). The number of moves increased 7.2% YoY, but average prices were lower by 8.2%. The number of corporate moves increased 8.8% YoY, but the average price decreased by 11.5%. Corporate moves were affected by changes in the sales mix; for individual moves generated through agent channels, quantity increased by 29.7%, but most moves were smaller than usual, which resulted in a 13.8% decrease in the average price. For corporate relocations, both the number of moves and average price decreased due to cost controls by client companies. According to the company, previously weak demand from individuals has been recovering since January.
• Transportation segment: sales 5.1 billion yen (+16.5% YoY), operating profit 672 million yen (+1.3% YoY; OPM 13.2% vs. 15.1% the previous year). Transaction volume for furniture and home appliances grew during the quarter.
• Imported Car segment: sales 1.3 billion yen (-35.4% YoY), operating loss of 47 million yen (vs. loss of 167 million yen the previous year).
• Real Estate segment: sales 6.6 billion yen (-7.2% YoY), operating profit of 10 million yen (vs. loss of 27 million yen the previous year). Sales of homes and condos were steady.
• Other: sales 2.7 billion yen (+1.5% YoY), operating profit 142 million yen (+63.9% YoY; OPM 5.3% vs. 3.3% the previous year). Childcare business was strong.

Q3 cumulative results were slightly behind the company plan. The full year forecast was unchanged; the company noted that Q4 will include July and August, months of typically high demand for moving. Additionally, the company expects the completion of some real estate projects to contribute (projects are booked upon completion, and more completions are expected in 2H FY09/10 vs. a 1H-heavy FY09/09). The company’s forecast implies a significant improvement in Q4 YoY: 250 million yen of operating profit vs. a loss of 240 million yen in Q4 FY09/09 (net increase of about 500 million yen).

Q2 Results FY09/10

Art Corporation announced Q2 FY09/10 results on April 30, 2010 (see table above). As a percentage of the full year company forecast, the cumulative Q2 numbers were as follows:

• Sales: 48.4% (vs. full year forecast of 69.3 billion yen)
• Operating profit: 46.2% (vs. full year forecast of 3.3 billion yen)
• Recurring profit: 48.6% (vs. full year forecast of 3.1 billion yen)
• Net Income: 43.5% (vs. full year forecast of 1.4 billion yen)

Q1 Results FY09/10

Art Corporation released Q1 FY09/10 results on January 29, 2010 (see the table above). As a percentage of the 1H company forecast, Q1 numbers are as follows:

• Sales: 41.7% (vs. 1H forecast of 35.1bn yen )
• Operating profit: loss of 191 million yen vs. 1H forecast of 1.6 billion yen
• Recurring profit: loss of 214 million yen vs. 1H forecast of 1.5 billion yen
• Net income: loss of 177 million yen vs. 1H forecast of 640 million yen

Q1 sales were 14.6 billion yen (-4.1% YoY). Results by segment are as follows:

• Moving segment: sales 9.0 billion yen (-7.1% YoY), operating profit 157 million yen (-43.8% YoY; OPM 1.7% vs. 2.9% the previous year). Number of moves increased YoY, but average prices were lower.
• Transportation segment: sales 1.7 billion yen (+7.5% YoY), operating profit 154 million yen (+25.6% YoY; OPM 8.9% vs. 7.6% the previous year). Transaction volume and customers grew during the quarter.
• Imported Car segment: sales 651 million yen (+4.6% YoY), operating loss of 9 million yen (vs. loss of 91 million yen the previous year).
• Real Estate segment: sales 2.3 billion yen (+0.8% YoY), operating loss of 83 million yen (vs. loss of 90 million yen the previous year). Sales of homes and condos steadily increased.
• Other: sales 958 million yen (-9.2% YoY), operating profit 74 million yen (+7.4% YoY; OPM 7.8% vs. 6.6% the previous year). Childcare business was strong.

On a consolidated basis, the company reported an operating loss (increased YoY), despite the fact that SG&A expenses declined (SG&A/sales fell from 24.4% to 23.3% YoY). Non-operating expenses and income fell YoY (income by a larger amount) which pushed recurring profit to a bigger loss YoY. Extraordinary items were minor.

There was no change to the FY09/10 forecasts.

Full year (FY09/10) Outlook

Sales

The company expects sales to increase 1.9% YoY, driven by improvements in increases in the Moving and Domestic Distribution businesses. The company hopes to improve Moving sales by improving the corporate sales channel and boosting individual moves through promotion efforts (including discounts offered through Post Office introductions). Domestic Distribution sales are expected to improve YoY, however the company expects OPM to decline.

