UT Group Co Ltd

TSE:2146

Earnings Call Transcript 2023-Q3

[若山 陽一, executive]

Thanks for tuning in for our third quarter earnings briefing. Let's get started. One of the biggest highlights of the past quarter is that we delivered highest ever quarterly EBITDA while putting the right structure in place to drive sustainable growth. Cumulative net sales after the third quarter increased to 12.4% to JPY 128 billion compared to last year. But we are particularly proud that EBITDA topped JPY 12 billion and the EBITDA margin expanded significantly to 9.4%, a big step towards our full year EBITDA target of JPY 15 billion as we focused on the margin expansion to become a leaner organization. It is great to see the top line growth resulted in the bottom line growth, and these results clearly showed that we become much leaner, taking another step closer to the JPY 15 billion full year EBITDA target. Before deep diving into the results, I think it would be better to give an overview of the current business climate and context in which we operate. First and foremost, demand for labor is slowing down. Within our business context, we are seeing a slowdown in labor demand in the electronics and the automotive sectors. In the electronics sector, in particular, some companies have put their hiring decisions on hold over the parts shortage issue and other supply chain difficulties. The same is true for our automotive clients, and they also have been forced to postpone their production plans over the past year. Of course, even in those sectors, there are a few companies where the demand for labor remains unaffected or still strong. We just have to look for them, and those small wins add up. Things are looking a little more positive going into the next 12 months, and we are going to make sure to get ready to meet that demand. But at the same time, the current business climate also brings opportunities for making deals, especially for the industry leaders like us, and we've received several leads. So M&A is certainly an option, and it is important to seize opportunities while the window is open. In contrast to what I just talked about, manufacturing business, area business is, in fact, doing great with regard to hiring as well as taking share. And any slack in manufacturing business has so far been picked up by area business. Area business explores and caters to the labor needs of local businesses regardless of the size, and we are a pioneer in this respect. We are not only lucky with the timing of the launch of this business, but also its significant growth, which now provides us with a valuable additional revenue stream. So while we are hoping for a rebound in this year in manufacturing business, we are also going to put more focus on area business to drive growth going into the next fiscal year. We have already made significant changes to our organizational structure and decision-making processes so that we can deliver our staffing services and solutions to all users more efficiently. We are adapting ourselves to the external environment right now to get off to a fresh start come April. And part of that effort includes our ongoing project [indiscernible], as we call it internally, whose goal is to gain overwhelming market share by the end of FY '25 by raising the quality of our staffing services for all our users. We will expand our offerings and create more value for money across our services and solutions. I will come back to this point later and give you more detail. Let's take a look at our P&L. As I mentioned earlier, net sales topped JPY 128 billion at the end of the third quarter, up 12.4% from a year earlier. Gross profit slowed 24.2% to JPY 25.1 billion. EBITDA, as I said, came in at JPY 12 billion, which included stock-based compensation expenses at this time. And so operating profit stood at JPY 5.6 billion. Ordinary profit was almost at the same level and below that is net profit. Just as a reminder, posting the stock-based compensation expenses is an accounting procedure, and we don't actually spend JPY 5.5 billion, but that's why the operating profit came in at JPY 5.6 billion. So if we took the stock compensation expenses out of the picture, our operating profit would be JPY 11.1 billion, and that should reflect our true earning capacity. We hold the largest share in terms of supplying workers to manufacturers in Japan. We generated JPY 128 billion in revenue and earned more than JPY 11 billion in profit just in 9 months. We have come a long way, and we'll continue to build on this earning capacity to drive further growth. I just want to note once again that the stock compensation expenses of JPY 5.5 billion is a one-off item posted as part of SG&A expenses, and we didn't spend JPY 5.5 billion because it is simply an accounting procedure. What I want to emphasize here is the fact that we are most likely to achieve our full year EBITDA target of JPY 15 billion, one year ahead of schedule. We've already updated our EBITDA goals to JPY 25 billion for FY '25 and JPY 19 billion for FY '24. The original target for FY '23 was JPY 12 billion in EBITDA, and we revised that upward. I just add that the results of the past 9 months gave us more confidence that we are going to meet the updated target for FY '23. This is our balance sheet. I have nothing special to say except that it is simple and our financial standing remains robust. We have JPY 31.4 billion in cash, and we borrowed JPY 3.9 billion in short-term loans and JPY 13.2 billion in long-term loans, around JPY 17 billion in total. So we have far more cash than the amount we borrowed as loans. In addition to that, we issued share acquisition rights worth JPY 6.1 billion this time. This is about the stock options I talked about earlier. And when these options are exercised, the amount will be added to shareholders' equity. Also, the value of goodwill remains at about JPY 5.6 billion. While the value of shareholders' equity is approximately JPY 20 billion, and that means that the goodwill is kept well under control despite our M&A activities. This slide gives us details about quarterly figures of net sales, EBITDA, EBITDA