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Edited Transcript of 6028.T earnings conference call or presentation 31-Jan-20 8:00am GMT

Q2 2020 TechnoPro Holdings Inc Earnings Presentation

Minato-Ku, Tokyo Feb 4, 2020 (Thomson StreetEvents) -- Edited Transcript of TechnoPro Holdings Inc earnings conference call or presentation Friday, January 31, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Miyuki Waki

TechnoPro Holdings, Inc. - Chief IR Manager

* Toshihiro Hagiwara

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

* Yasuji Nishio

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

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Conference Call Participants

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* Satoru Sekine

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

* Takeshi Irisawa

The Tachibana Securities Co., Ltd., Research Division - Research Analyst

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Presentation

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Miyuki Waki, TechnoPro Holdings, Inc. - Chief IR Manager [1]

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Good evening, ladies and gentlemen, thank you very much for taking time out of your busy schedule to attend TechnoPro Holdings, Inc.'s earnings briefing for the second quarter of the fiscal year ending June 2020. It is now time to start the briefing.

First, let me make sure you have all the materials distributed to you. Inside the envelope, you should find TechnoPro Group financial results slide presentation, TechnoPro Group current business environment and future management policies slide presentation, financial results for second quarter of fiscal year ending June 2020, IFRS basis, and feedback sheet on this briefing. We have handed out these 4 different materials. Please let us know if you are missing any, our staff will bring it to you.

In addition, we do have copies of integrated report issued last November and our in-house TechnoPro newsletter available at the entrance of this room. If you haven't picked them up yet, please do so on your way out.

Let me now introduce today's participants. Yasuji Nishio, Representative Director, President and CEO.

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Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [2]

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Good evening.

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Miyuki Waki, TechnoPro Holdings, Inc. - Chief IR Manager [3]

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Toshihiro Hagiwara, Director and Managing Executive Officer, CFO.

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Toshihiro Hagiwara, TechnoPro Holdings, Inc. - CFO, Managing Executive Officer & Director [4]

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Good evening. This is Hagiwara.

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Miyuki Waki, TechnoPro Holdings, Inc. - Chief IR Manager [5]

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In addition, please be advised that today, we have an independent outside corporate auditor present at the back of the room behind you, Mitsutoshi Takao. The company's policy is to have independent directors attend the earnings briefing to confirm the company's explanations and to directly grasp the request of investors. Your understanding is appreciated. I'm the moderator, Waki, in charge of Investor Relations of TechnoPro Holdings, Inc.

In today's briefing, we will first report on the financial results for the second quarter of the fiscal year ending June 2020, and then report on the current business environment and future management policies. The 2 presentations are scheduled to total around 40 minutes. And then we will take your questions until 6:00 p.m.

In order to enhance the information disclosure, the audio of today's briefing is distributed live in English. And the video is to be uploaded onto our website at a later date. In addition, the content of the briefing are scheduled to be transcribed in Japanese and English by a partner company to be published on our website. In doing so, we will also make public the content of the question-and-answer session. If that poses any problem, feel free to ask your questions without mentioning your name or affiliation. Your cooperation is appreciated.

We ask that you kindly switch your mobile phone to silent mode so as not to interfere with the proceeding of the meeting.

Without further ado, I now give the floor to CFO, Hagiwara.

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

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CFO, Hagiwara, TechnoPro Holdings. Thank you very much for your time today. I would like to talk to the slide titled TechnoPro Group Financial Results for the Second Quarter of Fiscal Year ending June 2020.

Now I mentioned in the last earnings briefings at the end of first quarter that we had a good start, but we have 1 day less in the second quarter and we should not be optimistic and we will manage with care. Now currently, the uncertainty of the economy has not changed and, in some industries, customers are starting to control their budgets.

Also for us, in March, a large part of our total contracts will be up for renewal, and in April, over 1,300 new grads will come on board. So we will continue to carefully control the balance between investment for growth - such as hiring, advertising, training -- and other expenses.

First of all, Page 2, I'd like to talk about the performance of the second quarter. Looking at the first half, revenue was up by 12.7% to JPY 79 billion. Opening profit -- operating profit is up by 11.3% to JPY 8.2 billion. And the net profit attributable to owners of the parent company is up by 16.5% to JPY 5.6 billion.

