UT Group Co Ltd

TSE:2146

Earnings Call Transcript 2023-Q1

[若山 陽一, executive]

Thanks for tuning in for our first quarter earnings briefing. Let's get started.

I want to begin with the key highlights for the first quarter. Here, we are showing net sales, EBITDA and net profit per share. And as you can see, sales and earnings soared to new highs in the first quarter of the fiscal year ending March 2023. Net sales rose to JPY 41.5 billion, up 18% from the same quarter last year. EBITDA jumped to JPY 3.614 billion with 8.7% EBITDA margin, which almost recovered to the pre-pandemic levels. EBITDA reached a record JPY 3.6 billion as revenue has increased consistently. EPS also grew significantly as a result. This is a summary of the earnings. One of the things I want to emphasize is that gross profit has grown dramatically over the past year. And the gross profit margin has improved almost 2 percentage points. It is truly remarkable that we earned almost JPY 8 billion in gross profit in just 1 quarter. Also, EBITDA came in at JPY 3.614 billion for the first quarter, up more than JPY 2 billion from the same quarter last year, and has more than doubled in just 1 year. Here, we are showing the numbers of domestic and overseas technical employees separately. And I want to note that we hire more than 32,000 technical employees across Japan. It is fantastic that this number increased by almost 5,000 in just 1 year. All in all, these are excellent results. Both revenue and profits have grown, the margin has recovered to the normal level and we started off to really strong operating profit and EBITDA numbers. Of course, we are going to keep the momentum going to be able to hit this year's EBITDA target of JPY 15 billion. And that is a step towards achieving our must target of earning JPY 25 billion in EBITDA in the fiscal year ending March 2025. So we are going to keep pushing for the next 3 years to bring EBITDA closer to the JPY 30 billion target as much as possible. This is the consolidated balance sheet. There has been no major change since last time. But if I'm allowed to emphasize the same point, it is that we have JPY 24.3 billion in cash, whereas we have only JPY 4.2 billion in short-term borrowings and about JPY 15 billion in long-term borrowings, approximately JPY 19 billion in total. So you can say that we are carrying virtually no debt. Another important point is that we have ample shareholders' equity about JPY 20 billion compared to the goodwill of JPY 5.6 billion. We are quite aggressive about mergers and acquisitions, but the goodwill is kept well under control, and it demonstrates that our investment decisions have been prudent and sound. Also, our shareholders' equity is more than 30% to the total assets. So we continue to keep our balance sheet free of material risk elements. Let me show you the quarterly changes in net sales and number of technical employees. The chart starts with the first quarter of fiscal year 2019 and up to the first quarter of this fiscal year. So 4 years ago, the first quarter net sales were a little over JPY 23 billion, but today, the quarterly net sales topped JPY 41 billion, as you can see. They almost doubled over the past 4 years. This revenue growth has come with an equally strong profit growth. In fact, just a couple of quarters ago, net sales were at the level of JPY 40 billion and EBITDA was just above JPY 2 billion. But the EBITDA in the latest quarter jumped to almost JPY 4 billion. So we are not just growing in terms of revenue, but also in profitability. And as I said earlier, the number of technical employees has reached a new high. It is obvious that the bigger we grow in size, the more potential we gain to become even bigger and more profitable. And it is no doubt that we are becoming the dominant player in the market. We have the largest market share in Japan in the factory worker dispatching service. We need to keep our dominant position and leverage it to continue to build a more profitable business. By the way, I said earlier that we had added 4,976 new technical employees during the first 3 months of this fiscal year. While we had hired a little fewer than 8,000 technical employees during the entire year last fiscal year and had added only 4,000 employees the year before. So the fact that we added almost 5,000 employees in just 3 months bodes really well for the rest of this fiscal year, and it makes us confident that we will grow even bigger. One of the reasons that we are confident and we will grow even bigger is that we have the capacity and the capability to hire a significant number of technical employees each quarter. We hire about 4,000 to 4,500 technical employees each quarter or approximately 1,500 employees each month. There is no other player that can hire this many people each month on a consistent basis in Japan, and our clients look to us for volume orders. So being able to hire many people means that we have more opportunities to gain orders. As I said, there is no other player that can hire 4,500 people each quarter. That's our competitive advantage. Another point I want to emphasize is that as it relates to profitability, we significantly reduced the per capita recruitment cost. The recruitment cost used to be JPY 300,000 to JPY 400,000 for every technical employee, but it is now down to a little over JPY 200,000. So while net sales and the number of technical employees are rising, the cost of hiring such as job postings is kept under control, and that's why our profit is growing strongly as well.

