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

I am Hagiwara, CFO of TechnoPro Holdings. Thank you for your time today. As explained in the first quarter financial results briefing, the issues we are facing now and the investors' concerns caused by them are the following 3 points: first, slowing top line growth due to worsening turnover ratio; second, deterioration in GP margin due to rising wages; and third, higher SG&A ratio due to soaring recruitment cost. We strive to overcome these urgent issues while sticking to our medium- to long-term strategic goals and hope to delay any concerns about our sustainable earnings growth, even if only to a small extent, by demonstrating a track record of our delivery over this fiscal year and the likelihood of our execution robustness for the next fiscal year and beyond. The current business environment remains as favorable as ever. And despite the political and economic uncertainty on a global basis, we are receiving solid orders from customers. We shall aggressively seek to negotiate higher unit prices when our contracts are renewed in March this year. In order to adequately reward our engineers through higher wages, we will aim to jack up prices and create attractive job opportunities, which will also help prevent them from leaving TechnoPro and enhance their motivation. During the medium-term management plan periods, we were awarded the IR Grand Prix by the Japan Investor Relations Association. In hindsight, the thoughtful advice and insight we have gained through dialogues with many investors have enabled us to evolve our approach to information disclosure and communication with capital market. For more sustainable IR activity of TechnoPro, we plan to increase frequency of contacts between future CFO candidates and investor community while keeping my succession in mind. Now I will explain the summary of the first half financial results, the key KPIs in Japan and the update of Overseas operations. First, let's look at the financial overviews on Page 2. Revenue for the first half of this fiscal year was JPY 118.4 billion, up 9.7% year-on-year, while GP was JPY 32.4 billion, plus JPY 3.3 billion or up 11.6% year-on-year, resulting in GP margin of 27.4%, up 0.5 points year-on-year. Although the recruitment cost and its ratio to revenue are on the rise due to an increase in the number of hires and the average cost per hire, SG&A expenses for the first half were JPY 17.5 billion and SG&A ratio for the second quarter stayed below 15%, just like in the first quarter. Please note that in the third quarter, when an increase in revenue is supposed to be small because of fewer working days than the second quarter, GP margin may fall below 27% and SG&A ratio may go back to 15% level. Both core operating profit and operating profit for the first half were approximately JPY 15 billion, up 21% year-on-year, exceeding the first half guidance of JPY 14 billion by about JPY 1 billion. Despite not anticipating any specific concerns for the second half, we have not revised the full year guidance upward at this point. The number of new graduates joining TechnoPro in April this year is around 150 more than last year. And with the significant increase in starting salaries, we will implement a special increment this April for new graduates who joined in recent years so that the salary reversal among generations can be eliminated. Consequently, the negative impact of GP in the fourth quarter when the temporary decline in utilization ratio occurs is expected to be greater than usual. In addition, for the second half, we are not necessarily optimistic about the outlook of our Overseas business, which has been roughly in line with the plan so far. Please understand the reasons for keeping the full year guidance unchanged. Pages 3 and 4 show the quarterly performance of each P&L item and key KPIs in Japan, including the KPI outlook after the third quarter. We have updated the key KPIs for the full year based on the results for the first half and the latest forecasts for the second half. Pages 5 and 6 show the performance by segment for the first half and the second quarter, respectively. The R&D outsourcing remains strong with GP margin continuing to expand and SG&A ratio declining because of the operating leverage benefits. As shown in the fact book data posted on our website, the solution business, which had been slowing down since the latter half of the previous fiscal year, has also made a slight comeback in the second quarter. Although we need to confirm the momentum in the second half, we are seeing growth in our solution offerings in both development and operation support areas, which are our main focus and can enjoy higher value and margin. Price negotiations at the time of March contract renewals this year are extremely important in preparation for the annual pay hike for our employees in July. We will strive to pass it on to customers, while taking into account the supply-demand gap and wage growth in Japan. We would like to share our achievement in the third quarter briefing. In the Construction Management Outsourcing, it is within the realm of expectation that GP margin for this fiscal year would worsen slightly due to the full implementation of work style reform after the grace period ended. Unlike the R&D Outsourcing, the Construction Management Outsourcing has switched to a