Edited Transcript of 6028.T earnings conference call or presentation 28-Apr-20 10:59am GMT

Q3 2020 TechnoPro Holdings Inc Earnings Presentation Minato-Ku, Tokyo May 11, 2020 (Thomson StreetEvents) — Edited Transcript of TechnoPro Holdings Inc earnings conference call or presentation Tuesday, April 28, 2020 at 10:59:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Toshihiro Hagiwara TechnoPro Holdings, Inc. – CFO, Managing […]

Q3 2020 TechnoPro Holdings Inc Earnings Presentation

Minato-Ku, Tokyo May 11, 2020 (Thomson StreetEvents) — Edited Transcript of TechnoPro Holdings Inc earnings conference call or presentation Tuesday, April 28, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Toshihiro Hagiwara

TechnoPro Holdings, Inc. – CFO, Managing Executive Officer & Director

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Presentation

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Toshihiro Hagiwara, TechnoPro Holdings, Inc. – CFO, Managing Executive Officer & Director [1]

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Hi, I’m Hagiwara, CFO of TechnoPro Holdings. Thank you very much for your time today.

Although it is not yet clearly evident in our figures for the third quarter, the spread of the new coronavirus has gradually begun to impact our activities and the customer demand. The uncertainty of the environment and business performance is increasing, and we are not relying on any optimism that the state of emergency will be lifted at the end of the Golden Week holidays or that corona will come under control followed by V-shaped recovery. With the leadership of our CEO, Nishio, we are working hard to secure business continuity and to protect our employees even if this situation continues for a longer period of time. We will carry our business operations as cautiously as possible, pulling everything forward on the premise that this is an unprecedented situation.

On Page 2, we have the Q3 performance overview. In the first 9 months of the fiscal year, net sales were JPY 119.4 billion, up 12.2% year-on-year. Operating income was JPY 13.07 billion, up 17.4% and net profit after deducting noncontrolling interest was JPY 8.97 billion, up 22.3%. In the third quarter alone, net sales increased 11% year-on-year. Operating income increased 29.5% to a record high of JPY 4.84 billion, despite the inclusion of approximately JPY 180 million of foreign exchange gains. Until March of this year, we seem to be doing well, and operating income has achieved the progress rate of 85.4% in 9 months against the full year guidance of JPY 15.3 billion.

However, from Q3, we started to control unnecessary SG&A expenses to prepare for the corona shock, so the SG&A in Q3 fell to a level below Q2. In Q4, we will continue to work to maintain and reduce such SG&A run rate, but we are leaving our full year guidance unchanged as we expect a drop in profits due to decline in sales and utilization rates from the corona disaster. Although the utilization rate in Q4 is usually lower due to seasonality with new graduates joining the company, it will be lower than usual this year. Currently, it is expected to be around 90% on average for 3 months, which is 3% to 4% lower than usual. However, about 1.5% of this is due to an increase in the headcount of new graduates hired.

On Page 3, we have the Q3 segment results. I won’t go into the details, but I will make one comment. In view that shortage of Japanese engineers is becoming more and more serious, we have actively been hiring and training foreign engineers, starting with neighboring countries such as China and South Korea, and recently from Vietnam, the Philippines, Myanmar, India and Sri Lanka, we’ve had talented engineers come to Japan, and we provided a work environment for them where they can improve their careers and fields. If you look at the chart, the growth in the number of non-Japanese engineers living in Japan is displayed, and it currently stands at 1,148 in headcount. The corona shock will constrain this activity in the short term, but in the mid- to long term, we believe this is an essential strategy for sustainable growth.

On Page 4, we show the group companies by segment. There is no change to this since Q2. Now it’s been almost a year since I joined the company, and it looks like we won’t have a single M&A transaction this fiscal year. In the first half, we focused on PMI and promoting collaboration across the group companies while conducting sourcing activities in line with our strategy. And we’ve had positive discussions with several attractive companies and some actually proceeded to due diligence. But because of the current environment, we are taking a break from M&A activity for now. As the corona problem begins to subside and confidence in the economy comes back, we believe we will have a great investment opportunity.

