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Edited Transcript of 6028.T earnings conference call or presentation 31-Oct-19 8:00am GMT

Q1 2020 TechnoPro Holdings Inc Earnings Presentation

Minato-Ku, Tokyo Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of TechnoPro Holdings Inc earnings conference call or presentation Thursday, October 31, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Toshihiro Hagiwara

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

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Presentation

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

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I'm Hagiwara, CFO of TechnoPro Holdings. Thank you very much for your time today. I would like to use this PowerPoint slide titled TechnoPro Group Financial Results For Q1 Fiscal Year June 2020.

Despite the talks about the uncertainties of the economy, we were in line with our plans during Q1 in terms of active head count hiring and unit sales price. We are expanding our business centered around technology, but we have been able to expand the geographical footprint due to M&A, et cetera. So we have now started to officially disclose segment information based on accounting principles. We would like to make sure we continue to enrich our disclosure to contribute to your analysis.

Page 2 shows the Q1 segment results. The first quarter revenue is JPY 38.9 billion, up 16.7% versus last year. Operating profit, JPY 3.88 billion, up 22%. Net profit attributable to owners of the parent company after deducting noncontrolling interests was JPY 2.65 billion, up 27.7%.

I'd like to mention 2 reasons as to why OP growth was greater than revenue growth: Number one, the unspent SG&A budget to be recognized. This is regarding hiring and training, and the SG&A amounts to about JPY 150 million.

Second reason is the other income. JPY 200 million has been posted. And amongst this, JPY 140 million is nonrecurring income that is not related to our business. Specifically, this is, well, JPY 76 million of foreign exchange gain -- or foreign currency-denominated put option reversal from minority shareholders of overseas subsidiary. Compared to the end of last fiscal year, the yen was stronger and so the foreign exchange gain counted on the operating profit has been posted according to IFRS. And the remaining JPY 65 million profit from early execution of a part of the put option is coming from Orion in U.K.

40% of the shares was held by the management, the 4 members of the management of Orion, but one has retired for personal reasons. So based on the option agreement, we were able to acquire 3.2% of its shares at a lower-than-usual EBITDA multiple, making profit from what we had recognized before as debt.

On the other hand, in the previous fiscal year, we have had the pro forma taxation regarding the subsidiary TechnoPro. And the tax induced, JPY 330 million, was all accounted for in fourth quarter as SG&A. But from this fiscal year, it will be expensed every month. So in the first quarter, JPY 93 million has been posted. As of end of first quarter, we have made no changes to this year's guidance.

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

On Page 4, we have the full year segment information, including forecast for this fiscal year.

Please look at Page 5 for the segmentation and relevant companies. This time, we are disclosing the segment information for the first time, making sure that you can compare this to the past. We have the 3 years history since June 2018. This is when the current midterm plan started.

Now the headquarter cost incurred by the parent holding company is allocated to each segment according to the amount of services provided. Also, the OP before PPA asset amortization is declared on this chart, too. We did not disclose the so-called EBITDA including amortization for it will be impacted by IFRS 16, which I will speak about later on.

So when you look at Page 3, the comparison of the first quarter, you can see that other businesses in Japan and overseas businesses segment revenue has grown dramatically. The other businesses in Japan grew because of the recruitment company, TECHNO BRAIN, acquired fourth quarter last fiscal year -- or April this year. And the latter is due to the U.K. company, Orion, acquired second quarter of last year -- or October last year. These 2 companies are fully contributing this fiscal year from Q1.

On Page 4, full year comparison, you can see the Singapore Helius company's impairment loss from the fiscal year June '19. So the impact of that is reflected on to overseas and corporate/eliminations segments.

On Page 5, we have the by segment company group. Ever since the IPO in December 2014, we have acquired 13 companies in total, as you can see on the numbering on this chart. In the first year of the current midterm plan, as you can see in the red bold squares, you can see the 5 companies. In the second year, you can see the blue double-line boxes, 5 companies that we have acquired. So in the third quarter of this midterm plan, we continue to consider M&A proactively with discipline as a means for growth and value creation.