In the Imported Car Sales segment, sales are expected to decline YoY, reflecting a shift to more pre-order sales (vs. carrying inventory) and maintenance.

Sales in the Housing business are expected to decline slightly YoY. The company suggested that FY09/10 will be a year of reduced risk for the segment via a “wait and see” approach to judge the market conditions.

Sales in the Other segment are expected to increase YoY, through expansion of contract arrangements with day-care centers inside the hospital in Childcare business. The company expects to have approximately 120 childcare facilities in operation at fiscal year-end.

Operating Profit

Consolidated OP is expected to increase YoY, along with a slight increase in OPM. The company expects OPM improvements in Housing and Imported Car Sales segments vs. FY09/09 losses (see table above for segment OPM estimates).

Recurring Profit, Net Income

If the company achieves full-year RP and NI estimates, FY09/10 would be the third consecutive year of improving margins after bottoming in FY09/08 (FY09/08 RPM was 3.8% vs. 4.2% FY09/10 estimate; FY09/08 NPM was 1.0% vs. 2.0% FY09/10 estimate). SR Inc. notes that yearly balance sheet leverage has been in decline from FY09/04 (assets / equity 3.2x vs. 2.4x in FY09/09), so an improvement in margins should be viewed in the context of lower balance sheet leverage: improving profits with reduced risk.

Future Outlook

Art’s longer-term sales target is approximately 100 billion yen (10% OPM), an increase of about 44% of FY09/10 estimates. The two possible scenarios: steady growth or M&A. Considering the first possibility: if FY09/10 through FY09/12 sales targets were achieved, the annualized growth rate (FY09/04 through FY09/12) would be about 5%. Compounding FY09/12 sales by 5% per year, the 100 billion yen target could be attainable by roughly FY09/19 (about 7.5 years). The other possibility, M&A, has been used in the past, and the company has suggested that it may do so again to expand non-core areas (Domestic Distribution and Childcare business).

The company’s 10% OPM target could be considered aggressive; OPM from FY09/06 through FY09/09 has averaged 5.9%. On a per-segment basis, only the Moving and Domestic Distribution businesses have achieved these levels (see Business Description).

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[edit] Business

[edit] Business Description

Art Corporation’s core business is providing moving services primarily for households; the end customers are both individuals and corporations (employee transfers). Other businesses include a domestic transportation service, home building and condominium development, and childcare.

Source: Company processed by SR Inc.

Main Business Segments

Moving (90.6% of FY09/09 Operating Profit, 62.5% of FY09/09 Sales; before elimination)

The Moving segment is the core business. Most moves are residential, with a comprehensive service menu available (see By The Way). The customers are individuals, coming from either a direct or a corporate sales channel (office reassignments requiring a residence move as well as moving services for individuals generated through various agent channels). In terms of service execution, individual and corporate relocations are the same, and difference is essentially only in contract origination.

The company has two brands: Art0123, and Duck (smaller-sized moves catering to students and singles, principally in Tokyo/Kanto). The majority of the company’s moves are under the Art0123 brand (85.9% of FY09/09 moving revenues), with corporate sales accounting for 59.3% of FY09/09 Art0123 branded moves.

Source: Company processed by SR Inc.

Art focuses on providing a high level of service to customers. The package offered to customers includes packing items before the move, transporting packed boxes and furniture to the destination, unloading and setting up furniture, unpacking, with optional cleaning and electronics installation service. The company says that “service first” is a key element of differentiation from competitors. The company created the Customer Satisfaction office in the early 1990s, when overall response levels were approximately 10%. In FY09/09, approximately 57% of customers return comment cards, 91% indicating satisfaction with the service.

Domestic Distribution (17.7% of FY09/09 Operating Profit, 12.2% of FY09/09 Sales; before elimination)

The Domestic Distribution business provides third party logistics services. The company offers storage at its warehouses and a fleet of various sized trucks (from micro-trucks to large trucks) for delivery service of multiple types of goods through the utilization of Moving know-how (mainly the dry cargoes). This business has historically delivered operating profit margins similar to the company’s core moving business (see table above), and is an effective way to increase utilization of assets for the moving trucks.