On Page 5, we have the quarterly performance for revenue and operating profit in comparison to last fiscal year. On an organic basis, excluding the M&A effect, the Q3 revenue and operating income increased 13% and 23.8%, respectively. The number of working days is 0.6 days more than last year, and our effort to control SG&A expenses has led to greater profit growth. Since the beginning of this year, we began to disclose the quarterly numbers of days of operation. So here, the estimated 57.1 days in Q4 is approximately 0.3 days less than the 57.4 we mentioned in the Q2 earnings results. The number of days is expected to decrease because more paid work are being taken by engineers — more paid holidays were taken by holidays (sic) [engineers]. And in addition, if we incur more standbys due to customers’ reasons and we cannot bill them, the actual number of working days will probably decrease even more.

On Page 6, we have the balance sheet and cash flow status. We continue to be in a net cash position, but in contingencies like this, cash is king. Our current cash balance of JPY 18.9 billion is only 1.4 months’ worth of business per month. We are speaking with our banking community to extend our working capital commitment line by 1 additional year beyond the coming June expiration date and also to increase the line of credit just in case. We repurchased JPY 1 billion of our own shares in March when the stock price plummeted, but this was funded entirely through bank loans, and this has no impact on our cash balance.

Also, we believe that some investors might be concerned about the JPY 37 billion in goodwill outstanding, which comprises about 80% of our total capital. So therefore, on Page 17, we have disclosed the breakdown of our goodwill balance. Of this amount, JPY 29 billion comes from a buyout by an investment fund prior to listing. Since this is a stock-based business with good visibility and the business value calculated with the DCF model is as much as 4 to 5x the goodwill book value, we believe that the risk of impairment is extremely low even if business performance deteriorates substantially in the near future. Also, the goodwill of approximately JPY 8 billion is due to 13 mergers and acquisitions after listing. This makes an average of JPY 600 million per transaction and the largest being only JPY 1.1 billion. So even if goodwill impairment were to occur in some of these deals, we believe the financial impact would be very small.

From Page 7 to 11, we have the major KPI analyses. As you can see on Page 7, the average utilization rate as of Q3 was 95.6% and at the end of March, 95.2%. Although this is slightly lower than last year’s levels, GP margins have been sustained despite increased standby cost. However, the utilization rate at the end of April is expected to fall below 90% compared to 91.1% last year. And at the end of June, it is expected to be slightly above 90% compared to 95.1% last year. Therefore, the Q4 average is expected to be around 90%.

On Page 8, we have the figures regarding recruitment and turnover. We have here the breakdown of hired headcount per quarter. Compared to last year, we saw intensifying trade friction between the U.S. and China in Q2, and then we have the emergence of the corona crisis in Q3. So we focused on quality over quantity and strategically reduced mid-career hiring. As a result, the number of mid-career hires in Q3 was lower than last year. As of April 1 this year, 1,364 new graduate engineers have joined the company, but we are currently suspending all hiring activities for the time being until we have more visibility into the business environment.

Generally, the turnover declines in times of unfavorable economy and in Q3, it improved by about 2 percentage points compared to the same time last year. The rate 10.6% in Q3 of last year may have been an outlier, but even on an LTM basis, it was 8.3%, so the upward trend has calmed down a bit. As we are suppressing our hiring activities now, we will take greater care to prevent retirement.

On Page 9, we have the engineer portfolio by technology and on Page 10, by industrial sector. Although inquiries for IT engineers are strong and the information industry is still growing significantly, existing projects may be temporarily suspended or new projects delayed depending on the end user situation. Therefore, we must pay more attention than usual to our customers’ business conditions.

On Page 11, we have the unit sales price. The average monthly unit sales price, including overtime for the first 9 months of this fiscal year, was JPY 633,000, an increase of 0.3% compared to same time last year. We were able to increase the existing engineers’ unit price, the base charge, by 3% compared to the same time last year. Despite the business climate, April charge-up was better than expected, in part due to the effect of equal pay for equal work, which began in April this year. Going forward, things may not be as smooth as it has been. But we will continue to improve unit prices in order to make a further decline in working days and overtime hours.

