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Edited Transcript of 6028.T earnings conference call or presentation 7-Aug-20 10:59am GMT

Full Year 2020 TechnoPro Holdings Inc Earnings Call

Minato-Ku, Tokyo Sep 16, 2020 (Thomson StreetEvents) -- Edited Transcript of TechnoPro Holdings Inc earnings conference call or presentation Friday, August 7, 2020 at 10:59:00am GMT

TEXT version of Transcript


Corporate Participants


* Toshihiro Hagiwara

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

* Yasuji Nishio

TechnoPro Holdings, Inc. - President, CEO & Representative Director


Conference Call Participants


* Hirofumi Oda

SMBC Nikko Securities Inc., Research Division - Analyst

* Satoru Sekine

Daiwa Securities Co. Ltd., Research Division - Research Analyst




Operator [1]


Good afternoon. Thank you for joining us in the conference call of TechnoPro Holdings, Inc. on the financial results for fiscal year ended June 2020 despite your busy schedule.

Today's conference call is attended by Yasuji Nishio, President, Representative Director and CEO; and Toshihiro Hagiwara, Director in charge of Management, Managing Executive Officer and CFO. The moderator is [Nogo Ogawa] from Public Relations IR department.

Now CFO, Hagiwara, will explain the financial results for the fiscal year ended 2020 -- June 2020 for about 20 minutes. And then CEO, Nishio, will explain the business environment and management policies for about 25 minutes. We will then take questions until around 6 p.m.

Please note that questions will be accepted only from the Japanese line. There are presentation materials of TechnoPro Group financial results for the fiscal year ended June 2020 and TechnoPro Group business environment and management policies are available on our website.

In order to enhance information disclosure, today's briefing is translated simultaneously in English. In addition, the audio of the presentations will be published on our website later, but not the Q&A part. In addition, the contents of the briefing will be transcribed in Japanese and English by our partner company and will be published on our website. Please note that the content of the Q&A part will also be disclosed.

First CFO, Hagiwara, will go over the financial results for the fiscal year ended June 2020. Please refer to the presentation material of TechnoPro Group financial results for the fiscal year ended June 2020.


Toshihiro Hagiwara, TechnoPro Holdings, Inc. - CFO, Managing Executive Officer & Director [2]


Good evening. I'm Toshihiro Hagiwara, CFO of TechnoPro Holdings. Thank you for joining us. As was mentioned at the third quarter earnings briefing, our group is beginning to feel the serious impact of COVID-19. The revenue and profit levels of our core business, the engineer staffing and contract outsourcing solutions business, primarily determined by the number of engineers, utilization rates and the unit sales price, each of the KPI is facing increased uncertainty. We expect this situation to continue for some time.

As for the financial results for fiscal year ended June 2020, which we disclosed today, the effective SG&A expenses reduction preceded and the profit exceeded the guidance. But the new fiscal year would be a year in which the growth will be halted for the first time since the listing of the company. I will defer the presentation on the current business environment and outlook under COVID-19, efforts for regrowth and the redirection medium and to long-term growth to CEO, Nishio, and also over the financial results.

Page 2, full year revenue was JPY 158.4 billion, up 9.9% year-on-year. Operating income was JPY 15.7 billion, an increase of 14.8%, and net profit was JPY 10.8 billion, up 11.8% year-on-year. In the fourth quarter, which felt the direct impact of COVID-19, revenue increased by 3.4% year-on-year. But due to the low engineer utilization rate, the GP margin was 23.8%, down 1.8 points from the previous year.

On the other hand, owing to cost reduction efforts, the SG&A expense ratio was kept at 15%, a year-on-year improvement of 3.5 percentage points. As for fiscal 2021, revenue is expected to decline and utilization rate is expected to decline compared to the previous year, and the increase in standby costs is expected to worsen the GP margin.

We would like to minimize the decline in operating margin by reducing SG&A expenses more than the year-on-year decrease in revenue and at least keep the SG&A expense ratio to below 15%. Continuing from the previous year, the goodwill of 2 domestic subsidiaries was incurred during fiscal 2020, resulting in recording a total impairment loss of approximately JPY 900 million. As management, we deeply regret this.

