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Edited Transcript of 2181.T earnings conference call or presentation 20-May-19 10:59am GMT

Full Year 2019 Persol Holdings Co Ltd Earnings Call

Tokyo Jun 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Persol Holdings Co Ltd earnings conference call or presentation Monday, May 20, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hirotoshi Takahashi

Persol Holdings Co.,Ltd. - Deputy President, COO, Group Function Control Officer & Director

* Kiyoshi Seki

Persol Holdings Co.,Ltd. - Executive Officer, CFO & Director

* Masamichi Mizuta

Persol Holdings Co.,Ltd. - President, CEO & Representative Director

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Presentation

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Kiyoshi Seki, Persol Holdings Co.,Ltd. - Executive Officer, CFO & Director [1]

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Thank you very much for coming to PERSOL's FY March 2019 Results Briefing, sparing your precious time.

Now according to the agenda, I'd like to explain the Part 1, the overview of the consolidated results for the FY March 2019. Here's the consolidated results for the FY March 2019. As you may already know, even though the macroeconomic environment has been facing a lot of uncertainties, there has been no particular negative factors in our business sector, and we could carry out the business continually in a favorable environment. As a result, the sales and operating profits achieved record high results for 7 consecutive fiscal years, and we're happy to report very robust financial performances.

At the very right of the chart, we are showing the results of FY March 2019. As for the sales, we achieved 7% growth from our organic existing business and a positive impact from the M&A of PROGRAMMED group in addition to that. So it was JPY 925.8 billion, which was a 28% increase year-on-year.

Also, as shown by the green bar next to it, the operating profit increased 22% year-on-year to JPY 44.1 billion. The forecasted profit was JPY 42.5 billion, so we exceeded the plan by JPY 1.6 billion.

Let me explain the drivers behind such results. There are mainly 3 of them. The first is the improved profitability of Temporary Staffing business, which is our core business. The second is the high growth sustained by the placement business. The third is the accelerated growth of PERSOLKELLY segment. Due to the contribution of these businesses, we could achieve a remarkable P&L performance.

Next, I'd like to give you the overview of the results by segment, starting from the upper left. The sales of Temporary Staffing and BPO segment was JPY 509.5 billion, which was a little lower than our plan. However, the operating profit was JPY 23.9 billion, and we still achieved a 0.1 percentage point improvement in operating profit ratio.

The details will be explained later, but the domestic Temporary Staffing was affected by the changes to Japanese laws, and we were mainly affected by a greater number of staff terminating the contract. Therefore, it may seem as if our growth is slowing down, but we are actually achieving a greater improvement in profitability and productivity and an increase of placement fees. So due to such variable factors, we achieved an operating profit of JPY 23.9 billion, which was 4.7% operating profit ratio.

Moreover, we have tried to cope with the changes in Japanese laws throughout the year, and that resulted in having 10,000 staff converting to open-ended contract arrangement. In the future business initiatives, we believe such arrangement will bring about many positive outcomes.

Next, let me move on to the upper middle Recruiting segment. As for this, the domestic job change market has been expanding despite the current macroeconomic environment. Helped by such a circumstance, the sales increased to 17.8% to JPY 85.8 billion, and the operating profit turned out to be JPY 15.5 billion. The main profit driver was the placement business, which achieved to 29% sales growth year-on-year, and this was really a big driver of the whole business segment.

Moving on to the upper right, the PROGRAMMED segment, only came to be included in the consolidation from the fourth quarter of the previous year, so we do not have a year-on-year comparison. However, as we had explained before, in Australia, there has been a fierce competition over low prices in the blue-collar workers staffing business. And since we wanted to avoid such a competition, we lost some orders from large clients. Throughout the year, we implemented various recovery measures, but we could not offset the drop completely so the sales was JPY 201.4 billion.

On the other hand, the Maintenance business progressed steadily over the year, and especially in the recent 4 quarters, we received orders from new clients such as airports and universities. So we are confident that it would bring about positive impact to our future results in FY March 2020.

Next is the lower left, PERSOLKELLY segment. The APAC market, mainly in Southeast Asia, has enjoyed very good circumstances in each of the countries. Based on such a background, for the first time since the joint venture was launched, this segment achieved operating profits. It has also sustained high sales growth ratio. At the same time, during this fiscal year, we added further headcount and invested in IT systems. In spite of such investments, the segment achieved a profit, so it shows that they are truly performing well.

