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

I'm Hagiwara, CFO of TechnoPro Holdings. Thank you for joining today's financial briefing. Concerns over a global economic downturn have been voiced and stock prices in the human resource sector, which is considered to be economy sensitive, have been stagnant in general, including TechnoPro. However, we have not seen any changes in current fundamentals of our business operations. Strong orders and resource shortages have continued. On the other hand, due to the seventh wave of the COVID-19, the number of our engineers infected with the virus is rapidly on the rise, resulting in a loss of sales due to shorter working days. However, compared to a year ago, which also included special leaves due to vaccination, we assume the financial impact would be minimal at present. As indicated in today's disclosure materials, we believe that the first year of the midterm management plan has performed well both in terms of financials and strategy. The second year in the plan is also positioned as an important investment period for achieving higher growth in the latter 3 years, and we recognize it as an extremely critical year in forming the foundation for the evolution of our core businesses and capabilities. Now I would like to explain the outline of the full year financial results, the Japan key KPIs, the update of overseas subsidiaries and the guidance for this new fiscal year. First is the financial performance summary on Page 2. For the full year, revenue was JPY 178.7 billion, up 10.8% year-on-year and GP was JPY 46.8 billion, up 18.0% year-on-year. GP's growth rate outpaced sales growth as a result of an increase in the proportion of high-margin businesses, such as project type services, digital technology-related solutions and Robosoft's offshore delivery model with GP margin of 26.2% or up 1.6 points year-on-year. We will strive to further improve our GP margin by securing high skilled engineers and accumulating technological knowledge across our organization. Core operating profit, which we announced to decrease in our latest guidance, grew 7.9% year-on-year to JPY 19 billion. The reason why we were able to deliver core growth despite substantial increase in recruitment expenses associated with the transition to normalization as well as the cost of implementing the midterm management plan was the fact that the incremental amount of GP was high enough to absorb these additional costs. The source of GP must be the added value provided to our customers and the quality of GP itself, which shows TechnoPro's true earning power is supposed to have improved. Operating profit, which includes the special items of other income and expenses, was JPY 20.6 billion, up 6.1% year-on-year and net profit increased by 16.5% to JPY 15.4 billion. Net profit significantly exceeded the guidance, primarily due to the nontaxable gain of JPY 1.8 billion from the reversal of Helius put option liabilities, which directly boosted net profit. Page 3 is the bridge of operating profit. With regard to the midterm management plan execution costs shown on the right side of the graph, the rate of full year progress ended up with 87.2% compared to 55% at the third quarter. By category, the solution talent recruiting cost advanced in the fourth quarter, resulting in an increase in hiring compared to the budget. However, the solution talent training cost was behind due to a delay in the first half of the year. However, the solution contents at our education and training subsidiary have started to be prepared, and the training programs with external partners, such as Amazon is getting on track so I think we can conduct sufficient training from the first quarter of this new fiscal year. The shortfall in strategic investment was mainly due to the delay in the start of AI engines development by about 6 months. The second year of the midterm management plan is also in the investment phase, and these 4 categories shown here have been budgeted, including the carryover of the unspent portion of the first year. The expected cost of the midterm management plan implementation for this new fiscal year as explained on a separate slide. Page 4 shows quarterly changes in revenue and operating profit and Page 5 shows quarterly changes in GP, SG&A and operating profit. At the top of Page 5, the GP margin for each quarter as shown in the table. In the previous third quarter financial results presentation, I mentioned that GP margin in the fourth quarter was expected to be worse than the same period last year. But GP margin in this quarter eventually exceeded the previous year's level, despite lower utilization ratio due to new graduates joining the company more than the previous year and additional allowance of the financial performance-linked bonuses for engineers. SG&A in the fourth quarter was JPY 7.9 billion, and its amount and ratio to revenue were relatively high. This was partly due to an increase in training expenses for new graduates and also due to around 20% increase in the financial performance-linked bonuses for administrative staff from the initial annual budget. We have shared profits with not only engineers but also administrative staff in line with our business performance for their retention and motivation purposes. SG&A in the fourth quarter included some aforementioned seasonal and