Looking at the second quarter alone, the revenue has gone up by 9.1% compared to same time last year, but the operating profit is only up to 3.2%. Most of the unspent SG&A budget of JPY 150 million in Q1 were utilized in Q2. And the foreign-denominated put options, liabilities for overseas subsidiaries, minority shareholders recorded foreign exchange losses and, thus, the other incomes and expenses under the SG&A line is less.

Now in Q1, we recorded foreign exchange gains, but now we have a foreign exchange loss of JPY 140 million, especially due to the strong sterling pound. We hedge about 1/3 of our pound-denominated debt balance with exchange reservations, but this was not enough to cover the loss this time.

Now looking at the second quarter alone, we have less profit because we have 1 day less, 1 working day less compared to last time. And the increase in SG&A compared to Q2 last year -- the SG&A is up, where we had unrecorded pro forma standard taxation last year. With 1 less working day, we will lose a profit of about JPY 300 million. So with this impact, well, what happened to the second quarter? The plan was we will get less profit versus last year. But despite this, the foreign exchange loss that I mentioned earlier, we were able to grow versus budget and versus last year. There is no change to the full year guidance after this second quarter.

On Page 3, we have the first half segment information.

On Page 4, we have the full year results by segment, including the forecast. And please see

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Now since we started to disclose our segment information, we've received many questions from the investors about the track records, the actual performance of the past quarters by segments. So we've created a document on that. In the appendix, in the very last page, you will see the year-to-date Q3 segment results for the previous 2 years.

On Page 3, we show the Q2 year-to-date comparison. You will see that in R&D outsourcing, both sales and profit are growing double-digit, in line with engineer head count growth.

And the same can be said for TechnoPro Construction, the Construction Management Outsourcing Business. Here also, sales and profit are growing well.

But as for TOQO, the construction design and earthquake resistancy study company, which we acquired last August, this one is slightly lagging behind in terms of profit. Regarding this, we aim to recover this in Q3 when we have more businesses from government agencies and many clients reach the end of their fiscal year.

Under Other Businesses in Japan, talent recruitment company Techno Brain, acquired fourth quarter last year, has contributed well and so did Boyd & Moore.

Under the overseas segment, we have Orion, U.K. company acquired second quarter last year, and this will contribute to the full year, the entire fiscal year from Q1. Having said that, for Helius, the Singapore company, this one is down in revenue, profit and engineer head count as well, although it is still in black ink.

Next, regarding our Chinese subsidiary, its contribution to the consolidated revenue is just only 1%. But still, we do have some impact from that new type virus and its impacts to our business.

On Page 6, we have the quarterly performance company revenue and profit versus last year. You can see that versus last year, the second quarter revenue is up by 9.1%, the operating profit is up by just 3.2%. But on an organic basis, excluding the M&A effect, the revenue was up by 11.1% and the operating profit is up by 13.8%. So the operating profit growth of M&A has declined this quarter by about JPY 400 million due to slowdown in Helius' earnings and foreign exchange losses pertaining to put option liabilities, thus negatively impacting the total growth.

In terms of the domestic utilization days, the number of days per quarter, I did mention at the last first-quarter briefing that we will have 1 day less in the second quarter. Therefore, this will create an impact of JPY 300 million impact on the operating profit. But as a result, we've had 1.4 days less, and the operating profit income is minus JPY 400 million. More than we thought, there were many customers who decided that December 27, the Friday of last year, should be a day off, and our estimation was a bit incorrect. There is also an impact of the work-style reform too, overtime work control too. These are all elements that we cannot control, and because of this, the working days are declining. We would like to continue to try to control this with base charge up and also expanding managed contracted business.

And on Page 7, we are looking at the revenue and operating profit growth in a bridge format after excluding impacts such as less working days. Although domestic engineer head count and utilized head count are growing over 10%, both revenues and operating profit are growing at a rate less than 10%, especially when you compare just the second quarter alone. But hypothetically, if we recalculate these numbers based on last year's working days, then we would have grown over 10%.

Also for your reference, we have calculations on if we had not introduced the size-based taxation and another calculation on if we had not the foreign exchange loss.

Page 8. Here, you can see the balance sheet and cash flow status. As of the end of December last year, net cash position was JPY 12.3 billion. As shown in the table on the lower right, credit line to finance M&As totaled JPY 10 billion, which enables us to make flexible investments, should there be any opportunities that present themselves for M&A deals that match our strategy.