headcount-driven strategy, actively recruiting inexperienced talents. On the flip side, this hiring policy has led to a deterioration in the turnover ratio, and the growth in the number of engineers in the second quarter stagnated slightly. While accelerating inexperienced hires, we aim to increase the number of engineers continuously and maintain OP margin. While the unit price of assigning inexperienced ones is relatively low, it becomes easier to raise the price once they have gained a certain amount of experience. So we try to generate funds that could not only improve compensation, but also be used for growth investments such as hiring and training. The other businesses in Japan, which turned a little profitable in the first quarter, lost money again due to the slump in the placement business. As the difference from the plan is still small, there is no change to the full year forecast. In the Overseas, I will explain the update of each foreign subsidiary later. Page 7 shows balance sheet and cash flows. In the second quarter, we completed a JPY 5 billion share buyback program and redeemed 3-year straight bonds of JPY 5 billion. Including the bank refinancing of JPY 3 billion, these are reflected in interest-bearing debt balance and financing cash flows, respectively. From Page 8 onward, we will look at the key KPIs for our domestic operations. The number of engineers at the end of December last year was 26,651, plus 1,921 or up 7.8% year-on-year, exceeding the plan by 251. While hiring has been strong, the number of resignations has soared, causing head count growth to fall below 8% from a year ago, and such a trend is here to stay throughout the year. Based on the updated full year hiring outlook, we have revised our forecast for the number of engineers at the end of June this year to 27,850 or up 6.9% year-on-year, an upward revision of 350 from the initial guidance. The average utilization ratio for the first half was 95.4%, a little bit down year-on-year, but the average full year utilization ratio of 94.8% is 0.1 points higher than the initial guidance. Given elevated starting salaries for new graduates joining TechnoPro in April this year, we would like to strategically extend the training periods and focus on the price of their first assignment, even if it means sacrificing the fourth quarter utilization to some extent. Pages 9 shows the distribution and year-on-year growth rate of assigned engineers by technology and industry. I'll spare you the details. The next topic is the status of recruitment and turnover. In the second quarter, we recruited 1,025 mid-careers, exceeding 1,000 for the first time on a quarterly basis. Based on the progress of the first half, we revised the full year hiring plan to 4,900, including 1,150 new graduates who will join in April, up 400 from the initial guidance. We have been accelerating hires to hedge against the potential downside risk of more resignations than our estimate. On the contrary, the turnover ratio in the second quarter was 8.8%, seemingly improved from the first quarter, while the turnover ratio in the second quarter when seasonal bonuses are paid in December, remains at the low end of each quarter. Looking at the LTM-based turnover ratio, it has already reached 9.7% in the second quarter compared to the budgeted full year one of 9.8%. In Mr. Yagi's presentation, we will explain the current situation in more detail by showing data trends by technology fields. Page 11 shows the change in its waterfall chart in unit sales price. The average monthly unit sales price for the first half was JPY 698,000, plus JPY 22,000 or up 3.3% year-on-year. The initial guidance for the full year average was JPY 695,000 per month, but this has now been revised upward to JPY 698,000. Please note that the base charge for our existing dispatch engineers at the end of December last year, which is not affected by working days or overtime hours, increased by 4.4% compared to a year ago, and the progress has been made in passing our incremental cost on to customers. Next is the update of our overseas subsidiaries. First of all, OP for the overseas as a whole reached JPY 1 billion for the first half, nearly double year-on-year. This was roughly in line with the plan, although performances varied from entity to entity. For Robosoft, which faces the challenge of winning new projects, its top line appears to level off, but has yet to turn around, falling short of its target by more than 10%. One reason for this is that the U.S. clients delayed digital investment decisions in the first half while waiting to see the ramification of the presidential election. In the second half, with the U.S. economy remaining solid, Robosoft shall focus on monetizing the pipelines it has built up in the first half. This fiscal year, it has maintained GP margin of over 40% through strict bench control, and OP is trending higher than the previous fiscal year. As part of the collaboration between Robosoft and TechnoPro to cultivate new Japanese customers, we have established an offshore development center in India for model-based development, targeting the automotive industry. The market for software-defined vehicles, SDVs, which are now becoming increasingly smartphone-like in cars, is expected to grow rapidly, and we believe that the solution offerings that align our customer base in Japan with Robosoft's