UT Group Co Ltd

TSE:2146

Earnings Call Transcript 2021-Q1

[若山 陽一, executive]

Let me explain about details of our first quarter results. I'm starting with topics. In the first quarter, as we were under the COVID-19 pandemic, we took several actions to enhance our revenue-generation capability to prepare for next pickup of demand. First of all, UT Global, operating managerial agency services for foreign technical interns were absorbed and merged into UT Aim for better efficiency as we were not able to expect immediate recovery of demand under the current COVID-19 pandemic. Then we have split our company, UT Technology into 2 parts to offer one-stop service to our clients, mainly by UT Aim. Design and development engineer dispatch business focusing on manufacturing sector was integrated with UT Aim as strong synergy impact could be expected; and then remaining part of the UT Technology, concentrating on the IT sector. This reorganization was to build up an organization, which offer high level of convenience to our clients. In addition to that, we made a decision to sell the web development engineer service as we were not able to expect further room for growth. This means we have reorganized ourselves, promote our business further with efficient use of our management resources by being free from traditional organization. We also have added 5 companies into our group via M&A. One of the acquisitions was based our area platform strategy. A company in Osaka called Support System has joined the UT Group since April, along with the idea to enhance our partnership with medium-sized dispatch company in the local area. In Solution Business, we acquired 3 companies from Toshiba Group in Q1 and then 1 from Hitachi immediately after that. As a result, our Solution Business now has a number of strong players. We started from Panasonic, then Hitachi Group, Fujitsu and this time Toshiba and another one from Hitachi. And now we are pretty much ready to support structural reform activities of our clients, mainly in electronics industry. We believe the acquisition of these companies were very meaningful to us as we could add companies that business strategies we're already matching with us well. As for the impact of COVID-19, fortunately, suspension of operation has been so far limited. This chart is about the impact of suspension or closure of operation. The bars represent the number of our dispatch technical workers affected. And as you can see, after hitting its peak in May, still over 2,000 were affected in June. However, in July, it became less than half of that to below 1,000 and we now expect further significant drop in this month, August. Although, we were expecting the impact prolonging into future months, but instead, we are now fortunate to be observing quite rapid recovery in last few months. So it might be possible for us to see no workers affected in September. Likewise, we now expect the impact of our clients' production adjustment to the reduction or cancellation of our dispatched workers would be weaker in August and then almost disappearing in September. So as we are moving second half of the year, it is important for us to realize positive net increase of the workers dispatched. In the second half, we need to try to bring ourselves back from defensive attitude to our original business activity level as much as possible and accumulate numbers further in the second half so we would be able to build concrete base to achieve our medium-term business plan targets. Therefore, we need to have strong sales activities in the second half. Now let me explain financial highlights of the first quarter. But before doing that, I want to explain about changes in our business environment. Although, we enjoying positive growth in last several years, the situation has become tougher since last year. Descriptions in red are negative macro environment changes. Firstly, with U.S.-China trade conflict, clients' manufacturing activities overall started changing in several different ways. In addition to that, global pandemic of novel coronavirus hit the market in the fourth quarter. So we needed to have very much defensive scenario. As I mentioned earlier, it was really good for us to start reorganizing our group companies and took actions to prepare for improved of our productivity for better efficiency in proactive manner. We are supported by clients, especially in semiconductor and electronics components sector and also automotive-related one. As for electronics clients, they continue to suffer with weak smartphone demands and were not increasing the number of workers very much. However, in the second half, we would like to expect much from 5G-related products demand, which is already growing. Descriptions in blue are positive factors. And in addition to the 5G, expectation of strong sales of products with which people can work better from home or non-office environment as the use of remote working style are being promoted under the COVID-19. Automotive industry was in very good shape before the increase of consumption tax rate. However, the auto-related demand started to drop after the tax hike that slowed down their demand to add workers. Then COVID-19 further impacted our business even more severely. In the automotive sector, automakers stopped their plant operation one after another due to the pandemic. Even though the actual impact to us was somewhat limited, but still the very much defensive situations continued for us throughout the quarter just ended. Now we would like to be well prepared for upcoming recovery in automotive sector as we now expect recovery in their production planning from the second half of the year. This has been about the environmental changes we recently experienced. This page is for the highlights of consolidated results of first quarter. As I explained earlier, first of all, some of our clients temporarily suspended their factory operations due to the spread of COVID-19. On the other hand, our approach to minimize the suspension and accumulated effort and the negotiation based on our area platform strategy has been bearing its fruit and we were able to sustain our sales and profit, even though we were expecting much larger decline in both of them. In addition to that, with 4 additional companies acquired and consolidated, we were able to increase the number of technical employees. So with this as an established base, we would like to further accumulate the number of them. As you can see, in terms of year-on-year changes of the quarter, net sales has hit the highest level and EBITDA hit JPY 1.935 billion. That means we could have a very good start for the year. Number of employees also hit the record high. Well, this is a summary of our income statement. Year-on-year change in our net sales was most flat. That means we can say, we were able to manage protecting our profit very well. Gross profit declined slightly to JPY 