As of FY09/09, the top 5 clients for the segment:

• Sanyo Electric Logistics (JASDAQ 9379, logistics for consumer electronics)
• Nitori (TSE 9843, furniture and interior goods sales)
• Daikin affiliate (TSE 6367, manufacturer)
• Sharp (TSE 6753; consumer electronics)
• Kintetsu World Express (TSE 9375; freight forwarding, logistics)

Imported Car Sales (255 million yen operating loss in FY09/09, 4.1% of FY09/09 sales; before elimination)

Business in the segment is automobile sales and maintenance for luxury cars (Mercedes AMG, Ferrari, Bentley, Porsche, etc.). The business had historically imported both pre-ordered cars and those to be held in inventory for sale, but the company has indicated a future focus on pre-ordered cars and maintenance service (reducing inventory risk).

The segment is minor, and has a limited impact on overall company results.

Housing (272 million yen operating loss in FY09/09, 12.8% of FY09/09 sales; before elimination)

Operations in the Housing segment are primarily building custom homes, homes built for sale, and condominiums. The custom home business has typically been the historic focus, although condominium development was emphasized from FY09/05 through FY09/07. The strategy for this segment is to maintain and improve current level of operations while reducing risks. Growth agenda has been put on hold.

The segment has contributed approximately 4.0% of operating profit since the company began reporting the segment (FY09/06), not including the operating loss in FY09/09.

Other (2.9% of FY09/09 Operating Profit, 8.5% of FY09/09 sales; before elimination)

Main business in the Other segment includes Art Childcare (nursery service) and merchandise sales.

Art Childcare operates nurseries in 112 facilities across Japan (over 70 hospitals, and select R&D facilities, as of April 2010). The company is committed to growing the Childcare business, noting that childcare is a very service and reputation-dependent business, characteristics similar to its core moving operations. FY09/09 sales in the segment were approximately 2.26 billion yen (35% of segment total), and the company suggested a medium-term sales goal of 5.0 billion yen (with a roughly 10% OPM target). The company says that the limiting variable for growth is finding and training the right people.

Merchandise sales are generally done in combination with moving sales activity — the salesperson offers appliances or small electronics to customers who are using Art’s moving service. The business has historically been a meaningful contributor segment to sales (3.944 billion yen FY09/09, 62% of segment total, before eliminations).

Main Facilities

The company’s main business is moving, and service takes place at individuals’ homes. Art has sales offices across the country (approximately 100) and multiple call centers. The Domestic Distribution business includes warehouses (one in Osaka, one in Tokyo) for holding customer inventory before delivery.

Business Model

The major revenue generator for the company is the residential moving business (Art0123-brand moves were 91.6% of FY09/09 segment sales), which serves two main customer groups: individuals and corporations (relocations for employee transfers (corporate relocations) and moves introduced through various agent channels (corporate agents)). The sales process for the two differs – the corporate relocations are done under a comprehensive contract with prices set in advance for a specific period; corporate agents and individuals negotiate the price of a move directly with salesperson coming to their home to make an estimate.

Beyond that the service is virtually identical: the end user (the person moving) contacts Art (either from an advertisement or employer suggestion) and then a salesperson provides an estimate of required manpower and trucks. The corporate sales channel can involve “ARTist2” – an ASP service developed in the late 1990s to enable easier employee relocation planning. (The company was an early mover with utilizing IT solutions with its services)

The business is highly seasonal: approximately 30% of all moves per annum is concentrated in March and April, (particularly late March to early April), with another busy period during summer (July to September). Moves made during the peak season are frequently for longer distances, which increases the price (a Tokyo-Nagoya move was approximately 250,000 yen for a typical family of four in FY09/09 vs. less than 100,000 yen for the average short-haul family move). The least busy time for the company has typically been in January and June. For corporate relocations, the prices are typically fixed but can change when the comprehensive agreement is renegotiated between Art and the corporate client (yearly).

Although the company offers discounts (customers introductions from certain channels can result in discounts of up to 50% during off-season), prices are roughly based on the amount of property that a customer wants to move. The company indicated that for an average 2LDK (approximately 50 cubic meters) apartment, one 25 cubic meter truck is required along with a few people (optional services can increase the personnel need). Because corporate relocations are mostly long-distance, prices there have typically been higher than for personal moves; however prices for both segments have been broadly declining since FY09/06.

The company indicated that although competitive industry pricing have been a factor in per unit revenue, the reality is that the trend has been for a larger proportion of moves for smaller households and singles (fewer contents leads to cheaper moves). Data provided by the company suggests that although the price per move has been falling, it has been gaining market share (illustrated by the average 6.2% YoY growth of total moves in the table above). The company expects prices to remain sideways to downward, making the number of moves the main revenue driver.