delivery capabilities are promising for the future. Furthermore, not only will TechnoPro have strengths in the field of in-vehicle control, such as model-based development; but Robosoft, which has a competitive edge in UI/UX design, will work to tap into a new market of in-vehicle infotainment which combines information and entertainment. In the China business, despite concerns about the economy and geopolitical risks, its second quarter result exceeded the previous year and the plan following the first quarter. As in previous years, profitability in the second half of the year would be lower than in the first half, but we expect to achieve sufficient earnings growth on a full year basis this fiscal year. Helius' financial performance in the second quarter worsened due to stagnant digital demand in the financial sector of Southeast Asia, where Helius operates and changes to Singapore's work visa standards. While OP for the first half was slightly higher than planned, we expect the business conditions to remain tough in the second half. U.K.-based Orion's OP for the first half was slightly up year-on-year, while it significantly missed the plan. Due to the budget proposal and economic uncertainty after the change of government to the Labour Party, there is little need for permanent employment and the higher-margin placement business has been sluggish. We try to minimize the shortfall in OP target by vigilant operations with cost reduction efforts. Page 13 is the guidance for this fiscal year and Page 14 is a breakdown by segment. As explained so far, there are no changes to the full year earnings forecast and only the domestic key KPIs have been updated. Finally, please see Page 15. At today's Board of Directors meeting, a resolution was passed to pay an interim dividend of JPY 30 per share with payment to commence on February 28. The year-end dividend for this fiscal year is forecasted to be JPY 60, bringing the total for the full year to JPY 90 and the annual dividend payout ratio to 50.9%. The JPY 5 billion share buyback program announced in August last year was completed at an average acquisition price of JPY 2,835 and all acquired shares were retired. Given the annual dividend forecast for this fiscal year, the total payout ratio is expected to be 77.7%. That's all for my presentation. Thank you very much.

I am Yagi, CEO of TechnoPro Holdings. Thank you for your time today. In the first half of the fiscal year, we achieved strong overall performance, reaffirming the solid progress of our medium-term management plan strategy and the path toward future growth. At the same time, we recognize the challenges that need to be addressed amid an increasingly uncertain business environment. As we move into the second half, we are refining our performance forecasts for each business division and working together as one group to achieve our full year guidance. First, based on Japan business KPIs, I will explain the current business environment. Page 2 shows the trend in contract renewal every 3 months. The contract renewal ratio for December 2024 was 93.2%, and it would have been 94.3% without the cancellations initiated by TechnoPro. Looking ahead to March, when we anticipate a renewal ratio similar to the previous year, we will proactively engage in charge-up and shift-up negotiations, taking advantage of this period when the number of contracts up for renewal is at its highest. At TechnoPro, annual base salary adjustments are implemented in July and formal labor negotiations commence in the spring. Given the current labor market and trends among other companies, it is likely that this year's wage increase demands from the labor union will be higher than in previous years. From the company's perspective, in order to mitigate engineer turnover, we will have to respond with an appropriate level of salary increases. By focusing on price up during the March contract renewal period, we aim to secure funds for salary increases while strengthening our profit base for the next fiscal year. Page 3 shows the trend of newly acquired orders. In all technology fields, the number of new orders in the second quarter exceeded that of the first quarter, with the year-on-year growth trend line also showing an upward trend from the first quarter to the second quarter. Based on the current strong demand, there are no visible signs of an economic downturn at this time. The assignment of new graduates joining in this April is also progressing smoothly. On the other hand, we need to closely monitor the impact of the new U.S. President's tariff policies on our clients as well as the growing disparity between winners and losers among companies. In particular, we are focusing on understanding the budget planning status of clients with March fiscal year ends and ensuring a flexible response. Page 4 shows the transition of mid-career recruitment by technology. Amid an ongoing intense competition for talent, we have continued to demonstrate strong recruiting capabilities in the first half of the fiscal year. Following 945 mid-career hires in the first quarter, we set a new quarterly record in the second quarter with 1,025 hires. By technology, the IT field saw the highest number of hires, driven by the increasing number of new orders. Anticipating an increase in resignations, we have also been proactively advancing our hiring efforts, resulting