UT Group Co Ltd

TSE:2146

Earnings Call Transcript 2022-Q1

[若山 陽一, executive]

Let me explain about our results in the first quarter of the year. Here's the agenda topics as we finished the first quarter of the year: Financial results of the quarter, earnings forecast and outlook for this year. Then I also explained about current progress of medium-term business plan.

Starting from topics. In summary, market is recovering, and we received strong demand. So I want to explain about the market and our performance. As our customers' production activities have been recovering, the demand for personnel has also been recovering rapidly. Left from here, is last fiscal year, and the right is current. As you can see from this chart, earlier in last year, demands were weak due to the COVID-19, then started recovering from second half, and we were also able to catch up accordingly. This situation continues. More specifically, monthly order taking has been high level, over 1,500 persons in recent months. This means our quarterly back order is about 4,500 that is a quick recovery. We managed to maintain this historical record level of order taking. And that means by making sure to hire employees, we should be able to grow our sales firmly.

Management policy for this fiscal year. In our medium-term business plan, we set our goal to reach JPY 30 billion of EBITDA in 5 years by March 2025. That also means we want to hit JPY 15 billion as half of that by March 2023 at the halfway stage. Steps toward this should be: First, in the fiscal year ended March 2021, we landed with JPY 115.1 billion in sales. The most important thing for current year is how much sales growth we can achieve beyond this point? So we want to grow sales to JPY 150 billion with gross profit of JPY 30 billion or more and JPY 9 billion or more EBITDA. To make it happen, sales growth is essential. So in this 5-year midterm plan period, it is important to grow sales and expand market share. Backed by strong demand today, we want to reach to JPY 150 billion in sales this year. Once we reach to that level, we will further grow our sales in the following year. Our sales in next year could be around JPY 165 billion to JPY 180 billion with gross profit of JPY 33 billion and EBITDA of JPY 15 billion. So it is very important to make JPY 150 billion of sales and more than JPY 30 billion of gross profit in this year, and that is why we are working hard to expand our share. In order to increase sales when demand is strong, recruitment is important. Demand is not our issue, but our challenge is about recruitment. In the first quarter, average hiring per month was 1,275, staying around high level. It was good for us to be able to keep hiring the record level of employees. As you can see in this slide, we have hired 3,827 mid careers in the first quarter and 583 new graduates have joined us. So total number of new hires were 4,410. For your information, we hired 1,201 employees in Q1 last year. So we were able to threefold the number of new hires in this year's first quarter. As a result, number of our technical employees reached to 27,177. The fact that number of technical employees, excluding overseas, have reached over 27,000 means we were able to make strong leap.

Next topic I want to highlight as a strategy is expansion of the area platform. Enhancement of our capability as supplier is important, especially in Tokai region, where demands are strong. This is a very important point for our future growth. By keeping the level of monthly hires above 1,000 in constant border, At the same time, as another way to enhance our sourcing ability, we have acquired 2 established companies, Progress and SURI-EMU. They are the companies with track records in worker dispatch business, not only dispatching Japanese, but also Japanese Brazilians. By consolidating of those established companies with strong track record into our group, our total capability to dispatch technical employees of not only Japanese but also Japanese descendant are enhanced very much in the Tokai region, where strong demand exists. The second strategic point is to train engineers of semiconductor manufacturing equipment. We have established 4 technology skill development centers where we train and convert semiconductor manufacturing device operators to its engineers. This demand has been very strong. Our plan is to develop 3,000 SME engineers in 3 years and 890 of them in this year. We provide not only dispatching but also development of engineers. And when we do this, doing this by identifying our strong points are important. This helps us to raise unit price. This is going to be an important function to those who want to acquire skills and develop their own careers. We will be able to raise our pricing, and that means we can also raise their pay. It was very good for us to establish the technology skill development centers to continue this flow. We also want to use this to increase our retention of engineers and to raise unit price.

From here, I want to explain about our financial results. Consolidated net sales increased significantly, JPY 10 billion or 36.3% year-on-year to JPY 35 billion. This was really a good point. Although our sales were increased, but profits were down. As I explained earlier, strong sales increase of about JPY 10 billion was partly due to our enhanced hiring activities. So we are spending in advertisement for recruitment as upfront cost. As this is the spending we intentionally use to expand share, that means recent results of increase in sales, but decrease in profit should be understood as temporary ones. We are working hard to gain market share with temporary rising cost. In addition to that, total number of engineers exceeded 27,000 in Japan only, and that means our sales and employee counts increased around 30%. I think, this was good results. This is about its details. In addition to organic growth, we also enhanced our profit base with M&As, especially from this year, Progress and SURI-EMU, large and well-established dispatch companies who dispatch Japanese descent were consolidated into our group. That means, in addition to organic growth, we were also able to grow with those acquisitions. So net sales in Japan recorded JPY 33.6 billion, plus JPY 1.5 billion in overseas. Number of technical employees are 27,000 in Japan and 12,000 overseas. So it is about 40,000 in total. Increase in number of technical employees mean we can increase number of customer sites to dispatch by managing better matching of these between the increase in employee counts and the increase in sites, we want to realize further value about the total. This is about quarterly changes in sales and number of technical employees in last 5 years.