Approximately 25% of per-move costs are related to trucks and transportation, with the remainder mostly related to labor. Costs are managed on a daily basis (per office), focusing on achieving maximum utilization of full-time employees (fixed cost). To improve productivity of the truck fleet (the company owns most of the trucks), the company will shift trucks between the moving company (which is typically busier on weekends), and the transportation business (more active during weekdays). Another technique the company has developed to improve efficiency involves employees: changing moving crew composition during slack periods. During the slow season, most moving crews are all full-time employees vs. the typical crew of one full-timer overseeing several part-time employees during peak periods.

Another aspect of cost control in the business is the IT system. The company developed a management system in the early 1990s to monitor resource utilization and improve productivity of its assets. The company says that the system is relatively sophisticated and unique when compared to competitors’ systems.

Cost Structure

The company’s two largest costs are labor and advertising (averaging 54.8% of SG&A from FY09/04 through FY09/09). Labor expenditures are the biggest single component (averaging 32.7% of SG&A from FY09/04 through FY09/09), and arguably the most important for Art’s business model; the company defines its business as customer service first, so employees are key assets. In the context of the business model, labor costs have fixed (full-employee) and variable components (part-timers brought in to increase capacity during busy periods).

Advertising expenses are variable. The company has suggested that the “right” mix varies due to the changing effectiveness of its mix (the company advertises on television, the Internet, as well as other media, but has suggested that the Internet is becoming more important to reach customers).

Profitability Snapshot, Financial Ratios

Gross profit margins have been largely stable at approximately 26% from FY09/04 through FY09/09. Operating profit margins have been in a declining trend (from 6.6% in FY09/04 to 4.4% in FY09/09) due in part to fixed labor costs (increased from 7.5% of sales in FY09/04 to 9.5% in FY09/09).

ROE has declined sharply from 16.1% in FY09/04 to 7.5% in FY09/09. Using DuPont analysis it is possible to split ROE into three factors (net profit margin, asset turnover, and an equity leverage factor computed as assets / equity) to see “what” causes changes in ROE. The company’s net profit margin has declined by roughly half, which has eroded ROE through lower leverage (profits were less, and equity increased).

SWOT Analysis

Strengths

• Focus on consistent levels of service. Art’s business had been built over years with an emphasis on customer service. Art is specializing in individual moves and that set the stage early on for the service focus. SR Inc. feels that this focus and long experience give credence to the company’s claim it is capable of delivering high levels of customer satisfaction on a consistent basis, often doing better than the competition. This strength is arguably a reason why Art has been successful in developing corporate sales – providing corporate customers with reliable, consistent service and few surprises.
• Domestic Distribution Business. The company’s Domestic Distribution business is a competitive strength because its sales can partially offset lumpy demand for moves (the company shares trucks between the businesses) and spare capacity. It further helps by allowing to improve the load on return runs for company trucks. It is possible that competitors without a similar capability could be forced instead to cut prices to improve utilization of assets, impacting overall profitability.
• Strength in Corporate Sales. Corporate relocations have higher average prices per-move than for individuals (see Business Model) and provide a steady flow of guaranteed users, a scarce commodity in the moving business where salespeople generally need to face-off their competitors every time they try to close a deal. As price competition persists for individual moves, a supply of the stable and higher revenue business is an important resource to boost asset utilization (improving competitiveness) and profits.

Weaknesses

• Limited differentiation possibilities in the core business. The company’s core business is focused on the shrinking domestic moving market. The industry is competitive and crowded. Furthermore the service is hard to truly differentiate. It is true that the company has achieved remarkable success and steady growth both in sales and market share over years; however sustaining the growth is getting harder. The company needs to continue to look for higher efficiencies and small breakthrough growth opportunities (large corporate customers, M&A, complementary revenue sources etc.).
• Non-core businesses underperforming Moving business. The company’s moving business has shown relatively healthy growth from FY09/04 through FY09/09 with respectable operating profit margins. The company’s expansion into Housing has added volatility to earnings and free cash flow without any obvious benefits. The company’s Moving business has been offsetting erratic performance in Housing and possibly taking a disproportionate amount of management attention.
• Business model based on higher labor costs. The company’s full-time employees have been with the company for relatively longer periods of time than competitors (see Competition). Employees earn higher salaries with tenure, raising the question if productivity and contribution to the added value of Art services increase with age or instead reach a plateau. Arguably the company’s service-orientation benefits from more experienced employees, but falling average moving prices could mean that the company has to work harder to overcome incrementally higher labor costs.