Since I became CFO in July last year, we've been applying more stringent discipline to M&A activities, not only from the perspective of consistency with the medium- to long-term strategy and raising EPS, but also being mindful that achieving ROIC exceeding capital cost is at stake. We will be careful not to record such impairments again in new projects in the future.

Revenue was short of the guidance by approximately JPY 1.6 billion. But we believe that this was mainly due to the loss of revenue due directly to COVID-19, and both operating profit and net profit exceeded the guidance.

Page 3 shows quarterly changes in revenue and operating profit. As organic growth, excluding M&A effects, revenue was up 11.3% and operating profit, 20.5%. From this quarter for the R&D and Construction Management Outsourcing segment, in addition to the number of domestic working days, we also are disclosing domestic working hours per day. In the future, I think that there will be more opportunities to explain the decrease in unit sales price by not only the number of working days, but also the decrease in overtime hours.

While paid holidays used by engineers and unclaimable temporary relief would reduce working days, an increase in telework and customer budget control would manifest themselves in the form of reduced overtime hours. In fact, the number of working days in the fourth quarter was 24 days lower than the forecast than 3 months ago. And the working hours per day decreased by 0.16 hours from the previous year or about 3 hours per month.

Pages 4 and 5 show the result by segment on a full year basis and for the fourth quarter. Construction Management Outsourcing and the other business in Japan have recorded goodwill impairment in the fourth quarter, which pushed down operating profit. The operating profit before PPA asset amortization includes reversal of the amount of increment losses. These checks were for the comparison on a constant basis.

Overseas has had strong impact of lockdowns. Still as shown on Page 5, even with revenue decline of 21.6%, profit was maintained. Unlike Japan, the overseas business model does not involve standby costs in principle. So the risk of falling into the red is limited, and we do not anticipate the need to sending money from Japan to make up for deficit in working capital.

Pages 6 and 7 show the effects of COVID-19, and this has been updated since the time of the third quarter earnings briefing. The R&D and Construction Management Outsourcing segments, which account for the majority of our revenue and profit, is a stock-based business and the 3 major KPIs shown here are extremely important. Above all, the engineer utilization rate, which is directly related to the profit margin consists of 2 factors: one is whether or not it is possible to keep contracts for currently working engineers, that is the contract renewal rate, is the key; and the other is whether the engineers that have reached the expiration of their contract can be reassigned quickly by a new contract, that is the point is -- the number of new assignments per month and their speed would be the key point.

Since April, delays in assignments have become noticeable due to restrictions on sales activity under COVID-19 and slowdown in recovery of the utilization rate has begun to emerge.

At the last earnings briefing, I explained that the contract renewal rates in the month of June will be a touchstone in estimating the future operating results. In retrospect, although it was not as good as the previous year, the deterioration was not as bad as expected, and we were able to renew the contract at a rate of 91% in June. Unlike during the Lehman prices, we have yet to see many contracts being terminated all at once or many charge-down request.

Customers seem to have learned a hard lifting from the Lehman prices, that major reduction in external resources with major results in delaying R&D activities and weakened competitiveness. And given chronic shortage of engineers, customers seem to worry that if they let go of human resources now, they will not be able to secure sufficient engineering workforce once the economy kicks up again. Still, the macro and microeconomic environment is expected to deteriorate over time, And contract renewals in September and December of this year are still uncertain. In particular, September is the contract renewal time for about 70% of all operating engineers. Last year, 92% of the contracts were renewed. But this year, we are expecting a tough situation.

Depending on the number of assignments in October onward and its speed to utilization may drop to the 80% range. And the assumption for the guidance, to be presented later, are based on that outlook. For other segments, please refer to the materials.

Page 8 shows the situation of Helius in Singapore, which recorded an impairment loss a year ago. The revenue was far below the planned target, but operating profit surpassed the earnings target despite the impact of COVID-19 and recognition of additional impairment was avoided. Revenue dependency on the largest customer, DBS, has dropped to 64% and GP margin is improving, but there is a constraint on the supply side of the engineer resources. So growth cannot be expected for the time being.

