UT Group Co Ltd

TSE:2146

Earnings Call Transcript 2022-Q3

[若山 陽一, executive]

Thanks for tuning in. I am happy to walk you through our third quarter results. Today, let me first give you an update on the progress regarding the execution of our fourth medium-term business plan. And then I'm going to run through the third quarter results before talking about the full year earnings guidance and the business outlook for the next fiscal year and beyond. So let's get started.

These are the key highlights of the third quarter results. Overall, we are growing at a very brisk pace, thanks in large part to the enormous demand for labor. That is why we have been hiring aggressively. That is why the number of our technical employees hit an all-time high of over 30,000 at the end of December last year, which was extremely exciting because we finally achieved one of our strategic goals.

And as a result of all this, hiring more and being able to satisfy the enormous demand for labor, our quarterly net sales reached an all-time high of JPY 41.4 billion in the third quarter. So Q3 has been a very good quarter.

Let me then give you an update on the progress we've made with our fourth medium-term business plan and talk about what's ahead for the next year. The current medium-term business plan is a 5-year plan from fiscal 2021 until fiscal 2025. And of course, this medium-term business plan is the first half of the long-term business plan, which spans 10 years from fiscal 2021 until fiscal 2030.

So the current fiscal year ending March 2022 is the second year of the 5-year medium-term plan, and we've just finished the third quarter of fiscal 2022. We are now setting ourselves up for even more significant growth from here over the next 3 years. And basically, we will stick to our current business model until fiscal 2025 because the objective for the current medium-term business plan is to increase our market share. So we are going to be focusing all of our attention on increasing our market share over the next 3 years. Just so you know, I mentioned earlier that we now employ more than 30,000 technical employees. Now there are approximately 400,000 temporary workers in the manufacturing sector in Japan. So that means our market share is 7% to 8% today. And as we try to hire more technical employees every year, we expect the number to rise from 30,000 to 40,000 to 50,000 by fiscal 2025.

So if the size of the market remains the same, 400,000, we will aim for a 10% market share or higher with the 50,000 technical employees. In that number, 10% market share is, by and large, the same as that of the so-called big temp staff agencies in the temporary administration job sector.

However, the temporary manufacturing job sector in Japan is currently going through consolidation with many smaller firms losing out to bigger ones. We are a big one. In fact, we are the biggest player in this sector. So we will continue to take advantage of that and keep working hard over the next 3 years to make sure we remain #1 in the market.

When it comes to the net sales target, we revised up the full year net sales guidance from JPY 130 billion to JPY 160 billion during Q3 as the demand for labor keeps growing, and we are able to continue to hire more technical employees to meet that demand.

We have overwhelming capabilities to hire and supply workforce and that's why we revised up our net sales guidance to JPY 160 billion. On the other hand, we lowered our full year EBITDA guidance from JPY 10 billion to JPY 7 billion, in large part because we decided to focus on hiring and that required quite a lot of expenses. But this drop in EBITDA is absolutely a one-off event, as I explained before and a necessary step to aim higher for the next fiscal year.

As you can see, we expect to generate JPY 180 billion to JPY 200 billion in revenue for fiscal 2023 and with JPY 180 billion to JPY 200 billion in revenue, we expect to earn JPY 15 billion in EBITDA for the next fiscal year. That's our target as we approach the halfway point of our medium-term business plan in fiscal 2023.

The target that we must achieve at all costs, if we want to reach the final goal of JPY 30 billion in EBITDA by fiscal 2025. In order to get there within a few years, we need to keep gaining market share and need to be a much leaner company by managing costs more strategically, and that's exactly what we are doing right now.

The headline of this slide reads that we have laid a groundwork to begin the journey that ends with JPY 15 billion in EBITDA in fiscal 2023. Of course, there are still many things to be done to make sure we really get ourselves to where we want to be, but I just want to mention 2 things that we believe are the most important. One is that we must continue to expand our technical workforce as much as possible by the end of this fiscal year.