Group Companies

Fully owned subsidiaries:

• ART Van Lines USA, Inc. – subsidiary in the US offering moving services
• ART Van Lines (H.K.) Ltd. – subsidiary in Hong Kong offering moving services
• ART Van Lines (Osaka) – logistics and transportation business in Japan
• ART Planning (Osaka) – subsidiary involved in real estate development
• Footwork International (Osaka) – subsidiary involved in online and catalog retailing (ART Shopping service)
• Grace – operates licensed nurseries in several locations across Japan.
• Coty – engaged in the operation of nurseries and childcare facilities at hospitals and corporate sites

Other subsidiaries:

• Duck (90.0% ownership) – moving business, focused on the Kanto region (Tokyo and surrounding areas). See Business Description for additional discussion.

Group Strategy

Art’s stated group strategy is to become a “life style” company (providing helpful daily services) with the Moving business providing a source of financing and marketing base. The company aims to use the Art0123 brand image to cross-sell group services (Housing, Domestic Distribution, etc.) to core Moving customers and vice versa.

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[edit] Market & Value Chain

Market Overview

Art’s market is moving services. The company estimates that there were approximately 2.32 million moves in Japan during 2008 and assuming an average price of 100,000 yen per move, the total market size is approximately 232 billion yen. The number of moves per year is a result of two factors: population trends (more people mean more moves) and overall levels of economic activity (fewer people move during recessions). Population and migration statistics provided by the Ministry of Internal Affairs and Communications indicates that the moving rate as a proportion to population has steadily declined from 10.3% in 1996 to 8.4% in 2008. The decrease in the moving rate suggests that on average, the frequency of moves is declining (once every 10 years in 1996 vs. every 12 in 2008). Assuming an average lifespan of 82 years (source: CIA World Factbook, 2009), this suggests that as of 2008, the average person in Japan will move 7 times during their life, vs. 8 for 1996 data. The implications for companies in the market is a reduced number of annual moves, but also a drift to less expensive ones as well (early and late moves in life are less expensive than those with children, etc.). The shift in moving frequency could partially be due to changing social prerogatives: employees had historically been dedicated to one employer, making work-life a priority. SR Inc. speculates if a shift to balancing family obligations could be making an incremental impact.

Along with a decrease in the absolute number of moves per year, the company estimates that more moves are smaller and for shorter distances which has lead to downward pressure on prices and increased competition.

With respect to competitive positioning, the company estimates that its share among the top 4 moving companies has been on an increasing trend. Competitor Sakai Moving has also been increasing share (moving caseload has increased approximately 9.4% per year since 2004; revenue annualized growth has been about 9.3%), possibly indicating that moving specialists have been gaining share at the expense of major logistic companies and small size moving specialists.

Considering the Art’s share of the total moving market, the company estimates that its total share has been increasing. The number of total moves performed by Art has been increasing by approximately 30% since FY09/05; the majority of these moves have been for corporate relocations (approximately 50.0% since FY09/05). (See Business Model for sales composition)

Market Growth

Structural growth for the Japanese moving services market seems unlikely given demographic trends. Ministry of Internal Affairs and Communications data provided by the company included an estimated population decline from 127 million people in 2005 to 89 million in 2055), other things equal. Whether or not such estimate proves to be a correct one, this trend and continued concentration of the population in the largest urban areas suggest fewer customers, fewer moves, and shorter distances.

Customers

The users of the company’s service are individuals (office moves represent a negligible part of the total revenue); paying customers can be split in two groups: individuals and corporations. Both groups have a relative advantage in bargaining power. When choosing the movers, individuals have very low search and switching costs. Corporate customers are an important part of the company’s business (relocations cost more and are a source of repeat business). Comparing both customer groups, both have a relative advantage, but corporate customers probably more so.

Suppliers

The company has the power in relationships with most of its suppliers (there is no shortage of truck manufacturers in Japan). To the extent that employees could be considered a supplier of labor, the balance is probably roughly equal (apart from being protected by strict Japanese labor laws, unionized employees are approximately 65% of the total workforce).

Barriers to Entry

Low for individual customers. Few tangible assets are required to offer individual moves (basically trucks). For corporate business, the requirements are higher. A nationwide network is essential to offer long-haul service, and the company suggests that sales expertise and experience is necessary for handling corporate customers.

