UT Group Co Ltd

TSE:2146

Earnings Call Transcript 2022-Q2

[若山 陽一, executive]

Thanks for tuning in. I'm happy to walk you through our second quarter results. Let's get straight to the conclusion. We have revised our full year forecast for this fiscal year. Here, the numbers for our initial forecast, we announced earlier. What's changed in the revised forecast is, first of all, net sales will go up. On the other hand, we have revised EBITDA and other profit figures downward. So I'm going to give you more details and explain how we have come to this revised forecast. The first thing I want to note is that demand has strengthened significantly over the past several months. Just yesterday, one of the big auto companies in Japan gave a positive outlook for this year during its earnings briefing. So we've seen quite robust demand from our clients in general and automakers, in particular. And we recently hired a record number of people on a monthly basis and have the highest order number in the company's history accordingly. So that presents us with the perfect opportunity to expand the size and scope of our business. We can also expect this favorable business climate to continue and become even better in the second half of this fiscal year. That is why we've decided to spend more to hire more people in the second half so that we can earn higher revenue than we expected in our initial forecast. That's the context where we've raised our net sales forecast from JPY 150 billion to JPY 160 billion, as I said earlier. The point here is the target for the number of domestic technical employees at the end of March 2022. We've raised the target from 32,000 to 34,000. We will respond to and satisfy our clients' strong demand for workers. And by doing so, we are going to scale our revenue to the next level and get already to start the new fiscal year. On top of that, we will also aim to generate JPY 15 billion in EBITDA for the next fiscal year. To achieve this goal, of course, we need to do more to improve cost efficiency across the functions. So we are going to hire more people for the rest of this fiscal year. But at the same time, we also have to realign and reorganize our subsidiaries, which have increased in number as our net sales have grown to further improve efficiency. The executive management has already made the decision and is committed to reorganizing the internal structure come April next year, so that we can get further ahead in the next fiscal year. I will share with you more details about this later. But in order to earn JPY 15 billion in EBITDA in the next fiscal year, we need to deliver a gross profit of JPY 34 billion or more. And I will show you later exactly how we are going to get there. I mentioned earlier that the demand is robust across the sectors and particularly so in the auto industry. Other than the auto industry, we are seeing very strong demand from the semiconductors and electronic component sector as well. So the elevated demand for workers coming from these 2 sectors has sort of helped sustain the high level of activity. More specifically, we are dispatching around 1,500 workers per month right now. And so far, we've been receiving this high level of orders almost consistently since the beginning of this year. That's 4,500 dispatched workers in the quarter, the highest figure in the company's history and is continuing and expected to continue throughout the second half and beyond. That's why we are focused on hiring right now. This robustness of demand is really reflected in the greater availability of manufacturing jobs. This light green line represents a job to applicants ratio for manufacturing jobs, and this is our playing field, so to speak. And if you look at here, since the worst level hit during the height of the pandemic, it's bounced back very rapidly. And the latest figure is 1.69, which means that there are 169 job openings for 100 people who seek employment that certainly evidence that there is robust demand for workers across the manufacturing sector, particularly in the auto industry, and the electronic component sector, as I said earlier. So workers are in short supply, and it's been like that for quite some time. But this has been unique to the manufacturing industry because if you look at the other line, that's the overall ratio, you will notice that we are uniquely positioned to benefit from this rapid recovery. Many other staffing service providers are still struggling in the wake of the pandemic. In fact, the overall jobs, the applicants ratio is 1.05 and has remained at this muted level across Japan, so it's easy for companies to find workers. The manufacturing sector, on the other hand, demands more workers, but there are simply not enough workers. UT Group has a nationwide network of recruitment, which we're also expanding. So we have the ability to hire a large number of workers in a month and provide them to our manufacturing clients, and that is driving further demand. So it's really a virtuous cycle. I think we are actually hitting