UT Group Co Ltd

TSE:2146

Earnings Call Transcript 2020-Q3

[若山 陽一, executive]

Thank you for tuning in. Here's the summary of our third quarter financial results. I'm going to pick up a number of slides from our data pack and focus on key highlights of our results. I may go back and forth between the slides. So if you want to read the data pack in its entirety, please check our website later.

So let's get started. First of all, here are the numbers on Page 6. Net sales came in at JPY 76.7 billion. Operating profit was JPY 5.974 billion. And we earned JPY 78 per share for the third quarter. Revenue and profit remained almost flat from a year earlier. And to be honest, we are very glad that they came well in line with the year earlier levels despite a sluggish recovery in the electronics sector, which was running at a much slower pace than we had expected. The slack was taken up by an increase in demand from the automotive-related sector. We were able to manage to hold the line because of the auto sector.

The third quarter EPS dipped below the year earlier figure, but that's because of the onetime loss in Q1. There is no more one-off item to be posted during this fiscal year, so we are confident that we will be back on track. And right now, in this fourth quarter, we are doing everything necessary to get us ready for the next fiscal year.

The next slide, Page 7, describes the breakdown of our net sales by business segment and how it changed over the past year. Net sales from the Manufacturing Business were dragged down by the prolonged slump in activities in our electronics customers' business, as I mentioned earlier. But it only dipped 4.4% from a year earlier precisely because of the strong automotive-related sector picking up the slack.

Also taking up the slack were our Solution Business, which was up 15% from a year before; and our Engineering Business, whose net sales jumped 22% year-on-year. The story here is that we got all hands on deck to pick up this significant slack in business activities in the electronics sector and managed to keep the year ago levels in terms of earnings.

But we also understand that we didn't hit the goal of JPY 10 billion in full year operating profit. We need to have a thorough review, find out what went wrong and make things right before this fourth quarter ends to make sure we reach this target next fiscal year. And we are already seeing a good momentum, which gives us confidence that we can hit the JPY 10 billion profit goal next fiscal year.

Speaking of the good momentum, I'd like to go back to Page 3 and talk about our area strategy. The workers dispatch industry in Japan is increasingly turning into one controlled by a few large companies. We are #1 in Japan. We are the industry leader in the manufacturing outsourcing business. We have a national presence. But there are also 1 or 2 good local players in each prefecture or subregion in Japan. Now those who need outsourced workers, our clients, tend to be big corporations. And what big corporations want is an outsourcing partner strong in compliance and with capability to hire and provide workers in every prefecture. That is why you see a number of local outsourcing companies being for sale in Japan. It's increasingly more difficult for local players to survive in this climate.

And that's the context for our acquisition of Support System Corporation. Support System Corporation will officially join our group in April this year. Based in Osaka, the company has a good presence in the local market with the annual sales of JPY 3.5 billion. It has some presence outside of Osaka as well in Tokai and Kanto regions.

But the company's biggest strength is the fact that it is an ISO-certified company. The company has ISO 9001 quality management and ISO 22000 Food safety management. This company is a go-to partner for customers in the food industry. So far, UT Group hasn't moved into the food industry, where we expect to see more foreign workers in the future. So having Support System Corporation join our group will certainly give us a clear important advantage in terms of broadening our customer base. We also expect the synergy between this company and UT Community, which we created as part of our area strategy, and that will build on our efforts to increase our presence in the local markets across Japan.

So we will continue to search strong local players for M&A. We may opt for a business partnership instead of capital alliance sometimes, but our overarching goal is to increase our market share in every region in Japan. So the acquisition of this company really set the scene in this regard. The other major development in our group is the consolidation of UT Global and UT Aim. We did this in anticipation of more foreigners coming to work in Japan, especially in the wake of the easing of the immigration rules back in April last year. And given the fact that Japan is going to host the Olympics and the Paralympics this year, there should be more opportunities for foreigners to come to work in Japan.

Demand is also rising. Big manufacturing corporations are expected to hire more foreign workers to work at their plants. And we are already providing labor management service through UT Global to those big manufacturers who employ foreign workers.

UT Aim is the largest provider of temporary workers in the manufacturing industry in Japan. And what we did is we transferred the labor management platform of UT Global to UT Aim so that we truly become a one-stop-shop provider of worker outsourcing services for every single one of our clients and wherever they are based and wherever they need our services. We are going to get us ready for the rise in demand for foreign workers. So these are the 2 major developments I wanted to talk about.

The next topic is our full year forecast for this fiscal year and the next. Let's jump to Page 12. We revised down the full year forecasts in light of the developments from the beginning of this fiscal year up until the third quarter. As I explained earlier, the slowdown in business activities in the electronics sector persisted during much of the period, and we might not have been able to keep the year before levels of revenue and profit without the better-than-expected performance of the auto sector.