ROIC for fiscal 2020 remained at 5.2% below the newly revised capital cost of 7.9%. Depending on the future development, we may have to reconsider the strategic positioning of this company within the group.

Page 9 shows the status of TOQO and Techno Brain, which recorded goodwill impairment. TOQO is a company that specializes in seismic assessment and inspection of existing buildings and architectural design of new buildings. And Techno Brain specializes in placement services focusing on engineers. Those were acquired with a view to expanding into high value-added fields, while recording profit, albeit a small amount, and contributing to raising EPS, the 2 companies have to revise the plan envisioned at the time of acquisition, so we proactively recognized impairment loss. We will start to improve earnings to achieve our profit level, which allows ROIC to exceed the cost of capital.

Page 10 is a waterfall chart of operating profit adjusted for special item such as impairment. Without adjustments, totaling JPY 670 million, operating profit was JPY 16.4 billion in the previous year. For your information, the loss related to Boyd & Moore, which mainly introduced its high-caliber human resources to IT and technology clients in Japan and Asia, was due to achievement rate of 110% during the 3-year earn-out period. And the additional amount paid exceeded the amount of recorded debt by JPY 110 million.

Page 11 shows balance sheet and cash flow. As planned, we increased the commitment line for working capital to JPY 10 billion. And acquired a new A- rating from the rating Agency, R&I, opening the way for financing in the bond market. In a difficult situation, securing stable liquidity on hand is essential for sustainable business continuity. So we will continue to pay close attention to cash flow situation.

Our key KPI indicators are shown on Pages 12 through 16. First, please look at Page 12. The average utilization ratio in fourth quarter was 89.8%, which was slightly lower than expected. This is because, under the emergency deceleration, we struggled to make the assignments more than anticipated, which resulted in the delay. Utilization ratio for June was 91.4%, and the preliminary figure for utilization ratio in July is about 91.5%, which is almost the same as June, and the monthly improvement has remained small.

Of the 1,364 new grads who joined the company in April, 85% have already been assigned. And we are working diligently with the goal of securing the assignment for all of them by the end of September. The total number of engineers declined since May due to our temporary suspension of hiring. However, we plan to resume mid-career hiring in the technical field, where resources have begun to be exhaustive in response to rising demand. And in the construction management field, we have already started to hire experienced engineers who can be assigned immediately.

And the Page 13 shows recruitment and turnover. In the previous fiscal year, we employed almost the same number of the previous year, excluding engineers acquired through M&A. As for mid-career hiring, we started to reduce hiring from the third quarter.

On the other hand, the turnover rate for full-time employees worsened to 10.1% in fourth quarter. As the economic condition deteriorates, opportunities to change jobs becomes scarce. So generally, the turnover is expected to decline, but at times, it goes up with people worried about future as the standby period gets prolonged. In fact, a recent analysis shows that people with relatively short experience and relatively low base charges are leaving the company. While properly caring for individual engineer, such as improving the training system during the standby period and consulting on career plans, we will continue to pay close attention to reduce turnover.

Page 14 shows assigned engineers portfolio by technology; and Page 15, by industrial sectors. Please refer to Nishio's slides for trends in demand by field.

The average monthly unit sales price is shown on Page 16, JPY 630,000 in the previous year, which was almost flat year-on-year. Declining trends in the number of working days and overtime hours are issues we have to tackle down the road. The base charge for existing engineers on assignment as of June this year was up 3.7% a year ago.

This indicates that the charge-off negotiation, which started from April 1, while the equal pay for equal work issue was being dealt with were successful even under the current environment. We believe this will serve as a buffer for the charge-down request in the future.

Based on the payout ratio of 50% as shown on Page 17, the year-end dividend will be JPY 100 per share. The total annual dividend will be JPY 150. A portion of JPY 2 billion, which was part of the free cash flow not used in M&A in the previous fiscal year was appropriated for share repurchase as the stock price declines and the total shareholder return, including dividends, was 68.9%.

Finally, Page 18 is the guidance for fiscal year 2021. Although the business environment is difficult to read ahead, the issuance, who has the most information about the market, should convey their forecast and outlook to the market. And we believe it is important to have close interaction with the investors.