temporary items. So please note that it was slightly higher than the normal run rate. Page 6 and Page 7 show full year and fourth quarter financial results by segment, respectively. In the R&D Outsourcing segment, the positive growth in revenue and GP versus the negative growth in operating profit year-on-year is attributable to the fact that government subsidy for continuous employment was included in operating profit in the previous fiscal year and that this fiscal year saw an increase in recruitment expenses and the cost burden of the midterm management plan implementation at SG&A level. We also recorded an impairment loss of JPY 360 million as other expenses. This is related to not goodwill, but customer-related assets of the company acquired in March 2016 as existing customers at that time were replaced with new customers earlier than expected. Most of the unamortized assets got written off and the amortization expenses will decrease accordingly from now on. In the Construction Management Outsourcing segment, sales, GP and the number of engineers were weak, but based on the cause analysis, various measures have already been taken and high growth is expected in this new fiscal year. The Other Businesses in Japan segment to which a highly profitable permanent placement business belongs, continue to perform well. The number of engineers hired by our group through a recruitment subsidiary increased significantly, and the group collaboration also progressed. The Overseas segment in which Robosoft has joined, accounts for more than 10% of consolidated revenue and the improvement in GP margin is also evident. The impact of the depreciation of Japanese yen compared with the previous year's exchange rate was JPY 1.2 billion in revenue and JPY 110 million in operating profit, respectively, but the growth was also seen on a local currency basis. The update of Overseas subsidiaries will be explained later. Page 8 shows balance sheet and cash flow. Although not yet reflected in the balance sheet and cash flow here, the acquisition of the remaining 20% of Robosoft's shares was completed on August 1 of this year. The cash balance of JPY 37.4 billion at the end of June is expected to decrease substantially due to this acquisition of additional shares of Robosoft, the payment of corporate income taxes at the end of August and the payment of year-end dividends at the end of September, but we believe that there are sufficient funds and borrowing capacity even if we conduct them and as in the future. From Page 9. These are the key KPIs for the domestic business. The upper limit of the number of engineers on the vertical axis was previously 23,000, but it has been changed to 25,000 from this time. The number of engineers at the end of June this year was 22,048, a net increase of 1,718 from 1 year ago, 448 more than the initial forecast of 21,600 and 48 more than the latest forecast of 22,000 at the third quarter. The average utilization ratio for the full year was 95.3%, up 0.7 points year-on-year. Due to a significant increase in the number of new graduates entering TechnoPro in April, the average utilization ratio in the fourth quarter was 94.1%, down 0.5 points year-on-year, but the utilization ratio at the end of June this year exceeded 95%. Not only new graduates, but also existing engineers who returned after the expiration of their contracts have been assigned in a short period of time. The negative impact of economic uncertainty has not yet appeared particularly in our domestic business. Next is the situation of recruitment and turnover. Under the midterm management plan calling for a shift from quantity to quality, we hired 755 mid-career engineers in the fourth quarter. Although the recruitment environment for high skilled engineers who can work immediately is becoming increasingly difficult, the number of mid-career hires throughout the year was 2,961 with an average of about 250 per month. We are by no means putting a cap on the number of hires because of our emphasis on quality. This is actual result of our efforts to hire as many talented engineers as possible because we are running out of resources against a bunch of new orders. As the recruitment environment is not expected to improve, we will aim to achieve the planned number of engineers in this new fiscal year, while compensating for the decrease in the hiring number of marketable engineers through global and potential recruitment. The structural and chronic shortage of engineers has led to an increase in orders from customers, particularly in the IT field for unexperienced engineers with OJT in their mind. Some of our customers have also disclosed their medium-term R&D road map to TechnoPro, and we are working to supply human resources to meet their needs in a timely manner. We believe that these indicate our customers' reliance on our recruitment and training capabilities. The annual turnover ratio for permanent employees was 7.7%. In the fourth quarter, it got back to the 8% level, but the spring, the start of the new fiscal year in Japan is also the season when people move the most, and the turnover ratio in the fourth quarter tends to be slightly worse than in other quarters because the retirement at the end of March is counted on April 1. In the United States and Europe, facing high inflation, the great resignation is underway in an environment