Obviously, our sales reached to record high level that was once again JPY 35 billion. As the JPY 35 billion is single quarter sales, that means we are in a condition to make JPY 140 billion or more sales a year. Based on this, our target to hit JPY 150 billion this year should be within our scope. I believe, we had a very strong start. As I said, EBITDA was JPY 1.57 billion that means despite the increase in sales, our quarterly profit was down year-on-year. But once again, this was due to the upfront spending in hiring. So this was intentional. You may not have to worry about this point. As a result, we were able to grow both the number of technical engineers and sales significantly. As for the speed of growth, the growth in the number of technical employees last year was 4,102 as a net. From last year ends 19,634 to this year's 23,736, the net increase in the year was 4,102. The net increase of 3,441 this time has been significant. As this is the growth in a single quarter, that means our capability to increase our employees should be about 3x stronger than the past as we just added 4,100 full year last year. This shows demand was very strong, and we were able to secure a large number of hires and the increase in the number of employees helped our sales growth. You should be able to feel how strongly we are growing. And I think this was very much satisfiable. This is the summary of our consolidated results. Net sales hit JPY 35 billion, record high as single quarter. Gross profit was JPY 6.85 billion. Gross profit margin slightly dropped. However, we will bring this back to 20% in the end. So you can feel secured. The reason why it was 17.3% was because in order to accelerate our recruitment, we used cash contribution to those newly hired and spent cost to employee dormitories in advance. Our cost of sales includes significant size of several expense items we spend as upfront cost. Gross margin was 17.3%, but our margin based on unit price was kept us 20%. So please understand our cost of sales includes temporary items. In SG&A, as this is the year, we are spending JPY 1 billion more to our recruitment ads. And those temporary increase in cost would be eventually settled by the end of the year. You would be able to understand that such spending was to set up an environment to create the situation we wanted to realize in the medium-term plan. So please feel secured. The fact we were able to grow our net sales 36.3% or about JPY 10 billion made us feel a good response.

This page is a summary of balance sheet. We have JPY 15.2 billion in cash and deposits, and the borrowings of short and long term is about JPY 11.1 billion. So that means, in essence, we have been able to realize debt-free conditions. Another point is goodwill. We are enhancing our growth strategy with M&As. That means goodwill is increasing. And if the company we acquired were not performing well, we may encounter the risk of impairment. It is very important for us to minimize such risks. We have been controlling the increase in goodwill and amortizing them regularly and proactively. We basically use conservative stands to make plans every year and try to achieve those numbers for sure. And goodwill this year is about JPY 6.2 billion, and the shareholders' equity is about JPY 16.6 billion. From the safety point of view, we have more cash and deposit than our borrowings, and our shareholders' equity is larger than the goodwill. Shareholders' equity ratio is 33.8% and gross debt-to-equity ratio is 0.68%, meaning under 1.0%. We are to realize our growth strategy. And at the same time, we are securing our safety by striking balance so that our company can continue its sustainable and stable growth. This is the key in our management policy.

This is our sales breakdown by segments. Net sales in manufacturing business increased 53.2%. This growth was stronger than we forecasted. That was because demand was stronger than we forecasted. So we tried really hard to catch up with this demand growth. Solution business sales grew 18.2%. Our customers were in the midst of their structural reform activities. And we have been able to benefit from those opportunities well. Engineering business is becoming an important pillar to support our overall earnings. Growth of this business was not so high as we are taking time to develop talent. However, its profit contribution is becoming more significant. Based on these, sales composition has been changed like this.

Next, changes in our manufacturing business in domestic and overseas. First, domestic sales were JPY 22.1 billion, 43.3% growth. This growth in manufacturing business contributed most to our overall company growth. EBITDA and EBITDA margin declined, but this was due to the upfront investment, so there is no need to worry. The number of technical employees also grew. This is about manufacturing business, excluding overseas. We exclude overseas here as overseas sales are still very small. And by excluding overseas, it becomes easier understanding real-term trend. Sales, technical employees and the monthly sales per chapter grew positive. EBITDA and its margin dropped. But once again, this was due to the upfront investment and no need to worry. This is about changes in sales in manufacturing business, excluding overseas. Semiconductors and electronics components grew 14.5%. Automotive, up 55%. The growth was very strong. 92% growth of Others include sales of newly consolidated companies.

