TechnoPro Holdings, Inc. (6028) Earnings Call Transcript & Summary

Hello. This is Hagiwara, CFO of TechnoPro Holdings. Thank you for your time today. Although greatly affected this year by the persistent pandemic, we managed to achieve results that exceeded our initial expectations. If you remember, we froze mid-career hiring, the fastest of all, in response to the poor future visibility and reduced the new grad hiring head count for April this year. However, we were able to quickly recover the utilization rate in the first half of the year and got the mid-career hiring gradually back on track in the second half as well. Due to the nature of our business, when we are in a progress of halting growth, profits become higher than reality due to cost reductions from less hiring. On the other hand, when we resume growth, the hiring costs increase first and then pressures our near-term profits. So in the fiscal year ended June '21, when we temporarily gave up on growth, we saw record profits. And in the new fiscal year ending June '22, this will be the first year of resuming growth. Our guidance, which I will elaborate on, is affected by the nature of this business. Next year, The Tokyo Stock Exchange will be reorganizing the market, and we have been notified that we meet all the criteria for prime market. We intend to maintain high standards of governance commensurate with a prime market stock, while complying with the recently updated corporate governance code. In addition, we implemented a 1-to-3 stock split on July 1 this year from the perspective of share liquidity and investment amount per unit. Please note that in our slides today, the per share indicators will differ depending on whether it's pre or post the stock split. Since we have the new medium-term management plan to present later, I will give a slightly shorter explanation than usual on the summary of full year results and the outlook for the new fiscal year. On Slide 2. The full year revenue was JPY 161.3 billion, up 1.8% year-on-year. Operating profit was JPY 19.4 billion, up 23.4% year-on-year, including JPY 1.8 billion of government subsidy for continuous employment in Japan. The core operating profit, excluding government subsidy, was JPY 17.6 billion, up 8.4% year-on-year. This does include the effect of significant decrease in hiring costs, but still we exceeded last year's level due to keen attention to the utilization rate. On Pages 3 and 4, we have the quarterly performance by item. We enriched information disclosure in the table below the revenue graphs in response to investors' requests. Please confirm the domestic sales KPIs, which are shown quarterly rather than YTD. The Q4 operating profit appears to have grown significantly, but this is because we recorded a goodwill impairment of approximately JPY 900 million in the previous year. This fiscal year, there is no impairment despite the pandemic. As described on Page 4, the SG&A in Q4 was higher than the same period last year. Hiring expenses increased by more than JPY 300 million versus last year, partly due to the effect of using some of the expenses we had saved up until Q3. In the new fiscal year, the SG&A will continue to rise for a while with hiring in full swing and strategic expenditures to implement the new mid-term plan. We will invest aggressively where we can expect sufficient returns. And on the other hand, we will continue to cut unnecessary costs we learned to save under the pandemic. On Page 5 and 6, we have the segment results. In particular, the Overseas segment achieved over 10% growth in both sales and profits for the full year. Later on, I will explain the status of each company on the slides that will follow. Page 7 shows the status of the balance sheet and cash flows. We are maintaining a strong financial base with an increase of cash balance by JPY 9.7 billion from last year. We have set a limit of total JPY 40 billion for M&A investment over the 5-year period of the new mid-term plan, but we believe we can secure sufficient funding without relying on equity finance, but through free cash flow from business, bank loans and bond issues. Page 8 through 13 shows KPIs of our domestic business. As shown on Page 8, the annual average utilization ratio was 94.6%. At the end of June, we reached 95.2% when the assignment of new grads who joined April this year was basically completed. We will continue to maintain the 95% line even after July and onward. The bar graph shows the number of engineers in Japan, which bottomed out at the end of March. At the end of June, we had 20,330 engineers, slightly higher than the annual average, which is 20,324, and the number is expected to increase steadily from July onward. Page 9 shows the contract renewal ratio. In our previous earnings briefings, I mentioned that the June renewals will not be significantly worse than last year, and we actually achieved 94%, the highest rate ever since being listed. This is probably because customers who end their fiscal year-end in March spend a large part of their development budgets in the second half from October onward, and they are trying to secure the necessary human resources early on. Page 10 shows the trend of recruitment and turnover. The number of mid-career hiring in the fourth quarter