The lower middle, ITO segment. Here, we also enjoyed a great corporate demand to enhance their IT systems. We received a lot of inquiries from our customers and record materials various system integration projects and IT-oriented outsourcing projects, so the sales increased 16.1% year-on-year.

On the operating profit side, as we had explained before, we spent JPY 1.2 billion to improve the treatment of workers during the FY March 2019. So as a result, the profit declined. However, now we have a better foundation to achieve improved performance throughout this fiscal year.

Finally, the Engineering segment. Both the sales and profits achieved steady growth throughout FY March 2019. By the client sectors, some of the clients such as the home appliance and the electronics sectors were bearish, but the automobile and the construction machinery sectors were showing very strong demand so we could achieve very good financial results.

So that was the overview of the segment performances, but I would like to give you a little more details on 3 key factors that impacted our profit. First is regarding the improved profitability in the Temporary Staffing and BPO segment. From the year before the last fiscal year, we began to show such a breakdown in analysis chart. We started from the operating profit of JPY 22.1 billion, and we had a profit increase of JPY 3.8 billion. And in FY March 2019, we consolidated some group companies in Japan, so the PMI cost was about JPY 2 billion, as we already explained before.

As a result, the operating profit was JPY 23.9 billion, which also led to a steady improvement of operating profit ratio by 0.1 percentage point. If we didn't have to spend the one-off PMI cost, the operating profit ratio would have been a little over 5%. So the overall profit-making structure is getting solidified. This shows that in the future, we can expect further profit improvement.

There are 3 key points in improving the profitability. First is the Genesis, which is the core Temporary Staffing HRIS system that we introduced, and the matching ratio using Genesis is improving. Secondly, as some of the workers switched to open-ended contract arrangements, we could secure the placement fee revenues. And third, with the changes in the market environment, we could raise the billing rates according to our plan. They are believed to be the key factors that drove the profit improvement.

Now let me once again recap the situation concerning the responses to open-ended contract arrangements, which I just mentioned. As of March 2019, the total number of temporary workers subject to the law change was approximately 25,000. After which, about 40% or 10,000 staff switched to open-ended contract and were hired by PERSOL. In such cases, we could raise the billing rate up by 10% in average.

Also, not including the time for training, the operation rate is nearly 100%. So they contributed to the improvement of profitability. Moreover, the middle layer shows the number of staff hired directly by client companies, and that is about 4,000. The situations are different for each client, but generally, after a thorough communication, such staff were properly hired by the companies.

The final group is the Temporary Staffing to new clients. They are the type who choose to be continually registered as temporary staff. And there are 11,000 of them, accounting to 40% of the total. During FY March 2019, such staff may have faced some time lag to choose over different contract arrangements, so that may have slowed down our top line sales growth to a certain extent.

Now regarding the temporary workers subject to changes in Japanese laws from hereon, I'd like to give you the future outlook. First, please note the peak in the middle of the chart. The vertical axis shows the absolute number of temporary workers subject to the law change. This is including the staff who had been working from before the change of laws and who continue to work at the same office exceeding 3 years, and the number of such staff constantly accumulated from October 2018 until March 2019.

The highest peak was in December 2018, and the second highest peak was in March 2019. So such staff who had been a temporary staff from before the law change and who exceeded 3 years during the 6 months were the ones that we first offered the choice to switch to the open-ended contract through delicate communications.

In general, the number of such staff peaked out after this April. As shown on the right in the narrow line, after this April, we've continued to have only a certain number of staff who would be subject to the law change. By controlling the numbers well or by having a better communication with them, in this fiscal year ending in March 2020, we might achieve a one notch higher level of sales growth.

Next is regarding the high growth of the Recruiting segment. The sales growth was 17.8% year-on-year, and the operating profit growth actually exceeded 40%. Again, the driver was the well-performing placement business. The sales increased 29% year-on-year, and it was including the good growth of doda plus, which is an online service.

Also, as shown on the right, the advertisement business for permanent job seekers grew well. So we achieved remarkable growth in various business areas in FY March 2018, and that greatly drove the total profit growth in the Recruiting segment. Also, even though it is not shown on the slide, since a business made some promotion investments in the FY March 2019, it achieved a positive growth year-on-year.

As for the performance improvement of PERSOLKELLY, the left chart shows the sales growth and the breakdown, and we achieved positive growth in almost all of the areas. The sales grew from JPY 65.7 billion to JPY 76.1 billion.