In our previous forecasts, we expected JPY 120 billion in net sales and JPY 10 billion in operating profit. It turned out, however, that our full year results this fiscal year would be much similar to what we had in the previous year, both in terms of revenue and profit. It's almost in line with the year before levels, but it's also true that we are unlikely to reach the original targets this fiscal year. So we are going to do many things during this fourth quarter to get us 100% ready to absolutely hit the JPY 10 billion profit target next fiscal year. We are focused on improving efficiency by consolidating some of our group companies and are building much stronger sales force.

Now in stark contrast to this fiscal year, the outlook for the next fiscal year ending March 2021 is much brighter, and we expect that it is going to be the year of recovery. So let me explain about it next. But before I do that, I think it's important to step back on why we set this target of JPY 10 billion in operating profit in the first place. We have our medium-term business plan. And in an initial version of the plan, our operating profit target by fiscal year 2021 was JPY 8 billion.

Take a look at these gray bars. Those are the profit targets for each year between fiscal 2016 and fiscal 2021. So we have the plan to increase our operating profit from JPY 2 billion to JPY 8 billion in 5 years. But until last year, our actual results constantly exceeded our initial targets.

As you can see, the green bars, we already achieved the JPY 8 billion profit target last year, fiscal 2019, 2 years earlier than originally expected, there being such growth momentum, perhaps bigger than anyone could have imagined, and feeling that momentum convinced us that our plan was right and things would pick up even more speed from there.

That is why we revised up our profit target last year to JPY 10 billion in fiscal 2020 1 year ahead of time. And that's when the massive production cut in the electronics sector began. You know the rest of the story. As I explained before, we have to revise down the forecast for this year's operating profit, and the new forecast is that the full year operating profit is expected to be flat from the year ago figure at around JPY 8 billion. So what we are doing right now in this fourth quarter is basically we are getting ourselves back on track so that we make sure we will absolutely achieve the JPY 10 billion profit target next fiscal year. Because once we achieve that target, the next target is to increase the operating profit to JPY 100 billion in 10 years, as we already announced. And in the next 5 years, the interim goal, if you will, is to increase it to JPY 30 billion by fiscal 2026. So threefold in 5 years and tenfold in the next 10 years. And that's our plan we're now focused to achieve, and we're building confidence around our plan.

Coming back to the JPY 10 billion profit target. It's true we didn't come even near it this fiscal year, but there are strong reasons why we believe we can hit this target next fiscal year.

First of all, a new legislation around equal pay for equal work will take effect come April this year, and a lot of our clients, like every company in Japan, need to comply with the law and ensure equal pay for equal work for every employee in their workplace. And that's going to be a huge challenge for our manufacturing clients and a huge business opportunity for us.

There are still many big corporations in Japan who have a different pay system for a different type of employment contract. They have one pay system for full-time employees and a different system for part-timers even though they are doing the same job. A typical large manufacturing company uses up to 20 different agencies to outsource the workforce for their plants, and the industry average is said to be around 6 agencies per plant.

So what's going to happen is that these big companies, our clients, need to develop a pay system that ensures equal pay for equal work. And that presents us a huge business opportunity because we have a consulting service to help our clients design and put in place that kind of pay system. We have a template of such pay system, the one based on skill, and this is something we have been doing since we started our business and developed over time. And the fact that we are the industry leader makes it easier for us to seize this opportunity as the consolidation of worker dispatch agencies is going to take place. We are poised to grow even bigger in the industry controlled by a few players because we are one of them. So this real change is going to be a huge opportunity for us, perhaps bigger than ever before. I have been in this industry for 25 years, but I've never seen anything like this before. And we must do everything we can to seize this opportunity and translate it into our success.

The other reason why next fiscal year is different from this fiscal year is the change in the business climate for our clients. The start of 5G network is one example, and the signs of recovery in the semiconductor sector is another.

Let's take a look at this chart. It tracks industrial production for integrated circuits over the years. When you look at the recent figures, you can see much correlation between the index and our performance. For example, in 2018 when our earnings had a big boost, the semiconductor market grew very strongly by more than 13%. On the other hand, in 2019 when we had a really difficult times, actually the market shrank 10%. See, we were here last year in a downturn. It's actually a sharp decline, and that's where we managed to hold the line. But as you can see right here, the market is expected to go up next year. In fact, according to WSTS, the forecast is 5.5% for 2020 and 9.8% for 2021. A huge rebound is projected right now. And we are already seeing a significant pickup in demand for workers in April and beyond, especially among our clients in the semiconductor sector. So this is another opportunity we have to seize.

So these are the 2 reasons why we expect a recovery next fiscal year. Our clients expect more business next fiscal year, and a huge opportunity will come with a law that requires equal pay for equal work. We must get ourselves 100% ready to build on these opportunities so that we will achieve the profit target next fiscal year that -- what we wanted to achieve this fiscal year.