However, since the contract renewal rate and the speed of assignment in September and December are still unclear. We will only announce the guidance in the first half of this year. The full year guidance will be announced promptly when a reasonable forecast becomes possible.

In addition to the 6 months of the first half of the year, the figures for the first quarter are also included. Taking into account the number of engineers who will be operating by the end of September, which reflects the contract renewal at the end of June, and the first quarter guidance is expected to be achievable.

On the other hand, the contract renewal rate for September is still uncertain, so we have to be rather conservative for the second quarter. Therefore, the average utilization rate, which influences the profitability in the second quarter is assumed to be in the mid-86% range in the second quarter compared to 91.5% in first quarter. An average for the first 6 months would be 89%. Reflecting on the contract renewal rate in September and the performance of the first quarter, if it becomes necessary to revise our guidance for the first half of the year, we will promptly announce it. In addition, the average monthly unit sales price is expected to decline slightly this year compared to the previous year.

We have not factored in significant base charge reductions due to charge downs. In the first half of the year, this is due to a decrease in working days and overtime hours. In addition, we will not post the announcement of the amount of interim dividend and full year dividend this time, but the policy is to maintain an annual dividend payout ratio of 50% as shareholder returns. However, the basic policy of minimum of 10% of DOE will be frozen from the viewpoint of securing liquidity. We would like to -- we would like all our shareholders to understand that we will maintain the hiring of engineers, which is the source of our profit, and secure sufficient resources to prepare for future regrowth.

Please refer to Page 19 for segment guidance for the first half. In my explanation, I touched on some numbers that are not included in the slides, but the script will be uploaded to our website promptly. So I hope you can check it later.

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

Next CEO, Nishio, will go over the business environment and management policies. Please refer to the presentation material entitled TechnoPro Group, Business Environment and Management Policies.


Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [3]


This is Yasuji Nishio, the CEO of the group. Today, I would like to talk about 3 things: first, the current status of the medium-term management plan, which ends in June 2022, focusing on the growth strategy; second, the management policy in COVID-19 environment; and thirdly, our thoughts on path to regrowth with NI in post-COVID-19.

First, progress of growth strategy initiatives under the current medium-term management plan. As you can see on Slide 2, there are 3 business strategies in the current medium-term management plan: first, stable growth in core business; second, shift towards higher added value of the business; and third, promoting globalization. In addition, as IT strategy, we added move toward platforms for business operations, utilizing information technology. So there are 4 pillars altogether.

Page 3. Among them with regard to shift toward higher added value of the business, given that it takes time to do it solely on our own and is not realistic, we consistently pursue the approach of collecting external companies with advanced technological capabilities as business partners, dispatching engineers of our group to partner companies for training or even after the training is completed, have them continue to be trained in the form of OJT, so as to enhance our talent.

From cybersecurity to AI, big data analysis, cloud ERP, RPA, training and consulting businesses, we have been expanding areas of coverage each year and have found many alliance partners, built and utilizing these ecosystems are now company-wide efforts.

In Slide 4, we are showing 4 representative examples of such efforts. For example, the field of cloud. I think this is the area in which Japanese companies are making major changes in the face of COVID-19, and we are expecting a great demand in this area in the future. And we are putting a lot of efforts here. Specifically, in response to needs of customers that wish to use public cloud, such as AWS and Azure, we have a unit providing support for the migration of existing systems to the cloud such as infrastructure development, design, construction, testing and maintenance. The number of engineers in this field is currently about 100 that are in AWS and Azure. And we are planning to change another 50 people for this year. And if the profit and loss situation allows, we would like to increase that even further.

In the areas supporting onboarding and maintenance of ERP, such as SAP and Salesforce, we plan to increase the number of engineers from 65 to at least 80 this year. AWS, Azure, SAP, Salesforce, each has its own engineer certification system and by increasing the number of certified engineers and by increasing the number of high-level certified engineers, we are strengthening the collaboration of the alliance system. As for RPA, it so happens that Helius of Singapore is a distributor of automation anywhere, which is strong in RPA. By strengthening this expertise and relationship with the company in Japan, we are expanding our business, not only in Singapore, but also in Japan.