Competition

• Sakai Moving Service (TSE 9039) – Main focus of the business is moving, the most comparable firm to Art (FY03/09 sales were 49.0 billion yen vs. 46.4 billion yen sales for Art’s Moving segment, including Duck, in FY09/09). It should be noted that in some regions 0123 branded service is provided by franchisees – adding the franchisee sales, the total sales for the moving business were approximately 49.3 billion yen (of which 0123 brand – about 45.4 billion yen). Sakai handled 486,934 moves in FY03/09 vs. Art’s approximate 296,000 (suggesting that Sakai’s total move price was about 100,000 yen vs. 155,000 yen for Art using revenue/moves). Sakai is larger in terms of employees (7,848 incl. temp staff as of FY03/09 vs. 4,653 moving segment employees reported by Art in FY09/09), with higher turnover (average 4.2 years of service vs. 6.2 for Art).

• Yamato Holdings (TSE 9064) – Dominant in small parcel delivery in Japan (main business), also offers moving services. According to the FY03/09 annual report, the moving business generated revenues in excess of 53 billion yen with an operating loss of 340 million yen. Yamato’s approach to the moving business was to leverage its small parcel delivery service infrastructure, which has met with limited success. Although the two services are similar concepts (moving goods), the know-how to sort and send high quantities of small parcels presents different challenges than managing multi-person moving crews and providing profitable price estimates.

• Nippon Express (TSE 9062) – Ground transportation specialists. The company has a formidable presence in domestic logistics in Japan (arguably the market leader) as well as worldwide presence. The company offers moving services, however the majority of its business is related to logistics (over 80% of FY03/09 sales). According to Art, Nippon Express is a competitor in a broad sense, but its limited focus on the moving might be leading to different levels of commitment to the moving business (Art’s core; an add-on service to Nippon Express’ logistics network).

Substitutes

There are limited practical substitutes to moving services for most customers.

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[edit] Strategy

Art’s strategy has been to differentiate its services from competitors by emphasizing on high levels of customer service. The moving business has historically (before the acquisition of Duck in 2007) pursued a strategy with elements of both market segmentation (focusing more on family and corporate relocations) as well as differentiation. The acquisition of Duck was intended to provide exposure to smaller and shorter moves, broadening the company’s services line-up. Although the company has been trying to achieve cost and other efficiencies from buying Duck, intense price competition in that market segment has made the transition to a broader market focus challenging.

Other businesses that the company has entered (real estate, nursery operation, etc.) have been based on what the company calls its core know-how: understanding how customers value service. Although the company has achieved a degree of success with its differentiation strategy in the moving business, performance in other segments has been slow to materialize. The company believes however that the Childcare business has significant potential to become a meaningful part of the group business.)

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[edit] Historical Financial Statements

[edit] Income Statement

The company’s top-line sales have been driven by the moving segment (averaging over 60% of total sales from FY09/04 through FY09/09). The trend of positive YoY sales growth was broken in FY09/09 partially due to price competition in the moving business (caseload grew YoY, but lower average prices resulted in lower total revenues).

Operating profit margin has been on a declining trend lead by an OPM decline in the main moving business (OPM has fallen from 12.9% in FY09/04 to 9.2% in FY09/09). Falling OPM in Moving has been somewhat offset by an increase in Domestic Distribution OPM (from 3.8% in FY09/04 to 9.2% in FY09/09). (See Business Description for segment OPM comparison)

Non-operating expenses have typically been mostly interest expense.

The extraordinary loss in FY09/08 was related to an increase in allowance for doubtful accounts (917 million yen) and a write-down on investment securities.

Historical Earnings Forecasts

Sales estimates in FY09/04 through FY09/07 have been reasonable; however company projections for FY09/08 and FY09/09 seem to have underestimated the impact of pricing pressures and declining economic conditions.

FY09/08 operating and recurring profits for the year were lower than initial estimates in part due to higher costs related to subsidiary companies (increasing labor and advertising expense by 1.3 billion yen). FY09/08 net profit was negatively impacted by an extraordinary charge for doubtful accounts (917 million yen)

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[edit] Balance Sheet

Assets

The company’s largest asset categories are fixed assets (buildings and land not held as inventory for the real estate business). The company’s current assets have typically been mostly working capital (receivables and inventory) and cash. Inventories on the balance sheet have been lumpy in terms of sales levels due mostly to the real estate business, which requires relatively large outlays and has a longer sales and development cycle.