4.634 billion as being affected by the suspensions of operations. Even under the suspensions, we continued paying salary to our employees. That means we can still say we protected our profit relatively well under the circumstances. And SG&A spending declined slightly due to a certain level of improvement in productivity. And as a result, our operating income for the quarter was JPY 1.763 billion, and EBITDA was JPY 1.935 billion. We were able to make better-than-expected profits. And as I mentioned, it was good for us to add more employees. Partly due to the M&A and consolidation, the number of employees have recovered to 21,000. That was very good for us. As we keep trying to add more employees, we would like to continue our effort to accumulate our sales as much as possible in the second quarter and onward. This is about quarterly changes for the point I just explained. If you keep following the numbers of the first quarter from previous years, you should be able to understand that the first quarter results this year was better than that of previous years. It was also better than last year. EBITDA was JPY 1.935 billion, and that was obviously larger than the same quarter in the past years. The EBITDA has been almost doubled in 3 years. That was due to the overall profitability improvements and several activities we have implemented. This year, we are trying to rationalize our own internal operations, and our clients also have started accepting our price revisions from this first quarter based on same work, same pay policy standards. These things worked well and helped us to set record of quarterly EBITDA amount, so we continue to work further to maintain and even enhance this situation from the second quarter and onward. Summary of balance sheet. There are no major changes here. Cash and deposits increased slightly to JPY 24 billion as we increased our borrowing to prepare for COVID-19 impact. As for the borrowing, we have JPY 2.8 billion as short-term borrowing and long-term ones to be paid within that year and JPY 10.3 billion as long-term debt. So total of debt is about JPY 13 billion. Against the JPY 13 billion of debt, we have the cash position of JPY 24 billion, that means we have JPY 10 billion more cash than debt. We also have JPY 16 billion of shareholders' equity and goodwill against that is about JPY 1.8 billion. So that means we have almost no risk of impairment. This means we still managed to maintain this sound condition of our balance sheet. Although we have a little more cash on deposit than before, with more borrowings due to the COVID-19, as I just explained, we currently have excess cash. And based on the need of working capital, we can also say we have stronger cash position than before. This happened because we used an assumption of the negative impact of COVID-19. If we were not facing against any downside risk with the virus, we may need to consider what to do with the excess cash, whether to return them to shareholders or, in case we start seeing the situation where we can actively make investment, we also need to consider the option. Now we have more options in management, therefore, we would like to seek for further growth with solid actions. As for the net sales by segment, as I described earlier, overall changes was flattish. However, Manufacturing Business sales were down by 15%. On the other hand, Solution Business sales almost doubled as demand in the business tends to emerge when our clients conduct structural reform programs. That means we have built up the business structure where Manufacturing Business of dispatching workers grow well when the economy is moving towards upward cycle. And Solution Business of companies we acquire due to the business restructuring grows when it is toward downward cycle. We were able to prove this with the results this time. When the economy is strong, our company grows with Manufacturing Business. And when it is weak, we grow with Solution Business. This is a very unique business strategy as a company. And we also believe we are going to have more room for further growth in the Solution Business. So we want to work harder in this area. Sales of Manufacturing Business was down by around 15%. However, fortunately, the number of technical employees were down only by 4.3%. Adding more companies as consolidated ones were part of the reason. As we maintain the number of technical staff, this should lead us to higher sales in the future. So this is a point we have been focusing very much. And against the circumstances we are in, I think we are managing well to keep us in good shape. Well, these are the changes in our Manufacturing Business. This page is about Manufacturing Business sales by client sectors. Overall sales were down by 15%. However, electronics was down under 10%, thanks to our client support. This was really a good result for us. On the other hand, sales from automotive-related clients declined very much as their suspension of operation was prolonging in large scale. So our sales was significantly down by 39.3%. So we were affected in this market, but other sectors covered part of that decline. So we were able to manage around this level. This page is also about Manufacturing Business by sector, as I just explained. Next is Solution Business, which showed a strong growth. Demand of the business has reached to unimaginable level that you may never expect with usual activities. The Solution Business is different from worker dispatching business where small revenue amounts are accumulated. You can realize dramatic growth by closing every deal, by taking care of operations of entire sections of client companies or by acquiring the group companies along with their reorganization activities. Our clients are in the middle of the structural reform that is about business structural reform and employment structural reform. The employment reform means about reviewing the distribution of full-time, dispatched and contracted employees. Even today, many large companies still have a large number of full-time employees. That means frequency of use of dispatched workers would keep moving higher. As their business and employment reforms continue, especially in the next few years, we expect to enjoy stronger demand and opportunities to take over their businesses. So by enhancing our sales team with a designated team, we offer services to satisfy their demand that leads to higher sales. So the Solution Business could grow significantly, as I just explained. Let me briefly explain about the companies we have added into our group in the Solution Business. Three from Toshiba Group that are UT Toshiba, UT Business Service and UT System Products. Mito Engineering Service was a part Hitachi Group. With these acquisitions, we added 1,085 employees from the 3 Toshiba companies and 390 from Hitachi to UT Group. With this Solution Business achievement, we would like to create the future of