Pages 9 to 13, our KPI analysis. First, as shown on Page 9, the number of the group's engineers in Japan now exceed 20,000. And during the first half of the current fiscal year, net additions totaled 719 and have remained solid. The average utilization rate in the first half fell 0.7 points from 96.4% to 95.7% year-on-year, but it is still within our target range of 95% to 96%, so we do not see this as a problem.

Page 10. Here, you can see changes in recruitment and turnover. In mid-career recruitment, our budget calls for the average monthly head count of 250 for a total annual recruitment of 3,000.

During the first half of the year, recruitment continued to be strong. And we were able to hire 1,825 mid-career employees, more than envisioned in the budget.

On the other hand, the turnover rate continues to deteriorate. The company's perceptions and the countermeasures will be explained in more detail later by President Nishio. From a management standpoint, we view this deterioration in the turnover rate as one of our important management issues, and we will strive to achieve our current target of 8% or less as soon as possible.

Page 11 is the portfolio of assigned engineers by technology. And Page 12 is the portfolio of assigned engineers by industrial sectors.

Page 11 shows that, as in the past, growth in mechanical engineers has been sluggish, such as machinery, electric and electronic, while Page 12 shows the slowing down of growth in the industrial machinery and electric and electronic sectors, which are susceptible to U.S.-China trade friction. Also as seen in the automobile company's financial results for the current term, transportation equipment is inevitably affected and budget control in the second half is being implemented by some companies. In these fields, the speed of the assignment decision getting -- is getting a little slower and the standby period tends to be longer than usual. We are carefully diversifying risks by maintaining contract unit prices through shifting to stronger companies in the same industry and also shifting to other industries.

Page 13 shows monthly unit sales price. In the first half of this fiscal year, the average unit sales price, including overtime, was JPY 631,000, a decrease of JPY 2,000 or 0.3% year-on-year. This is due to the effect of the fewer working days this fiscal year. However, through our management efforts, we have been able to improve the unit price of engineers who have been on our registration for more than 1 year, which is a more important index, recently by 3.4% compared to the previous year. And we will continue to work on increasing the unit price.

Page 14 is a semi-annual report on the progress of Helius' turnaround plan, which we promised at the earnings briefing at the end of the previous fiscal year. As shown in the operating profit graph, for the previous fiscal year operating income and profit margin declined sharply in the fourth quarter. And although it was still profitable, impairment was booked in the fourth quarter of the previous fiscal year. The 2 risks that we had previously recognized in the due diligence at the time of the acquisition, such as the high dependence of specific customers on DBS and the immigration regulations in Singapore, were manifested earlier than expected and the response was delayed. That was the reason. Had we been able to fully address these risks during the first half of this year, actually we are still in the middle of the road. DBS is an important client, and we cannot stop the business transaction immediately.

Our plan for this term was to gradually reduce the DBS ratio by developing new customers such as Japanese companies through our marketing cooperation. However, with the economic slowdown, the Singaporean government seems to be tightening integration regulations to encourage local employment, making it difficult to bring good engineers from India to Singapore in a timely manner. And the number of engineers and sales have decreased compared to both the previous year and the budget. Order inquiries are not weak, but simply it's a matter of immigration regulations that is affecting us in terms of securing enough engineers. However, by shifting the limited engineers among the customers and engineers, GP margins have been improving little by little, and while controlling SG&A expenses, operating profit has bottomed out in the fourth quarter of the previous fiscal year and profit margin is on a recovery trend.

In order to avoid the risk of overconcentration in Singapore, we are also expanding our business outside of Singapore. India, which has functioned as a recruitment base for engineers, has been able to receive orders for DBS jobs, which are shifting some of its development basis to India with higher margins than in Singapore, and both sales and profits have improved.

In Thailand, where we entered in the current term, we have begun business with local banks in Thailand and [SRs] such as IBM and Accenture, based on track record of supporting DBS' digital bank strategy. As we cannot be certain of the recovery in Singapore, growth in India and Thailand will be necessary for Helius' turnaround. So we will continue to work closely with local management and continue our management improvement efforts. As the first half of the fiscal year is already behind us, it has become difficult for Helius to achieve its sales budget for the current fiscal year. But at least if the current level of profit can be maintained, we believe that it is possible to achieve the full year budget based on the operating profit and profit growth from the next fiscal year onward. As CFO, I am not expecting any additional impairment.