It is important that we keep this ability to hire 4,000 to 5,000 people a quarter and we actually want to raise our hiring capacity to approximately 6,000 people a quarter over the next 3 years to achieve even higher growth in revenue in the medium term. I want you to stay tuned to our journey towards further growth. We have also seen significant improvement in the efficiency of SG&A expenses. The ratio of SG&A expenses to sales was 13.7% a year ago, and it has improved to 11.1% for the first quarter of fiscal year 2023. Our SG&A expenses are mainly divided into 3 categories. Those are personnel expenses, hiring expenses or expenses to recruit technical employees such as job postings and other expenses. And we have seen much improvement in the efficiency for every expense category. That is why the ratio of SG&A expenses came down to 11.1%. And we have a plan to reduce it to 10% by the fiscal year ending March 2025. We will bring it down by another 1.1 percentage points over the next 3 years so that our operating profit margin will be above 10% in the future. We have come a long way so far by reorganizing and realigning the companies we acquired according to our business strategies and integrating the back-office functions across the group to improve efficiency. Back office workloads such as payroll calculation [ used ] increase as the number of technical employees increased because each company had to do it itself. But we have integrated the back-office functions of several different companies in the group into one back office function of UT Group. That is driving the improvement in efficiency and bringing about tangible results since the new structure was put in place in April this year. Before talking about results by segment, I want to explain the changes we made to our business segments. To say the conclusion first, we have 3 business segments: Manufacturing Business, Area Business and Solution Business, all of which are positioned in our fourth medium-term business plan as segments to promote our growth strategy. Manufacturing Business provides one-stop dispatching services to large manufacturers. This business fulfills its commitment to provide a large number of technical employees as needed by our large manufacturer clients. And of course, we are a dominant player in this category in Japan. And we will continue to build strong relations with our clients by increasing our hiring capacity and delivering on their expectations. Area Business seeks as a mission to create jobs across Japan and provides a local platform that builds on the strength of the areas and meet the local needs so that we grow together with the local businesses. So Manufacturing Business is more like a B2B business and caters to the needs of particular industries, whereas Area Business delivers on the local demand for jobs and seeks to become a dispatching company loved by the communities in which we operate. They are completely different businesses with different clients and different management styles. So that's why we separate the 2 businesses, but both business segments are growing strongly, and I will give you more detail on that. We also have Solution Business. In Solution Business, we received excessive workforce of our large corporate clients and absorb and take over their entire function that they want to restructure. None of our competitors offer this kind of service. We are uniquely positioned in the market in the sense that we build strong relationships with our clients and our Solution Business complements the dispatching service business. Area Business provides workforce to our clients while Solution Business receives excessive workforce from them. We are able to respond to both situations where there is a lack of workforce and an excessive workforce. And both situations do arise in a large corporation. In a large corporation, it sometimes happens that 1 department or division needs more people, while another needs to cut the workforce as part of the restructuring efforts. There are often different contradictory labor needs within the same corporate client.

So being able to provide solutions to these completely different situations is certainly a competitive advantage for us. That's why these 3 segments continue to be our core businesses. And by making sure that they continue to grow, we can achieve our strategic goals in the fourth medium-term business plan. In addition to these 3 segments, we have 2 other business segments, which will help lay the foundation for long-term business growth and success. And that means we will invest more in Engineering Business and Overseas Business. These 2 business segments are still very small compared with the 3 core businesses. And if you want to understand our growth strategy, you should look at the 3 businesses. But I am absolutely sure that these 2 businesses will grow bigger in the future, and I hope you stay tuned to any developments that happened to these segments going forward. When it comes to Overseas Business, it is not our intention to sort of blindly expand our footprint in overseas markets. Our main focus is on Vietnam because there is a certain level of demand for Vietnamese people to work in Japan. We can provide a solution to the labor shortage in Japan's manufacturing sector by bringing in these aspiring Vietnamese workers in accordance with the current Japanese labor regulations. We can also provide a solution to Japanese manufacturers who own factories and plants in Vietnam. They want the local workforce to work for their factories in Vietnam.