was 649, which means that we are able to hire at least 200 people per month without lowering the bar too much. For your information, 257 mid-career engineers were hired in July. However, as we will be shifting to a more quality-oriented recruitment strategy, we believe it will be difficult to consistently recruit more than 250 every month. The turnover rate for permanent employees was 8.3% in the fourth quarter and 8.4% for LTM, or last 12 months. The turnover rate, which worsened in the first half, is recovering slightly in the second half. In the face of the structural shortage of engineers and supply constraints caused by intensifying hiring competition for IT engineers, it will become increasingly important to find ways to curve turnovers. At the time of pandemic, we were able to pay seasonal bonuses to our engineers as usual, and we also achieved a record high amount of performance-linked bonuses. We have redefined our company's purpose and vision in the new medium-term management plan, and we will continue to work to suppress turnover while maintaining close inter-branding and internal communications. Please refer to Pages 11 and 12 for assigned engineer portfolios by technology and industry. Page 13 shows the trend of the average monthly unit sales price. The full year sales price was JPY 634,000, an increase of JPY 4,000 over the previous year. The base charge of the contract for existing engineers on assignment as of the end of June this year was only 0.7% higher than that of a year ago. This is because the effect of the charge-off we obtained in April last year was not included in this period. And also, we prioritized contract renewal this past year, making it difficult to charge-up or shift-up. In the new medium-term plan, we will stick to this growth in unit sales price as we place greater emphasis on quality. Page 14 is an update of the disclosure we made in the second quarter results briefing about overseas subsidiaries. First, our Chinese subsidiary had a good year due to the economic recovery of the country. The loss in the fourth quarter was resulting from the timing of booking of provision of bonuses. The operating profit margin for the full year is over 15%. In the new medium-term management plan, we aim to maintain a high profit margin by focusing on high-end solution-oriented businesses. In the IT-related businesses, Helius saw growth in sales, but profits remained almost flat. The business in India and Thailand is starting up, compensating for the sluggish Singapore business, and the company is diversifying its customer profile, particularly in finance. Finally, at Orion in the U.K., sales and profits continued to recover from the first quarter to the fourth quarter, with the fourth quarter being the best since the foundation of the company. We are planning to acquire additional shares by the end of this year through the exercise of put options by minority shareholders. Page 15 shows the transition of dividends. The chart shows dividend and EPS calculated by using number of shares before the stock split. Based on the assumption of annual payout ratio of 50%, the year-end dividend will be JPY 135 and the full year dividend, including the interim dividend of JPY 50, will be JPY 185 per share. Page 16 shows the guidance and major KPIs for the new fiscal year, and Page 18 shows the results by segments. Although we anticipate an increase in revenue this fiscal year, we plan to see a large decrease in operating profit. This will be due to the impact of bringing the business back to normal as well as the additional cost of implementing the new medium-term management plan. As the company has set the dividend payout ratio at 50%, the dividend is expected to be reduced due to the decrease in profit. We ask for the understanding of our shareholders. Based on the assumption of the total hiring of 3,400 for the year -- a total of 3,400 for the year, including 2,700 mid-career engineers and 700 new grads entering April next year, the number of employees as of the end of June next year is expected to be 21,600, surpassing the record high number at the end of April 2020. And the kind of news that was released today has not been included for today's announcement. Unit sales price, which we have mentioned we will focus on, is expected to be JPY 645,000, an increase of 1.7% year-on-year. Lastly, on Page 17, is the operating profit bridge. Returning to normality, there is a total net decrease of JPY 1.2 billion over the previous year. Pro forma operating profit will be JPY 18.2 billion, which is higher than the JPY 17.6 billion of the previous year, but we anticipate an additional JPY 1.7 billion in costs to implement the medium-term business plan, resulting in an operating income guidance of JPY 16.5 billion. For each of these items, we have described the expected effect during the period of the medium-term management plan. Please refer to this page as you listen to the explanation of the medium-term management plan. The expenses to achieve the medium-term plan will be an investment of up to 1% of our sales each year for the next 5 years, which will improve our GP margin and make our business more resilient, allowing us to gain sufficient return on investment. That's all for me. Thank you very much.