In addition, President Nishio will explain in more detail our global collaboration efforts, including Helius.

Page 15 shows the EPS and the dividend amount, maintaining the payout ratio of 50% since the IPO. The interim dividend to be paid on February 28 is JPY 50 per share, and the annual dividend for the current fiscal year is expected to be JPY 140.

Last year, we repurchased shares at the price below JPY 6,000. At this time, we have no additional framework set for further share buyback. Our main shareholder return policy is to pay a regular dividend twice a year. If our stock continues to be undervalued in the market or if we are not likely to find investment opportunities to create value, for a while, considering the signaling effect and the capital efficiency, we will consider acquiring treasury stock as one of the options. In addition, all shares repurchased last year have already been retired. From the prospective incentives for executives, employees, we issue restricted stock every year, under the stock-based compensation program. But the number of shares retired exceeded the cumulative number of new shares issued so far. Therefore, the dilution is being expressed.

Page 16 is the slide shown previously about our current medium-term plans capital policy. We have not been able to announce any new M&A since I became CFO last July. While focusing on the PMI of Helius and other companies we have acquired, both in Japan and overseas, we are working proactively on M&A opportunity search by proposing to the target companies. In order to reach our goal in the next 5 to 10 years envisioned in the new medium-term plan to be announced at the end of July this year, we believe that it is imperative to fill the missing pieces of the group through M&As. We will continue to consider ways to close deals that are consistent with our strategy and that contribute to the value creation and sustainable growth.

That concludes my presentation. Thank you very much for your kind attention.

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Miyuki Waki, TechnoPro Holdings, Inc. - Chief IR Manager [7]

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Next, we would like to present the current business environment and management policies. CEO Nishio, please.

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Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [8]

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Yes, representing the group, I am Nishio. Today, I would like to talk to the slide titled Current Business Environment and Future Management Policies. With this, I would like to talk about the recent environment that surrounds the engineer staffing service based on the current macro economy as well as our own situation.

If you could please turn to Slide 3. We are using the usual slide that we've been using to show you the forecast of our mid- to long-term engineer staffing service business. When you look at the total staffing market in the industry, we utilize about 250,000 engineers in the market and 52% of this 250,000 are IT engineers. And these IT engineers are in high demand. And 10% are construction engineers. These together are experiencing deep shortage in talent. But these 2 are also the drivers of the staffing market growth in the future.

Now you can see the bar graph on the top right. This is showing the market growth. Yano Research Institute measures this every year, and they forecast an average 8% growth for the meantime. Having said that, fields such as machine designing and electric or electronic circuit design used to be Japan's strengths as a country, but the growth ratios are declining sharply recently. And even before the U.S.-China trade war started, the growth rates were not that high. But the hiring was the bottleneck at the time.

Hiring was the bottleneck, so therefore each of the players, including us, would hire including unexperienced engineers, the ones with lower skills, too, and then train them, educated them before sending them to customers. But since last year, the situation has changed. For case-related skills, case for connected, autonomous, shared electric-related skills, the demand continues to be steady, but we see a sharp decline now in demand for low-value process, unexperienced engineers or low-skilled engineers. This is the situation. And so the growth rate slows down really because hiring is difficult if the skill is highly demanded for. And so in combination with the situation, the growth ratio is slowing down.

And on top of that, we have the social challenge of the new type coronavirus, the infection, this disease. And so therefore, the machinery, electric, electronic fields mainly for manufacturing companies will continue to be flat or a slight plus, if good. This is our forecast for this year. In these fields, we really need to work on advancing the engineer skills even further.

Now on the other hand, when we look to IT skills or construction skills, we still have very high demand for these talents. And so we forecast a continuous growth, a quantitative expansion in the market. And you all understand that the demand for IT engineers is very high.

But when it comes to construction engineers, we've had this question, actually many questions and concerns from you about the demand post the Tokyo Olympics. And this question has been present from a few years ago. And every time, I've said that we have the reconstruction of the Great East Japan Earthquake and we also have the construction related to the Tokyo Olympics. And so we have many projects, and even some of the projects that are supposed to start in 2020 is being delayed. So I'm not worried, I said. And now it's time to make a judgment whether my answer was correct or wrong.