in a higher recruitment volume compared to the first quarter. Out of the total 1,970 mid-career hires in the first half, 376 were inexperienced talents requiring OJT. Notably, in the construction field, where experienced hiring is particularly challenging, we have already reached 246 hires in just 6 months compared to 347 for the entire previous fiscal year. Page 5 shows the trend in permanent employee turnover ratio and the number of resignations by technology. This fiscal year figures are based on an LTM basis, representing actual results from January to December 2014. As Mr. Hagiwara mentioned, the overall LTM-based employee turnover ratio stands at 9.7%, approaching the full year projection of 9.8%. However, there are notable differences in both levels and trends across technology fields. In the IT field, where the job market is most active, the turnover ratio is on the rise. However, we have managed to keep it within the expected range. Conversely, the machinery field has been relatively successful in keeping ratio lower. Measures such as strengthening interview frameworks with engineers through dedicated personnel assignments and shifting towards solution-based business models appear to be yielding positive results. The highest turnover ratio and the most pronounced negative trend are observed in the construction field, where we are actively hiring inexperienced younger talents. It is somewhat inevitable that inexperienced talents will experience reality shocks after joining, which leads to early resignations. Our competitors that primarily recruit inexperienced talents also tend to have higher turnover ratios. However, instead of leaving the current situation, which could potentially raise the overall turnover ratio, we have started specific actions such as more detailed root cause analysis and sharing best practices for preventing resignations across the group. Page 6 shows the assigned IT engineer portfolios by industry. The overall proportion of IT engineers has increased by 1.4 points compared to 1 year ago and by 0.9 points compared to 6 months ago, reaching 58.7%. As customer R&D activities increasingly shift towards software across industries, we have steadily transformed our engineering structure through both recruitment and development efforts, areas in which we have strong capabilities. A large portion of our customers are in the manufacturing sector, where digital engineering is driving business transformation across all manufacturing stages, including design, simulation, production management and quality control by leveraging data and software. As Mr. Hagiwara also mentioned, the automotive industry will be accelerating its focus on software-defined vehicles, SDVs, for the next era of mobility. Given this landscape, we believe that TechnoPro, which already has a substantial number of IT engineers and the capabilities to further develop them, has significant growth potential. Next, I will explain the medium-term management plan progress, starting with financial performance. Page 8 presents the financial targets of current medium-term management plan. While business performance has been strong so far this fiscal year, we must also take into account the reasons explained earlier by Mr. Hagiwara. Given that OP fell short of the guidance in the previous fiscal year, it is essential to restore it to the originally planned level. Therefore, we do not make an upward revision to our full year guidance. Additionally, the target figures for the final year of the medium-term plan include contributions from M&A, and we are not revising them at this point. Further comments on M&A will be provided separately. Page 9 provides a breakdown of revenue, revenue composition ratios for each business and KPIs. With the exception of the number of engineers, the fiscal year figures are on an LTM basis. The black outlines in the bar graphs from previous fiscal year onward indicate the contribution expected from M&A in our initial plan. While revenue from the core business is growing at a pace exceeding initial plan, revenue from the solutions business is on track to achieve its target of this year even without new M&A, and its revenue composition ratio is also increasing as planned. GP margin continues to rise steadily, surpassing our initial plan. Furthermore, OP margin, which was impacted by impairment losses last fiscal year, is on a recovery trend. SG&A ratio, which had remained high and were expected to take time to fall below 15%, have now entered a downward trend. As previously explained, the number of engineers is expected to reach the initial final year target 1 year ahead of schedule. Given this progress, we have revised our forecast upward from the beginning of the fiscal year to 27,850 engineers by year-end. I will provide further comments on the financial performance of both the core and solution businesses as well as the unit sales price in a later slide. Page 10 presents the year-on-year growth ratios and profit margin trends for the R&D Outsourcing and the Construction Management Outsourcing. This fiscal year figures are also shown on an LTM basis. First and foremost, I want to emphasize that the R&D and the Construction Management Outsourcing businesses, which together account for approximately 90% of total revenue and OP, continue to grow steadily. As shown in the upper graph, in the R&D