where salaries rise when people change jobs. Although inflation and turnover ratio have yet to reach such levels in Japan. Turnover risks are intensifying for TechnoPro, which has a large number of IT talents in higher demand. The payment of incentive bonuses based on our financial performance and the introduction of a new personnel system for engineers are part of countermeasures to deter turnover. The number of assigned engineers in Japan exceeded 21,000 for the first time. Page 11 and Page 12 show the portfolios of assigned engineers by technology and industry, respectively. Please check the details for each. The monthly average unit sales price on Page 13 was JPY 658,000, up 3.9% year-on-year. The year-on-year growth rate appears a little higher due to addition of companies with relatively high unit sales price, but year-on-year comparison from this new fiscal year will be apple-to-apple. In addition, as of the end of June this year, the base charge of existing dispatch engineers increased by 2.9% compared to 1 year ago and the rate of hike has been improving due to the charge-up and shift-up initiatives in March contract renewal negotiations this year. The most successful timing for charge-up is March for customers in the run-up to their new fiscal year starting in April. However, there is no seasonal tendency for shift-up. Therefore, we do not easily renew existing contracts when high unit sales prices are expected for different projects of other customers. This can only be done in a favorable business environment. Page 14 shows the update of Overseas subsidiaries disclosed semiannually. In the China business, revenue was up year-on-year. However, due to a slowdown in projects with high profit margins, operating profit remained almost flat for the year. The lockdown in the fourth quarter under the Zero-COVID policy has limited new sales activity, and this effect is expected to remain throughout this calendar year. This new fiscal year will be a year in which we will accelerate our shift to higher value-added solutions in line with the midterm management plan strategy. Helius is back on a growth path, even though its operating profit includes some COVID-related government subsidies. Our dependence on sales to the largest customer, Development Bank of Singapore, which once exceeded 70% has now fallen below 40%. The businesses in India, Thailand and Vietnam have also started to develop steadily, and we are diversifying our customers and regions. This new fiscal year will be a year in which we actively engage in the offshore delivery laid out in our midterm management plan, and we began to collaborate in selling Robosoft solutions to Helius customers. Although the profit amount has decreased compared to the first half of the year, Orion had its best year since its founding. While the inflation rate in the U.K. has exceeded 9% and the policy interest rates have continued to rise, uncertainty about the economic outlook is increasing. This new fiscal year will be a year in which we will assess its suitability for the group's global strategy. The following page summarizes the update of Robosoft, which joined the group in the second quarter. Up to now, we have seen rapid growth, particularly among existing customers in the United States as a result of its wave of digitalization. However, the economic recession possibility is a little worrisome. In order to achieve further growth, it is essential to develop new clients that more than make up for completed projects of existing clients, especially in the U.S., Japan and Europe, where their unit sales price and margin are high. This entails investment in expansion of sales organizations and marketing activity. By the way, we have been able to win new orders in Japan with our joint sales efforts, accumulating sales leads. Another bottleneck to growth is the availability of a sufficient number of engineers to take new orders. Given turnover ratio on the rise as well as wage inflation reaching 20% on average, GP margin has deteriorated since April this year. We plan to hold down average wages by hiring new graduates and young engineers based on the premise of training and to maintain GP margin of 40% or more by applying the new rate cards to new projects. Although operating profit for the second and third quarters was recorded at a lower amount than it actually was due to the transaction costs borne by the sellers, the operating profit margin before amortization of PPA assets for the full year is expected to be in the range of 20% in this new fiscal year due to an increase in SG&A in order to strengthen our sales and marketing capabilities. With the addition of Robosoft from the first year of the midterm management plan, our global strategy has become more concrete. Mr. Yagi will explain it in the second part. Page 16 provides guidance for the full year and the first half. For the full year guidance by each segment, please refer to Page 18. While revenue and core operating profit for the full year are expected to exceed those of the previous year. The growth rate of core operating profit of plus 5.1% is not yet close to TechnoPro's standard level because of the midterm management plan related investment. In this new fiscal year, we do not anticipate extraordinary gains as in the previous year. And at present, both operating profit and net profit are expected