But now facing the year 2020, I recognize that, as was reported in the Nikkei newspaper the other day, the talent shortage is still there despite -- there are many projects that have not started yet this year and despite the orders placed, and the back orders is highest at JPY 6.3 trillion. So I'm relieved right now about my answers in the past.

Now of course, the order for Great East Japan Earthquake or from North Japan, we see a selling down of the orders, but the rest of the projects throughout the country continues to be very strong in demand.

From Slide 4, I'd like to talk about some of the trends using the KPI that we always monitor. On Slide 4, we have the graph that is showing the back orders that we have received. I think that you will understand that when you look at the total back order situation, there's not much change even in the second quarter as of now. Because if you look at this, you can see that we're getting about 1,500 or more orders per month. And the fulfillment rates against these back orders, getting the orders locked in and being able to allocate our people there, the ratio is 30%. And from our past experience, a fulfillment rate of 30% is stable.

Having said that, after the first quarter of this fiscal year, in the machinery field, I already mentioned that we've had this mismatch in demand and supply. We have less orders for low-skilled engineers, but then for high-skilled engineers, we continue to have high demand, which is high -- which is more difficult for us to fulfill. So what happens is when the engineers finish their project and they come back to our company, if you are a low-skilled engineer, well, or if you're going to aim for a low-skilled work, you would be staying on the bench for a longer time. And since the allocation is a little bit delayed for low-skilled work, the total utilization rate is slightly down. However, we are not willing to sacrifice the base charges in an effort to force them to allocation, and we will continue to try to match them to quality orders.

What I have mentioned is further explained in detail on Slide 5. The utilization rate of mainly engineers and machinery is declining versus last year due to longer bench time, as I mentioned earlier. But on the other hand, as you saw in the previous earnings presentation, the base charges of engineers who have worked with us for over 12 months are growing over 3% per annum. This really justifies the reason why we do not need to reduce base charges to get them on board. We've always said that we are not going to reduce our base charges. And hopefully, you understand that this is justified.

If you can see the line graph on the right side, our gross margin is trending at almost the same level as last year. This is a result of our effort to offset less margin due to less utilization. Well, it's the same level of numbers. So you can see that the blue and orange is basically the same. But we're trying to offset less margin due to less utilization with unit price improvement. But the business environment is still tough, and gross margin is not improving.

So if you turn to Slide 6, you can see the turnover rate or the trend of it that I've already talked to a little bit earlier.

If you remember Slide 11 from the previous presentation, the earnings report, the turnover worsened by 0.9% versus last year in the second quarter. And usually, we've been mentioning that quarterly changes is mostly seasonal and it's not a problem. But when you look at this trend this time and calculate it based on the past 12 months, you can see that yes, the turnover is worsening, although gradually since October 2018. This is also what is described on the previous earnings presentation on the bottom graph.

Empirically, we know that if you've only been with our company for a short amount of time, the turnover rate tends to be relatively high for them, especially the ones who have only been with us for 12 to 24 months. But if they stick with us for over 5 years, the turnover rate all of a sudden becomes quite low. This is the trend that we know by experience. There's 2 reasons to this. First of all, the shorter the career, they tend to have higher turnover because of the hiring mismatch. In other words, the hiring personnel thinks a little bit too optimistically that it will somehow work out and they try to cover up the skilled mismatch, but it doesn't work. And so the client comes back to us and says, "This is not working." So -- and then there's a lot of work out there, right? Right? And if -- and nobody wants to be the mismatch, so they leave. It's a very typical case. And the second reason is the lack of follow-up after hiring.

So if you look at the Slide 6 right now, we have been able to accelerate growth throughout the fiscal years 2018 and 2019, yes, and we grew quite fast. And as a result, we actually had a greater increase in the shorter-career engineers. In other words, the ones that have higher turnover risk. So after this quick growth, with a time lag, we are now experiencing worsening turnover rates. We need to avoid this problem of the rise in turnover due to mismatch at the hiring stage. So we are reflecting that we need to carefully explain the required skill really when we're hiring and interviewing people, making sure that the applicants understand what they're expected for when they join the company, making sure that they don't feel like I didn't sign up for this. And this is the kind of direction we've given to our hiring division.

