UT Group Co Ltd

TSE:2146

Earnings Call Transcript 2023-Q2

[若山 陽一, executive]

Thanks for tuning in for our second quarter earnings briefing. Let's get started. I want to begin by looking back how far we have come. This graph is showing how revenue has grown over the past 28 to be exact years since we started. Although you see some ups and downs along the way, generally speaking, we've been growing quite consistently at a 40% CAGR in terms of revenue. And we want to continue to grow at the same or even faster pace going forward. Now I believe there are some investors who worry that staff and business is highly sensitive to economic cycles. So I want to explain that, that's not necessarily the case based on facts I'm going to show you in this slide. As I've just said earlier, we witnessed this significant and consistent revenue growth in our 28-year history. When you compare that with Japan's industrial production growth rates, for example, our journey of revenue growth has not always followed the macroeconomic trend for the same period. We have been growing because our business strategy has been working, and we have been chosen by our customers. It may have something to do with the size of our company. And I'm not saying that we are 100% recession proof, but it is very clear that the trajectory of our revenue growth has been decoupled from macroeconomic cycles, as you can see in this graph. I can say, we are at least a recession resistant as a company in the staffing industry. That's what I'm trying to get at in this slide. And at each phase of the economic cycle, we, as management, need to make sure that the company stays differentiated from competitors. When the economy is recovering or booming, we needed to step on the gas to further drive sales. When business slows down, our focus should be to try to increase our market share and to enhance relationships with our clients. It is critical that we are smart and nimble in identifying and acting on these changes in the economic conditions. We need to act differently as the clients' demand for workers changes. In a booming economy, a lot of companies demand more workers, and we do everything we can to seize this opportunity for growth by tapping into our hiring capacity.

Instead, when economic conditions become less favorable, big corporations will have redundancies, which they want us to absorb, where there's a need for improving productivity of their existing workforce as companies put a freeze on hiring. So it is important that we have a suite of solutions to meet the shift in demands of our clients. We will focus on solution business and career development services to raise productivity of employees, both of which cater to the needs of our clients in the recession phase.

The ability to make right decisions at right times is what's driving our market share gains. We hire more workers during good times. Business slowdowns are opportunities for us to further strengthen relationships with our clients by meeting their needs in challenging times. We have been successfully decoupling our growth from economic cycles, and we will continue to do so as a management policy. So what's happening to our market share during the latest economic cycle. As you can see over here, it's been growing faster, in fact, during the pandemic period, we chose not to find new customers. Instead, we focused on strengthening existing relationships to boost our share within our customers. We shifted our gear at the moment when signs of economic slowdown began to emerge due to the pandemic. We made a right decision at the right moment to shift our focus on helping our existing customers in ways only we can during the pandemic rather than trying to find new customers. That obviously worked. Our share increased and our growth story continues. Now what do we need to do for sustainable growth in the future? We have 3 business categories. So let's discuss for each one of them. Manufacturing Business mainly focuses on large corporations in the electronics and auto sectors, and these manufacturer clients provide us with volume. They demand many workers. So increasing the supply of workers to them will contribute to further revenue growth. Similarly, Solution Business also targets big companies or big electronics makers in particular, and we have created companies that absorb and receive their redundancies as they go through restructuring.

Fulfilling the massive demand for workers in the electronics and auto sectors and providing solutions to the consequences of structural reforms within our big electronics clients are keys to our growth. In addition, we have Area Business which we started this year to provide more efficient platforms that can deliver on local demands for workers and jobs across Japan. The current pandemic exposed the need for more flexible working such as working from home or easy commuting.

We saw this as an opportunity and expected that more people would opt for more flexible work arrangements. That's why we focused on developing local business, and we are right about that. This business is growing strongly. We are able to address different needs in these different business domains, and that brings us consistency and drives us to expand for sustainable growth in the future. What I want to tell you in this slide is that we have distinctive strengths and effective strategies to drive our growth. First of all, we are the leading staffing agency for Japan's manufacturing sector in terms of the number of workers we can supply and recruit. We also excel in training workers and helping them stay employed.