to decrease. We will strive to at least exceed the previous year's result in terms of annual operating profit. Each of the key KPIs forecast in Japan may appear to be conservative, but we will update them if necessary, based on our performance. Page 17 shows the results and plans for the cost of implementing the midterm management plan for the previous fiscal year and the new fiscal year. Even though we are in the investment phase, it accounts for about 1% of sales. And please note that this fiscal year's SG&A ratio on revenue can be maintained at 15% level. In particular, we plan to budget solution talent recruiting expenses that exceed the actual spending of the previous year and to spend more than the carryover of the unused amount of the previous year for solution talent training. The key to achieving higher growth in the latter 3 years of the midterm management plan as whether or not we can secure sufficient number of solution type of engineers. So we will make sure to invest properly from the first quarter this year. Finally, Page 19, as a shareholder return slide. The year-end dividend for the previous fiscal year was JPY 52 per share and the total annual dividend ended up with JPY 72 per share with its payout ratio of 50.3%. On the other hand, the annual dividend forecast for this new fiscal year is JPY 72 per share, the same amount as the previous fiscal year and the payout ratio based on net profit in the full year guidance is expected to be 57.0%. Although we forecast a decrease in net profit, we have decided on the dividend forecast by taking into account the steady progress of the midterm management plan strategy and also the stock price in the market. That's all for my explanation. Thank you very much.

I am Yagi, CEO of TechnoPro Holdings. In my part of the presentation, I will explain the current business environment, the progress of the medium-term management plan and our efforts on sustainability management. First, I would like to talk about our current business environment, which may be of interest to you amid the growing concern over the global economic recession. Page 2 as a slide showing the status of contract renewals. The bar graph shows the number of assigned engineers at the end of each quarter with a number of those up for contract renewal shown in light gray, and the number of engineers to return from allocation due to contract expiration as shown in dark gray. The line graph shows the contract renewal ratio at in each quarter and month. March is the end of the fiscal year for many of our clients and many development projects are completed to coincide with the end of their fiscal year. So the number of contracts up for renewals is the largest during the year. The contract renewal ratio for March of this year was 90.5%, which is roughly the same level as the previous year. The renewal ratio at the end of June of this year was 93.7%, and this result includes the portion of cancellations made by ourselves based on the shift-up strategy. Without these cancellations, the renewal ratio of June would have been calculated to be 94.8% in real terms. Page 3 shows the number of new orders. The bar graph shows the number of new orders and the line graph shows the tear on year growth ratio. In all technical fields, the number of new orders has remained high without decreasing and there has been no change in engineer shortages and strong R&D needs of customers. In the most recent fourth quarter, the number of new orders increased year-on-year in all fields of the machinery: IT, chemical and construction. The shift in the content of orders in the machinery field from conventional to advanced technologies has also continued. Page 4 shows the number of mid-career hires by technical field. In response to strong orders, we were able to hire an average of about 250 mid-career engineers per month in the last fiscal year, while maintaining our hiring standards. As you can see from the graphs, we've recruited well in the highly competitive IT field. However, hiring experienced personnel has become increasingly difficult. So we continue to focus on curbing retirement, resuming and actively recruiting foreign engineers as overseas travel has eased and hiring more inexperienced personnel on the premise of education and training. During the medium-term management plan period, we expect to hire approximately 900 to 1,000 new grads together with nearly 3,000 mid-careers each year. For new grad recruitment, the market risk we're forced to take during the periods between job offers and actual joining the company and the dilution of average unit sales price might be our concerns. But from the viewpoints of securing sufficient resources, the need to hire more new grads would be considered seriously. This is an overview and summary of our business environment as the fourth industrial revolution, which is centered on digital technologies like IoT and AI, demands innovation in society, our customers must invest in R&D from a medium- to long-term perspective to ensure their own competitiveness. Of course, we do not deny the possibility of changing our management policy in the event that the business environment changes in the future. Even in such a case, we intend to handle the situation appropriately by taking advantage of our flexibility and agility that we demonstrated to the fullest extent when the