Our goal is 34,000 technical employees by the end of March 2022, as I announced previously and repeatedly. It's already over 30,000 by the end of Q3, so we are well on track. We just need to keep on hiring more in Q4 to reach the goal of 34,000 tech employees by the end of March. The more technical workforce we have, the more revenue we can generate for the next fiscal year. For each annual increase in our technical workforce, our revenue base for the next year will become thicker as though we can jump higher as the ramps get higher, if you will.

That's what we need to do and keep on doing for the remaining months. The other important thing is that we need to become leaner as a company, and that requires cutting costs and improving efficiency. These are the 2 things that we are focusing on right now in Q4.

Exactly what are we doing to reduce costs and improve efficiency. One of the things we are doing is that we are now integrating and consolidating the back-office operations within our group following a series of corporate acquisitions we've made over the past few years. In addition to that, we are restructuring and reorganizing some of our subsidiaries so that we are able to create and deliver one-stop services for our clients.

We are conducting an in-depth review on our business processes and working to revamp our IT infrastructure. We are doing all of this to be able to better manage our business operations as we get bigger and bigger. We internally call it the efforts to put in place the right structure and put on the right outfit as we are growing out of the current arrangements. And we need to do it fast. Otherwise, it's never going to get done.

That's why we're doing them both at the same time, keep hiring more to maximize our technical workforce and put in place the better structure to keep costs under control. We have been doing them for quite some time, and that's why we can say we have laid the groundwork to begin the journey that ends with JPY 15 billion in EBITDA in fiscal 2023. To give you more detail on increasing the technical workforce, we have been able to hire more and increase our technical workforce since around fiscal 2021 when the impact of the COVID-19 pandemic on our hiring efforts was deep and extensive, particularly during the first and second quarters of fiscal 2021. I remember that about 4,000 of our technical employees were temporarily laid off. But since then, especially when the pandemic situation became somewhat less uncertain, we decided to focus on hiring more and the number of our technical workforce started to grow again on a quarterly basis.

We thought that the number of our technical workforce had hit the lowest as it could get. So we stepped up our sales efforts and focused on hiring more. And this is the result, the size of our technical workforce is growing strongly and consistently. We have now over 30,000 technical employees as of the end of Q3. And if the current pace of growth continues, and we hit the 34,000 mark by the end of this fiscal year, it is quite certain that we see very positive results for the next fiscal year.

Even if you don't hit the 34,000, anywhere between 32,000 and 34,000 will make for a brilliant outlook for the next fiscal year. Of course, we keep focusing on hiring to hit the 34,000 goal by the end of this fiscal year so that we have a bright year ahead. And what sustains and drives us to achieve the hiring objectives is, of course, the robust demand for labor.

And we want to look at both the availability of jobs and the price per contract. Let's take a look at the demand first. This orange line represents historical changes of Japan's overall jobs to applicants ratio between 2016 and 2021. As you know, any figure above 1 means that there are more jobs than job seekers, it's labor shortage. And this gray-shaded area is when the COVID-19 pandemic occurred.

Obviously, there have been more jobs than job seekers before the pandemic. The demand for labor had been very strong. Then the pandemic happened and the demand for labor plummeted very rapidly dipping below 1. Its impact continues to hit restaurants and other service sectors around the globe even today. But over the past year, the labor demand began to rise again and has been recovering more recently. And now the overall figure is 1.14, meaning that there are 114 jobs for every 100 job seekers in Japan.

Now when it comes to manufacturing jobs, our business domain, there has been a chronic labor shortage and one that is much more severe than in other sectors. Please look at the green line. The highest figure was 1.97 in 2018, which means that there were almost 2 job openings for each job applicant. Of course, the pandemic had an overwhelming impact on labor demand in every sector, bringing the manufacturing jobs availability down close to 1. But since then, we've seen a very quick recovery, it's literally a V-shaped recovery and it's at 1.86 today, almost recovering to where it was before the pandemic.