So for the IT division, which has been very good, the hiring head count is less compared to the past 2 years. We are hiring more than last year, of course. But if we had gone along with the past trend, we would have hired much more, but it's controlled right now.

And also, speaking of the second reason, which was the lack of follow-up after hiring, well, in the past 3 years, we had a great increase in the engineers. And against that growing number of engineers, we don't have enough personnel in the back office, the ones who go out for sales or the ones doing administrative clerical work. We are able to hire engineers, that is what our core business is, and we're doing that well, better than last year. But when it comes to hiring for back-office and clerical workers, we are in competition with any company out there.

So to be very honest, we are struggling to hire them. And we are trying to increase the head count in our inside offices. But the truth of the matter is that we really cannot pay full attention to every single employee, at least currently. So one effort that we're making is, since last year, in November, we are starting to analyze the exit reasons, the reason why they left, using artificial intelligence, making sure that we can follow-up some of the higher risk people intensively, so that we can increase our follow-up and care to these people who are leaving. I think we still need to educate the artificial intelligence a little bit. We had a great hit in November. The AI made it correct, but I don't think they were quite correct in December. So we still need to hone this.

Next, changing the subject, Slide 7. Since April of last year, there has been a series of new laws enacted in relation to the work style reform. And on Slide 7, you can see the status regarding the mandatory paid leave, at least 5 paid leave days to be taken as well as overtime rules. Here, you can see the status of our company.

In a nutshell, we have no problem in satisfying both of the requirements of 5-day paid leave as well as the overtime rules, on average, as you can see. However, in the past, although there were few, there were some engineers that worked in ways that exceeded the limit of the new labor standards. And therefore, since April of last year, we are managing the status of each individual, both in terms of paid leave days taken as well as the overtime status. We are looking that on the average basis, 3 months, 4 months. And we are managing all that by system so as not to violate the law. So please be rest assured.

Now incidentally, we believe that the government will start the auditing on this aspect. And we believe that the -- their mode of operation is to target larger companies. Basically, we believe that the improvement needs to be enforced on smaller companies. But government most probably would target the larger companies. So we have to be very cautious and well prepared for that.

In terms of the rate of paid leave days taken, our company is among the highest in terms of the rate among the Japanese companies. And therefore, it's not likely that we're going to see a significant increase in the number of the paid leave days taken.

However, in terms of the overtime hours, a decrease in overtime hours, we are seeing a gradual impact on our sales and profit. And we expect this trend to continue going forward. So we would like to make up for that difference by reviewing the contract terms and conditions. We are really working hard on that.

And next, since -- starting this coming April, the revised Worker Dispatching Act will come into effect. And I'd like to talk about the impact of that. That is Slide 8.

The original purpose of this revision was to eliminate the unreasonable difference between the nonregular employees and the regular employees. But when we actually look at this revised act, we find that in the case of dispatching, worker dispatching, even if the worker is a regular employee of the staffing company, his or her treatment has to be equivalent and balanced with the treatment of the regular employee of the dispatch client. So this is really an unreasonable legal requirement.

And at the beginning of its deliberations, the Labor Policy Council seems to have considered only the so-called dispatch client equivalent/balanced method, as shown on the right-hand side of this slide. And this is a method in which the wages must be equivalent based on the information provided by the dispatch client. But according to this, the wage of the engineer will have to change every time the assignment changes, and there was doubt on whether the client company would provide their own wage information. And due to these concerns, a compromise was made in which a labor-management agreement method was added, as shown on the left-hand side. This is a method in which the staffing company and the labor union is to conclude a labor-management agreement on the content of the wage table.

In addition, the Ministry of Health and Labor and Welfare has decided to show wage tables by job type and ability, we're talking about hundreds and thousands of types and ability, as the minimum standard of wages so that each employees wage must be at least exceeding the hourly unit price of that wage table. That is the requirement under the revised act. And this has resulted in the introduction of a minimum wage system by job type and ability only in the worker dispatching business. Now this is not a place to explain the details of the system, so I'm not going to go into the details, but just make 2 comments.

First of all, at present, we have yet to find a client company accepting the dispatch client equivalent/balanced method, 0. In fact, there are some clients that have already been notified of the termination of the contract with the staffing companies. I am aware of that development.

Second, in relation to the impact of this on our company's profit and loss, for some of the employees we will have to revisit their wage level. But we believe the amount of this is -- can be absorbed by our own efforts. The amount is not that large.