COVID disaster first occurred and to prove the resilience of our business. Even if an economic recession were to occur, we recognize that the shortage of engineers will remain unchanged over the medium to long term. Next, I will explain the progress of the medium-term management plan. Page 6 is an updated slide of the midterm business plan figures announced in August last year. As explained by CFO, Hagiwara, the previous fiscal year, the first year of the midterm plan got off to a good start in terms of business performance. For the current fiscal year, the second year of the plan, we have guided JPY 195 billion in revenue; JPY 20 billion in operating profit and core operating profit; and JPY 13.6 billion in net profit after taking into account the addition of Robosoft, current KPIs and approximately JPY 2.1 billion of the medium-term plan implementation cost. This is an upward revision from the original second year's target of JPY 186 billion in revenue; JPY 18.5 billion in operating profit and core operating profit; and JPY 12.7 billion in net profit, those of which were originally announced 1 year ago. Although operating profit and net profit are expected to decrease, core operating profit is expected to exceed that of the previous year, even with the cost of implementing the medium-term plan. Net profit is also expected to exceed that of the FY '21.6, which included government subsidy for continuous employment of approximately JPY 1.8 billion. We've not changed the numerical goals for the final year of the plan, recognizing that we will be required to take on the challenge of higher growth ratio in the third and subsequent years. Therefore, we need to make upfront investment in this new fiscal year to ensure the solid foundation for core business evolution, and it shall be important to gain a justifiable return on our investment in the third year and beyond. Page 7 shows the planned and actual revenue of each business and its percentage of total revenue. In the solutions business, revenue for FY '21.6 was JPY 27.8 billion, and the composition ratio was 17.2%, while FY '22.6 revenue was JPY 35.1 billion, and the composition ratio was 19.6%, exceeding the original plan. So far, we have made a steady step toward achieving our final goal of JPY 57 billion in revenue and 22.8% in the composition ratio. In the Overseas business as well, the addition of Robosoft was very effective, and the revenue composition ratio sharply rose to 10.6%. On the other hand, revenue in the core business, i.e. engineer staffing business in Japan, exceeded the previous year, although it did not reach the original plan and the composition ratio to total revenue declined from 74.3% to 68.6%. Although the core business fell short of the original plan, we do not see it as a critical problem. The fact that the core business is contributing to the generation of solutions talent is a proof of the progressive step by step transformation of our business model. In the core business, where market expansion is expected in the short to medium term, we will continue to pursue growth potential by refining our capability to respond to the shift to IT and software. Page 8 shows plans and results for each revenue percent of GP, SG&A, OP as well as number of engineers enrolled in Japan and average monthly unit sales price. One of the highlights of the first year's progress is the high growth of the GP margin, which reached 26.2% due in part to the cost of implementing the midterm management plan. The SG&A ratio exceeded 15%, but there is no change in our estimate to bring it down to the 14% range in the final year by operating leverage effects in the future. Although OP margin has temporarily moved up due to the income from COVID-related government subsidy of approximately JPY 1.8 billion in the FY '21 ended June and the gain on reversal of Helius put option liability of approximately JPY 1.8 billion in the FY '22 ended June, we aim to maintain OP margin in the 10% range even during the period, requiring the midterm management plan implementation cost and to bring it to the high-12% range in the final year of the plan. Both the number of engineers and average monthly unit sales price exceeded the first year's target. However, we recognize that future steps toward the final year goal will not be easy despite the forecast that the increasing mobility of human resources, especially for the IT engineers willing to change jobs, will continue. Our plan is based on the assumption that the turnover ratio will be kept under control. The high growth in unit sales price this time is that in the FY '21 ended June, a launch pad, the unit sale price remained lower due to business operations, prioritizing utilization during the pandemic. We believe, once again, that the key to increasing the number of engineers and the unit sales price in the future is to provide engineers with attractive jobs and adequate training programs so that they can be highly evaluated from our customers. Page 9 shows ROIC trends for the past 3 years for the companies acquired since listing. Total invested capital since IPO was JPY 22.4 billion or JPY 25.6 billion, if companies already merged into the core operating company are included, and the latest ROIC for investment as a whole was 11.3%, exceeding our minimum target of 10%. Over the past year, ROIC of all subsidiaries has