Thank you very much CFO, Mr. Hagiwara. Now the CEO, Mr. Yagi, will talk about the new mid-term plan. Mr. Yagi, please?

I am Yagi, appointed CEO of TechnoPro Holdings July this year, after my predecessor, Nishio. I Would like to take this opportunity to thank our shareholders, investors and all other stakeholders for your understanding and support. Thank you so much for your time today, and I look forward to working with you going forward. So now I would like to explain the contents of our new mid-term plan, Evolution 2026, which describes the evolution that we are aiming for, our growth strategy, key initiatives and figures. The mid-term period is 5 years, starting from the current fiscal year ending June '22 all the way to June '26. Please look at Slide 3. First, a brief review on the results of the previous mid-term plan. The previous plan with its 4-pillar growth strategy covered the period from fiscal year ended June '18 to fiscal year ending June '22. But thanks to your support, we were able to achieve most of the numerical targets 1 year ahead of schedule. Regarding the first pillar, stable growth in core engineers staffing business, we believe this one has been achieved, especially in terms of volume growth such as the number of IT engineers. On the other hand, we were not able to improve the sales unit price and issues remain in terms of quality. We're also still in the process of shifting towards higher added value, globalization and moving towards platforms utilizing information technologies. In terms of M&A, there were no new transaction closed in the last 2 years due to the pandemic. And we invested only JPY 11.2 billion, so we cannot quite say that this has grown to become a new core pillar. The way we managed our business last year could be characterized as contingency measures prioritizing contract renewals, SG&A reduction and securing enough cash position. But in order to clear these issues and achieve mid- to long-term growth, we must boldly invest resources where needed to create value. Please move on to Slide 4. We have made solid progress in achieving higher added value, although I may have been a little bit harsh on our self-evaluation. Slide 4 shows an updated summary of our achievements in building an ecosystem, which was mentioned in last year's earnings announcement. We are making progress in training and increasing the number of advanced engineers with consulting partner certifications from major IT companies and alliances with advanced technologies such as data science and AI. For example, the number of AWS and Azure cloud engineers has increased from 100 in June last year to 234 in 12 months, whereas the plan was to reach 150. The number of ERP engineers is now 94, also above the original plan of 80. We are convinced that engineers with technological capability will be high in demand as ever with DX accelerating in this new normal era, and they will be the source of evolution and growth going forward. Slide 5 shows the updated ROIC for the 7 companies, excluding the 3 M&As that were completed during the previous mid-term plan. Our goal is to achieve an ROIC of 10% or higher for each investment area and each individual company, but the total ROIC is 8.6%, although it is higher than our revised cost of capital of 7.6%. So we have asked each company to set up strategies and measures to exceed 10% at least in the new mid-term plan. And in order to generate synergies as initially planned, we need more cooperation across the group. We also reflect that in M&A deals that were not sourced from business needs, the roles and accountabilities may have been left unclear. Still, we believe that M&A is necessary to proactively pursue sustainable growth, self-transformation and capability evolution. Therefore, later on, we would like to explain the M&A policy and our discipline in the new mid-term plan. So please move on to Slide 7. Here, I would like to talk through our mid-term management plan. Since we delayed the announcement of this plan 1 year due to the pandemic, we, the Board, including the outside Board members, was able to spend plenty of time for discussions regarding these items that you see on the slide. I believe it was fruitful time for the management to gain solidarity as we execute the plan going forward. What's most important in the future is to establish a system to manage decision-making policies and key initiatives. In particular, if we see slow progress, we will identify the causes and take measures to improve the situation quickly and also discuss whether we should change the course or not. So regarding Slide 8, there is nothing particularly new on how we see the external environment. However, I would like to emphasize a few points here regarding our directions as a company. First of all, again, due to the pandemic, it has been clearly revealed that Japan is lagging behind in digital transformation, DX. And work style transformation has progressed. And thus, we have been able to define our direction clearly because of these revelations. Secondly, although the domestic engineer staffing market is expected to grow at about 6% per year, we believe that there would be a limit to maintaining the same or higher volume growth in the long term if we stick to this market. So therefore, to make a leap in our growth, we believe that we need to expand consulting and project-based businesses which have higher profit margins, and we need to enter into the IT service provider market, too, which is greater in market size. And the third