So the labor demand in our business domain is very strong. It also means that as long as we can hire more people, there are companies that need workers and that will bring us more revenue. So the question is whether or not we can hire and keep hiring more. Our answer is a definitive yes. We are perhaps the most hiring company in this sector in Japan. We have at most 15,000 applicants and hired 1,500 of them in 1 month, and that's our maximum hiring capacity today.

There is no other company in Japan that hires 1,500 people every month. Our competitors are no match. So we're going to continue to take full advantage of our hiring prowess and capacity to generate more revenue. This robust labor demand is really a very important factor. What about the price per contract? The price per contract tends to go up as labor demand grows. That is why we have seen a big rise in the price per contract, for example, during the latter half of this Q3.

In this graph, the value in April 2021 is indexed at 100. It's been going up consistently and is projected to rise this high by March this year. So it will be less than 10%, but it's grown significantly and the pace of growth is robust. This provides further evidence that labor demand outstrips labor supply and more companies are willing to pay more to get hold of workers. This labor shortage is a serious management issue for a lot of manufacturers, and we are here to help them by having hired more technical employees and supply much needed labor force.

I believe you now understand why we've been saying that hiring more people is of the utmost importance for UT Group. The other thing we need to keep focusing on for the remaining months is cutting costs and improving efficiency. As I said earlier, we need to become a leaner company. So far, we have been spending hiring expenses rather liberally because that's what's necessary to generate more revenue. Hiring expenses are more or less a variable cost. And if you want to generate more revenue, you need to spend more hiring expenses.

As sort of a general guideline, we usually spend about 3% of sales for hiring expenses, and that's actually been the average over the few years before last year, as shown in this chart. But over the past 12 months, since we decided to focus on hiring more technical employees, our hiring expenses have been well over the 3% normal level, going above 4%, 4.3% to be exact at one point in time. So we are willing to spend this much on hiring expenses to get hold of workers.

Before the next fiscal year and beyond, we will bring this down to the 3% level. By bringing it down to and perhaps keeping it below what we consider as our normal level because we're going to be more efficient, we can improve our profit margin next year. We have been spending this much on hiring, but we're going to spend far less in the months ahead.

Another thing I want to talk about is the database consolidation, which is just underway. This is part of the consolidation of some of our subsidiaries, including those that we acquired more recently. In April this year, we are going to create a company that consolidates several functions and operations that are currently spread across our subsidiaries, including the back office operations I talked about earlier.

And what we are trying to do here is integrate and consolidate their individual database that they use for hiring into 1 big database for the UT Group. I've said before that 15,000 people send their application to work with us every month, and we hire about 1,500 of them at most, and that's our maximum monthly hiring capacity. So it's about 10%.

Now it may be revealing that about 30% of the 15,000 applicants actually meet our hiring criteria. So in theory, we should be able to hire 30% of them, but in practice, we can hire only 10% of them for many different reasons, including mismatches in locations or working hours.

However, by integrating our database, we will be able to provide more job opportunities for those who want to work with us based on the entire job listing information that we have. We believe that will raise the hiring rate and will translate into a significant improvement in the number of hirings. And we hope that we will be able to increase our maximum hiring capacity from 1,500 per month to 2,000 per month.

If so, we can increase our hiring capacity without having to spend more on hiring expenses. We can hire more efficiently. That's very important and right now, we're doing everything we can to make this happen in April. And I'm very optimistic about growth opportunities that this initiative will open up for us for the next fiscal year and beyond.

There is another initiative that we are carrying out to improve cost efficiency, and that is to slash redundant SG&A expenses across several subsidiaries within our group. Those expenses are mostly expenses with respect to back office operations, such as accounting, payroll or dispatch and labor management. Today, there are back office functions at every single one of our subsidiaries doing generally the same but slightly different work.

So if we consolidated these 5 or 6 subsidiaries into 1 company, we can also consolidate their back-office operations as well. In fact, the new consolidated company is scheduled to come into existence in April and the work on the consolidation of the back office operations is literally ongoing as we speak. And I'm confident that our SG&A expenses will be spent more efficiently going forward.