This gives us a competitive advantage in quantity and quality, which in turn fulfills the need of our large corporate clients. That's the big picture. In addition to that, we now focus on developing local staffing business as the local demand for jobs is expected to grow even stronger in the years ahead. That is the business landscape in which we operate and capitalize on our strengths to further drive the business. This is something I have explained before. Japan's working population is estimated at approximately 60 million and the manufacturing industry employs about 8 million people. Out of the 8 million workforce, more than 5 million are so-called regular employees working for the big well-known Japanese manufacturers. The remaining 2.4 million are considered nonregular workers, dispatched workers, part-timers or contract workers. The number of dispatched workers in the manufacturing sector is estimated at 370,000 or about 400,000. The number of contract workers is also about 400,000.

What has been taking place in the manufacturing jobs is a shift from regular employment to dispatched labor caused by the restructuring that the large manufacturers need. That shift first emerged for contract workers when labor contract law was revised in 2013. Likewise, most manufacturers have stopped hiring factory workers for regular employment. So whenever they need more workers, they hire dispatched labor. Several regulations have been put in place to ensure a good working environment for dispatched workers. We expect that the shift towards dispatched labor will gain momentum and generate more demand, and we will do everything we can to leverage the opportunity into revenue growth. As I mentioned just now, there are approximately 400,000 dispatched workers in the manufacturing sector. Currently, we supply about 30,000 of them or 8.5%. Our objective is to supply 60,000 dispatched workers by the end of March 2025, doubling it in 2.5 years. This means our market share will increase to 15%, and we will become the dominant player in the industry, and we are on course to achieve that.

So what are the specific targets we are on course to achieve? These are the targets we set out to achieve in the fourth medium-term business plan, JPY 270 billion in revenue, JPY 25 billion in EBITDA and JPY 304 in EPS by the fiscal year ending March 2025. And these numbers are compound annual growth rates. We are currently in the fiscal year in the March 2023 and are working to make sure that we generate JPY 180 billion in revenue and earn JPY 15 billion in EBITDA. We will also do everything we can to increase our market share so that we stay, on course, to achieve all our targets in the years ahead. So far, we've been making very good progress, especially during the first half of this year. We have to continue what we've done into the second half so that we will absolutely achieve these objectives. I've just talked about where we want to be in terms of earnings numbers, but what does this mean to our employees? Exactly what's in it for them? First of all, we will deliver on the promise to raise the average salary of our technical employees by 20%. We will increase the visibility of efforts made by our technical employees, quantify their efforts for evaluation and translate them into a salary increase.

It creates a virtuous cycle, and it's important that we continue to do so. Second of all, we will bring down the percentage of SG&A expenses to sales to the 10% level by integrating back-office functions of many different subsidiaries in our group. And if we can bring that to 10%, our operating profit margin will also improve to 10% or higher. So we will achieve these objectives by the end of the fiscal year 2025. And third of all, we will increase our hiring capacity to be able to hire 2,000 people a month. So in addition to meeting the earnings targets, we will also make sure that we deliver on these practical objectives that directly benefits our employees by the fiscal year ending March 2025. Increasingly hiring capacity is definitely the key to our growth. Let's take a look back on how we got to where we are today. The last fiscal year ending March 2022 was a period where demand for workers was growing, and we hired 1,470 people a month, a figure that our competitors can't even come close to.

The hiring capacity itself becomes a value proposition, attracting more customers. Last year, we hired 1,471 people a month and the per capita cost of hiring was JPY 340,000. For this fiscal year, on the other hand, we don't have to be hiring as much as we did last year. 1,300 people a month is just about right, but we are bringing the cost of hiring further down. So what we have done is the integration of hiring functions within the group, and we continue revamping our owned media. Over the next 2 years, we will increase the hiring capacity to 2,000 workers a month and further bring down the cost of hiring from JPY 300,000 to JPY 280,000.

We know what needs to be done to achieve these objectives. We need to further optimize the functionality of our owned media and enable auto matching. Currently, we receive about 15,000 applications a month, screen 4,000 to 5,000 applicants for interview, carry out about 3,000 interviews a month and hire 1,000 to 1,500 people a month. There are a lot of human labor involved in this hiring process, which has become more complicated over the years. So there's a lot of room for integration and improvement.