Lastly, as always, in the area of AI and data science, the total number of engineers that have already been trained total 436 among the 3 companies in the alliance. Collectively, they are becoming a major force.

Slide 5 shows the latest ROIC of the company acquired during the period under the current medium-term management plan, excluding the 3 companies already merged. So we're showing ROIC of 7 companies. Against the invested capital of JPY 9.5 billion, the ROIC for the total of 7 companies was 8.0%, which is barely above the revised 7.9% capital cost of the company, not sufficient other than EDELTA. At present, the ironic fact is that M&A is made for growth of the dispatching business, they are performing better than the M&As aimed at increasing added value. But with the organizational change implemented on July 1, we have set up an expert unit to further enhance the synergy effect of the businesses within the group. While it may be difficult this year, we would like to see a big improvement after that.

Slide 6 shows the sale from contract services and solutions business on the left-hand side and direct sales from alliance on the right-hand side. I would like to conclude that the explanation of the progress of the current medium-term management plan by referring to the development status of the talent management system that has been built as the pillar of IT strategy for the last 3 years.

Slide 7 shows the summary. As shown here, almost all of the functions are to be -- or have -- are to be deployed this fiscal year. From recruiting to matching, training, retention, talent development and resource planning. The LMS that has already been deployed shows the maximum effect while the onboarding training and group trainings were virtually impossible due to COVID-19. And the portal site for engineers that started last month, for example, has the click reporting system installed that allows the company to receive various information directly from the engineers who are working in the field. So in the face of various restrictions on sales activities amid COVID-19, we are already seeing effects in terms of facilitating assignment and others.

With that, I would like to conclude my explanation on the progress of the current medium-term management plan and move to the next theme, which is the current business environment and management policies.

Slide 8. As CFO, Hagiwara, explained earlier, last fiscal year, we were affected by COVID-19. But in response to the decrease in revenue and profit, we implemented various countermeasures. Temporary increasing of recruitment and the effect of cost reductions proved to be larger in effect. And as a result, we were able to achieve year-on-year increase in revenue and profit. But we don't think this will be the case for this fiscal year.

At present, there are 2 dynamics in place that affect our business. One is the positive one. There is a strong intent on the part of the government not to allow a large cutback in dispatched workers as we saw at the time of Lehman crisis. And in response, the customers are worried about reputation risk caused by a large reduction of dispatch engineers.

And the customers are worried that given the shortage of engineers in Japan, which will not change once the dispatch contractors are terminated, it will be difficult to secure people in the after-COVID era and may fall behind in their R&D activities. And so they are trying to continue to sustain their contracts with the dispatch workers.

So this is a tonnage of dynamics, as was explained by Hagiwara earlier. The other is a negative, of course. Increasing number of listed companies are reporting large losses in their quarterly earnings for April to June. And the longer the prolonged impact of COVID-19, the larger the losses or at least the larger the number of loss-making companies.

So maybe eventually, they will reach the limit. And when the push comes to shove, there might be a big reduction in expenses. And when that happen, we might see a repeat of what happened during the Lehman crisis, in which dispatch contract will be terminated, and that is a negative force.

At present, these 2 competing forces are in balance. So the contract renewal rate in June has not fallen sharply, and we assume that the contract renewal in September will not be significantly reduced, although the figure will be lower than June.

A few months ago, I thought that September of this year would be a big turning point, but now I expect to see the upsetting of the balance of these 2 forces in December or March next year. There is a possibility of the change of this balance, which is now at this moment in -- well balanced. Therefore, we plan to continue prudent business operations at least for the next 1 year, assuming that difficult situation will continue until an effective vaccine is developed and all the people are duly covered by vaccination.

The scenario that this situation bottoms out in the second half of 2021 and then gradually recovers is the most likely one. At this moment, we see this as the most likely scenario. So until then, we will have to carefully and firmly monitor the contract renewal rate, customer needs and then speed of assignment. I think this is a period of major upheaval in which we have to respond flexibly to changing circumstances.