All the things I've just explained inform the assumptions behind our earnings guidance for the next fiscal year. We expect to generate JPY 160 billion in revenue and earn JPY 7 billion in EBITDA for this fiscal year and hope to generate JPY 180 billion to JPY 200 billion in revenue for the next fiscal year. In fact, we are currently drafting our budget for the next fiscal year, which I think will be finalized sometime in March, and we will be able to announce the revenue target in our next quarterly earnings briefing.

Of course, the most critical aspect is that we earned JPY 15 billion in EBITDA. To do that, net sales must be increased by JPY 20 billion to JPY 40 billion and EBITDA goes up by JPY 8 billion. And what we are paying attention to is gross profit. We expect that we will earn about JPY 28 billion in gross profit for this fiscal year, if net sales come in at JPY 160 billion, in line with our expectations.

If we earn JPY 36 billion in gross profit for the next fiscal year, it will be very likely that we can achieve the goal of JPY 15 billion in EBITDA. So what I'm saying is that the JPY 8 billion increase in EBITDA will mostly come from the increase in gross profit.

Furthermore, even as we expect the net sales to go up, we will keep SG&A costs under control and spend the same level of expenses as we spent this fiscal year to really make sure that we hit the EBITDA goal of JPY 15 billion for the next fiscal year. We must do everything in our power to make it happen.

So it was almost like a progress report on the current and medium-term business plan. What I am going to do next is to give you a brief overview of our Q3 results. These are the headlines of our Q3 results on a consolidated basis. The thing I want to stress the most here is that not all players in the staffing industry are winning in the age of the pandemic, small- and medium-sized firms and agencies are still struggling, and most of them have suffered a severe decline in revenue and profit.

We are one of the few that managed to achieve a 37.9% growth in net sales, thanks in part to the corporate acquisitions, but also due to some organic growth. We believe we have figured out our winning formula in the market disrupted by the pandemic and remained laser-focused on our sweet spot. That's how these results have been achieved.

I think we need to deep dive into the situation that surrounds us, especially at a time like this, to really know ourselves and to be able to meet the needs of our customers. We knew that small players will lose out and had a vague incline of the developments that were to come. But actually seeing this kind of growth in numbers has got us all excited about the pace and scale of the success we are all feeling. And we are moving forward with a strong sense of pride and ownership. Plus, we have over 30,000 technical employees as of the end of December last year, one more reason to celebrate the third quarter.

Hirings have been growing at pace, as I said earlier. These are the quarterly numbers of hirings over the past couple of years. It is very clear that the pandemic put a damper on our hiring, especially during its early phases. We only hired about 1,000 people in a quarter. We then decided to hire more aggressively and the quarterly number of hirings rose sharply. Since the beginning of this fiscal year, we have been spending more money to hire more people. We have been consistently hiring over 4,000 people on a quarterly basis. None of our competitors hires as many people as we do, at least as far as I know. And this is obviously our competitive advantage.

Next, let's take a look at the quarterly changes in sales and the number of technical employees. We are showing changes in net sales, EBITDA, EBITDA margin and technical employees over the past few years, quarter by quarter. And as you can see, net sales have been growing every year for the past few years. For fiscal 2022, of course, we show these numbers up to Q3, but net sales have already grown 40% compared with the last Q3 figure. But even more impressive is the fact that we've added 8,051 technical employees in just 1 year since the last Q3.

During the last fiscal year, the technical employees grew by over 4,100, which is a very significant increase, much bigger increase compared with the earlier years. But the increase we have witnessed over the past 12 months has been phenomenal and far outpacing any previous growth we have experienced. And we still have 3 more months to go.

As a result of all this, quarterly net sales have hit a record high at JPY 41.4 billion in Q3 and the number of technical employees topped 30,000. Q3 EBITDA was JPY 2.479 billion, and the EBITDA margin was only 6%, but this is because we have been spending more expenses to hire more people. I've already explained all this.