improved. In order to improve ROIC, TOQO has been pursuing synergies with our construction management business; Techno Brain has been actively promoting placement within the group; and Helius, based in Singapore, has been developing new clients in India, Thailand and Vietnam. These 3 companies have finally exceeded 7.6% of capital cost. Please note that Robosoft's ROIC counts only the consolidated 9 months this year. At the time of formulating the midterm management plan, we set an M&A investment quota of JPY 40 billion and clarified strategic targets and financial discipline. Since we still have approximately JPY 30 billion left in our investment budget, we intend to continue to pursue them and as that are consistent with our strategy, both domestically and internationally based on our strict policy and discipline. From Page 10 onward, I will explain our progress over the past year, mainly using excerpts, reprints and updated versions of previous disclosure materials. We are also monitoring internally according to the roadmap on this page, and we are trying to take action as soon as possible if the things are not making progress. Page 11 shows LTM-based GP margins without seasonality for both the R&D Outsourcing and Overseas segments. GP margin for each segment has improved as the share of solution businesses with high GP margin has expanded. In the R&D Outsourcing segment, GP margin rose from 24.2% in the second quarter to 24.6%. While in the Overseas segment, GP margin rose from 24.8% in the second quarter to 27.9%. This sharp increase in the Overseas segment was mainly due to the addition of the highly profitable Robosoft as well as the strong performance of each Overseas subsidiary, especially Helius and Orion, which increased their lucrative recruiting business. As explained by CFO, Hagiwara, Robosoft's profit margin is expected to decline due to necessary investment in the near future. So there is a large possibility that GP margin in the Overseas segment as a whole will not rise as steadily as in the past. Page 12 is a reprint of a previous document. This page shows how we combine the digital technologies listed in the bottom row and provide solution offerings listed in the middle row to our customers in order to solve their issues. Page 13 is a continuous disclosure document of revenue, average monthly number of solution type of engineers and average monthly unit sales price in the Japan solution business. Three months revenue, which was in the JPY 8 billion range for the first and second quarters, got to be in the JPY 9 billion range in the third and fourth quarters. The full year total revenue of JPY 35.1 billion and 19.6% of revenue composition ratio are consistent with the figures in the revenue and KPIs breakdown on Page 7. Our focus on the solution business, where the average monthly unit sales price is in the JPY 800,000 range, far exceeding the overall JPY 658,000 is expected to contribute significantly to our future growth. The average number of allocated engineers in the solution business exceeded 3,600, accounting for about 16% of the total number of engineers in Japan. The target for the final year of the midterm management plan, which is already included in the integrated report is 6,000 engineers, equivalent to approximately 22% of the expected total number of engineers in Japan at that time. Page 14 is a continuous disclosure material on the results of training engineers who can work in new technological fields. The training of AI, machine learning engineers, data scientists, cloud engineers and ERP engineers progressed by 1,411 in the last fiscal year alone for a cumulative total to 2,467. And we have been promoting efforts to have a total of 3,000 AWS certifications by June 2025. The following the certification as AWS partner by Amazon, we were also able to augment our SAP-related certifications through the integration of GCOMNET, whose acquisition was announced last summer. Page 15 is also an excerpt and reiteration of the medium-term business plan presentation. Unlike strategy consulting firms and system integrators, we can capture the customers' real issues and provide optimal delivery from planning and proposal to design and implementation by sales promotion leveraging our engineers working at on-sites of customers. Page 16 is an updated version of the results of sales promotion through our engineers, which we call One-click Reporting. Here we see: one, the number of reporting, orders and winning contracts through those reporting has increased as a result of measures to penetrate, such as the monetary incentives to engineers; two, high ratios of exclusive orders and contracts, one have been maintained due to the gathering high potential needs at a stage not yet identified by other companies; and three, we have been able to gain revenue by acquiring new projects rather than simple headcount augmentation. With the convergence of the COVID disaster, still not in sight and certain restrictions on sales activities expected to continue, we intend to promote the penetration and utilization of this system within the group. Page 17 is about our global strategy. Since the current midterm management plan was formulated prior to the acquisition of Robosoft, we have reviewed and reoriented our global strategy with Robosoft as the center. After reorganizing the strategic and regional