rare sweet spot right now where the demand for workers keeps growing and yet we can supply them without adding to the cost of hiring. So as long as this gap is as wide as it is today, companies like us, we have the ability to find and hire workers across different parts of Japan can take full advantage of this recruiting network to satisfy the pent-up demand. Just as I explained earlier, we have been hiring more than 1,500 per month for the past couple of quarters, 1,551 on an average to be exact. And we have a backlog of close to 5,000 orders for the third quarter and beyond. So by focusing on hiring and keeping this level of hiring for the third and fourth quarter of this fiscal year, we will achieve net sales of JPY 160 billion as expected in our revised forecast, and that will lay the foundation for further revenue growth in the next fiscal year and beyond. This graph shows exactly how many technical employees will be working if we continue hiring as planned. Right now, we are here, 28,720 technical employees are working through UT Group. By the end of the third quarter of this fiscal year, we will have 32,000 technical employees and 34,000 technical employees by the end of this fiscal year. Net sales will, of course, increase accordingly. And that number will set the baseline for the next fiscal year, which we are going to build on. So we really need to focus on hiring in the remaining quarters because that will surely set the stage for the next fiscal year as we aim for further revenue growth and also will increase the likelihood of us reaching the goals of our medium-term business plan. I think we have all the pieces together to get to the next level, and we all feel clear-eyed about what needs to be done to get there. And now we've come back to the revised forecast. Let me repeat. We've raised our net sales forecast by JPY 10 billion from JPY 150 billion to JPY 160 billion. We're going to increase our market share. To do that, we're going to need to spend money. We will spend about JPY 2 billion to focus on hiring. So I want you to understand the spending JPY 2 billion to hire more people will generate JPY 10 billion of additional revenue. That's what this revision is all about. These changes in the organization of our subsidiaries will be in effect come next April. The executive management has already made the decision, as I said earlier, all these companies joined or partnered with UT Group at different points in the past. And now we're going to realign and consolidate them if that contributes to improve overall management efficiency. We decided with subsidiaries to be consolidated pretty early on, and this will be the new structure to be put in place in April next year. But we are constantly reviewing our structure and always trying to find the optimal number of subsidiaries for each of our business divisions, and we're doing this all in order to maximize management efficiency. So we are as keen to hunt for companies as to integrate them for more efficiency, so to speak. What we have to do now is to do whatever we can to make sure that this consolidation will lead to a higher profit margin for the next fiscal year and beyond. Okay, that wraps up the topics related to our management policy. From here, I want to show and walk you through our second quarter results and talk about the situation around each of our business segments. As I noted earlier, our second quarter net sales rose 36.8% from the same period of last year to JPY 72.5 billion. EBITDA came in at JPY 2.88 billion for this second quarter, and the EBITDA margin also fell because we spent more money to increase our market share and is reflected in this precipitous rise in net sales. So it's all pricing and things are going exactly as planned. The number of technical employees is now 28,702 as a result, and we continue to focus on hiring and bring the number to 34,000 by the end of this fiscal year. This graph shows quarterly changes in sales and the number of technical employees. Of course, the point I want to stress here is that the number of technical employees jumped by 4,984 between the first of this fiscal year and the end of the second quarter. It was a very brisk pace. And in fact, it was the highest pace ever which led to the strong quarterly revenue figure of JPY 37.3 billion for the second quarter. And we expect the revenue will continue to go up in the third and fourth quarters. The revised full year revenue guidance is JPY 160 billion. So it is safe to assume that the third quarter revenue will be over JPY 40 billion. And when the number of technical employees reaches 34,000 as planned in the fourth quarter, the fourth quarter revenue will likely be in the neighborhood of JPY 45 billion. And that level of quarterly revenue will become the baseline for us in the next fiscal year and beyond. I think that these revenue projections give you some idea of how much growth in net sales can be expected for the next fiscal year. You can also understand that we will continue to benefit from this extremely