TechnoPro Holdings Inc

TSE:6028

Earnings Call Transcript

[Toshihiro Hagiwara, executive]

I am Hagiwara, CFO of TechnoPro Holdings. Thank you for your time today. For our main domestic business, which accounts for approximately 90% of the group's total revenue and operating profit, we fully recognize that the issues we are facing now and the investors' concerns caused by them are the following 3 points: one, slowing top line growth due to worsening turnover ratio; two, deterioration in GP margin due to rising wages; and three, higher SG&A ratio due to soaring recruitment cost.

This fiscal year shall be a year in which we will appropriately address such urgent issues and allay any concerns about our sustainable earnings growth. I will keep these points in mind as much as possible during my presentation today.

The current business environment remains favorable, and the first quarter financial results for this fiscal year were slightly higher than initially planned. For global manufacturers, the stronger yen trend may have a negative impact on their operating performance. But so far, there has been no sign of a slowdown in orders from our customers. In addition, contracts that expired in September this year have been renewed as usual and a shortage of resources to satisfy robust demand is here to stay.

The key to overcoming 3 challenges mentioned before is to jack up unit sales price. And in September contract renewals, we diligently executed charge-up and shift-up initiatives and were able to secure aggregated amount of price improvement that exceeded the same month last year.

In preparation for the critical stage of price negotiations in March next year, we will continue to work on acquiring digital skills and improving technical level through our training program and pursue the gain of a fair price with an eye toward further wage hike. The higher price of each individual not only contributes to TechnoPro's top line growth, but also leads to improved treatment and motivation of engineers, which must be extremely important in preventing resignations.

Now I will explain the summary of this first quarter financial results, the key KPIs in Japan and the update of overseas operations. First, let's look at the financial overviews on Page 2. Revenue for this first quarter was JPY 57.8 billion, up 9.4% year-on-year, while GP was JPY 15.4 billion, plus JPY 1.4 billion or up 10.2% year-on-year and GP margin also improved by 0.2 points. SG&A expenses for this first quarter were JPY 8.5 billion, plus just under JPY 200 million year-on-year, with its growth rate remaining at only 2.3%.

In recent years, the more usage of paid recruitment agencies has pushed up the average cost per hire, leading to a surge in recruitment fees. However, the proportion of such agencies in the recruitment channel seems to have plateaued, and we could assume that in the future, hiring cost will settle at a level that is commensurate with the number of hires. We will also try to optimize it by promoting referral recruitment by our employees and attempting new methods such as direct recruiting.

SG&A ratio, which had remained high until now, finally fell below 15% to 14.8% in this first quarter. This fiscal year, except for the fourth quarter when new graduates joined the company, we aim to maintain SG&A ratio at around 15.0% in the second and third quarters.

Core operating profit and operating profit for this first quarter are around JPY 7 billion, respectively, both of which are up more than 20% year-on-year. We have reached 50% of the first half guidance of JPY 14 billion and given more working days in the second quarter than in this first quarter, we are off to a good start.

Pages 3 and 4 show the quarterly performance of each P&L item and key KPIs in Japan, including the KPI outlook for the second quarter. As our engineer pool expands, the earnings impact due to an increase or decrease in the number of working days has become greater than before.

Page 5 shows this first quarter results by segment. First, please take a look at the R&D outsourcing, which has demonstrated the strongest performance. Revenue grew by 11.0% against a 7.7% headcount growth year-on-year because the improvement in unit sales price contributed greatly to this. GP margin also increased by 0.1 points year-on-year. Considering that wage hike rate in July this year exceeded the previous year and the number of working days was fewer year-on-year, it can be said that passing on cost to customers has progressed more than ever before.

Please note that GP margin of 26.6% in the first quarter of the fiscal year ended June 2023 is an outlier due to the reversal of paid leave provisions. Moreover, as can be seen from up 0.7 points in OP margin year-on-year, SG&A ratio has decreased compared to the previous year. The operating leverage related to fixed costs such as headquarters administration, which had been offset by the increase in hiring and training expenses in the business divisions has finally become apparent.