Outsourcing, the growth rates of GP and OP exceed that of revenue. This is driven by improvements in GP margin and OP margin, as indicated in the bottom graph. Despite rising wage pressures, we have successfully prevented a decline in GP margin through strategic price adjustments and the expansion of the solution business. Since OP margin is calculated after allocating the headquarters' management costs, the greater improvement in OP margin than in GP margin indicates that operating leverage is kicking in. In the Construction Management Outsourcing, the year-on-year growth rates of gross profit and GP margin have slightly declined. This is primarily due to the impact of work style reforms introduced in 2024 for the construction industry, which have reduced overtime hours and weekend work as well as our accelerated hiring of inexperienced talents. However, OP margin has remained stable. And like in the R&D Outsourcing, operating leverage has started to take effect. Page 11 is a redisplay of the road map slide for achieving high growth. It maps out the strategic measures needed to overcome challenges and changes in the business environment that were not anticipated when the medium-term management plan was formulated. These measures aim to achieve high profit growth by driving revenue growth, expanding GP margin and reducing SG&A ratio. Page 12 updates the slide that was added during the second quarter earnings announcement. The financial performance table presents revenue, monthly average unit sales price and the number of assigned engineers for both the core business and the solutions business for the first half of the year, along with year-on-year comparisons. This data highlights the steady progress of our gradual business model transformation, as outlined in the current medium-term management plan. The monthly average unit price in the solution business reached JPY 818,000, surpassing the JPY 666,000 of the core business with a higher year-on-year growth ratio as well. The growth ratio of the number of assigned engineers was also higher in the solution business, increasing its share of total revenue. Since entering the second quarter of this fiscal year, the solution business has been regaining momentum, continuing to show strong performance as of December last year and is expected to maintain this momentum. The current medium-term management plan set a 5-year CAGR target of 2.7% for the average unit sales price, which was recognized as a stretch goal, as previously mentioned. By the end of the previous fiscal year, the actual 3-year CAGR was 2.3% However, the year-on-year growth ratio for the first half of this fiscal year exceeded the initial 5-year CAGR plan, reaching 3.3%. Price improvements have also contributed to offsetting the rising costs of recruitment and training. SG&A ratio improved by 0.7 points, decreasing to 14.8%. These financial results indicate that the strategic initiatives outlined on the previous page are starting to deliver tangible results. In the core business, we are promoting a shift toward a more price-focused approach while also serving as a pipeline for continuously supplying engineers to the solution business through talent development efforts. The number of engineers transferred to the solution business increased from 278 in the first half of the previous fiscal year to 495 in the first half of this fiscal year. The consulting organization established under the current medium-term management plan is still in the process of building its team and further investment is necessary. However, the number of upstream project acquisitions has increased. And despite the small scale, revenue exceeded the first half budget. Additionally, to strengthen the project risk management framework essential for the growth of the solution business, we are advancing the development of contract screening processes and consolidating quality management functions. Page 13 outlines our current M&A policy. Given the high level of interest from investors, we have added this slide to provide further clarity. With the start of our current medium-term management plan, we have set an investment budget of JPY 40 billion and established discipline for M&A execution. To date, we have invested a total of approximately JPY 11.7 billion in the acquisition of Robosoft and GCOMNET, but we have not executed any new M&A deals since then. That said, we do not intend to pursue acquisitions merely to utilize the investment budget or meet the final targets of our medium-term management plan. Instead, we will prioritize strategic alignment and actively pursue acquisition opportunities that fit our strategy. Specifically, we are targeting SIRs that have the potential to become core entities of our Japan solutions business, contributing to the expansion of our capabilities and the creation of attractive job opportunities for engineers. Our sourcing activities in this area are ongoing. For overseas operations, in line with the overseas business strategy, we reaffirmed and announced at the end of the last fiscal year our focus during the current medium-term management plan is on strengthening Robosoft's sales capabilities, enhancing its offshoring capacity and evaluating the potential divestiture of overseas subsidiaries that lack strong synergy with our Japan business operations. Therefore, we have decided to put new overseas M&A