Liabilities

Art’s liability structure has been characterized by more current liabilities (typically short term debt) than long term liabilities (FY09/04 through FY09/09). The amount of interest bearing debt has been volatile (from 15 billion yen to 21 billion yen). The changes in debt appear to be related to the Housing business: Moving business assets have been relatively constant (FY09/04 through FY09/09; approximately 15 billion yen) and other segments have smaller asset requirements (see Business Model). This leads to the conclusion that the Housing business has increased consolidated balance sheet volatility from large debt finance requirements. As of FY09/09 the company had 10.4 billion yen of short term credit available from at least 8 different banks (using 4.5 billion yen), suggesting adequate liquidity was available. The company’s weighted average cost of debt (FY09/09) was 1.25% (including adjustments for implied interest rates related to leases).

As of FY09/09, the company had limited off balance sheet obligations: the retirement benefit plan and minimum lease obligations (held off balance sheet) were negligible, approximately 503 million yen.

Shareholders’ Equity

Shareholder equity increased in FY09/05 from the IPO. A securities valuation charge in FY09/06 of approximately 667 million yen accounted for the difference between net income and shareholder equity growth. Shareholder equity increased less than net income in FY09/09 due to stock repurchases (approximately 237 million yen).

As of FY09/09, the company had no reportable stock option information.

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[edit] Cash Flow Statement

Operating Cash Flow

The company’s operating cash flow has been volatile, mostly due to working capital requirements from the real estate business (properties are carried in inventory; the long sales cycle creates a timing difference between increases in inventory and sales).

Investment Cash Flow

The company’s investment cash flows have largely reflected investments in fixed assets to run the business (vehicles, etc.); however the company has also made investments in securities and real estate. The large outflow in FY09/07 was related to the acquisition of Childcare business.

Financial Cash Flow

The main component shaping the company’s financial cash flows has been the issuance and repayment of debt. The company raised approximately net 2.1 billion yen in long term debt in FY09/05 and repaid net 2.5 billion yen the following year (FY09/06). The net inflow during FY09/07 was mostly due to a 6.3 billion yen issuance of short term debt, of which 1.4 billion yen was repaid in FY09/08. The outflow in FY09/09 was the result of debt repayment net (4.5 billion yen short term, 216 million yen long term).

The IPO during FY09/05 produced 1.6 billion yen of cash.

Simple Free Cash Flow

Art’s simple free cash flow has been mostly negative (using cash) from FY09/04 through FY09/09 due in part to changes in working capital related to the real estate business. The relatively large value for individual pieces of inventory (property) has the effect of making working capital changes lumpy.

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[edit] Other Information

[edit] History

Source: Company processed by SR Inc.

June 1972 Licensed freight business in Osaka with capital of 10 million yen. Terada Transport Corporation

February 1976 Entered the moving industry.

June 1976 “Art Moving Center” created to focus on moving business

June 1977 Art Moving Service Co. established in Osaka City; 5 million yen capital

June 1977 Added the 0123 telephone number to the company strategy

October 1977 Began advertising in Town Pages telephone directory.

June 1990 Change of name to ART corporation

September 1990 Osaka showroom for imported cars business

October 1993 “One-stop service” moving service started

April 1995 Tokyo showroom for imported car sales business

December 1995 Started using Doraemon character

August 1997 Established “Art Van Lines Co” for logistics

August 1998 Acquired ABC Japan Corporation, entering the residential real estate market.

October 1998 ABC Japan Corporation changed name to Art Planning Corporation

September 1999 Corporate relocation system ARTist2 developed

October 2001 Merged Terada Transport Corporation with Art Moving Center, Art Trading Co

October 2004 Listed on TSE and Osaka

October 2005 Moved to first section of TSE, OSE

January 2006 Acquired Footwork Ltd.

September 2007 Acquired Grace Corporation

October 2007 Acquired Duck Corporation

The company’s history traces back to 1968, when Terada Transport Corporation was founded in Osaka. The 1973 oil crisis put strains on the freight industry in Japan, forcing market participants to look for other opportunities for fleet utilization to offset costs. At the time, the moving business in Japan was non-existent. Moving services available were mostly truckers who were trying to make extra money with their trucks. Chiyono Terada, the founder’s wife, saw the possibility for a market (providing a moving service in an organized fashion), and the company entered the moving business in February 1976.

The company began advertising and developing the moving business in earnest in late 1977, with marketing efforts centered on the “0123” brand and placement in Town Pages telephone directory. The company continued to open branches across Japan during the late 1970s, and made its first overseas expansion in 1986 to the US.