In the construction management outsourcing, we have already factored in a slight decline in GP margin this fiscal year because of restrictions on holiday work and overtime hours as a result of the implementation of work style reform for which its grace period has now expired. In this business, we actively hire inexperienced personnel with training requirements and the year-on-year growth rate in the engineer headcount has exceeded that of the R&D outsourcing. Although the unit sales price for inexperienced hires is low and the turnover ratio for those tends to be high, we will focus on increasing the number of engineers under the disciplines of being able to properly recoup investment and not significantly deteriorating profit margins.

The other businesses in Japan, which were in the red in the previous fiscal year, turned slightly profitable in this first quarter. PC Assist, which engages in education and training for engineers, is in the midst of a structural transformation in which it continues to incur losses due to upfront investment to expand external sales to corporate clients in response to dwindling demand for its school business for individuals. Meanwhile, Boyd & Moore, which provides executive search service for foreign tech companies and recorded write-down of goodwill in the previous year, posted a profit.

In the overseas, the amortization expenses for customer-related assets that were impaired in the previous year have been reduced by about half. And for a year-on-year comparison of profit in real terms, please refer to operating profit before PPA asset amortization. As for the overseas as a whole, revenue and OP for this first quarter landed in line with the plan, and I will explain the update of each foreign subsidiary later.

Page 6 shows balance sheet and cash flows. In this first quarter, we made payment of approximately JPY 4 billion due to bank holiday adjustments at the end of the previous fiscal year, paid corporate taxes and year-end dividends as usual and are also in the process of share buyback, resulting in a large negative cash flow for this quarter.

As September 30 this year was a weekday, there were no expenses to be paid the following month due to bank holiday and the cash balance of JPY 32.7 billion is based on actual figures. And on October 25, we redeemed 3-year straight bonds of JPY 5 billion, of which JPY 3 billion was refinanced through bank borrowings. These will be reflected in interest-bearing debt balance and financing cash flows in the second quarter.

From Page 7 onward, we will look at the key KPIs for our domestic operations. Please refer to the fact book file posted on our website for the detailed KPIs, including solution business data. The number of engineers at the end of September this year was 26,281, plus 1,930 or up 7.9% year-on-year. Due to the increase in resignations, although hiring has been strong, the year-on-year headcount growth has fallen below 8%, and this trend is expected to continue throughout the year.

Based on the updated hiring outlook for the first half, which will be touched upon later, we have revised our forecast for the number of engineers at the end of December this year to 26,570, an upward revision of 170 from the guidance. The average utilization ratio for this first quarter was 95.1%, up 0.2 points year-on-year. Given slightly lower ratio for the second quarter than last year, the average for the first half is expected to be 95.3%, the same as the guidance, while there are no concerns about demand. As long as the utilization ratio stays at around 95%, it is within the margin of error.

Pages 8 shows the distribution and year-on-year growth rate of assigned engineers by technology and industry. I'll spare you the details. In most verticals, IT-related assignments and inquiries have been increasing.

The next topic is the status of recruitment and turnover. In this first quarter, we hired 945 mid-careers, exceeding 900 as in the fourth quarter of the previous fiscal year. Hiring in the second quarter has been also progressing smoothly with 1,870 hires being currently planned for the first half, up 170 from the guidance. Turnover ratio for permanent employees is budgeted to be 9.8% for this fiscal year under the assumption that there would be even more resignations than in the previous year.

That being said, anticipating a potential downside that would exceed this estimate, we are taking preemptive steps to hedge against this risk to some extent by hiring more than planned from this first quarter. The number of permanent employee resignations in this first quarter was 635 and including the outlook for the second quarter, such number is supposed to be at the same level as the initial plan.

Due to the increasing mobility of human resources in Japan, the surge in resignations at TechnoPro continues and the LTM-based permanent employee turnover ratio has risen to 9.3%. As an effort to retain good talents, we have developed our own AI engine by analyzing the trends of resignes based on historical data, so we can early identify engineers at high risk of quitting and take good care of them on a priority basis. We will continue to enhance the accuracy of our data analysis and strive to help prevent turnover. Additionally, we have assigned new dedicated interviewers from this fiscal year to further improve the effectiveness of this initiative by listening to engineers' wishes and complaints in a timely manner.