Now including the increase in contributions to the defined contribution pension system which we announced in July of last year and other improvement in treatments, which is to increase the cost by JPY 3 billion over 3 years, around JPY 3 billion, as we announced previously.

Including these additions, we would like to promote improving base charges after the end of March so as to minimize the impact of the rise in the personnel cost. In fact, we are considering this as a positive development, not a negative impact. And so our sales and marketing people are really working hard to make sure that this is a positive development, and we believe that the negotiations starting in March would be really critical.

Now next slide. Here, you can see the progress of building a talent management system using IT and AI, which has been continuing for some time, starting from the training management system, the recruitment system and the turnover risk calculation system that was mentioned a little earlier. We are utilizing the system on a trial basis based on AI. The highlights of this year is we plan to start operation of a portal site for each engineer, equipped with an analysis engines, in July of this year.

And in the next slide, you can see the restructuring of our enterprise system. As was mentioned earlier, to increase the number of engineers and to break the vicious cycle that leads to an increase in the back-office personnel and to standardize the internal business operation and to strengthen the internal control system, the business reform project started in January of last year under my leadership. After 1 year of the study period, the selection of the package of the enterprise system, expense system, workflow system and others has been completed already. It was confirmed that the investment effect was well above the capital cost. So we decided to start the system development, specifically with a plan for 3 years from this year. The approval was given by our CFO, Hagiwara-san as well. All of these will be completed in January 2023. But in the meantime, we are planning to release the system in stages so as to dramatically improve our production efficiency.

I'm afraid I'm taking more time than I planned, so I'm going to be very brief.

Next slide describes the progress of the globalization of our group. Albeit gradually, the cooperation amongst the group companies is becoming more concrete. As a major topic during the first half of this fiscal year, we established a company called TPRI Technology, headquarter in Bengaluru in India in September of last year. We have already received orders for development from some Japanese customers, clients and are currently working to gradually expand our business and build an internal control system. We want to make this a center of our global expansion, as a supply base and as an offshoring base.

Finally but not the least, the progress of the new medium-term management plan development. In this new medium-term management plan, we intend to clearly show the purpose, vision, mission and strategy based on the discussions of where we should be at least 10 years from now rather than rewriting and repeating the existing plan. We will also consider revising our corporate vision. The executives within the group, who will be responsible for the next era of the group, are taking the lead and have been studying since November of last year. I will accelerate my discussion after this month and conclude my explanation by sharing with you a plan so that we can share with you this new medium-term plan in July of this year, at the time of the earnings briefing.

And with that, I'd like to conclude my presentation. Thank you very much for your kind attention.

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Questions and Answers

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Miyuki Waki, TechnoPro Holdings, Inc. - Chief IR Manager [1]

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Ladies and gentlemen, thank you very much for your attention. This concludes the presentation part, and we'd like to start Q&A. As we've mentioned, we will describe the questions on document and upload them to the Internet with your name and affiliate. So you can decide to not mention these 2 points, if you will not -- if you wish not to disclose the information. Two questions per person, please, and please raise your hand if you have a question.

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Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [2]

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Please?

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Satoru Sekine, Daiwa Securities Co. Ltd., Research Division - Research Analyst [3]

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Sekine from Daiwa Securities. I have 2 questions. First question is short-term topic regarding the utilization rate. I understand that the utilization rate has been declining, well declining partially since Jan.-March last year. But after this quarter, I'm wondering what your observation is. For example, after Jan.-March, are we continued to be soft? And is that why you're trying to offset that with base charge so that you can maintain the gross margin although the utilization ratio was not as good? Or do you think it will continue at 96%?

The second question is more mid to long term. You've been speaking about the operating profit level and the need to raise it from the current 10% to a higher level. And to do this, I think I remember you talking about the importance of improving the gross margin. But in this midterm plan that you're planning to disclose, would you bring up improvement of profit margin in this new presentation?

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Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [4]

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Talking about the short-term utilization ratio and how we perceive it, when you compare it by business units actually, we have machinery, we have IT, we have chemical, bio, construction. Basically, these 4 pillars. But just the machinery, just machinery is the -- lagging behind, and the rest are really as good as last year. The utilization ratio is maintained versus last year, and that means we're not -- we don't have much inventory, although I shouldn't really say that. But yes, the utilization ratio is becoming less since Jan.-March, and that is true. Quarter by quarter, the situation is becoming more strict.