favorable business climate. These are the second quarter results, of course. And I want to take note of a couple of points for future improvement. First of all, gross profit margin and SG&A expenses, some of which are, of course, necessary spending for future growth, including hiring expenses. Some of this increase in spending is just a transitory and not recurring in subsequent quarters. We will also save our expenses as we move ahead with the reorganization and improve management efficiency. So we are taking this two-pronged approach, if you will, to improve our profit margin for the next fiscal year and beyond. So exactly what contributed to this increase in net sales over the past 12 months. There were some partnerships and M&A is involved. So let me explain this a little bit more. Net sales grew about JPY 20 billion or JPY 19.5 billion to be exact for the second quarter this year from the same quarter of last year. This was thanks to a sales increase in our existing business and also the contribution from more companies joining our group. We strike a good balance between organic growth and successful partnerships. It's an excellent way of increasing revenue. The number of dispatched workers in the automotive-related sector has been rising as well. The numbers here are indexed at 100 starting January this year, and you can see almost a 40% growth in less than a year. This is another evidence that the auto industry's demand for workers has been really robust. In addition to that, as I explained earlier, the demand from the semiconductors and electronic components sector has also been rising. We're not dependent on only 1 sector. And as I just said, we have 2 revenue drivers, organic growth and M&A. So as far as revenue growth is concerned, I believe our continuous efforts have paid off. The next thing I want to talk about is why the second quarter EBITDA dropped from JPY 3.8 billion to JPY 2.8 billion over the past year. As you can see, the biggest part is the increase in hiring expenses, that's JPY 2.4 billion. And the next big cost is hiring-related expenses such as company housing expenses for newcomers. So these 2 items alone cost about JPY 3 billion as additional expenses. Of course, we were in the midst of the pandemic last year. So it's not an apples-to-apples comparison when it comes to hiring expenses. We had extremely low level of hiring expenses last year because of the pandemic. But still, I think we spent approximately JPY 2 billion more than we do in normal times in terms of hiring expenses. And of course, this increase in hiring expenses led to the increase in net sales. Anyway, this is a snapshot of how we were doing in terms of EBITDA and why we needed to revise our initial forecast downward. This is a summary of our balance sheet. The point I want to stress here is that our cash position has decreased by about JPY 10 billion over the past 6 months, and that is partly because we paid a dividend to our shareholders. The other point is that our debt, both short-term and long-term borrowings is approximately JPY 11 billion, but we still have JPY 15 billion in cash. So that means we have virtually no debt. Also, goodwill has risen slightly to JPY 6 billion due to M&As. But again, we have more than JPY 17 billion in shareholders' equity. We have been relatively aggressive in M&A, but at the same time, we have been very cautious so as to avoid the risk of inflating the goodwill significantly. And that is why our balance sheet remains so stable. There is no big change from one year to another. It's very simple, and you don't have to worry about any potential big impairment loss. Now let's look at our second quarter results by segment. The biggest increase in net sales, obviously came from the manufacturing business. We hit rare sweet spot, as I said earlier, there are more manufacturing jobs than job seekers right now. So the manufacturing labor market is very tight whereas the nationwide availability of jobs is still limited, meaning we can hire more people in many parts of Japan now and supply this workforce to those companies who demand it. So we obviously want to focus on hiring an increased net sales in the manufacturing segment in the second half of this fiscal year. This story is very similar for the solution business. Big cooperations are in the midst of restructuring across many sectors. So we expect that demand for our solution business will continue to grow. This growth in net sales over the past year, however, in part came from our existing clients who wanted us to absorb their excessive workforce. Either way, we have been doing what needs to be done to drive growth in each of our business segments, and they're growing as a result. Let's dig a little deeper on the manufacturing business. Just as I said before, its second quarter net sales grew 46.3% year-on-year for fiscal year 2021, whereas EBITDA fell 44.1% during the same period because of the necessary increase in hiring expenses, which I explained just earlier and the number of technical employees obviously