point is that the trend of globalization will not stop. As long as domestic customers continue to demand for highly skilled human resources and advanced technology engineering solutions, we need to source competitive resources from overseas, not only domestically because when it comes to cutting-edge technologies, the reality is that overseas countries have much more advanced talent than Japan does today, unfortunately. Page 9 shows our understanding of the mid- to long-term business environment, especially with focus on the demand and supply. The wave of digitalization is happening across the industries, and mission-critical systems can no longer solve all the challenges that our customers face. So as product life cycles become shorter and agile development is required, customers are no longer trying to build everything in-house, and they expect us to do much more than just providing labor resources. We are asked more often to discover issues and solve them on the ground together with the clients. In addition, the spread of remote work will enable us to provide services from nearshore and offshore locations, promoting use of freelancers in the gig economy and securing talented people on demand. As the demands of society and our customers continue to change, we must also evolve in our capabilities in order to continue to provide added value. And also by solving technology-related issues and maintaining our competitive advantage. Please move on to Slide 10. This time, under this pandemic, the government demonstrated a strong will to secure employment. So we were not hit severely. But having said that, if the situation becomes more serious, our customers may temporarily reduce the number of external engineers they use, especially in downstream processes, just like we saw after the Lehman shock. To increase our resilience to external shocks and to continue to be a true partner to our customers, we need to form a virtuous cycle where competent engineers are attracted by the abundance of the attractive jobs that we provide. And such engineers can earn the trust and appreciation of our customers. So therefore, we will strengthen our capabilities in human resource development and reskilling, working on hiring more engineers despite the domestic supply constraints that we are seeing today. We also need to work on systematic accumulation and utilization of technical knowledge and the ability to discover customer issues, proposed solutions and implement them. On Page 11, we have the diagram of our purpose and philosophy, which we redefined when we formulated the new mid-term plan. The purpose of TechnoPro Group is driving the power of technology and talent to co-create value together with our customers for a sustainable society. We have tried to express this in a fundamental and straightforward manner, reflecting the things that I have already mentioned today. Now although purpose management is a trend nowadays, we should avoid it from becoming a purpose wash. We obviously need to be aware of our connection to society, but we also need to make sure that it's rational, closely linked to our business and feasible and that it would lead to profits through provision of value to our customers. In addition, from the perspective of increasing engagement, attraction and retention, we will also implement internalization of the purpose and branding. On Slide 12, we are showing the statements regarding the values imbued in our purpose. So please refer to this later on. On Page 13, we have described the conceptual diagram of our mid-term strategies. Now we will not choose the path of business diversification such as entering nonengineering fields just for the sake of top line growth. Unless we can boost capital productivity and growth opportunities, we know that we will not be able to gain your understanding and from our stakeholders. We know that investors like you can diversify your risks with other companies. To evolve, leveraging on the value chain of our core business and our customer and engineer base, we will pursue growth in our Solutions business, Engineering Training business and DX Promotion business. As you can see on this conceptual diagram, while cultivating and fertilizing the soil of our capabilities to establish strong routes, we will aim to grow the chunks of our core businesses to a higher level, while the 3 businesses will bloom and bear fruit. It is because our core businesses are strong that we can adopt this kind of strategy with business transformation. In the Solutions business, we will expand our technological domain from the conventional technology to digital domains and shift from mere provision of human resources to delivering results and concepts. In the Engineer Training business, we will integrate the education and training functions and resources of PC Assist, which operates Win School, and utilize our existing sales channels and our experience in training to sell these curriculums externally so that this grows into one of our income pillars. And in the DX business, we will further evolve the talent management system under development and build a business model that utilizes data knowledge over the mid- to long-term. The vast amount of data that contributes to analysis in order to increase the lifetime value of engineers is a valuable asset for us. So now Mr. Shimaoka, who was appointed COO of the group in July and is overseeing the execution of domestic and Overseas business operations, will take you through the specific business strategies.

