TechnoPro Holdings Inc

TSE:6028

Earnings Call Transcript 2023-Q1

[Toshihiro Hagiwara, executive]

am Hagiwara, CFO of TechnoPro Holdings. Thank you for your time today.

TechnoPro has transitioned to a company with an audit and supervisory committee after receiving approval at the General Shareholders Meeting on September 29, 2022. Under the appropriate supervision of the Board of Directors, we will build a system that can further accelerate management decision-making and execution and increase the probability of achieving our medium-term management plan.

At the Board of Directors meeting held on the same day, we resolved to completely revise our corporate governance guidelines and strengthened our response to each principle stipulated in the Tokyo Stock Exchange's Corporate Governance Code. This includes clarification of the consistency with corporate philosophy, management policy and management plan as well as the establishment of reappointment criteria as well as appointment and dismissal standards for CEO and Directors.

In response to growing interest in sustainability agendas amongst society and investors, we also announced our support for the TCFD in June this year and began disclosing information based on the TCFD recommendations. Please refer to our website for these new corporate governance guidelines, climate change-related information disclosure based on the TCFD framework and our latest corporate governance report.

This fiscal year, the second year of the medium-term management plan, we were able to significantly exceed the budget from the first quarter despite concerns about a global recession as well as political and economic uncertainty. Order inquiries from our customers are still strong and chronic resource shortages have continued.

Now I would like to explain the overview of the first quarter financial results, major KPIs in Japan and the current status of overseas subsidiaries.

First, let's look at the financial overviews on Page 2. Revenue in first quarter of this fiscal year was JPY 48.2 billion, up 15.8% year-on-year, while gross profit was JPY 13.2 billion, up JPY 3.3 billion or an increase of 34.2% year-on-year and GP margin ended up with 27.5%, up 3.8 points year-on-year. The main breakdown of the increase in GP is described in the comment column. In addition to the steady growth of the domestic core business and solution business, the performance of Robosoft, which was consolidated from the second quarter of the previous fiscal year also contributed.

Although it is a special factor compared to the previous year, our engineers have taken more paid leave under the pandemic environment, resulting in reduction of remaining paid leave days. Therefore, the provisions for paid leave recorded as an expense in this first quarter decreased by JPY 520 million year-on-year. Consequently, GP, core operating profit and operating profit are boosted by this amount, respectively, which is equivalent to up 1.1 points when converted to each profit margin.

In the first quarter of this fiscal year, core operating profit was JPY 5.9 billion, and operating profit was JPY 6 billion, both growing by more than 50% year-on-year. However, the expenses related to provisions for paid leave mentioned earlier are noncash items, so we estimate that the actual profit level will be around JPY 5.5 billion after deducting the special factor of around JPY 500 million.

Given the first quarter financial results, it is highly probable that we would exceed our guidance for at least the first half of the year, but the guidance remains unchanged as it is difficult to estimate the reasonable amount of revision at this time. At next financial results briefing for the second quarter, we are ready to revise our full year guidance, if necessary, based on the results of the first half as well as the business environment and future outlook at that time.

Page 3 shows the progress of investment for medium-term management plan implementation. We have positioned the first 2 years of the medium-term plan as an investment phase for building a solid foundation for the evolution of our core business. And for the current fiscal year, we have budgeted medium-term plan implementation cost of a little less than JPY 2.2 billion.

In the previous fiscal year, the preparation for investment had not yet been ready from the start and the progress rate of spending in the first quarter was only 9%. But in this first quarter, the investment amount was JPY 450 million and the progress rate was 20.7%.

Investment in solution talent development through education and training is slightly behind, while recruitment of solution talent is progressing as planned. The war for solution talent is the most intense, while the hiring target here is not limited to engineers but also includes presales consultants and project managers. As a latecomer, we're striving to transform into a solution service company by offering attractive job opportunities to attract and retain highly qualified consultants and project managers. I recognize that it shall be an important key for our transformation journey.

The progress rate of strategic investment seems to delay a little bit, but the system development to promote DX within the group which started from the previous fiscal year is progressing. In addition, collaboration with the University of Tokyo Graduate School of Engineering, which was announced the other day, has also started. In this joint research by utilizing the vast amount of data we possess, we plan to: one, visualize technical skills and improve the accuracy of matching with jobs; and two, predict future technological trends and propose appropriate educational content. We believe that it will contribute to the expansion of the solution business and the commercialization of the engineered training and the DX promotion businesses, which are listed in the medium-term plan.

