UT Group Co Ltd

TSE:2146

Earnings Call Transcript 2021-Q3

[若山 陽一, executive]

I would like to present the results of the third quarter, key topics for the period, our outlook going forward and the progress towards our medium-term plan.

First of all, the key topics for the period. A key issue is how COVID-19 has affected our business. As you can see from the graph, the impact of the suspension and closure of operations largely tapered in the second quarter and was close to 0 by the third quarter. Similarly, the reduction or cancellation of dispatched workers caused by production adjustments at clients decreased considerably in the second quarter and was basically 0 in the third quarter.

Looking back, we can see that the impact of COVID-19 arose mainly in the first quarter with a partial impact on the second quarter and a recovery in production in the third quarter. We have been tapping the demand from this recovery, which we view as a positive development. Recently, demand has been very brisk, thanks to a sharp recovery in the third quarter from the production adjustment seen in the first and second quarters.

The left graph shows UT Group's new hires in the electronic-related sectors. The right-hand graph shows UT Group's new hires in the automotive-related sector. The data shows that both sectors have shown strong growth. For the electronics-related sector, growth accelerated in September and in particular, since the start of the second half year, with monthly new hires topping 200 in November. New hires were down slightly in December, owing to the lower number of business days. But the general trend shows an increase in hires accompanying the growth in demand.

Looking at automotive-related hires. The figures have recovered as an even sharper incline, with growth in new hires increasing since September and the start of the second half year to approach 400 in December. For December alone, aggregate new hires for the electronics and automotive sectors were around 600. From January onwards, we believe demand is strong enough for monthly new hires to rise to 1,000 or more. For reference, new hires of 1,000 per month is equivalent with our record highs reached in September, October 2018. For the second half year through in the next fiscal year, we intend to achieve new hires in excess of this record figure.

This page shows quarterly changes in the number of technical employees. We were able to achieve growth in most sections -- most segments, with particularly strong growth in the Manufacturing Business, which was up 1,502 people versus end September. Of course, this owes, in part, to the addition of a consolidated subsidiary, but also owes to strong orders from clients in the semiconductor-related and automobile-related sectors.

The Solution Business also showed growth. For the Engineering Business, the addition of new graduate hires was a positive development. However, during the period, the COVID-19 pandemic resulted in a slight contraction in opportunities for One UT, which is a system that allows employees to switch from manufacturing to engineering, a kind of career boost that bridges the gap between UT Group and our clients. However, this did not affect the overall trend for growth, and the key task for us is how we tap into this recent strong recovery in demand and turn this into revenue.

From this perspective, the first half year was marked by concerns over demand. But with demand recovering sharply in the second half, the key issue is how we can increase hiring efficiency. This is something we have more control over within the group, making it easier for us to formulate our outlook.

Another topic for the period is Seekel Holdings, a personnel dispatch company that specializes in Ibaraki region. We acquired 100% of the company's equity in November as part of our area platform strategy. The strategy has involved a number of acquisitions in the past, including companies such as UT Community and Support System. Seekel Holdings is a third acquisition under the area platform strategy, which involves entering capital alliances with the leading companies in a given area. The strategy kicked off in the Kansai area and proved very successful. So we have made our third acquisition.

In addition, in October, we acquired Green Speed, a Vietnam-based company that provides similar services to UT Group. Green Speed dispatches personnel to factories in Vietnam and has a large share of the market in Ho Chi Minh. Many of the factories to which it dispatches workers are owned by European companies or local production facilities owned by our Japanese manufacturing clients. One of the ultimate goals of the acquisition is to give cross-border career support via Japan's foreign technical intern program.

Although at present, the Visa situation is somewhat complicated owing to COVID-19, the number of interns is expected to increase in the near future. Once this happens, we intend to bring manufacturing workers who have developed their skills in Vietnamese factories over to Japan for further technical development, after which, they can return to Vietnam with stronger career prospects.

The acquisition made the foundation for this strategy, and we are very excited to see how this business will develop. The manufacturing worker dispatch market in Vietnam is growing considerably at present. We intend to grow our operations within Japan by 25% to 30% per year, but potential growth in Vietnam is higher still, at 50% or more. We believe this is a good opening play in a strategy that can complement our domestic operations.

One aspect of our business to date has been to provide career support and training to manufacturing workers, whom we then dispatch to client sites for a high unit price. In order to accelerate this trend, we decided to establish technology skill development centers in Kitakami in Tohoku, Kumamoto in Kyushu, Yokkaichi and Osaka.