Thank you for the introduction. I am COO, Shimaoka. I will explain our growth strategy through the evolution of our core business. First, I talk about our core business, the engineer staffing business, in Japan. With companies accelerating DX, technological innovation and automation of development, the shortage of engineers in Japan is expected to continue into the future. If labor shortage makes it even more difficult to hire and wage hike becomes apparent, we believe it will be a risk to only pursue scale to grow the staffing business. We believe that securing excellent engineers and developing human resources for chosen target technologies will become important for competitive advantage. And so our basic operation policy for our core business will be pursue further quality, increasing emphasis on software and seeking room for growth. Page 16. From the perspective of our purpose, changes in the external environment and the evolution of capabilities, it is important to be a company that is attractive to our customers that owns good services and quality engineers and has an attractive work environment that allows personal growth, both to existing engineers and potential recruits, that I think is important. In order to achieve this, we need to evolve while utilizing the foundation of our core business. Evolution means not only responding to the demands of staffing as in the past, but also providing problem-solving solutions in new technological fields, especially in the digital technology field. In addition, we should offer engineers diverse career paths to improve their compensation, provide them with exciting assignments and provide an environment where they can feel that their work in product leads to the realization of the sustainable society. We will strategically shift our focus from the supply of human resources to the pursuit of results and go beyond traditional staffing services to focus on problem-solving solutions. At the same time, we will provide our strengths in advanced technology training and solution-based human resource development programs to 20,000 engineers, analyze performance data and sell more efficient training programs externally. In addition, we will start a data solution business, utilizing our internal big data, to recruit and train engineers, transfer engineers between industries and convert engineers' core competencies and shifting from hardware to software. Next page please. The Solution business, which we will strengthen, is not a state-of-the-art business. We are a late comer. On a global basis, there are many Solution businesses that focus on DX. And more Japanese manufacturers are changing their business model from products to solutions. So we need to implement a superior strategy than our competitors. Therefore, in order to establish a competitive advantage, we have decided the basic operation policy to be focusing on digital field, leveraging core business assets and overcoming technological resource constraints in Japan. Page 18. This is our competence and the platform ecosystem we should aim for. In order for our Solutions business to expand and grow, it is important for us to capture broad and deep demand from a wide range of industries and sectors and to have a service lineup that is numerous and high quality to meet those demands with solutions and to create a system that can discover, develop and provide new technologies and solutions. General strategy, consulting, companies and SIers companies are already developing such businesses, but their solutions are only partial, limited to identifying issues at the planning stage and proposing solutions and undertaking software development to solve issues. We will create a system that can discover issues, plan and propose the best solution and delivers an integrated solution from design to implementation. We have business relationships with about 2,000 companies in a wide range of industries such as automobiles, semiconductors and financing solutions, and about 20,000 engineers are working on-site at our clients. Our engineers have spent 3, 5, sometimes even 20 years at our clients, being in close contact with the issues faced by them. By having our client-facing engineers acquire consultation skills and by strengthening the system so that these are able to find and extract issues and make proposals, even though they are dispatched engineers, we will be able to consolidate a wide variety of needs. In terms of supply, we will continue to develop our own solutions in Japan and overseas, absorb technology by investing in start-ups and conduct M&A and alliances for target solutions and utilize sole proprietaries, including gig economy workers, to ensure sufficient supply. The COI organization will conduct continuous marketing and assessment. The COE organization will share accumulated expertise and services and internal DX will be established for seamless service delivery. To become a platform for solving customers' problems, that is our vision and the competitive advantage of the TechnoPro Group. Moving on to Page 19. With regard to the global expansion of the Solution business, the medium-term management plan defines the countries where there is a high demand for digital technology as demand countries. The countries where the population of talented software engineers is increasing and where many of them are active as engineers in their own countries and in other countries as talent countries. And the countries where new technologies and solutions are created, such as Israel, Eastern European countries and the West Coast of the United States as technology countries. From the point of view of supplying solutions domestically, we will absorb technologies and solutions from the technology countries and collect