margin and the number of technical employees over the past years. As you can see, net sales have been growing rather constantly. We are showing figures from Q1 of FY '19. Today, we are a company that generates JPY 43.8 billion in revenue in just one quarter, which, by the way, hit a new high. Also, we earned over JPY 4.6 billion in EBITDA in the last quarter, which is also the highest ever quarterly figure with 10.6% EBITDA margin, the second highest figure following the 10.8% setback 4 years ago. The number of technical workers employed in Japan topped 32,000 during the last quarter. We have more workers than never before. We also employ more than 14,000 technical workers in overseas markets and has been a significant growth. We now generate more revenue, earn more profit and hire more workers than ever before. And today, we hold the largest share in terms of supply workers to manufacturers in Japan. We supply more than 32,000 technical employees to manufacturing companies in Japan, and there are about 400,000 temporary workers currently being employed in the country's manufacturing sector. Our immediate goal is to double the number of our technical employees in 2 years to more than 60,000 so that we establish ourselves as the dominant player in this space, who provides the best services in terms of career development of those employees and in other aspects for all our users. So we are going to keep our foot on the gas to achieve growth. Again, we've come a long way, and we are now a company that can generate JPY 12 billion in EBITDA in 9 months. And we are most likely to hit the full year EBITDA target of JPY 15 billion for FY '23. This graph is showing the average monthly hires and the per capita hiring cost. The light blue bars represent the average monthly hires, and we are hiring between 800 and 1,200 workers a month, meaning that our average hiring capacity is a little over 1,000 workers a month. We want to increase the number to 2,000 a month so that we will be able to take more market share in the years ahead. As I said before, because we are #1 in this industry, we no longer worry about not getting orders and filling the orders we received, even though we are still sensitive to economic cycles. So the question is how many we can hire to satisfy the demand that is out there. In order for us to double the current market share and the amount of revenue we generate by FY '25, we hope to increase the number of hires to approximately 2,000 a month. That's not exactly doubling the current hiring capacity, but certainly, it requires a lot of efforts to boost our hires. And in fact, many projects are running in the company such as centralized management of job postings or quality and efficiency improvement in my job searching. We have many things to do and issues to address. But if we will be able to hire 2,000 workers a month, it will be highly probable that we achieve the goals of our medium-term business plan. And right now, we are doing everything we can to be able to do so. One of the reasons why we've become leaner as an organization is the fact that we successfully improved the SG&A efficiency, bringing down the percentage of SG&A expenses to revenue from 13.9% to 10.9% in one year. And as I mentioned earlier, we no longer worry about getting orders. Our goal is to increase the hiring capacity. As long as we hire more, we grow bigger. And as we grow bigger, we will further improve our profitability. That's what we try to achieve. So we remain focused on and allocate all of our resources to increasing the hiring capacity, at least for the next 2 years to achieve what we set out to achieve. These are results by segment. Although manufacturing business still generates the most revenue, area business continues to narrow the gap, which will certainly help us achieve a balanced revenue mix. So we remain focused on area business going forward. As for our manufacturing business, on the other hand, a moderate rebound in orders from major manufacturers is more likely in FY '24 and beyond. So we will be ready to fill those orders, and we believe that our focus on both manufacturing and area businesses will lead to an increase in total revenue. In addition, being a relatively new line of business, solution, engineering and overseas businesses will be realigned within a framework in which we revisit its strategic priorities and adjust resource allocation as needed going into FY '24. So while our primary focus will remain on manufacturing and area businesses, we will also steer these relatively new businesses into something that complements the 2 main businesses. This slide is comparing each segment's net sales 9 months into FY '23 with the same period last year. Of course, the key takeaway is that net sales grew strongly for each segment. It seems that many competitors have been struggling in this environment, but we managed to get growing because, a, being the biggest player in the industry, we were getting more orders than our competitors, despite a decline in the volume; and b, we continued hiring workers. So we are proud of these results, and it's hard to imagine that the demand situation will get worse than now. So I think the question is whether or not we can fully meet the demand for labor as production bounces back. We are doing everything we can to be ready for that, and we always aim higher. The same is true for EBITDA as well. It's not showing in percentage for area business because we were losing money a year ago. Average segment grew strongly. The number of technical employees as well grew in every segment, except for manufacturing business, which was really struggling to account a very modest gain. However, as I mentioned earlier, we expect the production will bounce back over the next 12 months in this sector, and it will add to the strong growth expected to be driven by other segments. These are manufacturing businesses results at a glance. I have nothing special to say except that we have been navigating these difficult times rather successfully and smart about spotting opportunities for growth. And it's how these relatively decent results came about. If