Enabling auto matching alone, for instance, will eliminate most of the tasks in the hiring process and can significantly lower the cost of hiring. Then we need to be much better at retaining job seekers. So by the end of the fiscal year 2025, we should be the dominant player in the industry with our superior hiring capacity and that will allow us to expand our presence into a broader nonregular employment market that encompasses manufacturing and related jobs and provide our services in the new space.

So once again, putting these hiring initiatives in place is absolutely critical for us to really make sure we achieve our targets in the fourth medium-term business plan. What I have been talking about so far is actually a general overview of how we got to where we are today and what needs to be done to drive further growth. So let's turn our focus to details about the second quarter results. Here are the key figures. Net sales and EBITDA hit new highs yet again for the second quarter on a consolidated basis. Net sales were up 16.1% from the same quarter to JPY 84.28 billion. EBITDA soared to JPY 7.426 billion with 8.8% EBITDA margin from JPY 2.890 billion the same quarter last year, up 156.9% or almost [ 2.5x. ] These are really good results. EPS also jumped accordingly. This is a summary of the earnings. One of the things I want to emphasize is that gross profit improved 2 percentage points. Similarly, the percentage of SG&A expenses to sales also improved significantly from 14% to 11.2%. As a result of all this, EBITDA margin surged to 8.8%. The full year EBITDA target is JPY 15 billion, and we achieved almost 50% as we ended the first half. So we've been on course so far, and we need to stay on course for the rest of the year. Once again, our EBITDA soared 156.9%. Net profit attributable to UT Group jumped more than 500% from the same quarter last year. Here is our consolidated balance sheet. I have nothing special to say except that our financial standing remains robust. We have JPY 26 billion in cash. Whereas the total amount of short-term and long-term borrowings is about JPY 18 billion. So you can say that we are carrying virtually no debt.

We have more cash than borrowings. The difference is about JPY 8 billion. Another important point is that the value of shareholders' equity is approximately JPY 23 billion while the value of goodwill remains at JPY 5.6 billion, although we are quite aggressive about mergers and acquisitions. The goodwill is kept well under control, and it demonstrates that our investment decisions have been prudent and sound. So I don't see any problem with our balance sheet. Let me show you then quarterly changes in net sales and number of technical employees over the years. The latest quarterly net sales came in at JPY 42.7 billion, near the highest ever levels. The latest quarterly EBITDA figure hit a new high at JPY 3.8 billion, beating the previous highest just a quarter ago. They are the 2 points I want to emphasize. Just as I explained earlier, some historical perspective is necessary to appreciate the growth of UT Group. This slide is about our hiring capacity. We are increasing our hiring capacity. These light blue bars represent the average number of monthly recruits while the orange line indicates per capita hiring cost. What these graphs suggest is that we have successfully boosted our hiring capacity to more than 1,000 hires or close to 1,400 hires a month while keeping the per capita hiring cost at JPY 250,000 for the past 6 months.

So if we keep the per capita hiring cost at this level and continue to hire more than 1,000 workers a month for the rest of this fiscal year, the full year results will be something that makes us really proud and provide another testament that things are under our control. The efficiency of SG&A expenses continues to improve. Hiring expenses such as dual postings declined, personnel expenses went down as productivity improved, other expenses dropped in part due to restructuring. As a result of all this, the percentage of SG&A expenses to sales improved to 11.2%. And do we expect to see further improvement in this number because we replaced the core system with a brand new one back in April. And the 6 months of work on the business improvement project are now beginning to pay off.