digital talent from the talent countries with the aim of bringing in excellent human resources and suitable solutions domestically. Over the medium term, we will capture demand not only from Japan, but also from Europe, the U.S. and China, which are demand countries and combine on-site services with offshore services in India, as we do in Japan, to realize solution service on a global basis. Page 20. These are the digital technologies and solutions that we are focusing on. In order to increase the percentage of engineers with digital elemental technologies, we will develop the skills of our 20,000 engineers, leverage our customer portfolio and alliances and actively hire and increase the number of people with these technologies when hiring engineers. The upper part shows 16 solutions in which engineers with digital elemental technologies can play an active role. We will increase our solution lineup by developing in-house, collaborating with alliance partners and through M&A. Digital technologies and solutions are not set in stone. We will constantly assess our technologies and solutions and create and add new technologies and solutions. Next, on the Engineer Training business, a new pillar, which we will strengthen further. Please look at Slide 21 for this. The competitive advantage of this business comes from the fact that we are taking one of our strengths, our own training programs, for internal use and analyzing them to find the most beneficial ones that would be good to sell externally. As stated in our financial statements, the average annual utilization rate of our engineers is always above 95%. We are no longer living in an age where engineers can work with one product or one technology for the rest of their lives. And constant change in growth are required. Our strength lies in our ability to constantly track industries, products and technologies and to change and improve the capabilities of our engineers in response to changes in supply and demand and technology trends. We will leverage on our deep understanding of changing customer demands and technology trends, our knowledge on what kind of training our engineers need, which qualifications are effective and valuable and the skills engineers need to acquire shift from -- acquire in order to shift from declining industries and technologies to growing ones. We'd like to make sure that we look at the data and understand the trends and use that as our know-how. Therefore, this Engineer Training business is not simply a technology education. We will develop and sell curriculums based on our experience in boosting engineers' capabilities to meet changing market values and demands. We believe that this is our competitive advantage and one of the revenue sources evolved from our core business. Next on Slide 22. This is regarding the DX Promotion business. Now first of all, we're showing this diagram regarding our internal DX, describing the vast amount of data we have collected from our businesses. We use this data to improve the efficiency of hiring, HR development, retirement, predictions and et cetera. As we drive digital transformation with AI, we believe we can improve operational efficiency and accelerate the increase of engineer's lifetime value. We believe that our competitive advantage and new business pillar is to convert the results of our accumulated know how into a business model over the mid- to long-term and to sell it to customers in Japan and around the world. On Slide 23. In regard to our M&A policy, we are focused on aligning with the strategies set forth in our mid-term plan to complement our solution lineup in new ecosystems, to develop new markets and capture digital talent and to accelerate the growth of data solution business and the Engineer Training business, we are willing to invest a cumulative JPY 40 billion over 5 years, while ensuring process transparency and thorough financial discipline. Slide 24, please. These are the target of our M&A alliances, mainly composed of companies that help evolve our core businesses. The table shows for both Japan and overseas, the core and complementary businesses, how we position the evolution as well as the Solution business, Engineering Training business and DX Promotion business. Our focus is on meeting the digital needs and problem-solving needs of our clients and also on building an attractive work environment for our engineers. On the next page, I will explain how our recent M&A transactions are positioned in the target digital technologies and solutions. Please move on to Slide 25. This is the outline of the 2 M&A deals that we have announced recently. We announced Robosoft Technologies. So this Robosoft Technologies is a company that sees demand from Europe, the United States and Japan, and its strength lies in high profitability by provision of software products developed offshore, India, and UI/UX solutions, much needed in this new normal era for the retail, media and entertainment industries. And then there's GCOMNET. GCOMNET will contribute in strengthening our service lineup of SAP ERP implementation and consulting as well as training the SAP consultants. This is the kind of business that GCOMNET is strong in. So if you look at this chart on the top left and also the chart on the bottom right showing the solutions and the digital technologies, you can see that both companies' service solutions are in line with our target, and the acquisitions are consistent with our mid-term plan. Slide 27, please. This is a road map of our growth strategy through core business evolution. In 2022 and 2023, the 2 years, we will build the foundation of our competitive ecosystem. And then from 2024 to 2026, we will achieve high growth from this foundation that we will have built by