We already opened the first center in Kitakami. The areas of Kitakami, Yokkaichi and Kumamoto are areas where client demand is particularly strong, and our plan is to build a technology skill development centers in order to train 3,000 workers over 3 years. That is 1,000 per year on average if we're dispatching them to clients. The target area has expanded to include Osaka, but all 4 areas are places where dispatch demand is growing swiftly for engineers capable of working with semiconductor production equipment and related devices.

The dispatch business model involves maximizing the dispatch unit price and the number of dispatch workers and semiconductor production equipment engineers carry a higher unit price than manufacturing operators. So the key question is how many of these engineers we can train? We believe there is demand to support 3,000 engineers over 3 years, and we intend to train workers in collaboration with our clients.

The technology skill development centers are an opening play in a strategy that aims to provide one-stop solutions for client needs covering manufacturing operators through semiconductor engineers.

We next turn to the highlights of consolidated results, which are the product of the main themes addressed earlier. As you can see, we achieved record net sales, which owed to the improvement in the order environment through the third quarter and a boost from M&A mentioned earlier. The fact that we were able to generate record net sales despite the COVID-19 pandemic was a particularly strong result. We also reported a record increase in the number of employees.

Our medium-term plan aims to increase technical employees, thereby driving growth in sales and overall profit and winning market share. We have made progress towards this goal, even despite being in the midst of the pandemic.

This is an overview of results. I particularly want to point out that despite the current situation, net sales rose to a record high, although the rise was admittedly only 7.7% year-on-year. The situation also resulted in some of our personnel being put on standby, but even so, the gross margin held at 19%.

If we exclude the impact of putting staff on standby, our operations were still able to generate a gross margin of around 20%. This was a relatively strong result and showed we were able to keep sales and gross profit steady. As a result, EBITDA came in broadly at JPY 6.3 billion, while net profit attributable to the shareholders of the parent rose by a substantial 18.5%. The 9-month period was fraught with uncertainty about how far we could achieve net sales growth. But in the end, the result was extremely positive.

This page shows quarterly momentum for sales and number of technical employees. As you can see, record net sales were reported in the third quarter at JPY 29.6 billion. EBITDA topped JPY 2.4 billion, and the EBITDA margin was 8.2%. With the order environment in a favorable position, we intend to record net sales for the fourth quarter in excess of the JPY 29.6 billion for the third quarter with a firm boost to profit.

We now look at the balance sheet. If we focus on where there has been change, we can see the result of M&A has driven up goodwill by JPY 2.4 billion, bringing the balance to JPY 4.25 billion. Shareholders' equity rose to JPY 18.6 billion, and we believe the figures show we have strengthened our alliances in a well-balanced manner without excessively inflating goodwill. In addition, cash and deposits was JPY 26.3 billion, while short-term and long-term debt together total only around JPY 12 billion. Net cash is, therefore, JPY 14 billion. The balance sheet is simple without many changes over the period. And we have maintained a healthy financial position. Our gross debt-to-equity ratio is 0.67 and net debt is basically 0.

Looking at the segment breakdown of net sales, I would like to point out the growth in the Solution Business during the pandemic. The Manufacturing Business struggled the most in the first half and the first quarter in particular. And we took a defensive approach of minimizing the decline in sales in that business. At the same time, demand for the Solution Business has risen considerably in these circumstances. The Solution Business takes on staff and outsourcing demand from clients that are undergoing restructuring or takes on a division in its entirety by acquiring the related entity. We are the only dispatch company that is able to provide such a service.

The Manufacturing Business, which dispatches workers, and the Solution Business, which takes on workers and entire businesses, operate in different market environments. Under the current situation, it is the Solution Business that saw growth of just over 100%. It is precisely because we have the Solution Business that we can achieve stability in overall sales. Large companies, especially those which are our clients in the electronic business and the automotive business, are poised to enter a period of restructuring. As such, outsourcing operations should see strong growth ahead, which should drive expansion in our Solution Business.

I will now provide an overview for each segment. For the Manufacturing Business, there were fears of a sharp decline in sales. However, in the event the decline was kept at only 8.9%, which is actually a strong result.

Looking at the Manufacturing Business in more detail. Results in the third quarter came in above the third quarter and the prior year. We believe this shows that the market changed considerably in the second half of the year. Similarly, technical employees also came in above the prior year in the third quarter. Despite some prior concern over how far sales would decline, actually year-on-year momentum turned positive from the beginning of the second half.

