TechnoPro Holdings

Hello, I am Hagiwara, CFO of Technopro Holdings. Thank you for your time today. In Japan, the spread of the new coronavirus infection is still not subsiding yet, and a state of emergency has been declared for the third time. Compared to the first declaration in April last year, we are not experiencing major disruptions in our operations at this time, but there will probably be some cases where the date of assignment, which we fixed in the contract, will be delayed. During the second declaration from January to March this year, we negotiated with clients for the contract renewals in March, and we were able to achieve a renewal rate of 90.4%, which is a bit higher than normal. Since our first priority was to get those contracts renewed, we couldn't achieve as much charge-ups as much as last year. But as for the number of engineers returning to the bench due to contract expiration, we were able to keep it lower than expected. Also, the headcount of new graduate engineers who joined April this year is less than 300, over 1,000 less compared to last year. So even under the current circumstances where COVID is once again spreading, new assignments are proceeding smoothly, and we expect to confirm the assignment dates for all new grad engineers by the end of June. As a result, the June end utilization rate is expected to exceed 95%. Also, we upward revised our full-year guidance based on the third quarter results and current KPIs. Nevertheless, the number of engineers enrolled in Japan has declined month by month since its peak in April last year, and that is when we froze mid-career hiring. And since then, we have turned negative ear on ear since January. We believe that the next fiscal year or the first year of the new midterm management plan, we are currently formulating. Now, we will be a difficult year in terms of sales and profit growth. So in order to mitigate the pressure on profits, such as hiring advertisement fees, upfront investments on growth strategies in the new midterm plan, and lack of the subsidy we received this year, we will focus on mid-career hiring in Q4. and secure a sufficient number of engineers by July, which is the start of the next fiscal year.

Now I would like to explain the outline of Q3 results, major KPIs and Q4 forecasts on the following slides. First of all, let's look at page two.

Cumulative Q3 revenues were approximately 120 billion yen flat versus last year. Operating profit was 14.8 billion yen, up by 13.8% versus last year. Now this includes 1.7 billion yen of government subsidy for continuous employment in Japan. So if we exclude such subsidy and other extraordinary items, the core operating profit was 13.1 billion yen, up by 2.6% versus last year. Looking at the cumulative results for the first three quarters, as well as Q3 in isolation, we have managed to maintain the core business margin ear on ear by making up for the decline in the gross margin with an improvement in the SG&A. From Q1 to Q3 this fiscal year, standby costs have been curbed due to recovery in the utilization rate, and the decline of gross margin is smaller than last year. But the SG&A run rate and the SG&A ratio have been on an upward trend due to increased recruitment advertising expenses since we resumed hiring. These changes indicate that our operations are returning to normal. And although it has been a difficult year with COVID, we managed to get through without any decline in the amount or rate of core business profit, excluding the impact of subsidy for continuous employment and other factors. The revised full year guidance for the current year is also shown in the right most column. And I will explain this later on another slide.

On page three, we have the quarterly performance of revenues and operating profit.

From this time onward, we're disclosing the average monthly unit sales price for each quarter separately. On page 11, we have the year to date average unit sales price. but this table on this slide shows the prices for each quarter. Please note that the unit sales price is affected by the level of the so-called base charge or contract unit price, as well as the number of operating days and hours. Looking at Q3 in isolation, number of operating days were 56.5 days, up 0.7 days, or 1.2% versus last year. Also, working hours per day were 8.51 hours, down 0.05 hours or 0.6% year-on-year. The average monthly unit sales price was 640,000 yen, up by 2,000 yen or 0.3% year-on-year. The number of operating hours per day has finally started to exceed 8.5 hours, but Q4 includes the third declaration of state of emergency and the golden week holidays. And on top of this, we have the government's request for people to stay home and to take days off from work. So there are some slight risks in our Q4 forecast regarding operating days and operating hours.

On page four, we have the Q3 YTD results by segment.

The domestic R&D and construction management segments, which together comprise more than 90% of consolidated revenues and operating profit, the year-on-year growth in operating profit continues to seem high due to SG&A cost reductions and the subsidy. Also, the headcount of non-Japanese engineers living in Japan is now 944, and this is a significant drop from the peak of just under 1,200. Before COVID, we used to hire about 400 foreign nationals per year, but global hiring is now completely shut down with COVID, and the population is decreasing as engineers continue to retire. The other businesses in Japan segment once fell into the red in Q1 due to the slump in permanent placement business. But we managed to return to the black ink in the first half. Currently, the margin is still deteriorating, but we expect to stay in the black ink for the full year. In the overseas segment, both revenues and profits increased despite COVID and margins improved too. The main driver was the margin from the China business and the UK subsidiary, which showed recovery in Q3 to last year's revenues and operating profit levels. On page five, we have information regarding balance sheet and cash flow. We believe we continue to maintain a strong financial base. As shown in the table on the bottom right-hand side, we have a commitment line that will expire in June this year, but we plan to extend 10 billion yen for working capital purposes, a reduced part of what we extended for emergency use a year ago. In addition, we plan to roll forward the 10 billion yen for M&A so that we can respond with agility when M&A deals rise. From pages six to 11, we have the major KPIs. So first of all, on page six, the average utilization rate in the first nine months, this was 94.5%, and the utilization rate at the end of March was 96.2%. Because the first half was sluggish, the average utilization rate for the first nine months was 1.1 percentage point lower than last year. However, the Q4 utilization rate is expected to be much higher than last year, because that was when we struggled with COVID. Therefore, the average utilization rate for the full year is expected to be 94.5%, 0.5 percentage points higher than last year. The bar graph here shows the number of engineers in Japan, and as hiring has gradually started to get back on track, the month-on-month decline has become smaller.