positioning of Overseas subsidiaries, we have decided a new global policy to take an integrated approach in order to achieve further growth while focusing on the digital domain. Robosoft has a strong reputation for providing digital solutions with superior UI/UX and has its competitive advantages in design, engineering and implementation. However, compared to global players, Robosoft is still lacking in higher-margin upstream functions, such as planning and consulting. In addition, analytics is becoming increasingly important across the entire IT and digital services value chain. Therefore, we are pursuing bolt-on type M, and as that will contribute to the acquisition of such complementary capabilities and the development of European and U.S. customers, while involving Robosoft itself in the deal process. While Robosoft solution business know-how has been shared within the group through the PMI process to date, we will further promote the transfer of Robosoft's knowledge to the Japan business and the global exchange of talents in the future. We believe that it is meaningful to engage in overseas business only when it is utilized for the evolution of the Japan business. In the lower part of Page 18, you can see the summary comments on the progress of the first year and the plans of the second year for both the Engineer Training business and the DX Promotion business. In the first year, we had to think on the run in both businesses. But in the second year, we have a clear idea of what we need to do. The decision to promote both businesses further is a rational one for us as both can leverage the elements of our existing business model and the capabilities we have cultivated so far, and they are necessary for the sustainable growth of our core business and solution business. We will also invest in these businesses from the beginning of this fiscal year, focusing on the buildup of a platform for reskilling and upskilling engineers with an eye to future external sales and monetization. Please go to Page 20 for explanation on sustainability management. First, I would like to talk about our initiatives on corporate governance. As announced at the end of June, we will make a transition to a company with audit and supervisory committee, subject to approval at the General Meeting of Shareholders this September. The agenda for the election of directors based on the transition will be announced at a later date, while the ratio of independent outside directors, directors not engaged in business execution and female directors are expected to be 50%, 67% and 25%, respectively. In addition, the current skill matrix developed prior to the midterm management plan will be revised from the perspective of strengthening linkage with the midterm management plan and strategies and will be announced in this year's convocation notice of General Shareholders' Meeting as well as our integrated report. Using the new matrix, we will continue our efforts to solidify corporate governance structure by, for example, considering a phased succession of outside directors based on skills and experiences that need to be reinforced and strengthened in terms of strategy execution. Please proceed to Page 21. In the first year of the medium-term management plan, we were able to almost complete the establishment of a system, basic policies and regulations to promote enterprise risk management and sustainability-related agendas. We have also begun to implement concrete measures to fulfill our social responsibilities such as signing up the United Nations Global Compact, expressing support for the TCFD recommendations and joining various organizations for diversity promotion. We will continue to utilize the Sustainability Committee to promote measures to address climate change and our materiality as required for a company listed on the Tokyo prime market, and we'll disclose the details and progress of these measures in the integrated report and on our website. Please keep your eyes on the information. Page 22 is about the personnel system for engineers introduced newly this July. It goes without saying that engineers are extremely important assets in our business model and a personnel system for engineers must be aligned to our business strategy to effectively utilize resources and achieve sustainable growth. Therefore, we have formulated a new personnel system with the following main components: one, to measure and evaluate the market value of engineers in terms of technical skills and business skills in line with our purpose; two, to prepare various career paths for engineers such as project manager, project leader and technology consultant, et cetera, in line with the solution business expansion policy; three, to visualize the definition of required skill set, salary range and expected unit sales price for each grade and provide a framework to motivate engineers to improve their skills. The introduction of the new system entails a certain increase in costs by salary repricing for some engineers who have been undervalued, but this is part of the investment in human capital. We believe that we will be able to fully recoup our investment by recruiting excellent talents, helping to improve retention rates, delivering maximum performance and driving charge-offs. That concludes my presentation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]