The official name of the company changed to “Art Corporation” in 1990, and Art expanded into the car import and sales business the same year. Art expanded into housing in 1998.

ARTist2 was developed in 1999, providing the platform to grow the corporate relocations business.

The company listed on Osaka and Tokyo stock exchanges in 2004, and moved to the first section of the TSE in 2005.

Following the IPO, the company was on the acquisition path: buying Footwork International (online and catalog sales) in 2006, followed by Grace Corporation and Coty (both childcare service providers) and Duck Corporation in late 2007.

The acquisition of Duck Moving Center has been a relative disappointment for the company. Initially pursued as an avenue into both Kanto and smaller moves, the business has been unable to achieve similar margins to Art0123. The main reason for lackluster performance has been falling prices in small-moves and advertising costs. When the company bought Duck in 2007, prices were increasing but prices later fell.

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[edit] News & Topics

The company announced on June 4, 2010 that the company Chairman Toshio Terada had turned in his resignation which was accepted effective immediately. The resignation was to take clear personal responsibility after criminal charges were filed with the prosecutor’s office accusing Terada of “improper acts”.

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[edit] Top Management

Chiyono Terada is the President. She led Art’s push into the moving business in 1976 when Terada Transportation Corp. created Art Moving Center (see History). Terada became the President of Art Moving Center Co., Ltd. in 1977, and has been the key person responsible for the emphasis on customer satisfaction during the company’s growth. Art Moving Center Co., Ltd. changed its name to Art Corporation in 1990. Terada joined the Board of Directors for Daikin (Domestic Distribution customer; see Business Description) in 2002.

Masato Terada is an Executive Director and member of the Board. He joined the company in 1994, and was made the Osaka branch manager in 1998 and a Business Development Director and Board Member in 2000. He has held multiple leadership positions in the company.

Hideki Terada is an Executive Director and member of the Board. Prior to joining the company in 1995, he was with Sharp Corporation. He has been manager of the Taba, Chiba, Tokyo blocks (1999, 2000).

Of the 13 corporate officers, Terada family members occupy 4 posts and are the largest block of shareholders (see Major Shareholders).

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[edit] Employees

The company employed 1,736 full-time employees (the equivalent of 2,917 as part-time) as of FY09/09. Key statistics:

• Average age: 31.8 years old
• Average length of employment with the company: 6.2 years
• Average annual salary: 4.5 million yen
• Unionized. The Art Corporation Union has 3,036 members as of FY09/09 (both full and part-time employees)

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[edit] Major Shareholders

The company’s largest single shareholder is President Terada. The Terada family controls approximately 52% of the company stock.

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[edit] Dividends and Shareholder Benefits

The company’s dividend policy is based on payout amount (vs. payout ratio). (See Per Share discussion in Balance Sheet)

The company’s shareholder benefit program offers gift certificates to be redeemed in the company’s mail order food catalog:

• Over 100 shares for less than a year: 3,500 yen gift certificate (over a year, 5,000 yen)
• Over 2,000 shares for less than a year: 5,500 yen gift certificate (over a year, 7,500 yen)

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[edit] Investor Relations

The company maintains an IR website, and publishes information in both English and Japanese. The company holds results presentations semi-annually.

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[edit] By the Way

Source:Company processed by SR Inc.

Full list of services

Included services (no charge)

• Take away used boxes (within 3 months of the move date)
• Moving large items around in the house (within a month of the move date)
• Installing insecticide sheets beneath tatami mats and carpets
• Installation of anti-earthquake mats underneath furniture
• Installation of damp-proof mats beneath tatami mats and closets
• Family saloon transportation
• Rental of eco-easy box for packing dishes
• One stop service to handle utility connection/disconnection
• MovingOne – provide cost estimates online
• Neighbor introduction service
• Clean Sock service – workers wear new socks
• Furniture Cleaning service – workers will clean the furniture

Paid services

• Packing and unpacking service
• Apron service (storing and smartening up rooms)
• Electrical work – installation and replacement of light fixtures, air conditioners
• Disposal service – removal of unwanted appliances, other goods, etc.
• Piano - moving, tuning
• Automobile moving at the same time as belongings
• Air conditioner cleaning
• Old and new house cleaning & repair
• House modification – maintenance, remodeling of interior and exteriors
• Floor coating of new residences
• Carpet cleaning
• Insecticide and sterilization treatments for kitchens, bathrooms and beneath tatami mats
• Storage – temporary, long term
• Furniture and electronics sales

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[edit] Latest Q&A

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