And we can raise the margin to a much higher level by bringing back the hiring expenses to our normal level. So what we are going to do is to further increase net sales in Q4 so that we will get off to a brighter start in the next fiscal year. Again, we are growing at a fast pace, and I hope you are as excited as we are about our growth trajectory. These are the numbers I've already talked about, and I don't think I have any more detail to add.

Here, I want to briefly talk about some risk factors. There are production cuts across the auto industry and the global chip shortage, and these have an impact on our business as well. But it hasn't resulted in the termination of the contracts, i.e., cut in the workforce. Rather, our clients so far have responded to these disruptions by just cutting or transferring working days.

Also, as I mentioned previously, the situation of strong labor demand and tight supply remains unchanged. So most of our clients are not planning to downsize their workforce but to keep it at the current levels and make some little arrangements so that they can weather this storm. So the impact on our business is anything but critical.

Again, I guess our clients think that it is better to cut hours than people in a situation like this. To illustrate this point, this graph shows the number of dispatched workers in the automotive-related sector. It starts at January 2021 and in 12 months, this grows almost 50%. So the labor demand has been and continues to be strong. The impact on our business so far has been minimal because of this. But of course, we should never let our guard down, and we are working closely with our clients to merge from this storm stronger together.

On this slide, I want to explain why this third quarter's consolidated EBITDA fell JPY 900 million to JPY 5.3 billion from the JPY 6.2 billion the same quarter a year before. It is primarily because there was another set of one-off expenses associated with our decision to hire more technical employees, such as company housing expenses or gift money for newcomers.

We spent about JPY 1.3 billion for that as a one-off item, pretty much like a special marketing expense. Also, there was an increase in SG&A expenses, hiring expenses in particular. We spent JPY 3.2 billion more than we had done the year before. If we combine the two, we spent JPY 4.5 billion more in expenses, but they are all one-off items, extra spendings that we don't usually spend in normal times.

So had it not been for these extra expenses, the Q3 EBITDA would have been close to JPY 10 billion. But we needed to spend that amount of extra expenses in order for us to further boost our revenue in the next fiscal year and beyond. I've already explained this earlier in my presentation, I just wanted to give you more details to further illustrate my point here.

This is a summary of our balance sheet. Here, again, I have nothing special to add except that there is nothing that would pose a risk to our financial health. We have JPY 18.5 billion in cash, and our debt, both short-term and long-term borrowings is about JPY 10.3 billion. Our gross debt-to-equity ratio is at 0.56. So you can say we are carrying virtually no debt.

There is no impairment risk either. Take a look at the goodwill, for example, we have about JPY 6 billion in goodwill. But our shareholders' equity at JPY 18.2 billion is substantially larger than our goodwill and we keep impairment risks well under control despite the fact that we have been acquiring quite a lot of companies.

We are able to keep these risks under control because we sign carve-out deals at book values and avoid acquiring overvalued companies in this industry. We go ahead with deals only when the price is right. You can count on our prudence and good judgment in this regard as well.

Let's move on to talk about our Q3 results by segment. Net sales increased for each segment, Manufacturing, Solution and Engineering Businesses. It is a very exciting result, and we are particularly happy about this extraordinary growth for our Manufacturing Business and continued growth for Solutions Business.

These 2 businesses share the same client base and the deeper the ties with our clients become the more revenue we can generate. This result reflects further deepening of the ties with our clients. Engineering Business grew as well. Its pace of growth doesn't look as impressive as that of the 2 segments, but it's growing as expected and Engineering Business is positioned as complementary to Manufacturing and Solution Businesses. So that's the overall picture.

If we dig a little deeper on the results of Manufacturing Business, we see that its net sales jumped 45.9% from the same quarter of the previous fiscal year, and that's the number of the domestic sales. This big increase in net sales is thanks in large part to the robust labor demand in the automotive and the semiconductor and electronic parts sectors. The 2 main pillars of our business.

Labor demand in these sectors is expected to remain robust for the next fiscal year and beyond, so we keep focusing on these sectors to achieve further growth. A couple more things to talk about Manufacturing Business. Its net sales increased consistently from the previous year, even quarter-by-quarter. The number of technical employees as well increased for this segment, so basically the same story line.