So of course, there's the U.S.-China conflict, which we were hoping that will be relaxed. But then now we have a new topic of the new coronavirus and now we are less optimistic, and we think that this will continue to lag on -- linger on a little bit and impact our utilization rate, which will continue to be sluggish. But the other ones -- the reason is we're out of inventory. So there's no way we can improve the utilization ratio any further than -- because it is high already. And that's why there is not much more leeway left to offset the sluggish situation of machinery.

To your second question about the margin improvement in the mid-term plan, what am I going to announce in this mid-term plan? Well, actually, we haven't fixed that yet -- part yet in our presentation. Yes, we would like to improve our margin. But we do have a handicap, and that is this mission-critical system, which we are going to improve over 3 years going forward. This, we really need to complete. Otherwise, the SG&A ratio is just continuing to go up. This is the trend. And so I think that we really need to make sure that we know the level of SG&A and the investment into our mission-critical system, et cetera, before we can announce the margin. But we have no intention of making the margin less. So please stay tuned.

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Miyuki Waki, TechnoPro Holdings, Inc. - Chief IR Manager [5]

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Any other questions anyone? Please raise your hand, if you have any.

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Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [6]

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Anyone? No questions? Yes, I see a hand over there.

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Takeshi Irisawa, The Tachibana Securities Co., Ltd., Research Division - Research Analyst [7]

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Irisawa from Tachibana Securities. I have 2 questions. First, in relation to the work style reform and overtime work. In terms of the actual paid leaves, you said that it's not going to change much, whereas the overtime reduction might have impact. So can you elaborate on when you are going to start reducing and how much?

And regarding the equal pay for equal work, by improving the base charge you were to make up for the difference, that's what you said. But the expected increase in cost, I think it's 3.4%, I think is the improvement in base charge. How much of an improvement do you need to be able to absorb the difference? Have you had any internal calculations on that?

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Yasuji Nishio, TechnoPro Holdings, Inc. - President, CEO & Representative Director [8]

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Overtime reduction, how much would this continue? Well, we're hoping that it will hit the bottom sooner. But what is becoming more clear recently is -- used to be the overtime work hours would be a good metrics of the economic situation -- economy. And until a year ago, it was just the impact of the work style reform that resulted in the reduction in overtime. The clients were trying to reduce. But since around the middle of last year, especially around September of last year, some of the companies have implemented the restrictions in overtime, not allowing overtime work. And so the figures that I showed you earlier partially reflect that, making it more difficult to really see the situation. So even with the work style reform, we may see a bottom in the reduction in the overtime work. But due to other reasons, maybe we are going to see further reduction. So there's a risk there.

Regarding the equal pay for equal work, how much of the base charge improvement is needed to make up for the difference? Well, as I said earlier, the JPY 3 billion cost increase to improve the treatment, that are already incorporated in our medium-term plan. And so if we just look at the pure impact of this equal pay for equal work program, it will be 0.3% -- well, in addition to the usual regular charge up, how much? Let me think. 0-point whatever percent, a very small increment. So we're not really concerned about that. In fact, recently, I did review the negotiations with the client, and there are 2 types. One is, as our competitors are saying, with the work life reform -- work style reform, we want to improve the treatment, they say that well, it's awkward to make that argument because that would go against this difference in the term and term contract and the nonterm contract. And some of the clients are talking about terminating the contract.

So this week, I was being briefed about the situation. And I'm told that 1 company is willing to increase. So I have a great expectation. I'm hopeful about the development. So compared to the usual years, I believe that the base charge will increase more so this March. Now those contracts which are to be renewed in March, we believe that there will be work style reform-related cost plus something else. Whereas those that would not renew the contract in March, they will just focus on the work style portion.

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Miyuki Waki, TechnoPro Holdings, Inc. - Chief IR Manager [9]

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Do we have any other questions? Please raise your hand if you have questions, please. It seems like we have no further questions, so we would like to close the QA session. And also with this, we would like to close TechnoPro Holdings Financial Results for the Second Quarter of Fiscal Year Ending June 2020. Thank you very much for your participation. Please leave your questionnaire on your table. And also remember to take the integrated report and our in-house magazine when you go out of this venue. Thank you so very much.

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