Looking at results in the Manufacturing Business by industry. The decline in automobile-related sales was sharp, especially in the first half, partly owing to suspended operations. The situation started recovering rapidly in the third quarter, but sales for the 9-month period are still being dragged down by momentum in the first half. Currently, even the automobile-related industry is showing growth, and we aim to push growth from the fourth quarter onwards.

This is especially the case for electronics-related industry where 5G network rollouts are occurring, but it's also true for the automobile-related industry. When clients in both the automotive and electronics industries become more active, competition over recruitment becomes intense, and this was a positive factor for our business in the third quarter.

There is not much further to add on this page, but we can see that the pace of decline in sales has narrowed considerably. The situation in the second half of the year clearly differs from that in the first half.

Now we look at the Solution Business. Sales approximately doubled. We have created ties with companies carrying out restructuring and have been in discussions with a variety of manufacturing clients. These developments have surfaced in numerical data, resulting in very strong sales growth and a similarly strong growth in profit.

All the metrics on this page is showing major year-on-year growth. And since we have entered the period where we can expect considerable expansion ahead, the Solution Business has a promising role in supporting our medium-term plan. The companies that were incorporated into the Solutions Business includes 3 Toshiba Group entities and 1 Hitachi Group entity. Legacy companies include UT Pabec, originally a JV with Panasonic; and Fujitsu UT; as well as the Hitachi entity, UTHP. To these companies we added 3 Toshiba entities and a Hitachi entity Mito Engineering. As a result, we now have some form of capital alliance with Panasonic, Fujitsu, Hitachi and Toshiba. We intend to use these companies as a place to assign staff from clients undergoing restructuring. These companies here are the foundation and the starting point rather than the end goal. We have now finally put together a portfolio of companies with which to tap outsourcing demand and drive future growth.

This is the Engineering Business, which broadly speaking, takes on new graduate recruits for dispatched to client sites. For mid-career recruitment, we created a career support path that enables manufacturing operators to transfer mid-career to engineering. However, COVID-19 placed restrictions over training programs, and the ability to transfer workers across regions declined drastically during the first half. This resulted in workers being placed in temporary standby for a time. From this perspective, operations focused on new recruits with mid-career development support through One UT severely limited.

Even within those circumstances, we were able to secure a major improvement in margins, with EBITDA margin an extremely high 16.1%. From April onwards, we plan to take on 500 new recruits who will predominantly be allocated to the Engineering Business. This should drive further sales growth. While at the same time, we intend to use our technology centers to help train and provide career support to semiconductor engineers. We therefore intend to build a complementary relationship with the Engineering Business and drive sales growth that can leverage our strong margins.

Sales and other key trends for the Engineering Business are on this page. Please note the significant improvement in profits versus the prior year. This is a stable development, and we view keeping a healthy margin while growing sales further into the next fiscal year as a key priority.

Of particular interest is the large increase in construction engineers. The design and manufacturing sector fell slightly owing to the decline in factory production. However, recently, demand in the Engineering Business has been extremely strong as it has been in the Manufacturing Business. In contrast to the first half, we aim to make proactive use of our One UT business, including personnel transfers from the third quarter onwards. We hope to have such operations up and running by the next fiscal year.

The design and manufacturing sector, which mainly dispatches engineers to manufacturing businesses, showed year-on-year growth in the third quarter. Construction engineers sector has shown solid momentum from the beginning of the year. Our strategy has involved the shift away from the IT engineer sector towards design and manufacturing.

This partially explains the figures here. But going forward, we intend to strengthen the IT engineer sector while expanding our core strategy of providing one-stop engineer dispatch solutions to manufacturing clients and at the same time, securing further growth for the construction engineer sector. In sum, we intend for the design and construction sectors to complement the IT sector, underpinning growth for the Engineering segment overall.

Regarding our full year forecast for the current year, we have held off from revising our targets, which is still the same as at the start of the year. Our sales target is JPY 108.8 billion. EBITDA is JPY 6.7 billion. Operating profit is JPY 6.0 billion.

Regarding these targets, if you refer back to Page 11, broadly speaking, net sales for the third quarter alone was JPY 29 billion. For the fourth quarter, we aim to generate higher sales of around JPY 30 billion. Aggregate sales for the first 3 quarters was JPY 82.6 billion. If we then add the JPY 30 billion for the fourth quarter, full year net sales will come to over JPY 112 billion to JPY 113 billion. The key point for the fourth quarter, therefore, will be how far sales will exceed the JPY 30 billion mark. And attainment will be governed by demand and recruitment.

I've already said that demand is not an issue. We're also putting our full weight behind recruitment. If we are able to make 1,000 new hires per month on average, then generating sales of over JPY 30 billion in the fourth quarter is a feasible prospect. The sales, the top line is governed by demand and new hires, which are in a positive situation at present.