The right chart shows the operating profit and the breakdown. Since we booked some impairment loss in FY March 2018, the goodwill amortization reduction was about JPY 5.6 billion. However, we also invested in human resources and IT systems during this fiscal year. This means that while making necessary investments for the future, PERSOLKELLY successfully established a good foundation to improve the profitability.

Finally, I'd like to briefly explain the highlights of the market environment. Overall, Japan is continually facing a shortage of manpower, and nothing has changed. Among the KPIs that we use, what we are showing here are the comparison with the year ago level for each business: the dispatch, the placement, the advertisement for full time and the advertisement for part-time. In all of those job vacancies, we are seeing very strong numbers. We believe this trend will continue, so we are hopeful that the results of FY March 2020 will also meet expectations of the investors.

That was all for Part 1, the overview of the consolidated results. Thank you very much.

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Masamichi Mizuta, Persol Holdings Co.,Ltd. - President, CEO & Representative Director [2]

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This is Mizuta. Thank you very much for coming to our briefing despite your busy schedule. Now I'd like to cover the Part 2 to explain the progress status of the midterm management plan.

The original midterm target for the sales in FY March 2020 was, as shown here, JPY 980 billion, but we would now like to aim for a little higher target of JPY 1 trillion. Likewise, the EBITDA target will be upgraded from JPY 63 billion to JPY 66 billion. Still yet, the operating profit target will be kept at JPY 48 billion as we would like to do some investments.

Now we had explained this many times before, but we have 5 priority strategies set out in our midterm management plan. Today, out of these 5, I'd like to talk about enhancing the awareness of the PERSOL Group, investing for further business growth and M&A investments in details.

It's been over 2 years since we changed the company name to PERSOL, but the PERSOL brand has not penetrated well into the market yet. In addition to that issue, a lot of people are not having an association between company brand PERSOL and our service brands such as TEMPSTAFF, doda and an. Actually, there were times when I exchanged business cards and said that I was Mizuta of PERSOL, and this other person looked surprised and said, "Oh, Mizuta-san, I didn't know you quit TEMPSTAFF and went to PERSOL." It's sad, but I still get such reactions.

From this April, I don't know if you have seen it already, but we started this TV commercial using Mr. Uchimura, a popular comedian. Mr. Uchimura has been ranked #1 in the survey for the celebrity whom I wish was my boss for 3 consecutive years, so he's the perfect man to represent the PERSOL brand. I'm very proud to have chosen Mr. Uchimura as our brand personality.

This is one another priority policy, the core HRIS system, Genesis, for the Temporary Staffing business. We invested JPY 4.6 billion in this system, but the profit contribution effect was JPY 2.2 billion in FY March 2019, almost in line with our simulation for the profit contribution. As for the contributing factors, the greatest effect was coming from the integration of the system among the group companies. We had nearly 30 group companies in the Temporary Staffing business, but we integrated several of them into the core company, PERSOL TEMPSTAFF, during last fiscal year. The effect of integration was large.

This fiscal year, we would like to increase the number of group companies that use Genesis further. And with that, we would also like to promote the group consolidation. The benefit of using a common system is big. Some of the work that has been handled in Tokyo now can be transferred more and more to the regional cities, and with that, we can lower the operational cost, too.

The next is another priority policy to leverage M&A and digital technology as much as possible to realize a better convenience. This is also a very important strategy. With regards to this matter, Mr. Takahashi who is in charge of this project will explain the details later again.

Let me move on to Part 3, the forecast for the fiscal year ending in March 2020.

Earlier, I said that our midterm sales target is now revised to JPY 1 trillion, and that means this fiscal year, we are targeting the sales that tops the JPY 1 trillion mark. The growth rate will be 8%. Nowadays, we hear a lot of news regarding the economic environment, and I realize that there are some concerns for an economic downturn or a downfall.

On the other hand, the shortage of manpower is becoming a serious structural issue, and I would say the shortage of manpower is a bigger issue than the concerns for an economic downturn. The momentum that we are seeing upon entering this fiscal year is as great as we had expected, so we believe this 8% sales growth can be achieved.

With regards to EBITDA, we are forecasting JPY 66 billion with 10.1% growth. And the operating profit, we'll stick to the original midterm target of JPY 48 billion.

Also, starting from this fiscal year, we decided to disclose the forecast for the net profit prior to the amortization of goodwill. This is almost equivalent to the profit based on IFRS, and we are forecasting JPY 36.1 billion in FY March 2020.