our outsourcing services together with them. Next is the Engineering Business. Engineering Business, especially its net sales somehow managed to stay flat, but its EBITDA grew significantly. One of the reasons was, from last year, when we had a difficult time to allocate new college graduates, we hired over 1,000 college graduates as a group total and accepted all of them in April. That was the record-high level we never had experience in our company's history and that really was a big challenge for us. With this experience, however, we now have better organization to support the college graduates. And this year, we were able to manage allocation of 500 or so newly hired ones with assignment. This means we were able to reduce initial cost of those newly hired college graduates. As a result, although we usually have hard time to post strong profit in the first quarter every year, we could have a strong start this year with operating profit of JPY 0.6 billion even in the first quarter. The number of technical employees increased quarter-on-quarter. This is about Engineering Business sales by sector. Engineering sales tied to manufacturing sector dropped by around 5% as affected by production adjustments in the overall market. On the other hand, it was very good to see the sales from construction engineers grew by 16.5%. From now on, we expect 5G- or IT-related demands to grow bigger so we want to develop our opportunities in IT engineer sector to make them much larger. For that, we have split the company to create specialized one in the market and also collaborating with our joint venture with Fujitsu called Fujitsu UT. So this is about the situation, too. As for the forecast fiscal 2020 ending March 2021, we originally assumed the worst-case from April to June but successfully managed to prevent that happening and protected our business. We are also implementing our own organizational reform programs that are helping us to accumulate more profit. M&A and business partnerships are expanding our revenue base. Based on these, we made a great progress than our original expectation in the first quarter as we did whatever we could do and made an achievement. Having said that, we decided not to change our forecast for this fiscal year as initially planned with COVID-19. Because it is difficult to predict the development of the infections and estimate the spread of the virus in and after the second wave. Although our clients are almost ready with production recovery plans from the second half, but it is still not very clear about the impact of the COVID-19 in their manufacturing plants. So as we just finished the first quarter, we decided not to clear our original forecast but stayed with them. However, by the time we finish the second quarter, we would like to review the situation carefully and continue to do so every quarter. As an additional information, let me explain how we make the net sales forecast. The base sales for this year are forecasted as JPY 103.8 billion. From this baseline sales, this area in green means 14% decline in sales assumed in existing businesses. And that would be covered by sales of companies we are adding by consolidation. So in the end, we are landing with flat growth. So in order to take upside from this baseline, we need to make this forecasted decline in sales to smaller percentage, then we will be able to take upside. But we are not ready to promise that happening. This means our challenge in the second quarter and the second half of the year is about us trying to make it happen as much as possible. In terms of progress of our net sales after the first quarter, first of all, the Manufacturing Business have been performing just in line with our plan. As the number of electronics sector was better than our initial forecast, we'd like to expect more in the second quarter and second half as well by including 5G-related demands. On the other hand, progress of our sales in automotive-related sector was behind the plan as they had suspensions of operations just in the first quarter. However, they have announced their production recovery plans starting from the second quarter, especially for the second half of the year. We would like to expect very much from it. Talking about future of our auto-related customers. This chart is about the estimated index of industrial production in Japan. And normally, when an industry of our clients was showing recovery in this index, that means their manufacturing activities should become busier. The busier the production plant becomes, the more workers they need to have. As you may notice, in July and August, transportation equipment, meaning our auto-related clients, are showing strong growth month-on-month. This is the reason why we believe we can try to overachieve our forecasted net sales from auto-related customers from this second half and onwards. We would like to try hard by securely checking the situation of our clients. Let me rephrase the point and the business strategy we need to focus in our business outlook. First of all, local area, we keep saying area platform strategy. And that means by promoting business alliance or capital partnership with strong players in local markets, we can gain higher market share in each of them. That helps us to be regarded as more useful and a convenient dispatching company by both workers and clients. Then that again helps us to expand our share. This is the situation we are creating. Another point is our one-stop strategy for major manufacturers. As I explained earlier, we have reorganized our group. So to our major manufacturer clients, we can, first of all, dispatch workers to their manufacturing plants and also can offer training to improve their skills in the plants. In other words, we can offer one-stop service with which we can supply or accept workers and also can train them with dispatch. With the services that no one can copy, this one-stop strategy would differentiate ourselves with others. Then Solution Business, accepting our clients' employees as a support for their mobilization of human resources has been our unique business strategy. And this is also the business currently growing at the fastest pace, so we try to keep them growing even further. These are our 3 basic strategies. Our advantage of commitment-based order taking is also important. We make our commitment to dispatch certain number of workers by agreement. Backed by our strong hiring capability, which is #1 in the industry, we continue this commitment-based order taking by offering the commitment to our clients so they can be well prepared for the launch of their production plans. In addition, expansion by the engineering domain is our new challenge. We would like to capture future demand expansion phase with collaborative activities between our group company, Fujitsu UT, and newly reorganized UT Technology. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]