Page 6 shows the quarterly trajectory comparing the revenue and OP with last fiscal year. Against this fiscal year's guidance, the revenue is -- progressed by 24.3%. And the operating profit, although it includes nonrecurring items, progressed by 25.4%. On an organic base, existing businesses, excluding M&A effect, showed solid growth of 16.2% and operating profit up by 16.1%.

From this period, we have begun to disclose working days per quarter. But in actual, the working days, excluding holidays, has gone down because of the engineers' paid leaves. So the figures from second quarter and on are estimations based on track records. Usually, the second quarter of each fiscal year has more working days. But in this fiscal year, the working days for second quarter is estimated to be 57.3 days, which is approximately 1 day less compared to last year, which we had 58.3 days.

Moving on to Page 7. This is the balance sheet and cash flow status. From this fiscal year, the IFRS 16 has been applied. So the operating lease, which used to be off-balance, is now posted on both the assets and liabilities, thus impacting some of the financial ratios.

In our company, offices such as headquarter and sales offices and also dormitory for our employees are included. So at the end of this first quarter, the amount totals up to JPY 11.5 billion. So the balance sheet has increased significantly from end of last fiscal year, but there's no impact to the net current profit and no impact to the ROE, which is very important to our capital policy.

According to IFRS 16, the lease payment is now accounted as depreciation. So there is some changes in the EBITDA calculation and the operating cash flow, the financing cash flow in the cash flow statement, too. So please be aware of these changes.

Net cash flow has decreased by JPY 5.4 billion due to corporate tax and dividend payout. But still, we secured net cash position of JPY 6.4 billion. Also, as you'll see on the bottom-right chart, we have abundant commitment lines for investments such as M&A, indicating the fact that we have enough borrowing capabilities.

Also this fiscal year, we have set a commitment line for share repurchase. And we actually executed a buyback of approximately JPY 1 billion after announcing our full year results at the end of July.

From Page 8 to 12, we disclose the usual KPI analysis. On Page 8, you will see that during this first quarter, the engineers in Japan increased by 357, steadily growing as we did the same time last year. The Q1 average utilization rate is down by 0.7 percentage points from 96.2% last year to 95.5%. But still, this is within our comfortable range of 95% to 96% so we don't think this is an issue.

Looking at the head count of engineers in overseas subsidiaries, it has decreased by 42. This is mainly due to the Singapore company, Helius. Although the order is growing steadily, due to tightened regulations on immigration by the Singapore government, we are struggling to procure talent from India. This trend will continue for a while. But by strengthening hiring of engineers in Singapore and also the business expansion in India and Thailand and controlling SG&A, we are making efforts to secure and recover profits.

Page 9 shows recruitment and turnover. In mid-career, we have an average of 250 every month, 3,000 for the full year. That is the budget, but we've done well in first quarter like we did previously. We were able to hire 923. Especially, the hiring of IT engineers is brisk.

On the other hand, the turnover of permanent employees would seem to show signs of an improvement in the previous quarter. Fourth quarter last year did not turn out well, and now the situation worsened slightly in Q1. Despite the quickly increasing engineer head count, we could not allocate employees and management position to the branch offices. And we reflect that we have neglected to provide care and to establish matching with those attractive orders. The turnover is one of the most important KPIs for us, so we will continue to make efforts to keep it to 8% or less, which is our current near-term goal.

Page 10, assigned engineers by technology. Page 11 shows the same by industrial sectors. As you can see on Page 10, the proportion of IT engineers is about to exceed 50%. On the other hand, when it comes to the mechanical engineers, we don't see them coming in as much into the job-switching market. And as our competitors are, we're struggling for mid-career hiring. There is enough orders coming in, but the active head count is not growing with enough momentum. So we will try to continue to increase the unit sales price by promoting more education, training and team-based allocation.