then. So this is the last part of my presentation. Finally, it's about our purpose, driving the power of technology and talent to co-create value together with our customers for a sustainable society. This purpose was created based on the changes that we see today in the environment and the evolution of our capabilities. TechnoPro Group will evolve its core business, focusing on quality rather than diversification. Evolution will be apparent in the Solution business, Engineer Training business and DX Promotion business. As they say, a company is its people. And we, too, believe people are the treasure of a company. And without their growth, the company cannot grow. This is what I believe. And it's a word that I cherish most of all. Our engineers will keep changing and growing towards their target technologies, and we will continue to build our competitive ecosystem based on our core business foundation to not only grow our staffing business in Japan, but also to evolve into a global solutions company. I will now explain about governance and plans, financial targets. Please refer to Page 29. We are fully aware of the importance of constant improvement in governance as we strive to achieve our purpose. We established a Nomination and Compensation Committee in 2015, criteria and procedure for the appointment and dismissal of the CEO in 2018 and formulated a skills metrics in 2019. We are proud that we have been ahead of the trends of other companies in Japan. The CEO succession was implemented as part of a gradual generational turnover in the management team, similar to the changes in the CFO and Audit & Supervisory Board members over the past few years. The timing of the succession was also based on the belief that new leaders should be committed to the realization of the new medium-term management plan. The transfer made through an objective process led by the Nomination and Compensation Committee composed entirely of outside directors demonstrates the good governance of the company. Also based on the digital shift strategy of the new medium-term management plan, we plan to submit a proposal to appoint a new female outside director with rich knowledge in the IT field to the ordinary general meeting of the shareholders in September. If the proposal is approved, 3 out of 13 directors and auditors will be women. The ratio of outside directors will be 44%, and the ratio of non-executive directors to total directors will be 56%. Page 30. I'd like to talk about risk management. In the recent revision of the corporate governance code, the concept of ERM, or enterprise risk management, has been added for the first time as a responsibility of the Board of Directors. As a company that fully complies with the code, we will introduce ERM at the start of the new medium-term management plan. There are a wide range of risks, each with different impact and foreseeability. The newly established ERM committee will manage these risks on a group-wide cross-functional and integrated basis. The Board of Directors will monitor the status of risks based on the reports of the ERM committee and utilizes them in making management decisions. The accurate understanding and appropriate management of risks and the development of a system to achieve this are extremely important, not only to comply with the CB code, but also for sustainable growth, especially in the Solution business and Overseas business. Based on our risk appetite policy of pursuing profit growth over the medium- to long-term, we will not only view risks as threats, but also promote forward-looking risk management to enable sound risk taking. Page 31. Furthermore, in order to realize our purpose, we will continue to identify materiality, strengthen our management base and implement various measures in consideration of ESG and SDGs and proactively disclose related information. It goes without saying that efforts to prevent negative impact on business and society are essential. At the same time, we believe that there are things that the TechnoPro Group uniquely can do to create positive impact and co-create value with our stakeholders. First, as a business, we have the ability to develop the power and potential of people. Creating opportunities for people to play an active role in accordance with the concept of DE&I, diversity, equity and inclusion, making human resources sustainable even in the midst of accelerating technological change by investing in education and reskilling and improving the status and treatment of engineers have extremely high social significance. It is also the basis of our business growth. Next about solving society and customer issues through technological capabilities. We will enhance our ability to respond to DX and provide solutions and act as a nodal point to connect different technological fields and companies, Japan and the world. Towards a carbon-neutral society, we will also strive to improve our ability to respond to shifts in the energy balance and related technological innovations. In this way, based on the concept of creating social value through our business activities or CSV, creating share value, we are determined to respond to the various issues of ESG and SDGS. Next is Slide 33. Next I will explain plan's financial targets. As was seen in the road map, first, the overall plan is to make strategic upfront investments in the first 2 years and to recover the investments in the latter 3 years to achieve high growth. In particular, I'd like you to understand that expenses to achieve the medium-term plan is an upfront investment essential for the evolution of our capability and the transformation of our business model. The figures are based on an expected increase in inorganic revenue of JPY 30 billion. The planned figures for