increased as much. This shows another dimension of the performance of a manufacturing business. I'm going to skip the slide because there's a lot of overlapping information. I just want to say that this positive momentum is likely to continue. So what sectors in the manufacturing segment have been driving the growth in net sales. The single biggest growth factor was the automotive-related sector, up more than 50% year-on-year. The semiconductors and electronic components sector continued to grow consistently. The other sector nearly doubled its net sales, up 97.7% because of the merger and acquisition. This is the breakdown. We have successful M&As and good organic growth. I think it's fair to say that we're doing quite okay in terms of increasing our net sales. So we just have to make sure that we do everything we can to take advantage of this favorable business climate. This slide gives you additional detail. The second quarter sales figure for the automotive-related sector is the highest ever quarterly number. We saw robust growth in the manufacturing segment in general. I've already talked about a solution business. I just add that there is robust momentum. We're seeing very healthy growth in solutions business. There's just another piece of information I want to share with you, which is that we were joined by a new company on a consolidated basis in October. The name of the new company is UT FTSAS Creative. The company employs about 1,150 people with annual revenue of about JPY 6 billion. It's a company of sizable scale and joined us from Fujitsu Group because we have a long-standing relationship with Fujitsu. This will allow us not only to expand the scope of services and solutions we can provide to Fujitsu going forward, but also to bring our outsourcing solutions to the next level as we further develop relationship with many of our clients. Engineering business also continued to grow at a healthy pace. As I noted earlier, its EBITDA margin remains at the high level at 14.5%. It's a profitable business. For next year, we welcome new graduates as well as newly minted engineers returned from factory operators through our career change support program. So we need to make this business bigger for them just as we need to do the same for every line of businesses we do at UT Group. This is also growing at a healthy clip, but we need to do more, so they will grow at a much faster pace going forward. We now have a bigger pool of factory operators as the manufacturing business experiences a boom a good portion of them eventually will opt to become engineers through our program. In fact, we have to make sure that they do so, so that engineering business will be able to see the kind of dramatic growth we have witnessed for the manufacturing business. This is the sales breakdown for engineering business. It's a well-balanced growth. As you can see, this sector that we are particularly focused on is design and manufacturing engineer because this is very much interrelated with the manufacturing business. We have this career change support program called One UT. And when our factory operators want to become engineers, they often choose to be design and manufacturing engineers because they can put their experience to use. We also see a very nice growth in the construction engineer sector. This is almost the same as the previous slide. I covered this slide earlier. So how should we put the forecast revision in the context of our medium-term business plan. In this graph, the green bars represent our net sales, and those in orange color indicate our EBITDA. For the previous fiscal year ended March 2021, the full year net sales came in at JPY 115.1 billion with JPY 7.9 billion in EBITDA. For this fiscal year ending in March 2022, we revised our initial forecast, as I said repeatedly, raising our net sales forecast by JPY 10 billion from JPY 150 billion to JPY 160 billion and lowered our EBITDA forecast by JPY 2 billion from JPY 9 billion to JPY 7 billion. Driving revenue growth for the medium term is an integral part of our growth strategy. And as I said earlier, there is no better time than now to step up our action. That's why we are spending more money than usual to hire people, which will translate into more revenue. And as I previously explained, if we managed to generate about JPY 45 billion in quarterly revenue for the fourth quarter and be able to sustain the level of revenue going forward, there will be approximately JPY 180 billion in annual revenue for the fiscal year ending March 2023. That's where we are trying to get to. And under the JPY 180 billion net sales scenario, our EBITDA will be JPY 15 billion for next year. These are ballpark numbers in our plan because we expect quarterly revenue to increase even further in the next fiscal year. So our net sales projection for the fiscal year ending March 2023, actually ranges between JPY 180 billion and JPY 200 billion. And that means that with the current pace of revenue growth, we are on track to achieve the fiscal year '25 revenue