Sales by sector in manufacturing business. We enjoyed very strong year-on-year growth. And in the automotive sector, quarterly sales grew to about JPY 6 billion, getting closer to the level of semiconductors and electronic components. I think this means diversification of our customer sectors have been working well.

Next is solutions business. Solutions business, 18.2% sales growth, was also strong. We hired new graduates and added employees from the companies we acquired in the business. Due to the temporary integration-related costs, EBITDA and the margin declined, temporarily. However, just like in manufacturing business, our cost of new hires and consolidation of acquired companies increased, but margin of the business was not declining so quickly. This decline in profit should be understood as heavy investment to match against strong sales growth. Solution business is growing like this. Both number of technical employees and sales grew. Engineering business, sales grew slightly by 0.2%. EBITDA was JPY 579 million, and margin was 14.1%. This means a slight decline. In Q1, we regularly have cost factors like new hires joining our company. The numbers were down, but that was a very small drop, almost same from last year, and we think it's just about the margin of era. Rather than trying to find out the reason that the foundation of profit-making has been established, it should be more important to focus on how we grow sales. Here, talent development at the technology skill development centers should be important to lead us to the sales growth. These are the results.

This is the engineering business sales by sector. Sales in our mainstay area, design and manufacturing engineer increased 1.4%. Construction Engineer grew 3.5%. In sectors where we have been strong, we were able to manage growth. But in IT engineering sector where our business was still small or denominator was small, so we have changes like this. The business overall was able to realize growth even though that was a very small one. Anyhow, the engineering business needs to have larger scale. Engineering businesses, we are trained talent of manufacturing business move to and work for more specialized field. This means that growth of engineering business is supposed to follow the talent development in manufacturing business. To that extent, after the sales of manufacturing or solution business grew, sales of engineering business would show its growth later with time racks. This time rack should be understood at the time we need to develop talent. And I think the role of the business should be to raise unit price, and we are going to realize this by talent development. So please keep your eyes on its progress. Sales by sector as I explained. From here, I explained about earnings forecast and outlook for this year. As for the overall market demand, the line in orange is about the change of overall jobs to applicant ratio, which is currently above 1.13x. That means market today is in short labor again. In manufacturing market, lines in green. The ratio is 1.52x showing V-shape recovery. You may not feel this directly, but labor shortage in manufacturing market is becoming tighter than overall market. And this is a tailwind for us. It is possible to assume this tight labor would continue for the meantime. From the viewpoint of machinery orders especially for manufacturing in the private sector by excluding infrastructure related for ships and from electric power companies, monthly changes in the machinery orders are rising this year. Especially in 4 prefectures in Tokai region where demand is recovering sharply and this relates to our acquisition of companies Progress and SURI-EMU. In this chart, scale of jobs to applicant ratio is different from previous page for the nationwide. And the ratio in the region is higher than 2x. As I explained earlier, jobs to applicant ratio in manufacturing market was over 1.5x. And especially in 4 prefectures in Tokai region, it was over 2x. That means there is a room for extra supply capacity for us to add as that should be well absorbed by growing demand in the market. The point is how we enhance our capability to supply technical employees. We would also like to make sure that consolidation with companies, like Progress and SURI-EMU, and M&As could contribute our future results. Based on the points I just explained, once again, our target this year is JPY 150 billion in net sales and JPY 9 billion EBITDA. Point is, how much more sales we can add beyond JPY 150 billion. That ensures us making JPY 30 billion or more gross profit and JPY 9 billion or more EBITDA. Then in next fiscal year, we try to reach next level by hitting JPY 150 billion EBITDA. That means important thing for now is to increase sales by expanding market share and make sure that would be followed by profit growth. This has been our performance today and outlook for the year.

Finally, I would like to explain about progress or medium-term business plan. Today, in our medium-term business plan, initially, we target net sales of JPY 130 billion. However, as we hit JPY 115.1 billion last year, now we have raised the target to JPY 150 billion and accelerated the schedule one year earlier. Original plan was to realize threefold growth in 5 years or growth of 25% CAGR. We now try to accelerate this one year. This means we have finished the quarter of the plan. And we think we have had a good start as we are currently enjoying strong sales growth. In order to grow our EBITDA to JPY 9 billion this year, then JPY 15 billion next year and JPY 30 billion in fiscal year ending March 2025, we expand our market share and improve productivity and efficiency as that should contribute to realized EBITDA growth. Thank you for your kind attention.