activities on hold for the time being. Additionally, from a long-term growth perspective, we have adjusted our financial discipline standard for achieving a 10% ROIC, extending the target time line from 3 years to 5 years post acquisition. Finally, I will explain our approach to sustainability management. In December of last year, we published the Integrated Report 2024. Based on feedback from our investors, we have made continuous improvements and refinements. The latest addition includes new additions such as a dialogue between the COO and our alliance partners' president as well as a roundtable discussion with the members of the Nomination and Compensation Committee. We have also expanded the content related to human capital strategy and employee interviews. We encourage you to take a look at the report. TechnoPro will be holding a small meeting on March 17, Monday at 4:00 p.m., focusing on sustainability with a particular emphasis on human capital management. The main speaker will be Mr. Okumura, Executive Officer, who is in charge of our corporate strategy. If you wish to attend, please contact our IR team. Page 16 illustrates our value creation process, which is also included in the integrated report. At TechnoPro, we believe that human capital is the source of value creation. Through the integrated promotion of human capital strategy and business strategy, we aim to increase economic value and achieve our purpose by creating positive outcomes for society, which translates to social value. Some investors have pointed out that our targeted SDG goals appeared too broad and unclear. In response, we have streamlined our focus from the original 9 goals to 3. Specifically, these are quality education, decent work and economic growth and industry, innovation and infrastructure. Aligned with these SDG goals, we are committed to creating value by addressing the shortage of technical talent, maximizing opportunities for engineers and driving innovation and solutions to social and environmental challenges through customers. To achieve this, we have defined materiality and KPIs to guide and advance our initiatives. Pages 17 to 19 focus on human capital management. As emphasized in the CEO's message in the integrated report, TechnoPro aims to serve as a platform where engineers gather, grow and thrive. We seek to contribute to the development of Japanese economy and the maintenance of its vitality by helping create a society where more workers transition into growing industries. TechnoPro has both a strong customer base and talent development functions that enable engineers, who are evaluated and compensated under a job-based HR system, to take on challenges in these high-growth fields. Through the success of our engineers, we will continue to address the increasingly complex challenges faced by our clients and society. Page 18 is a representation of the logic tree diagram showing the connection between human capital investment and shareholder value enhancement. Page 19 shows the trends in human capital KPIs that impact the value drivers from the previous page. As explained today, many KPIs directly linked to enhancing earning power, such as the number of engineer recruitment and average monthly unit sales price have improved year-on-year. We will continue working on optimizing allocation within the group and strengthening talent development to further improve unit sales prices. This will enhance engineers' sense of fulfillment, satisfaction and compensation, ultimately addressing the business challenge of reducing turnover. While KPIs related to total training attendance and hours have declined, we are making progress in verifying the effectiveness of training content based on ROIC and strategically developing high value-added talent in collaboration with alliance partners. This is reflected in the increase in the number of assigned engineers in the solution business. Additionally, we are committed to initiatives that promote health and improve workplace environment. In October last year, we introduced a leave system to support employees balancing work and medical treatment, ensuring that those with illnesses who have the motivation and ability to work can receive appropriate treatment while continuing their employment. The final slide presents key certifications and recognitions received from external parties. TechnoPro, despite having a relatively short history in the capital markets, was awarded the IR Grand Prix in a short period. This achievement is the result of our steady efforts driven by the valuable input we have received from investors over time. Although not included in the materials, today's Board of Directors meeting resolved to revise our existing anti-bribery policy to the anti-corruption policy. This change reflects feedback from certain ESG rating agencies, which emphasized the need to clarify our stance on prohibiting all forms of corruption, not just bribery. The new policy will be promptly published on the Sustainability section of our corporate website. Similarly, based on suggestions from ESG rating agencies, we have also completed updates to certain aspects of our personal information protection policy. We will continue to incorporate insights gained from dialogue with investors into our management and strategy. That concludes my presentation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]