target in our medium-term business plan 1 or 2 years ahead of schedule. When it comes to EBITDA target, it is JPY 15 billion in fiscal year '23. The reason for that is because fiscal year '23 is the halfway point to fiscal year '25, the final year of the current medium-term business plan. And the planned goal for EBITDA is set of JPY 30 billion. Of course, we need to be able to generate as much revenue to meet this EBITDA goal. And in this regard, we are pretty confident that we've set an excellent pace of revenue growth in order to get us where we want to be. What needs to happen going forward is for us to bring the profit margin back to what it used to be and then bring it to an even higher level to hit the target. Let me then spend a few more minutes to talk about the progress we've made so far in the context of the medium-term business plan before I finish my presentation. These are our numerical targets and commitments in the medium-term business plan. I believe this is the most important takeaway for you. So I know I repeat myself like a broken record, but let me explain once again. This is our plan for net sales, and this is for EBITDA for the 5 years. We finished our last fiscal year with JPY 115.1 billion in net sales, which was actually higher than what we had planned. For this fiscal year, we have raised our initial forecast of JPY 150 billion in net sales to JPY 160 billion. For the next fiscal year ending in March 2023, our net sales are expected to be between JPY 180 billion and JPY 200 billion, and that is what we plan to achieve in fiscal year '25. So we are likely to hit that target 1 or 2 years ahead of schedule, as I noted earlier. What about EBITDA? EBITDA came in at JPY 7.9 billion last year, and we expected this fiscal year's EBITDA to be JPY 10 billion in our original plan. But as I explained, we have lowered that to JPY 7 billion because we've decided to spend more hiring expenses to boost net sales. And now we are trying to bring that up to JPY 15 billion for the next fiscal year. Now I hope I have explained well enough to make you feel as confident as we are that net sales will likely increase that much for the next fiscal year. But I guess you may not be confident as much about the likelihood of us being able to earn JPY 15 billion in EBITDA for next year, more than double what we expect to earn this year. So let me explain this. If net sales come in at JPY 160 billion this year, as expected, the gross profit will be in the neighborhood of around JPY 30 billion. What is critical here is gross profit. We expect to earn JPY 7 billion in EBITDA for the JPY 30 billion gross profit for this fiscal year, meaning that we are spending about JPY 23 billion in expenses. Now if we have JPY 180 billion in net sales in the next fiscal year, the gross profit will be around JPY 34 billion or at least that's what we are aiming for. The point here is that we expect the amount of profit will go up by JPY 4 billion, just by looking at the expected increase in gross profit from JPY 30 billion to JPY 34 billion.

Then when you look at SG&A expenses, hiring expenses, in particular, we are most likely to spend about 5% of our net sales for this fiscal year as we focus on hiring. In normal years, we spent about 3% of our net sales on hiring expenses. So this year, we are spending 2 percentage points more than we usually do. For the next fiscal year, we are going to bring it back down to the 3%, the normal level. and that will translate into a saving of about JPY 3 billion to JPY 4 billion in hiring expenses next year. So if you add this to the expected increase in gross profit of about JPY 4 billion, we can expect the next fiscal year's EBITDA to be JPY 15 billion, up JPY 8 billion from what is expected to be for this fiscal year, and that's what we are trying to achieve. This is the logic behind our EBITDA forecast, increase gross profit by JPY 4 billion and save expenses by JPY 4 billion in order for us to bring EBITDA from JPY 7 billion to JPY 15 billion for the next fiscal year. So what we think needs to happen is, first and foremost, we should hire more people and increase net sales this year and then bring down hiring expenses next year. So the important milestones include the number of technical employees at the end of this fiscal year. The target is 34,000 because that forms the basis for net sales. And the percentage of hiring expenses to the amount of net sales, that's 3%. We're going to bring it back to the more normal level by carrying out the reorganization, being smart about spending hiring expenses and other measures I've already talked about. And of course, the final goal in the current medium-term business plan is JPY 30 billion in EBITDA. But first, it is critical that we make sure we do everything we can, such as driving revenue growth and efficiency in everything we do to reach the halfway point of JPY 15 billion in the next fiscal year. That does it to my presentation. Thank you very much for watching.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]