The key issue is how far we can fully tap these 2 factors to drive sales growth ahead. Our goals for the next fiscal year include generating monthly sales from March of around -- of at least JPY 10 billion to JPY 11 billion. If we are able to secure monthly sales of JPY 10 billion, we will be able to generate annual sales for the year of JPY 120 billion. In other words, we are focusing on building up next year's baseline as much as possible.

From that perspective, our spotlight is on how much we can raise new hires in January through March. On top of that, if we can build up new hires ahead of the new fiscal year, sales for the fourth quarter should come in above JPY 30 billion. And that would represent a strong starting point for the new fiscal year. At the same time, in the third quarter, we succeeded in bringing EBITDA up to JPY 2.4 billion. Our basic goal is to keep EBITDA for the fourth quarter at JPY 2.4 billion to JPY 2.5 billion. As we've been able to reach this level in the third quarter, we have built the foundation to generate full year EBITDA of JPY 10 billion in the next year. Our goal for the rest of this year is, therefore, to maintain structures able to stably generate quarterly EBITDA of around JPY 2.5 billion and sales of over JPY 30 billion.

As I said previously, EBITDA for the first 9 months is around JPY 6.3 billion. Our current full year target is JPY 6.7 billion. This implies a fourth quarter EBITDA of JPY 0.4 billion. The gap between our implied target of JPY 0.4 billion and our underlying capacity for quarterly EBITDA of JPY 2.4 billion is around JPY 2 billion. This will be allocated to aggressive spending on recruitment and M&A in the fourth quarter.

Specifically, we plan to spend an extra JPY 1 billion on recruitment and a further JPY 1 billion on M&A and alliances. This represents a sharp increase in spending, which we have budgeted for because we believe the current strength of demand is a good opportunity to grow sales in the fourth quarter and beyond. We will therefore step up recruitment to that end. Our target of over 1,000 new hires would be higher than our past record from 2 years ago. Very few companies in Japan are seeking to take on 1,000 new hires per month during the COVID pandemic. However, our goal is to build local recruitment operations precisely during this pandemic period to achieve our monthly target of 1,000 new hires.

We have already entered the stage of top line growth. And in the fourth quarter, we intend to spend aggressively on recruitment as a means of taking market share. And that is the intention behind our JPY 2 billion increase in spending and is also why we have refrained from revising our full year targets. In other words, we have left ourselves a buffer to raise spending and take market share.

That was a somewhat long introduction, but returning to Page 26. We have left our EBITDA target in place at JPY 6.7 billion. Actual capacity is higher than this target. This is our outlook for hiring activity. As an overview, the light colored bar shows orders, and the darker blue shows new hires. As I explained earlier, new hires in December was around 600 to 700 people in aggregate for both the automobile-related and electronics-related sectors. We plan to raise this to 1,000 in January.

There is clearly a large increase in demand as shown in back orders. And we expect to hire 1,000 staff each month in January through March. This represents a new phase for UT Group, where we will tap demand, increase recruitment and thereby achieve unprecedented sales growth in the fourth quarter and beyond.

I'm going to skip over the details of our medium-term plan and present the conclusion. Our current medium-term plan, sales and EBITDA targets are shown here. We're currently in FY '21. We raised our sales target partway through the year to JPY 108.8 billion. And a key point for the remainder of the year is how far we can extend sales beyond then. Our internal target for the next fiscal year is for sales of between JPY 130 billion and JPY 150 billion. We will be laying the foundations for meeting this target in the current fourth quarter using organic growth to reach sales of JPY 130 billion and believe that growing client inquiries related to our Solutions Business means a sales target of JPY 150 billion is feasible. This will provide support for the EBITDA target of JPY 10 billion.

Our internal EBITDA target for FY '25 is JPY 30 billion. Of course, in order to reach JPY 30 billion in 5 years' time, we will need to pass an interim target in 3 years' time of JPY 15 billion by FY '23. Initial target for FY '23 was JPY 12 billion. Achieving this will require EBITDA for FY '22 of around JPY 10 billion. So we aim to see EBITDA growing at this gradient on this graph. And although there will be some adjustment between fiscal years in terms of spending, we aim for sales growth to be matched with spending so that appropriate profit can be booked in each year. And we will be focusing on this, so it comes out clearly in our IR activity for future periods. Within that context, we will work to ensure solid growth in sales on a quarterly basis. Thank you for listening. [Statements in English on this transcript were spoken by an interpreter present on the live call.]