Pages 4 and 5 show quarterly trends in each PL item and major KPIs that make up domestic revenue. Due to time constraints, I will omit the explanation.

Page 6 shows the first quarter results by segment. Please keep in mind that higher profit growth and profit margins in the R&D segment are showing fundamental improvements due to an increase in the number of assigned engineers and the unit sales price, while they also include the extraordinary impact of smaller provisions for paid leave.

The Construction Management segment, which was slightly sluggish in the previous year, has returned to a growth trajectory. For sustainable growth in this area, it is essential to hire young and experienced workers to deal with the aging of existing engineers. And it is also important to control the unit sales price in response to the risk of a decrease in working days due to the spread of the 5-day work week. These are business challenges we have to address.

Operating profit in the other businesses in Japan segment has decreased year-on-year, but its absolute amount is small and the impact on the group is minor. In the Overseas segment, the year-on-year growth rate has increased due to the addition of Robosoft, which was not yet consolidated in the first quarter of the previous fiscal year. I will explain the situation of each company later in another slide. The effect of yen depreciation due to exchange rate differences compared to the previous fiscal year has been plus JPY 800 million for revenue and plus JPY 100 million for operating profit.

Page 7 shows balance sheet and cash flows. In the first quarter of each year, the burden of paying corporate income tax and year-end dividend is bigger, and this year's purchase of additional shares in Robosoft resulted in huge negative cash flow of JPY 10 billion. From the second quarter onwards, we believe that we will be able to sufficiently cover both investing and financing cash flows by an increment of operating cash flows. We also believe that we will be able to flexibly respond to borrowings required for M&A, if necessary.

From Page 8, it will be the main KPIs for the domestic business. The number of engineers at the end of the first quarter was 22,273, an increase of 225 from the end of June this year. And the expected number of engineers at the end of this December was revised from the initial forecast of 22,400 to 22,550.

The average utilization ratio in the first quarter was 95.9%, up 0.4 points year-on-year. The utilization ratio reached 96.0% at the end of September this year. And although we expect the average utilization ratio in the second quarter to be slightly lower at 95.8%, we do not regard it as a deterioration. The contract renewal ratio in September landed at 93.7% this year compared to 93.4% in the previous year, while it could have been close to 95% without our voluntary cancellation aiming at higher contract price in the different projects.

Considering the current demand conditions, we believe that we should pursue higher price aggressively, even if the standby period is slightly longer rather than focusing on the utilization ratio by selling engineers at unsatisfactory price who have just returned at the expiration of their contracts. Under the new personnel system, engineers' salaries are linked to their value in the labor market. So our sales reps are becoming more aware of selling prices.

Next is the situation of recruitment and turnover. We have not shifted to a recruitment strategy that emphasized headcount in pre-pandemic but the number of mid-career hires in the first quarter recorded 812, which was the highest quarterly figure during the period of the medium-term plan. Although the competition continues to be fierce, I'm sure that we have been able to hire good talents. The expected number of mid-career hires for the first half has also been updated from the initial forecast of 1,450 to 1,550, while as of now, 900 new graduates are expected to join us next year April.

From the perspective of coping with supply constraints, potential hires on the premise of training, which have become more and more important were 85 in the R&D segment and 46 in the Construction Management segment, respectively, out of 812 in this first quarter. In addition, global recruitment, which was resumed in the second half of the previous fiscal year was only 25 in this first quarter. While it will take some time to form a population of candidates, we're working with local agents in each country to ramp up global recruitment.

On the other hand, the turnover ratio for permanent employees in this first quarter was 7.9%, up 0.3 points year-on-year. On an LTM basis, it is gradually deteriorating after bottoming out at 7.6% in the third quarter of the previous year. We plan to keep the turnover ratio at 7.7% for this fiscal year, which is the same level as the previous year, although our target is 7.5%.

Please check the distribution of assigned engineers by technology on Page 10 and by industry on Page 11. There have been no major changes in customer trends compared to 3 months ago. And the comments section follows the previous report.

Page 12 shows changes in unit sales price, which we are particular about in the medium-term plan. The average monthly unit sales price in the first quarter was JPY 655,000 this year, up 2.4% from JPY 639,000 in the previous fiscal year. In the previous year, the positive impact of including companies with high unit sales price was included. But from this fiscal year onwards, year-on-year comparisons will be apple-to-apple.

In response to the first quarter results, we've updated the initial forecast of JPY 658,000 to JPY 659,000 for the first half of the year. Moreover, as of the end of September this year, the base charge or contract price for existing dispatch engineers increased by 3.3% compared to a year ago. It has recovered to the plus 3% range of the pre-pandemic level due to the charge-up and shift-up efforts at the time of contract renewal.