As for the dividends, the year-end dividend at the end of FY March 2019 was raised from JPY 10 to JPY 15 with a 50% increase. Naturally, this fiscal year's interim and year-end dividend is expected to be JPY 15 each, so the total will be JPY 30.

Moving on to the forecast by segment. The first is the Temporary Staffing segment. As Mr. Seki explained earlier, the last fiscal year's growth rate was not good enough, and I am not satisfied. Actually, the number of staff to be terminating the contract turned out to be higher than our expectation, and that was the biggest reason why our sales did not grow as much as we had thought. This fiscal year, we are expecting the sales of JPY 549 billion with a 7.7% growth.

As I would explain in the next slide, and I really hate to say it because it sounds like an excuse, but we are affected by the extra-long Golden Week this year with 3 additional holidays. The negative impact on the sales is about JPY 6.3 billion. On the profit, there is about JPY 1.1 billion negative impact. This was a fiscal factor, and please understand that there was nothing we could do to avoid this.

Let me talk about some of the initiatives of the Temporary Staffing segment for this fiscal year. We had about 10,000 open-ended contract workers as of the end of March 2019, but this is likely to increase about 5,000. They will become a stable source of revenues. The billing rates are rising very much, and the growth rate has been about 2% year-on-year.

Our response to the revision of the Workers Dispatch Act will settle down for a while, but next April, there will be another legal revision to introduce the same work, same pay principle. It is going to be a big revision of the law for us. There are always positive and negative aspects in such legal revisions, but I believe the positives are rather higher than the negatives.

What I mean by that, for instance, is the prices. When the client company uses our temporary staff under the same work, same pay system and if the client chooses even a balanced method for Temporary Staffing agency, then there would be certain conditions. The wage to be paid to the temporary workers would have to be equal or higher than that of the full-time employees engaged in the same work, which means that if the company is in Tokyo, the hourly wage to be paid to the workers will have to be JPY 1,650 or higher. Otherwise, it will be in conflict with the law.

Our current wage levels are basically satisfying such legal requirements. However, it is also a fact that there were some aggressive companies with a business model to use abundant temporary workers at much lower prices. Such a business model will no longer be viable with the introduction of same work, same pay principle. For example, if the hourly wage is JPY 1,650, we would have to bill JPY 2,300 or JPY 2,400 to the client company. Otherwise, our company cannot survive. Even in Tokyo now, there are some companies billing lower than JPY 2,000, and such practice can no longer prevail. The new law will lead to a better price control in the market, so we'd also like to work hard to persuade the clients to agree to a higher billing rate.

Now this is the excuse I made earlier regarding the reduction of working days upon the extra holidays that led to the impact of JPY 6.3 billion on the sales and JPY 1.1 billion on the profit. Please understand this. Also, this impact is limited to the first quarter, and therefore, the first quarter sales will have a negative impact of 5%.

Next, I'd like to talk about PROGRAMMED. I'm aware that we have caused a lot of concerns to many of you here. The Australian economy is enjoying a moderate growth along with the increase of the population, so the market is likely to achieve a stable growth even if not a rapid growth.

Now PROGRAMMED has mainly 2 businesses, one is staffing and the other is maintenance. As for the staffing sales trend, from the fourth quarter of FY 2018 and to the first quarter of FY 2019, the sales declined about 4%. This is because we lost the orders from some large accounts. In reality, it has been difficult to recover the loss of the large accounts, but we have achieved a rather moderate or stable sales growth since then.

As for the maintenance business, we have been winning contracts for airports and public housings, which are large in size and extending over several years. As a result, we have been piling up a good level of back orders, so we believe we can achieve a sales growth of about 4% to 5% this fiscal year.

Since we must continue to achieve growth, we would like to especially focus on infrastructure, mining and health care, which are likely to grow well. Also in Australia, the investments in the infrastructure are likely to be continually active so we shall make sure to capture the demand. Australia is such a big country, of course, so we'd also like to utilize the technology that we have in order to enhance the convenience of the customers.

The next is PERSOLKELLY. The APAC economies are doing well, so with the boost of the tailwind, we would like to achieve a double-digit sales growth. The profit may not be so high, as we would continually like to invest in the human resources and the IT systems.

As for the remaining ITO and Engineering segments, we have no issues at all. They are achieving steady growth.

So that is all for a brief explanation on Part 2 and Part 3 from myself. Thank you very much for your attention.