Despite this, we will continue to strive for regrowth after COVID-19 pandemic is over. Specifically, in addition to ongoing strategic efforts with alliance partners, efforts to complete the development of the IT system of our company and the talent management system described earlier have been maintained. We are also implementing security measures and introduction of client-based system. Although it is a tough time, we will continue to do these things with the utmost effort.

In Slide 9, we show the current status by technology. Slide 10 shows the situation by industry. Along with a brief comment, we showed the weather map created by the CFO as a new attempt this time.

First, Slide 9 is by technology. Mechanical design, electrical and electronic design and chemical fields are marked with rainfall. On the other hand, field of IT infrastructure is a sunny mark, which is expected to continue to be booming, including support for telework. Embedded control, software development, biotechnology and construction are positioned somewhere in between.

Slide 10 shows the situation by industry, the automobile industry is the toughest and has a heavy downpour mark. The information industry continues to have strong need. But if the end users are manufactures, we are not optimistic since the project postponement and cancellation are fully anticipated. The group covers a wide range of fields and the fact that we have risk diversification is quite beneficial. As I have explained from the past, the strength in the IT field is now a major positive factor for us now.

Slide 11 is an image of future market trends as we look at it now. As I explained earlier, from this year to the first half of next year, total KPI management and cost management will help protect the company's future, protect employee job security and protect shareholder interest. While thoroughly solidifying our defenses, we will improve the skills of engineers, who will be the source of future growth if we improve their skills through alliances and aim for regrowth from the second half of 2022. We must consolidate our defenses and prepare for the next growth.

The business policy for this is shown in Slide 12 in text. Since the contents are the same as what I have just explained, I would like to skip the explanation.

Now on the third topic of today, I will explain the point of our business policy in the post-COVID-19 era from the slide 13 onwards. Many Japanese, including myself, have recognized the fact that Japan was lagging behind Western countries in digitization. Until now, the term digital transformation, or DX, has been used. But I think Japanese companies have not grappled with the notion in earnest, except for some advanced companies. There is no doubt that the age of post-COVID-19 is truly an era in which digital transformation in Japan will advance rapidly. DX progresses not only in the information industry, but also in the manufacturing and service industry or rather in all fields, including the public sector, where IT penetration is the lowest. The key technical areas include cloud-based system, network infrastructure, AI and Big Data analysis, cybersecurity, IoT, RPA and so on. These fields are as explained at the beginning, exactly the field of our collaboration with alliance partners that we have been promoting so far.

As shown in Slide 14, the ICT investment in Japan is quite low compared to the Western countries in the graph with 1995 at 100. In the era of post-COVID-19, the amount of ICT investment in Japan will increase significantly, and the demand for engineers will also increase accordingly. Perhaps Japanese and U.S. alone would not be able to satisfy the demand.

Slide 15 touches on the medium to long-term external environment that surrounds us. I am convinced that the age of post-COVID-19 will pose an opportunity for us. In fact, it is once in a 100-year opportunity for us, as a group. In a way, we have been prepared for this for quite some time. Although it was not enough, but I did not anticipate that the perception of the world would move this fast, this far with COVID-19. I thought we still had time, but the situation began to move faster than we expected.

The needs of society post-COVID-19 are the needs of our customers. Many of our business partners, who have the power to realize such needs, are the very foundation of our business. Even if they have needs, if they are not able to make investment, it doesn't lead to anywhere. And we have the resources of engineers who can meet that need, especially IT engineers.

In addition, we are building an information collection capability and an education and training system that can respond to the evolving new technologies. Of course, the current system of our group is insufficient. How quickly can the latest overseas technology be incorporated into the group? That's the question. It is also necessary for us to evolve ourselves in such areas as having offshore development capabilities to supplement human resources in Japan. Therefore, we believe that our overseas expansion in the future or maybe M&A will be focused on these areas.

Slide 17 touches on our future M&A perspective, I would like to give priority to picking up projects that match the direction of the group that I have just mentioned.

Lastly, I will qualify our future strategies 1 year from now in the new management plan. When we announced midterm business plan of the group, we will explain that.