Page 13 shows the current update of overseas subsidiaries. In the China business, there were concerns about restrictions on sales activities due to the lockdown imposed by the Zero COVID Policy but both revenue and profit are able to grow year-on-year. Most of our customers are Japanese companies. And in addition to transactions with their local subsidiaries in China, we also have offshore operations to Japan. We assume the sales collaboration with our domestic business has worked well.

Helius achieved the highest growth among overseas subsidiaries, although the profit margin declined due to the disappearance of government subsidies related to COVID-19, which were recorded from the second quarter of the previous fiscal year. Even excluding the effect of the weaker yen, revenue and operating profit increased by 25% and 30% year-on-year, respectively. SGA is increasing due to investments to expand the offshore delivery services, while joint sales with Robosoft for Helius customers are also progressing.

Orion's profit margins have been particularly low since the second half of the previous fiscal year, partly due to high inflation and recession concerns in the U.K. However, both revenue and profits turned to increase quarter-on-quarter, and we are looking for growth opportunities while continuing to appropriately control SGA.

Robosoft's quarter-on-quarter revenue growth stalled for the first time due to higher exposure to the North American market where some customers sensitive to the economic outlook curtailed digital spending. Nonetheless, North America is the market with the greatest digital-related demand, and we are continuing to invest in expanding our sales organization in order to develop new customers and deepen our relationships with existing customers.

We are also diversifying our customer geographies by hiring a new country manager for Japan, planning to open an office in the U.K. and working with Helius in Singapore, as mentioned.

In addition, GP margin of Robosoft fell to 37% in the first quarter of this fiscal year, and we have not yet been able to fully pass on the wage inflation in India to our customers. On the other hand, it is necessary to secure sufficient engineer resources to acquire new projects. In August of this year, 105 new graduates joined the company, and this standby cost also worsened GP margin.

Robosoft has a unique education and training program to convert new graduates to full-fledged engineers in a short period of time and also provides abundant OJT opportunities through actual projects. Utilization of new graduates will reduce the average wage. And once assigned to the billable projects, it will lead to an improvement in GP margin. We plan to restore it to the 40% level as early as possible this fiscal year.

Since the revenue of the Overseas segment have exceeded 10% of our consolidated one, we started disclosing revenue by customer regions in our financial statements.

Page 14 shows full year and first half guidance. As explained today, we have not revised our guidance for the first half and the full year at this time and have only updated our domestic key KPIs for the first half. Again, we plan to revise our full year guidance, if necessary, when we announce the second quarter financial results.

Pages 15 to 18 remain unchanged. And Page 19 is an update of risk assets. The Helius minority shareholders put option was not exercised, and the phased purchase of the remaining shares of Robosoft was completed. So the obligations and liabilities related to each have been extinguished.

On Page 31 of the data references, we have added a graph showing the wage increase rate in Japan, which is of great interest to investors when analyzing TechnoPro as well as the industry. According to the data disclosed by the Ministry of Health, Labor and Welfare, the average wage hike of Japanese private companies has hovered around 2% for the past several years when deflation continued.

As a note, our regular pay raise is given once a year in July, which was equivalent to an average wage hike of 2.2% this year. Additionally, we made extraordinary grade changes under the newly introduced personnel system this year. And our average wage hike, including this effect has been 2.5% in total. In order not to deteriorate GP margin, we are thoroughly striving to improve the contract price or base charge of existing engineers by 3% or more every year.

However, a year of experience would not be enough to justify a 3% price hike to the customers. After all, it is necessary to conduct proper education and training in parallel and develop engineers to deserve the new price. The graph on the right reveals Japan's low investment in human capital. Our products are engineers, and we must refine or recreate the skills of our engineers to meet the needs of our customers and continuous investment in human capital is quite essential.

As a source of competitive advantage in the HR business, the recruiting and sales power has been insufficient and the importance of human resource development capabilities through upskilling and reskilling has been increasing. Also, our customers must boost their investment in training their own engineers. And we believe that our training programs and data management system will contribute to external sales of the engineered training business and the DX promotion business, which are listed in the medium-term plan.

Last but not least, we plan to publish the latest integrated report on our website on December 1 of this year. In addition, following last year, we are planning an opportunity for investors to have a direct dialogue with our outside directors in early December. So if you are interested, please contact our IR department.

That's all for my presentation. Thank you very much.

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