Page 10 shows the change in its waterfall chart in unit sales price. The average monthly unit sales price for this first quarter was JPY 685,000, plus JPY 17,000 or up 2.5% year-on-year. From the second quarter onward, we plan to achieve a price hike of more than 2% year-on-year. Please note that the base charge for our existing dispatch engineers at the end of September this year, which is not affected by working days or overtime hours, increased by 4.5% compared to a year ago, the biggest one ever.

As the average wage hike for our engineers in July 2024 was 3.8%, we think that we have been able to pass on the salary increment to customers through contract negotiations over the past year. Recently, the contribution of project type services to price improvement has been limited. As a result of adding inexperienced engineers to projects as part of OJT, the average unit sales price of project-type services has become a little difficult to increase.

Next is the update of our overseas subsidiaries. Robosoft, which faces the challenge of winning new projects, saw its first quarter revenue fall short of the previous quarter and slightly below the plan, but it achieved OP target. In order to build up new pipelines that exceed those of the previous fiscal year, Robosoft has implemented initiatives that enable it to make proactive adjustments if necessary, by thoroughly managing KPIs for sales activity volume and productivity. As a positive sign, the total contract value of new projects acquired in this first quarter increased quarter-on-quarter, hitting bottom in the third quarter of the previous year.

While these billings are recorded over multiple quarters, revenue in the second quarter would be above this first quarter result. Simultaneously, Robosoft is accelerating its efforts to cultivate Japanese customers through further collaboration with TechnoPro. Unlike the first half of the previous year, Robosoft secured 40% GP margin in this first quarter and continues to work on maintaining high utilization through bench control and preventing unprofitable projects. Nevertheless, due to delays in top line growth, Robosoft has not been able to make up for the upfront investment so far, resulting in unsatisfactory returns on it.

Please note that GP and OP in the fourth quarter of the previous year were inflated due to the onetime effect of bonus provisions reversal and excessive cost reductions. In the China business, despite concerns about the economy and geopolitical risks, its first quarter revenue and OP both exceeded the same period last year and the plan for this fiscal year. We expect to see increased revenue and profit this fiscal year as we expand offshore projects from Japan, which are less affected by situations in China and advance into the lucrative solutions domain.

Digital demand in the financial sector in Southeast Asia, where Helius operates has been stagnant and revenue for this first quarter was slightly down year-on-year and quarter-on-quarter. Given increasing difficulty obtaining and renewing work visas in Singapore, it is becoming more imperative to provide services utilizing offshore resources rather than employing foreign talents in Singapore for sustainable growth of Helius.

U.K.-based Orion's OP for this first quarter was down 20% compared to the plan. Although demand for staffing contracts remains solid, the need for permanent employment is weak due to economic uncertainty and thus higher-margin placement business has been sluggish. Considering the sale of Orion, we will manage this asset with the minimum goal of continuing quarter-on-quarter earnings growth at least.

Page 12 is a guidance for this fiscal year and Page 13 is a breakdown by segment. There are no changes to the earnings guidance for the first half and the full year. Only the domestic key KPIs for the first half have been partially revised based on this first quarter results and second quarter outlook.

Next, please see Page 14. In order to signal that TechnoPro's recent stock price has not been properly valued in the market, we launched a JPY 5 billion share buyback program in August this year and repurchased JPY 3.6 billion worth of shares in this first quarter. Taking into account the annual dividend forecast for this fiscal year, the total return ratio would be 70.7% at this point, reaching 77.9% when the JPY 5 billion buyback is completed.

Finally, we will release the integrated report 2024 on our website in early December this year as well. After this publication, we are planning to provide an opportunity for investors to directly engage with our outside directors this December, just as we have done in the past. We are also gradually promoting the succession of our outside directors while keeping in mind factors such as tenure, skills, experiences and diversity.

Masahiko Ito, who served as CEO and Chairman of the Board of Directors at Fujikura, a global manufacturing company and led it to a sustainable growth phase through restructuring was appointed as an outside Director of TechnoPro in September this year. Going forward, we will continue to aim to implement the best corporate governance practice and further enhance the shareholder value while constantly striving to evolve our Board of Directors based on the issues identified through analysis and evaluations of the effectiveness of the Board.

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.]