Certainly, what we were discussing before COVID-19 has the same directional with what I just said. Today, it is about the progression of digital transformation. Without support from the society, it would have been or it would have become a huge pie in the sky. But thanks to COVID-19, this pie is now on the ground in front of us.

What we do now is to think about what to do with this pie. How to serve it so that our customers and the society as a whole will enjoy it? And this should be conducive to our regrowth. How the group will have a major leap forward, so please feel high hopes on our meeting next year.

That's all for me. Thank you very much.


Questions and Answers


Operator [1]


We will now take questions. And I will explain how to raise questions. (Operator Instructions) The first is Mr. Sekine from Daiwa Securities.


Satoru Sekine, Daiwa Securities Co. Ltd., Research Division - Research Analyst [2]


Sekine from Daiwa. I hope you can hear me?


Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [3]




Satoru Sekine, Daiwa Securities Co. Ltd., Research Division - Research Analyst [4]


I have 2 questions. First is on your plan for the first half of this fiscal year. Based on what you said earlier, especially September onward, maybe not a big risk, but lower utilization rate, I think, is assumed.

So in that sense, maybe your forecast is a bit lower bound. What about the cost aspect as well as impairment loss? Can you explain the gap that I felt existed between what Nishio-san said and Hagiwara-san said?


Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [5]


Okay. Hagiwara, the CFO, will take that question.


Toshihiro Hagiwara, TechnoPro Holdings, Inc. - CFO, Managing Executive Officer & Director [6]


Well on our plan for the first quarter, certainly, we believe the situation is rather firm. But for the second quarter, the contract renewal rates, we will not know until immediately before. So maybe we are taking a slightly conservative view. So maybe you're right. For the first half, the minimum is the forecast that we are presenting now, the lower bound, in other words.

And as was mentioned earlier, first quarter, if it turns out to be pretty good, and if the renewal rate, the contract renewal rate exceeds our plan, then at the time of the first quarter earnings briefing, we might revise the forecast for the first half. But there are so many uncertainties today. What we share with the investors and the market, we want to be conservative and show you sure figures.


Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [7]


This is Nishio speaking. For the first half, Hagiwara-san and I are in agreement. And is it firm or not? Well there's some buffer contained in our plan. The employment adjustment subsidies are not included. We had some internal discussion about that. And especially from the outside directors, it was pointed out that the subsidies from the government should not be included from the very beginning.

In other words, we should operates without relying on that. But of course, we should file applied for the receipt of the subsidies if we are eligible. But that is not included, and therefore, it should be considered as a buffer.


Satoru Sekine, Daiwa Securities Co. Ltd., Research Division - Research Analyst [8]


I see. My second question. Earlier, CEO, Nishio, talked about the path towards regrowth, especially in the area of digitization, you said you'll be putting focused efforts on that.

From the capital market, we -- comparing your company and the dedicated IT companies, we get the impression that IT companies have more expertise in this area. The engineering staffing company, your business, what do you think are the advantage that you have in growing in this?


Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [9]


This is a long-term plan. And so I can't really give you the detail because that will be part of the new medium-term management plan. The way we see it over medium to long-term, the staffing the dispatching business to solution provider, that shift is at the basis of our medium to long-term view. So consultation, solutions company to develop the resources, talent for that and what will be the basis for that would be what we are doing today in terms of alliance strategy.

For example, a consolidation was when we started for manufacturing. And it takes time for training, education as well as cost. So the number is still limited, but once we started this business, we found that there is a need -- demand for that. So for the digital transformation area overall, we want to expand step-by-step, so that will be recognized as a professional group. We are going to transform ourselves in that direction. And for that, we will continue to discuss various plans.


Satoru Sekine, Daiwa Securities Co. Ltd., Research Division - Research Analyst [10]


Well, a follow-up question. In IT, the dedicated IT company, compared to those, what would be your advantage? What would be the opportunities that you see with the dedicated IT company?


Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [11]


You're talking about as the system integrators, right?

Well, the larger the size of the company, the larger projects should we win -- could be won. And so they have a good project management capability.