So we can meet the local labor needs in Vietnam as well as the need for Vietnam's workforce who want to come to work in Japan. We want to act as a bridge between Vietnam and Japan, because we believe Japan's labor exchanges with Vietnam are expected to be more active and robust than with any other country in the world over the next decade. That is why we are going to focus on Vietnam. That's why we want to create a platform that helps fulfill both labor news in Vietnam and Japan in the medium term, and that's why we want to make this business bigger and successful. The basic idea is the same for Engineering Business as well. Engineering Business helps those who are working in the clients' plants and factories has dispatched workers when they decide to advance their career as engineers. So there needs to be more coordination and cooperation with manufacturing business and improvements to the system and the training programs to ensure a smoother transition from a manufacturing worker to an engineer and provide an opportunity of career advancement to those working with us. That's our medium-term ambition for this business, and we want to make it one of the core businesses of UT Group. Once again, if you want to see our current progress towards the fourth medium-term business plan, you should look at the growth strategy of each of these 3 segments. And if you want find a future plan to enhance our corporate value, you should look at the relations between the 3 core businesses and the 2 future-oriented businesses. Here are the results by segment, and we are also comparing net sales and sales composition of the first quarter of fiscal year 2023 with those of last year. As I said earlier, manufacturing area and solution businesses comprise almost 90% of the total revenue. So if you look at the 3 businesses, you will understand what kind of company we are. Our future will depend on what we're going to do with the 2 business segments. So it is important that we make concrete business plans about what we're going to do with these 2 segments before the fiscal year ending March 2025. Let's turn our focus to net sales by segment. We have 5 segments, as I explained earlier. It's very simple, and I'm not going to explain each one of them because we don't have much time left. To make a long story short, every segment has grown. Each and every business segment has grown strongly, and I think there are very few companies like us out there in this regard. Here is EBITDA by segment. Again, each and every business segment has grown strongly, and I doubt there are many businesses like us because companies usually suffer a loss for some years after they started a new business. So it is remarkable that our new businesses earned strong profits. The number of technical employees also increased for every segment. That really tells how strong the demand is and how unique our position is in the market. We are #1 in the industry and #1 in terms of hiring capacity. We are unique in the sense that we are able to receive and absorb our clients' excessive workforce and to bring workers from Vietnam to Japan. So our clients trust us and leave to us all the tedious work of adjusting labor supply and demand for their factories. We have expanded the scope of our services to such extent that we become the dominant player in the industry and see every business segment grow strongly. Now let's dig deeper into the results of Manufacturing Business, whose revenue comprises almost half of the group's total revenue. This segment saw growth in all key metrics: net sales, technical employees, EBITDA and monthly sales per capita. These results were all in line with or above our expectations. So we are in really good shape. While we made some tactical moves to mitigate the impact of the production adjustments in the auto industry, we are really encouraged by the fact that this segment grew strongly in every key metric for the first quarter. Manufacturing Business consists of 4 subsegments: electronics, industrial and commercial machinery, transportation equipment and other. And we saw growth in every subsegment as well. But the biggest growth is seen here in transportation equipment or automotive-related industry, where the overall demand for labor remains very strong despite the production cuts. When it comes to auto clients, we receive volume orders, but there are slight adjustments in some areas while the overall demand for labor stayed strong, and that's why net sales grew very strongly. So I believe that we are overall in a very fortunate situation. Of course, when overall demand for labor becomes strong, clients need to accept a higher unit price. Otherwise, they wouldn't be able to get hold of enough workers. So in that sense, it is a very tight labor market today. We want to take advantage of the current market conditions in order to provide as many technical workers as possible to our clients. And to do that, we need to negotiate with our clients to agree to the optimum unit price so that they consider us to be a reliable provider of necessary workforce. We cater to the needs of each individual client and deliver tailor-made services that I think is also a reason why manufacturing business saw a robust growth in each subsegment as well. What is also remarkable about Manufacturing Business is that its gross margin improved significantly. The improvement in gross margin came from, in part, the rise in the unit price starting this fiscal year. It is more than 2 percentage point improvement from a year ago. Of course, we were impacted by the production cut in the auto industry, but the impact was mitigated and offset so much so that the gross margin improved to 21%. This is an excellent result, and it is because of our persistent efforts to cut costs in detailed negotiations with our clients to raise the unit price. This slide is just to show you that we are training a large number of prospective engineers. And there are more high unit price orders because of the tighter labor market. So orders are growing, the unit price is rising and more engineers are being trained and produced. They are all linked. Our business is higher and dispatch technical employees help them stay employed, provide them with education and training to raise the unit price and their wages. This virtuous cycle leads to better employee satisfaction and lower turnover, which then translates into the consistency with which we provide a necessary workforce to our clients. And this cycle for our business model is working. We are seeing orders growing and the unit price rising. Each and every element in this model is effective and works in coordination. Now when it comes to Area Business, net sales, the number of technical employees and EBITDA are all growing, except monthly sales per capita, which is down a little bit. Monthly sales per capita go up and down depending on the number of areas where sales are growing or shrinking. Anyway, these are the results. This business segment started when 6 different companies were merged into one. And since its inception, this segment has been growing while it was going through the integration, thanks to a lot of hard work by each area team. It was a challenging environment at the beginning, but now it's all up and running. Another point I want to make with regards to Area Business is the steady rise in the number of dispatched workers. In this graph, the value in the first quarter of fiscal year 2022 is indexed at 100. There are, of course, large differences in the number of contracts among different areas from 136 in West Japan to 112 in Kanto region. But overall, we saw a significant increase in the number of contracts in every region over the past year. The nature of labor demand is very different between large corporations and local businesses. To make it really simple provide large volumes of dispatched workers to large corporate clients, whereas we provide a small number of workforce to many different local companies in our Area Business. So the ways we do business are completely different, but we are executing the best strategy for each business segment, and that's working as these results clearly testify. We have also integrated the back-office functions to cut any unnecessary costs. Solution Business too saw net sales, the number of technical employees, EBITDA and monthly sales per capita, all growing at pace during the first quarter. One thing I want to announce as it relates to Solution Business is that we sold UT System products back in March this year. It is a company that sells information system equipment. It's a completely different business from what we do, and we don't expect to have much synergy between this company and our core businesses. That's why we decided to sell this company. We luckily found a buyer, so it's no longer a consolidated subsidiary. We also want you to note that we make decisions faster than before. Engineering Business is as I said earlier, something that complements our core businesses. And here, we also see healthy growth in net sales, technical employees, EBITDA and monthly sales per capita. It is still a very small business, but we have high expectations with this segment, and we're making sure that this business will grow bigger in the future. This slide is showing its net sales by subsegment, construction engineers and IT engineers, both subsegments are growing.