On Pages 12 and 13, we have a summary regarding the COVID-19 impact for Japan and for overseas. On Page 12, we explained the impact on the domestic engineer dispensing business under the so-called stock type recurring revenue business model, which accounts for just under 92% of our sales. Although working from home had begun to increase, especially for IT workers, still the standby has increased due to customer requests since the declaration of the state of emergency in April. And if the state of emergency lasts for only a short period of time, most of the invoicing can be done with negotiation. But if days of emergency are prolonged, then we are afraid that the contract may not be renewed or maybe even terminated in the middle of the contract. We currently estimate that in Q4, the corona crisis will hurt the sales from this part of the business by about JPY 0.5 billion to JPY 1 billion.

In the future, we would like to carefully manage the company looking ahead and determining what we should do now based on the premise that the major KPIs I’ve just explained will naturally be affected, which means the number of engineers will decline compared to last year, the utilization rate will recover slowly and the unit sales price will decline. While the overall impact is small, the permanent placement business is more susceptible to the economy and technical education training businesses with schools around the country has been forced to close their classrooms for a period of time.

On Page 13, we have a summary of the overseas situation, which accounts for just 6.6% of consolidated sales. While some countries are experiencing a lockdown much more severe than in Japan, some of the business models are different from Japan where we, in principle, employ engineers full time. So therefore, we believe the impact to the GP will be limited. We are currently in close contact with the management from each country to accurately assess the situation and to quickly develop a recovery plan.

On Page 14, we have the lookout and our policy — we have the outlook and our policy for the future. Again, I must reiterate that this is an unprecedented and unusual situation, so we must abandon optimism and place the highest priority on business continuity while firmly protecting the employment of our engineers who are our assets. In March of this year, we were able to achieve the same 90% renewal rate as last year. But we believe that in June, the next month for major renewal, will be a touchstone in predicting our performance for the next fiscal year and beyond. For companies that closed their fiscal year in March, they maintain their initial budgets for Q1 as they operated their business during April to June. But naturally, many of them will start to revise their budgets based on the corona impact as they start the second quarter and beyond. Therefore, though some of our sales activities have been constrained, we are still making efforts to maintain the renewal rate in June.

Our management members, including CEO Nishio and myself, have all experienced the Lehman shock. We know what to do in order to stay ahead in these situations, and we always assume the worst-case scenario and make every effort to respond quickly. We have always run our contingency simulations on a regular basis during normal times, and our analysis shows that in our domestic business, the breakeven utilization rate is 80%. And with further cost reduction, we can even survive under a utilization rate in the 70% range.

On Page 16, we have the history of the domestic engineer staffing market after the Lehman shock. But even then, the market contracted by about 15% and bottomed out in about a year and have since recovered. So we believe that our business dealing with engineers is relatively less susceptible to the risk of economic fluctuations compared to other personnel-related businesses. Once again, if we persevere through this emergency, we expect to see further consolidation in the industry, bringing customer demand and engineer acquisition to major operators like us, and thus allowing us to reap the residual benefit.

In our previous financial briefings and conversations with investors, we’ve mentioned that the midterm plan will be announced together with the full year results at the end of this fiscal year. However, we need to concentrate our resources on overcoming the crisis now. And since it is difficult to develop a mid to long-term plan with concrete and reasonable numerical targets, we would like to postpone the announcement of the new medium-term plan. Having said that, the management team will obviously continue to discuss our long-term vision and growth strategies and will actively seek to identify new business opportunities that can adapt to the new norm post corona.

Finally, on Page 15, we have the EPS and dividend historical figures. Since we have not revised our guidance for the current fiscal year, we expect to pay an annual dividend of JPY 140 per share. As I mentioned earlier, we acquired JPY 1 billion worth of our own stock at an average price of JPY 4,300 in March when the stock price plummeted. As a result, the total amount of share repurchases done this year has exceeded JPY 2 billion, and shareholder return ratio through buybacks have reached approximately 20% of this current year’s net profit, which is forecasted to be JPY 10.1 billion.

This is the end of my presentation. Thank you very much.

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

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