And other than that, I don't think there's much difference. What is our strength, we can win big projects, and therefore, what doesn't exist in Japan as projects, look for seeds of such projects overseas and transfer that expertise to our engineers and sell that to the customers. In other words, we are strong because we have nothing to defend.


Operator [12]


Next question from SMBC Securities, Mr. Oda.


Hirofumi Oda, SMBC Nikko Securities Inc., Research Division - Analyst [13]


My name is Oda from SMBC. Can you hear me all right?


Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [14]


Sure. Yes.


Hirofumi Oda, SMBC Nikko Securities Inc., Research Division - Analyst [15]


My first question is in line with what was asked by Mr. Sekine, there was overlapping. The assumption for the average utilization rate, could you tell us a bit about the assumption for that? Sometimes you have difficulty in having the solid figure for the redeployment. So the figure here, this is 80%. So that means that the -- your managers are now talking to the client, the contact person, and they are happy at feeling that it is very difficult or just having the conservative figure because of the fact that you don't have the actual confidence of your future perspective.

And also about the weather charge, sunny mark, rain mark, so just tell us the differences between IT and mechanical and the utilization -- the ratio at the end of second quarter compared with the end of third quarter. So in what way should we look at it? And could you tell us a bit about how you look at how you see the utilization rate? This is my first question.

And also, I'd like to ask you my second question now. The second question is about the path for the regrowth from Page 11 to Page 12. So you might want to pass this, but it's okay. So could you tell us a bit more about what you actually bear in mind for your account for regrowth. So when do you think you will see the trusted changes on shift as it's shown on Page 12? So please share with us the time schedule for that. These are the 2 questions I have.


Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [16]


Thank you. For the first -- the first half, especially the second quarter, and the first is about the contract renewal rate at the end of September, and there is one more uncertainty, which is about the COVID-19 pandemic. And there have been the very massive restriction of our marketing opportunities. We are not able to visit our customers. So we only have to -- we can only contact them with the telephones or the Zoom meeting.

And then when the proposal is made and when the customers think about accepting it, they have to meet with the person that we are talking about. In the past, they were able to meet with the person, but in many ways, we only are able to have the interview over the video or over the telephone. So they are not accustomed to it. So this is from June -- from April to June. So this is the situation where people have difficulty hiring.

So as was mentioned by Hagiwara, for the first quarter, we have the conservative figure. The utilization rate is set at a lower figure. And about the marketing activities, this will be solely dependent on how or when the COVID-19 pandemic will be contained.

But recently, we will see the increase of the number of the infected cases. So at the end of the first quarter, we have not seen the closure of the COVID-19. And then this year, we will see more and more the restriction of the -- our sales activities. So with this risk in mind, we decided to touch a figure of 86% or 87%. And then in terms of the average of the renewal rate, the contract renewal rate, we think it is higher than that. But still, we have to be conservative.

Then about mechanical and IT. We compare it with the first quarter what would be the utilization rate. In the case of IT, this is not only about because -- this is not necessarily about the needs of the customers but rather restriction or the limitation of our freedom in contacting our customers are the determining factor.

In the case of mechanical part, they are -- the needs are dropping. And also we have difficulty deploying our sales activities. So that's the reason why the mechanical part is lower than IT. And then in case of biochemical, for example, the contract renewal rate is set in par with the previous year. So we are more bearish here -- bullish here. So mechanical, lower, but again, we have to be cautious about the level of litigation of our marketing activities, I understand.

The second question is about the regrowth. What are some of the paths we have for the regrowth? And you talked about the time schedule, that was the question. And this is a rough -- this is difficult for us to answer. We should be prepared, and we are more than ready to start the preparation for this year. And we see the decline of the average utilization rate, and this would come close to the breakeven point. Then in a situation, we do our best and we try to make sure that we assigned in here with the very high level of expertise. So we will do our best to develop these high-caliber engineers. So we have already started this. But as for the timing, we would like to disclose that in the mid-term bussiness plan that we will discuss next year.

Let's now come to close. So we're going to end the Q&A session. Please send your questions via e-mail or telephone.


Operator [17]


With this, we conclude today's conference call. Thank you very much for your participation.

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