Lastly, based on what I discussed so far, once again I will argue that it is highly probable that we can achieve this JPY 10 billion profit target next fiscal year. First of all, demand for dispatched workers will rise sharply from this April. Our clients in the semiconductor and electronics component sector have already asked us to supply 500 workers come April. April is the month when new graduates come onboard as well. So combined with the expected demand of 500 workers, the overall demand for dispatched workers is likely to become huge over a period of time from April.

We're also asked at this point in time to supply around 600 workers to the automotive-related sector. And let me stress that it is relatively unusual that we can anticipate the demand for April now. At any rate, we already know that the demand for dispatched workers will be quite strong in April. We need to supply at least more than 1,000 workers, including new graduates, in April, and that will be only the beginning. And we believe that this huge increase in demand will form a sufficient basis for expanding our sales, which is necessary to achieve our profit target in the next fiscal year.

Second, we expect that more and more medium-sized dispatch agencies will be for sale, presenting us with more opportunities to do M&A. The acquisition of Support System Corporation is a good example, as I mentioned earlier. We will continue to seek such deals and opportunities for business partnership with good local players because that is one of the keys to driving growth.

Third, our unique Solution Business is expanding at a healthy clip. In Solution Business, we help our clients carry out the structural reform in the organization. In the electronics sector in particular, more of our clients than ever before are implementing a structural reform program right now in order to rightsize their workforce. What we do is that we accept these employees from our clients and redeploy these talents to other companies as dispatched workers. And we believe that through this business, we are playing our part to increase labor mobility in Japan as well.

So far, we've been very fortunate working with the leading electronics manufacturers such as Panasonic, Hitachi or Fujitsu; created joint ventures with them; and acquired some of their subsidiaries through capital alliance with them. We also announced that 3 Toshiba Group companies joined us back in November last year. So our next financial results will include their results on a consolidated basis. And we anticipate more of such deals will follow in coming months and years. As we integrate more companies and business units from our clients' business into our organization, stronger cooperation and alignment will be necessary.

The key to bringing success to our Solution Business is having a good track record of building excellent customer relationships. From Panasonic to Toshiba, we have developed a relationship with many clients, and that is our distinctive strength, kind of which no one else in this industry has. So we need to take advantage of that, and I want to bring our partnerships with our clients to a next level going forward.

Fourth, our Engineering Business is poised to grow big on the back of a chronic shortage of engineers across different sectors. What we are doing here is that we are training our dispatched workers in our Manufacturing Business as engineers. We are providing career development opportunities to them. And finally, it is time to speed up this process, especially in anticipation of a recovery in the semiconductor sector this year. It is also a very profitable business, so we are focused on delivering results.

Last but not least, I really want to talk about our business about foreign technical interns. Let me give you the context first. Generally speaking, as I mentioned earlier, the worker dispatch industry in Japan is increasingly controlled by only a few players as more consolidation is taking place in the wake of the new legislation around equal pay for equal work. And so the share of dispatched workers in the entire labor market is only going to increase. Perhaps a more immediate example of that is that we recently absorbed redundancies from some of the electronics sector clients.

At the same time, the average fee for worker dispatch continues to rise due to the chronic shortage of labor. So it is only natural that we are focused on expanding the client base and work hard to be chosen by the market while taking advantage of the rise in the average fee. That's our basic growth strategy.

Having said that, there are still many labor-intensive sectors or jobs which cannot pay higher wages to their workers. And for those sectors and jobs, the only sustainable option is to rely on foreign workers. That's why the Japanese government decided to make a big policy shift and eased rules to accept more foreign workers. We may still be in the early days of laying the foundation around big corporations to accept more foreign workers, including technical interns from our neighbors, but I am absolutely certain that this business will grow for mid to long term.

UT Group has been doing its share of the groundwork. And more recently, we have signed partnership agreement with some Vietnamese companies. So getting this business in motion at a faster pace is our midterm focus.

In summary, we expect the following things to happen for the next fiscal year and beyond: demand for dispatched workers will make a rebound; an increasing number of midsized dispatch agencies will be for sale; there will be more opportunities for us to absorb workers from our clients in our Solution Business; and our Engineering Business is poised to fulfill our strategic goal as demand for engineers will rise; on top of that, we're going to build on what we have done so far to accept more foreign workers.

Our midterm goal is to be able to provide a full range of outsourcing services for dispatched workers, foreign workers and skilled senior workers that we rehire from our clients. We're going to be the only company that provides comprehensive services to support these workers and leverage their resources to the fullest. We're also going to be the first to design and implement a successful growth strategy in a dramatically changing work environment, and I'd like to have your continued support and understanding.

Once again, it's absolutely imperative that we earn JPY 10 billion in operating profit for the next fiscal year because that will set the perfect scene for achieving our next big milestone, which is operating profit of JPY 30 billion in the next 5 years.

That's it from me. Thank you very much.