Let me also talk about Overseas Business. Again, net sales, the number of technical employees and EBITDA are all growing. I myself, visited Vietnam back in early July, and I was impressed how strong the labor demand was in the country. And pretty much like in Japan, they choose a staffing agency that best fulfill their labor needs in terms of quantity and quality. So we are going to keep our focus on Vietnam and continue to build a relationship with our clients in Vietnam. Also, we are going to strengthen cooperation and coordination between our businesses in Vietnam and Japan because this is our competitive advantage. So I just walked you through the first quarter results. For more details, please read the information pack. We are happy to answer any questions you may have. So please feel free to contact us any time.

Last but not the least, let me spend a few minutes to talk about what we are doing and where we are with regards to our current medium-term business plan. First of all, let's see our full year earnings forecast. The net sales target is JPY 180 billion, and the EBITDA target is JPY 15 billion. The other earnings targets are as follow, and we are making sure that we achieve every single one of them. We just finished the first quarter with JPY 3.6 billion in EBITDA, as I explained earlier. So you can almost say that we are on course to hit the full year EBITDA target if the current trajectory continues. We expect to build on the first quarter's momentum for the rest of the fiscal year, so we were off to a really good start and going as exactly as planned to achieve the JPY 15 billion EBITDA target. Of course, the JPY 15 billion EBITDA target is not our final goal. We set a higher goal for the fiscal year ending March 2025, the final year of the fourth medium-term business plan. It's a 5-year plan, and we are hitting the halfway point. The EBITDA target for the third year of the plan is JPY 15 billion, but the final EBITDA target is JPY 25 billion, and it is a commitment. Internally, we are aiming even higher and hoping to earn JPY 30 billion in EBITDA for the fiscal year ending March 2025. If we earn JPY 30 billion in EBITDA in 2025, then we will work to triple that amount over the next 5 years to be able to earn JPY 100 billion in EBITDA by the fiscal year ending March 2030.

So what we are doing right now and continue to do is laying the foundation to make such transformation possible. And what we focus on doing until fiscal year 2025 is expanding our market share in the worker dispatching business. It's very clear and simple. We are doing and continue to do everything we can to increase revenue and expand our market share in the business domain where we are already strong. And these are the targets we must achieve by fiscal year 2025. The next growth strategy we'll pursue after we achieve year 2025 targets is the one that will bring our business model to the next level. I'm not going to give you detail on that today because of the time constraint, but we've already made available some detailed information on our long-term business plan on different occasions. As I said earlier, during the period of the fourth medium-term business plan, we are expanding our market share in the worker dispatching business to earn more profit. So that means that profit should grow almost in tandem with revenue. In that sense, earning JPY 15 billion in EBITDA at the halfway point of the current 5-year business plan is critical if we want to achieve the JPY 30 billion in EBITDA, the informal final target for fiscal year 2025. If we hit the JPY 15 billion target this fiscal year, that will make us a little bit more optimistic about later years and achieving the final goal set for fiscal year 2025. So please stay tuned for what we are up to. The fact that we were off to an excellent start, posting JPY 3.6 billion in EBITDA for the first quarter is, I believe, really reassuring to all of us. We will continue to monitor our progress and are determined to do everything we can to ensure that we continue to grow consistently in the mid- to long term. Thank you for your support, and thank you very much for watching. [Statements in English on this transcript were spoken by an interpreter present on the live call.]