the fiscal year of the medium-term management plan ending June 2026, revenue of JPY 1,250 billion, operating profit of JPY 32 billion and net profit of JPY 22 billion. The operating profit figure in this term's guidance shall be the bottom. In the second year, the fiscal year ending June 30, 2023, we plan to recover operating income to JPY 18.5 billion, which is higher than last term's operating income of JPY 17.6 billion, excluding government subsidy for continuous employment. As a scalable business expands, the hurdles to sustaining high revenue growth will increase. However, we will continue to focus on profit growth. We have set a 5-year CAGR target of about 10% for both operating profit and net profit with the base year of fiscal year ending June 30, 2021. We are expecting, for the second half of the 3-year period, a 20% CAGR in profit growth. Although ROE will fall below 20% at one point, we plan to achieve 20% or more in the final year of the plan as net profit grows. Page 34, you see the breakdown. On Page 34, we show you the revenue by business and major KPIs as well as the financial targets. Although we will continue to expand our core businesses that have room for growth, the percentage in revenue will decline to 64% in 5 years, and instead, we will increase the Solutions and Overseas businesses. And although it will not be in a single step, we will make steady progress in transforming ourselves into a technology solutions service company. We plan to increase the number of engineers in Japan at a CAGR of approximately 6%, while focusing on quality in hiring and controlling turnover. A number of new graduates hired in Japan, which was approximately 1,400 at its peak, has been reduced to approximately 300 this April due to the risk of assignment during the COVID pandemic, but we plan to hire approximately 700 next April in 2022. From 2023 onwards, we believe it's appropriate to continue hiring about 800 to 900 new grads per year. However, what is important here is quality. And we'd like to take on the challenge of hiring high-end new graduate that meets the needs of the DX era. Our biggest focus will be the ratio on revenue. Through the ambitious challenge of raising the unit sales price in Japan to JPY 720,000 level in 5 years, expanding the solutions business with high GP margins and acquiring companies with high profit margins, we intend to increase the gross profit margin to about 27% in 5 years. The SG&A ratio will be kept at around 14% through operating leverage by improving operational efficiency and promoting internal DX. The operating margin in the previous fiscal year was 12.1% due to special factors such as government subsidy for employment continuation. But in the normal mode, before COVID-19, it was in the 19% -- excuse me, in the 9% to 10% range. For the first 2 years, the operating margin will return to pre-COVID levels, but the plan is to aim for 12.8% in 5 years. We will also revise the executive compensation system to improve incentives for management to achieve business results. Please refer to Page 35. The performance share unit, PSU, which will be introduced subject to approval at the general meeting of shareholders in September, is a performance-linked compensation system in which the amount of share compensation is determined according to the degree of achievement of KPIs in the final year of the mid-term business plan and shares with the restriction on transfer equivalent to that amount granted afterwards. The period of restriction on transfer is also set to last until the day of retirement, aiming to create incentives to improve the share price and to further align interest with shareholders. The previous system of awarding restricted stock beforehand had a strong aspect of fixed compensation, so it will be abolished with the introduction of the new scheme. The formula and incentive curve adopts new net profit and ROE as KPIs as shown in the document. The net profit position will be 0 if it falls below JPY 17.6 billion, which is 80% of the planned target of JPY 22 billion for the final year. And the ROE portion will be 0 if it falls below 20% in the final year of the plan. We believe that this shows the management's stance of emphasizing profitability, growth and efficiency as well as its strong commitment to achieving the plan. The PSUs will be issued to the Executive Directors of the company as well as executive officers and core employees of the group. The share compensation expense has been included in expenses to achieve the medium-term plan as explained in the operating profit bridge part by our -- the CFO, Hagiwara. We have also revised the executive compensation mix, which used to have a high percentage of fixed compensation, and we designated it to incentivize the achievement of business results by making the percentage of the variable compensation, the majority of total compensation. In the case of the CEO, the ratio of base compensation to total remuneration will be 47%, less than 50%, if the target is 100% achieved. Next page, Page 36. I'd like to talk about capital policy and shareholder returns. There are no plans to change the existing basic policy under the new leadership and the new medium-term management plan. The 4 basic policies are to maintain dividend payout ratio of 50% or more, to achieve sustainable growth of EPS, to achieve ROE of 20% or more and to maintain a debt-to-equity ratio of less than 1. We will continue to strive to maintain financial soundness and, at the same time, create value exceeding the cost of capital and realizing shareholder return with TSR, total shareholder return, in mind. This concludes our presentation of the TechnoPro Group's new medium-term management plan. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]