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Hirotoshi Takahashi, Persol Holdings Co.,Ltd. - Deputy President, COO, Group Function Control Officer & Director [3]

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This is Takahashi. Thank you very much for coming today. I would like to go back a few pages to the midterm plans priority strategy on M&A and the active new business investments so that I can explain a little more details.

So please look at Page 17 or the slide in front of you. We have been expanding our overseas business very actively, especially during this midterm period. As Mr. Mizuta mentioned earlier, we acquired PERSOLKELLY and Australia's PROGRAMMED as a part of mega M&A projects, and our overseas sales was more than JPY 250 billion. They have grown into the size to comprise over a 1/4 of the PERSOL Group's total sales.

The series of investments to solidify our business foundation overseas have come to a pause, and now we are working on the PMI, the internal post-merger integration and improvement. That is the current phase of the overseas business.

In terms of the business performances, their contribution to the operating profit may still be small, but they are steadily achieving improvements on the EBITDA basis. So we are hopeful about the overseas business.

In fact, 4 or 5 years ago, the overseas sales were less than JPY 10 billion, but it had grown to the level of JPY 250 billion. And by the end of this fiscal year, they are likely to reach nearly JPY 300 billion in total. In any case, the first priority for the moment is to improve the internal operations with some investments.

As for the domestic market, we have conducted some small and midsized M&As. One of them is Avanti Staff Corporation that was turned into our subsidiary, and the other is MOL Career Support that we inherited the business.

Also, just the other day, we made an announcement that we acquired Fuji Xerox Learning Institute, which is engaged in employee training and education area. Even though we had also been engaged in the training area partially, we felt that we should enhance such a new business area further to create a new pillar of revenues so we decided to acquire the Institute.

As such, our M&A activities overseas will be a little quiet in the coming year. But domestically, we would like to seek good opportunities, especially focusing on the ones that would surely contribute to the enhancement of existing business.

Also, as shown on the right-hand side, we're going to take on some challenges in the new business areas. Many of those candidates will be small companies, but since we have established the CVC fund called the PERSOL INNOVATION FUND, we are now proactively seeking various alliances and acquisitions. One of them is ShareFul, which was jointly established with Lancers, and we started the operations from this fiscal year.

We also have some other companies that we invested in the past, and one of them is Comparably, which is a consumer review site. Also, there is Sukedachi, which is an on-demand matching service for construction site workers, which is an area of business that we did not involve ourselves in the past. The logo on the right with yellow W mark in black is Wonolo, an American company that provides online staffing platform in the United States.

We have actively invested in such companies, sometimes partially and sometimes fully, to consolidate them into our group. Our conventional Temporary Staffing, placement services and outsourcing businesses can be supplemented by the new technologies of such startups to improve the productivity further. In some cases, we might be able to tap into a new market. These were the things that we had in our mind to carry out the investments according to the midterm plan, and we would like to engage in such activities this fiscal year.

Let me move on to the next page. This is the final year of the midterm plan, and you might say that JPY 2.5 billion budget for the investment is too small. However, we jointly founded Shareful. We established MiiDas by ourselves organically, and we invested in POS+, which is a cloud post system, and such businesses are growing steadily well. Both MiiDas and POS+ are only a little over JPY 1 billion, but they are already doubling or tripling the sales year-on-year. They are expected to achieve 200% or 300% sales growth this fiscal year again.

Then rather than pondering on the business case carefully like we do in our conventional investment process, being agile to make prompt decisions on a weekly or monthly basis to accelerate the investments if the things look good enough is called for. Those are the things that we are working on right now, and we believe we can make most of the JPY 2.5 billion budget to pioneer new services and products. In the meantime, we would like to foster various seasoned ideas while the overall situation is good.

The driving structure is as shown here. We have PERSOL INNOVATION CO. that is in charge of the business operations, and we also have PERSOL INNOVATION FUND that is engaged in researches in Japan and in overseas, including the U.S., Singapore and India. Not just in Japan, we would like to find services which are a bit different from our conventional HR service such as HR tech company and new AI technology that may contribute to the enhancement of our matching and fitting services.

As such, we would like to upgrade our services more than ever and also try to go into the new business area if there is an opportunity continuing. Those are the things that we would like to do. In April, PERSOL INNOVATION has made a fresh start. We would like to make this final year of the midterm plan a jump board for the new leap in the coming years, not just by enhancing the existing business, but by also pioneering the new business areas.

That is all from me. Thank you very much.

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