you look at the results by subsegment, nothing special really stands out. We navigated through the difficult times, being aggressively defensive, if you will. What is truly remarkable about manufacturing businesses results is that its gross margin has improved a big time to 23.1%, and the sector has emerged out of the impact of the production cuts by the automotive clients. So now is the time for manufacturing business to take advantage of an expected rebound in demand as production bounces back going forward. The sustained expansion of gross margin is underpinned by our people development expertise and continuous supply of quality workers to our big manufacturing clients, which in turn allow us to negotiate a higher contract rate with our clients. And as the client demand for talent gets stronger, we are seeing more momentum towards the expansion of gross margin. Our clients, big manufacturers, in particular, desperately need get people to stay with them, and we're here to help them retain good people. That continues to be our focus and the value we deliver to our clients. These are results of area business by segment. One of the hallmarks of Area business is its very high recruiting efficiency. I mentioned earlier that area business and manufacturing business complement each other. And here, I want to give you some illustration as to the point I'm making. As you can see, our clients in the manufacturing sector need more workers per client than those in any other sectors. The number of clients in this sector may be few, but they need a large number of workers as many other big corporations do. In contrast, there are many clients in our business, but they need fewer workers per client than those in the manufacturing sector. And we seek more local clients by leveraging the local connections network we have developed so far. The point I'm making here is that we're executing completely different hiring and marketing strategies for these 2 different businesses. So that's where we are. We have developed different strategies, and we are working very well in the sense that when big businesses are struggling like today, local smaller businesses are doing just fine. When the economy is generally good, both types of clients will be doing great. But even if the manufacturing sector faces some unusual difficulties such as part shortages or production delays, are business continues to perform strongly. We expect that things will turn around in months ahead for the manufacturing sector and both manufacturing and area businesses will drive growth, allowing us to boost our hiring capacity. Solution business also grew strongly. I just want to add that we sold the UT System Products, which was not our core business, are now poised to run our core staffing business more efficiently. I don't have anything special to say about engineering business either, except that this business, too, complements other businesses and is growing. Overseas business also grew at a healthy clip, and we saw a big jump in the number of hirings, and that is because of one Vietnamese subsidiary, which holds the largest share in the market in Southern Vietnam. This company, Green Speed now seeks to gain the largest share in the entire manufacturing sector staffing market in the whole country, just like UT Group has the largest share in Japan. There are a lot of parallels in the way we act and strategize. So we are going to continue to work closely to build a bridge between our businesses in Japan and Vietnam. Last but not least, let me report on the progress we made in executing the medium-term business plan and share with you the guidance for FY '23. Let me begin with the guidance first. We are most likely to hit the full year EBITDA target of JPY 15 billion, and we are doing everything we can to make sure we finish this fiscal year successfully. When it comes to shareholder return, it will be 30% of our net profit, if we exclude the stock compensation expenses of JPY 5.5 billion. The balance between cash return and share buyback will be decided later, but we consider that the total shareholder return ratio of around 81% will be most appropriate. Here is where we are today in terms of the execution of the medium-term business plan. We set targets of revenue, EBITDA and EPS. For FY '23, there will be JPY 180 billion in revenue, JPY 15 billion in EBITDA and EPS, which is JPY 79, including the stock compensation expenses, the EPS figure would be vastly different without it. But again, it is a one-off item, and there will be no such expenses in the next year and beyond. In the years ahead, our primary focus will remain on increasing the top line and taking share. We hope to hit a JPY 300 billion mark in FY '25 and to achieve that organically without M&A, we need to have the hiring capacity of about 2,000 workers a month. And even if we build to hire 2,000 workers a month, we will do M&A and whatever it takes to be able to generate at least JPY 270 billion in revenue by FY '25. With JPY 270 billion in revenue, we should earn JPY 25 billion to JPY 30 billion in EBITDA by FY '25. And that's the overall picture of where we are today in the execution of the medium-term business plan. We're proud that we are on course to achieve the targets. But as I said, we always aim higher. To take more market share, we are going to make a few adjustments to the organizational structure in April so that we can put more focus on each region and our local subsidiaries will be more empowered to step up hiring and marketing in the areas they operate. We will also create a new department that oversees and manages our companies by grouping them into categories based on the type of clients they cater to. And there will be a team focused on developing new businesses. We also put in place a more flat structure for our corporate officers so that we speed up our decision-making process and better reflect the voices of the people on the ground. All of that means that we will have the means and the capacity to carry through our plan with increasing probability of achieving the targets we set. That's it from me. Thank you very much for watching.