We know what it takes to bring it down to 10% by the fiscal year ending March 2025. We know what needs to be done to raise gross profit margin to more than 20% and operating profit margin to 10% or above. And we know exactly how we're going to generate more revenue and improved efficiency of SG&A expenses at the same time. These are results by segment. Manufacturing Business focuses on large manufacturers. Area business caters to the local companies need for workers. Solution Business receives and absorbs redundancies caused by the restructuring programs of our large corporate clients. We also have Engineering Business and our Overseas Business is focused on Vietnam. These are the net sales figures and the percentages for each segment. I think that the percentages will be evened out eventually, but now and in the foreseeable future, these 2 segments when they deals with large manufacturers and the other that focuses on local businesses will drive our revenue growth complimented by the other 3 segments, although we expect that each and every segment will continue to grow until the fiscal year ending March 2025. This slide is comparing each segment second quarter net sales against the same quarter last year. Of course, as you can see, the key takeaway is that net sales grew strongly for each segment. The same is true for EBITDA as well, very healthy growth in every segment. The number of technical employees too grew strongly in every segment. So far, so good. And I think our next challenge is how we can grow even further.

There are several issues that we need to overcome, but we believe that we have done everything we possibly can and our efforts produced results rather quickly. Another point I want to make is that the gross margin of manufacturing business improved to 21.9% for the second quarter. It's an improvement of 3.9 percentage points from the same quarter last year. These are not full year figures. So they don't really look as straightforward as they should be, but it's a significant improvement and is caused by an increasing unit price as well as in market share. This graph below shows the impact on our gross profit due to the halt in operation following the production cuts by our auto clients. As you can see, we felt some impact in the beginning of this fiscal year, but more recently, we have seen almost no impact on our gross profit. One of the things that manufacturing business focuses on is the development of SME engineers. The goal is to train and produce 5,000 SME engineers over the next 4 years at the four technology skill development centers we established across Japan. We trained and produced 1,000 engineers this year. We are on course to achieve the target. Training a large number of engineers will be another value proposition we can offer to our customers. These are segment results of area business. The thing about area business is that it is a large market because the target is not limited to big corporations.

We are building close relationships with local businesses to get insights into local labor needs. This is available asset that we can leverage by mobilizing our resource to make area business even bigger. We started this business back in April. We look for a partnership through mergers and acquisitions, for example, with leading staffing companies in each area to leverage their hiring prowess so that we capture the local demand for dispatched labor.

This is about Solution Business. We absorbed redundancies from our big corporate clients. We saw good results in Solution Business because there were more clients who needed our solution, and we put focus on them. Engineering Business has grown at pace as well, although it is still a small business. It's a business that provides opportunities and services to those who want to transition from being technical workers to engineers, and we will continue to invest in this business going forward.

Overseas business too has grown strongly. Big progress has been made in business in Vietnam, and we think that demand will continue to increase in Vietnam. I'm done talking about the second quarter results. Last but not least, I want to briefly touch upon the earnings forecast for this fiscal year and how it fits into our medium-term business plan. Once again, these are the full year targets, JPY 180 billion in net sales, JPY 15 billion in EBITDA, et cetera. We were off to a really good start and ended the first half with excellent results.

We continue to work hard in the second half. Of course, some degree of uncertainty remains for those clients in the semiconductor industry in particular, but as we have always done, we will turn challenges into opportunities by providing a plethora of solutions to change the needs of our customers. So we are confident that we can continue to grow revenue and earnings in the second half to achieve our full year targets. So how does this forecast fit into the fourth medium-term business plan. As I said just now, JPY 180 billion in net sales and JPY 15 billion in EBITDA, these are the full year targets for this fiscal year ending March 2023. Of course, we want to keep growing our earnings to JPY 19 billion next year and a JPY 25 billion in the fiscal year ending March 2025.

We believe we can achieve these targets by further increasing our hiring capacity and market share. I guess these targets are easier to understand when presented visually. Internally, we are aiming even higher going beyond JPY 25 billion in EBITDA. At any rate, we definitely want to be the perfect staffing supplier in the manufacturing space by the fiscal year ending March 2025.

And in the next 5 years, after 2025, we will have another ambitious goal to achieve in the next medium-term business plan. Until 2025, our focus is further increase our market share and do whatever we can to improve the working environment for our technical employees and make the work experience as rewarding as possible. That's the overarching goal that we set out to achieve as one team. Thank you for your support, and thank you very much for watching.