This page gives us a more detailed breakdown of the net sales of Manufacturing Business. As I've just mentioned, sales of the automobile-related sector jumped dramatically, up 55% year-on-year, reflecting the strong labor demand. Semiconductors and electronic component sector as well saw a healthy growth in net sales up 19%. Net sales of other sector almost doubled, but that's mainly because of the corporate acquisitions we've made over the past year. All in all, this is a well-balanced sales mix.

On this page, we are comparing the quarterly net sales of each sector within Manufacturing Business between this fiscal year and the last. The semiconductors and electronic components as well as the automobile related sectors, both sectors saw a significant and consistent growth in quarterly net sales. And it is important to note that the automobile-related sector is now generating almost as much revenue as the semiconductors and electronics components sector. The same is true for other sector as well, earning almost the same level of net sales, thanks to the corporate acquisitions. Again, it's a well-balanced sales mix and a well-balanced growth as well. And all of this reflects our company's progress and sophistication in management and execution.

Solution Business' Q3 net sales grew strongly as well, up 17.2% year-on-year. Also for Solution Business, UT FTSAS Creative, formerly known as Fujitsu FTSAS Creative joined UT Group on a consolidated basis. This new company will help us make our ties with Fujitsu even stronger.

We have a long-standing relationship with Fujitsu. There is a company called Fujitsu UT, which joined our group several years ago, UT Group has a 51% stake and Fujitsu FTSAS has a 49% stake in this company. So UT FTSAS Creative joined our group in addition to Fujitsu UT, and that will certainly help bring our relationship with Fujitsu to the next level.

Solution Business' quarterly net sales and number of technical employees are growing from a year ago, too. As I've just mentioned, UT FTSAS Creative joined UT Group on a consolidated basis in October last year. UT Group has a 51% and Fujitsu FTSAS has a 49% stake in this company. Fujitsu UT joined our group on a consolidated basis back in April 2018, we have a 51% and Fujitsu FTSAS has a 49% stake in Fujitsu UT.

And these 2 companies, UT FTSAS Creative and Fujitsu UT are working together to provide solutions to the staffing and outsourcing needs of Fujitsu Group. A stronger partnership with Fujitsu Group will give us more opportunities to cultivate and capture their demand for labor going forward.

Engineering Business also grew in terms of net sales, as I said earlier. What stands out in Engineering Business is its high profitability. So it would be better if we focused on boosting revenue from Engineering Business. But as I explained earlier, Engineering Business is positioned as complementary to Manufacturing Business.

It serves to sort of ensure the continuity of career for those who wish to advance their career from manufacturing jobs to engineer positions. And its main focus is our existing technical employees with such aspirations. That is why the pace of growth is different from that of the other 2 businesses. So it is not that Engineering Business is losing its shine or struggling, we have managed to keep its high profitability level, so we're going to work hard to bring it to a higher level for the sake of our technical employees as well. The quarterly net sales as well as number of technical employees in Engineering Business are also growing compared with a year ago.

When it comes to career advancement for our technical employees, it is difficult for those who have manufacturing jobs to become IT engineers because the types of skills and experience required for IT engineers are something very hard to learn for someone working in a factory. So instead, we are focusing on those who wish to become construction engineers and design and manufacturing engineers. And that's why these 2 sectors have grown. And that's why the quarterly net sales of these 2 focused sectors are growing consistently compared to a year ago.

Let me once again show you our forecast of the full year results for fiscal 2022. We are doing everything we can to earn JPY 160 billion in net sales and JPY 7 billion in EBITDA. I also want to repeat the key points of our current medium-term business plan. First, we will make sure that we achieve our net sales and EBITDA goals for this fiscal year. And second, we're going to generate JPY 180 billion to JPY 200 billion in revenue and earn JPY 15 billion in EBITDA for the next fiscal year. We are drafting our budget right now, and we will make an official announcement when we are ready.

That brings to an end of our earnings briefing. Thank you for watching.

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