CHARM CARE CORPORATION Q2 FY2025 earnings call

Consolidated Financial Results Overview

• Consolidated revenue is 20.051 billion yen (+7.9% YoY), operating profit 1.753 billion yen (+11.6% YoY), ordinary profit 1.877 billion yen (+7% YoY), net profit 1.271 billion yen (+11.9% YoY). Revenue and profit for the core care business are in line with plan, driven by sustained high occupancy and improved labor productivity.
• Gains from high occupancy of existing homes offset temporary losses from newly acquired M&A homes, delivering year-over-year growth in both revenue and profit.

Capital and Shareholder-focused Management

• The company's ROE consistently exceeds its cost of equity. Management is currently working to clarify investment return criteria (in addition to existing ordinary profit margin on sales) for new home openings, to embed cost of capital awareness into operations.
• The company targets increasing the dividend payout ratio to 30% over time, balancing growth investment and shareholder returns.

Growth Strategy

• The long-term target remains 100 billion yen in revenue and 10 billion yen in ordinary profit by the 2027 June fiscal year. New facilities scheduled for opening after 2027 June include 4 planned projects: Charm Suite Kyoto Matsugasaki, Charm Suite Higashi-Totsuka, Charm Suite Chidoricho, and Atenity Chofu Shibasaki.
• Rising construction costs and extended timelines have reduced the feasibility of traditional greenfield new openings, so the company will shift focus to M&A and take-over of underperforming existing homes from other operators. The company has a strong track record of turning around acquired assets (such as Like), and is receiving strong pipeline of M&A opportunities.
• The company is developing a new third business pillar, currently piloting an abuse detection/prevention system and developing a new conversational care robot prototype with a new partner (prior robot development with Welwill failed and was written off).

Human Resource Strategy for Labor Shortage

• The company targets industry-leading pay and DX to attract and retain talent: current average annual pay for facility staff is already 300 thousand to 400 thousand yen higher than the union average for major care providers, hitting industry top levels.
• A lean operations project has cut ~90 positions and reduced total labor costs by 0.6 billion yen in the prior fiscal year, through optimized staffing and process improvements. The company continues to deploy AI, IT, and robotics (monitoring devices, communication tools, delivery/cleaning robots) to improve efficiency.
• The company has implemented an optional 3-day work week (4 10-hour shifts per week, allows side work on one off-day) since September last year, rolled out to 90 homes excluding new openings, with over 40% of staff opting in. Mid-career applications have risen 20% YoY, and the system supports workforce rejuvenation and lower hiring costs.

1. Care Business: Total segment revenue is 18.944 billion yen (94.5% of total consolidated revenue), with an 18.2% year-over-year increase in operating profit to 2.378 billion yen. Breakdown: Charm Care Corporation standalone (excluding M&A-acquired homes): revenue 17.507 billion yen (+14.9% YoY), operating profit 2.481 billion yen (+27.6% YoY); Subsidiary Like: revenue 1.057 billion yen (+13.5% YoY), operating profit 0.189 billion yen (+19.2% YoY); 7 newly M&A-acquired homes: revenue 0.378 billion yen, operating profit -0.2 billion yen. Average occupancy rate of existing homes is 94.8%, with Like's existing homes hitting 99.5%.
2. Real Estate Business: Total segment revenue is 4 million yen (0.02% of total consolidated revenue). All major sales are scheduled for the fourth quarter, with the Kita-karasuyama project on track for completion and sale this fiscal year, and 3 total properties planned for sale in Q4.
3. Other Business: Total segment revenue is 1.103 billion yen (5.5% of total consolidated revenue). Good Partners (hospice business): revenue 1.389 billion yen (+56.8% YoY), operating profit 0.069 billion yen (+22.2% YoY). The new abuse prevention system is still in field pilot testing, with profitability expected further in the future. The occupancy introduction business Charm Senior Living is driving move-ins to company facilities effectively.

• Full-year 2025 June fiscal year guidance is maintained unchanged from the initial forecast, despite temporary profit drag from newly M&A-acquired homes, as growth from existing homes offsets the impact. Dividend guidance is also unchanged.
• The prior 3-year medium-term plan's 2025 forecast of 57 billion yen revenue and 5.7 billion yen ordinary profit was revised downward to 50.1 billion yen revenue and 5 billion yen ordinary profit, due to unanticipated construction cost inflation and project delays from 2024 industry issues, and the delayed schedule of the large Kokuryo real estate project to next fiscal year. The Kita-karasuyama project remains on track to close this fiscal year.
• Going forward, medium-term targets will be set after more rigorous scrutiny to avoid large deviations from actual results, addressing prior criticism of excessive upward bias in earlier projections.

• Rising construction costs and extended construction timelines have made traditional greenfield new care facility development less feasible, as target yields cannot be met.
• Industry-wide labor shortage is intensifying: post-COVID economic recovery has increased competition for workers across sectors, pushing up labor costs, and demographic trends will make talent recruitment increasingly challenging for the care sector.
• Hospice operations have inherently higher risk than the company's core paid nursing homes: hospice relies on volume-based insurance revenue (80-90% of total revenue versus 30-40% for core care homes), carries higher risk of overbilling issues and insurance payment revision risk, and has shorter average stays that make operations less stable.
• The care industry is entering a period of consolidation, with increasing rates of bankruptcy and exit among smaller operators, though management views this as an opportunity for growth.

Q: What are the key challenges and improvement outlook for the 5 ex-Care21 homes and 2 CM Care homes acquired via M&A? / A: The 2 CM Care homes are already nearly fully occupied, meeting occupancy targets ahead of schedule, so they are expected to contribute to profit quickly. The 5 ex-Care21 homes had very low initial occupancy (60 occupied units out of 368 total at handover), which has improved to ~140 occupied units as of the quarter, with Charm Suite Toyosu already turned profitable. Improvements are progressing on plan, with occupancy expected to continue rising gradually to target levels over time.

Q: Why has the number of vacant take-over (nuke-nuki) deals increased recently, and what is the current pipeline status? / A: More small and mid-sized care operators are exiting the market due to worsening labor shortages and inability to cover rising costs, which has increased the supply of available vacant home deals. The company is prioritizing these opportunities as a lower-cost alternative to greenfield development, and has a steady pipeline of candidate properties under review that fit the company's return criteria.

Q: What is management's view on the recent industry-wide improper billing issues for hospice care, and what is the company's own exposure? / A: The company notes that most hospice operations have a very high share of volume-based insurance revenue, which creates natural incentives for overbilling, unlike the company's core fixed-fee paid nursing home business. The company's own hospice business follows strict internal billing controls aligned with regulatory requirements, and has no history of improper billing to date.

Q: How did the company improve Like's occupancy rate so dramatically after acquisition? / A: The improvement came from Charm Care's existing specialized move-in sales capabilities, which leverage the company's brand recognition, dedicated sales team, and the occupancy referral business to drive consistent new move-ins. The company also adjusted staffing and service offerings to match market demand, which quickly lifted occupancy from pre-acquisition lows to the current near-full level.