And finally, we were able to stop the decline in March.

So of course we appreciate the addition of new grads joined the company, but we seem to be able to hire at least enough mid-careers more than the total retirements starting from this month. In our previous earnings announcement, we mentioned our plan to hire 300 mid-career engineers in Q3, but that resulted in just 288. However, 220 mid-careers joined in April, and we expect to hire more than 500 in total for Q4. So although there have been some delays, we now have a sizable population of applicants, and now it's really about where we set our hiring hurdles according to the current demand. In the field of construction management, where we face a shortage of engineers and aging population, we're slowly restarting our effort to collaborate with our customers to nurture young talent. And we now see increasing cases of inexperienced workers being assigned to new positions after a one month training post joining the company. And although the level of experience and skills required for orders from the IT field is still high, higher than compared to pre-COVID levels, especially in the new digital domain where there's a shortage of engineers in Japan, we plan to gradually increase the ratio of quote, the training after hiring quote style, which allows for a certain period of time on the bench while being trained. We believe digital technologies and solutions will be the key to our future growth strategy, thus our strong focus on this in our mid-term plan. Page 7 shows the contract renewal rate which we started to disclose since the previous earnings presentation. As mentioned in the beginning, the March contract renewal rate was above 90% compared to our assumption of 87.8% in our previous presentation. However, you can say from a different perspective, this was because we had less chances to discontinue contracts that were not likely to get charge-ups at the time of contract renewal. And so we hung on to those contracts and we could not shift those engineers up to projects with higher charges. Now here in Japan, the establishment of a vaccination system is rather delayed and many of our clients are still cautious about the future. Therefore, the total amount of charge-ups and shift-ups obtained at the time of March contract renewal was just one third of the amount obtained last year. That's when the equal pay for equal work effect served us positively. Even compared to the year before, when we didn't have such effect, we only obtained about 60% of that this time. Regarding contract renewals in June, which account for about 55% of all renewals, we currently do not expect a sharp decline from the previous year.

On page eight, we have the trend of recruitment and turnover.

The headcount of mid-career hires has grown gradually during the periods of Q1 to Q3, but global hiring is not going to be active for some time, so it will take more time before mid-career hiring returns to the normal scale of 200 to 300 engineers per month or 700 to 900 engineers per quarter. The guidance for next year will be announced in August together with the full year results. And the number of engineers to be hired during the next fiscal year will obviously be one of the major components of our assumptions. At this timing, when we make this presentation, we'll also talk about the degree of demand recovery and our hiring policy. In a stock type business like ours, the engineer headcount and the unit price that we build up in the first year has a continuous effect into the second year and on. So clearly next fiscal year will be the key year to achieving numerical targets in the five-year midterm plan. We managed to reduce turnover gradually every quarter, including contract employees. And the last 12 months base turnover rate, limited to full-time employees, decreased by about 0.1 percentage point from 8% in the previous quarter. Now, this is still not a satisfactory level, but we will continue to work on reducing turnover as we effectively communicate the new midterm plan internally to our engineers to convey our emphasis on skill improvement, reskilling through extensive training programs, as well as improvement in engineers remuneration. On page nine, we have the engineer headcount by technology. And on page 10, we have the same by customers industry. Although the utilization ratio has returned to pre-COVID levels, the number of assigned engineers turned negative versus last year for the first time due to the decrease in the total number of engineers. Going forward, we will be able to sustain the monthly growth due to full-scale hiring, but the year-over-year decrease will continue for a while. However, we will aim for a positive turnaround as early as possible in next fiscal year. As for the trends by technology and by industry, there is no significant change from what we have explained previously. So please confirm our past comments. On page 11, we have the average monthly unit sales price. And that was 632,000 yen for the nine-month average, down 0.2% from last year. So compared to last year as the gap in overtime hours, compared to last year, the gap is becoming smaller. So the factors pressuring the unit price are gradually diminishing. Although the contract unit price of assigned engineers as of March end was 2.3% higher than a year ago, we struggled with charge up negotiations. So the rate of increase has been gradually shrinking from 3.7%, which is what we achieved at the end of June or Q4 last fiscal year. Furthermore, at the end of June, we expect that the rate of increase to shrink further

as the charge-up effect obtained April last year will start to wear off.

In this current situation, we cannot hope for aggressive charge-ups and shift-ups, but what we can do now is to raise our engineers' skills through training and to pivot their skills to technology fields in higher demand. In order to do this, we will invest in education and training more than ever before. On page 12, we have the revised Q4 and full year guidance and related KPIs. And on page 13, we have the breakdown of that by segment. The revised full year guidance is based on Q3 results, the March contract renewal rate, the level of assignment of new grads joined in April, and the forecast for mid-career hiring in Q4. The revised full-year figures are revenues 159 billion yen up by 0.4% year-on-year, Operating profit, which includes the 1.7 billion yen of subsidy for continuous employment is 18 billion yen, up by 14.1% versus last year. And although this is not in the disclosure materials, we hope to achieve a positive result on a core business profit basis, which excludes this year's special items such as subsidy for continuous employment and managed to grow beyond 16.2 billion yen, the level achieved last year. Last but not least, we have information regarding the dividend on page 14. Based on the full year guidance and dividend payout ratio of 50%, mentioned earlier, we forecast the year-end dividend of 122 yen per share. Added with the interim dividend of 50 yen per share, this will bring the total annual dividend to 172 yen. That is all for my presentation. Thank you very much for your attention.