On Page 11, we see growth in most industrial sectors, except for the electric and electronic field, which we see a minus compared to the same time last year. There is slowdown in semiconductor sector affected by China-U. S. trade friction, too, but we are carefully diversifying risk through reassigning engineers to high-performing customers in the sector or other industries.

Page 12 shows the trend of unit sales price. In this first quarter, the monthly average sales price, including overtime hours, was JPY 626,000, up 0.8% compared to same time last year. The recent trend of less overtime hours and more newly hired new grads with lower prices have impacted and resulted in some dilution. But due to our clear strategy, we were able to increase the base charge for existing engineers by 3.6% compared to last year. We would like to continue to increase this unit price so that we can increase the base charge at least 3% every quarter.

Page 13 shows the EPS and dividend history since IPO. We will continue to commit to payout ratio of 50%. We have achieved continuous growth, and so this year's dividend is expected to be JPY 140 per share.

As I mentioned earlier, full year results were announced last time. And ever since, we have executed share buyback equivalent to approximately JPY 1 billion at a price of less than JPY 6,000. Our main shareholder return will be conducted through the usual dividend with a payout ratio of 50% and also raising stock price through continuous EPS growth and value creation.

But if we see that our stock price is cheap, then we have an option of opportunistic buybacks, too, looking at capital efficiency. The current share repurchase program will end on November 28, but we will continue to watch our share price even after that.

On Page 14, we have the capital policy that we have presented in our midterm plan. This slide has been inserted from the previous financial results presentation. We will continue to run the company so that we can realize value creation based on capital costs.

Finally, I would like to talk about our outlook and strategy on Page 15. This first quarter, we were able to deliver a sound start of the fiscal year. But in the second quarter, we have the JPY 150 million of SG&A, which was left unused in the first quarter. And also, we are behind JPY 300 million because we will have 1 day less operating days compared to same time last year. So we will run the company carefully.

And we will continue to invest in talent nurturing for the future even if we sacrifice a little bit of utilization rate and gross margin. After we finish the training period of 3 to 6 months, we will be able to allocate them with much higher base charge, and so the ROI should be very good.

Also, we established a subsidiary in India where Japanese companies are increasingly looking to build R&D facilities. We would like to provide service to the Japanese companies there, utilizing deep pocket of Indian talent with high engineering capabilities. With this subsidiary, we will aim for organic growth and also use the foothold for M&A sourcing of Indian companies.

Next, we have the outlook and strategy for Q3 and beyond on the bottom half of this page. As you see, we have posted impairment for the Singapore company, Helius. Although we are posting more profit than budgeted, the number of engineers is not growing fast enough. So this requires close monitoring.

We also hired a personnel mid-career, a person that has experienced PMI of overseas subsidiaries and foreign investment funds and investment projects by trading companies. So with this leadership that has been working full-time since October in Helius, we will be able to manage the company and support the company much more closely.

As for the new graduate engineers coming in next spring, the number is 1,300, exceeding the original plan of 1,000 by 300. So in the second half, we will have much more cost than the initial budget. This will contribute to the increase of utilization and gross profit margin next fiscal year and on, but we need to make sure these people are allocated to work during Q4 so that we can offset the minus in this fiscal year.

Also, due to the equal pay to equal job policy that will be executed from next April, there are negotiations in the industry, mainly for business and clerical workers staffing companies. We think this is an opportunity, and we would like to proactively start pricing negotiations for charge-up and shift-ups, too.

We also have the uncertainty of the economy triggered by the China-U. S. trade friction. But currently, we don't see any facts that are becoming obstacles to our growth strategy. But we would like to continuously monitor our KPIs rigorously with quick actions and risk diversification.

Finally, with organic growth and M&A, we would like to continue to grow. M&A is an important driver for our growth strategy. We have pipelines for Japan and overseas. Now M&A execution itself is not an objective. But based on the future policies and promoting M&A, we would like to continue to proactively consider our steps for M&A while checking consistency with our strategy.

This concludes my presentation.

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