TechnoPro Holdings

I am Hagiwara, CFO of TechnoPro Holdings. Thank you for your time today. Given that this is the second quarter of the current fiscal year, we are disclosing not only our usual financial results, but also KPIs for the solutions business and status on the PMI of RoboSoft acquired last year in a separate deck that summarizes the progress of the new medium-term management plan. We recognize the importance of tracking our progress and we will continue to listen to our investors' advice as we enrich information disclosure and communicate with the market appropriately going forward. Last year in December, our outside directors had their first small meeting with investors. Last year, we had events such as the succession in the CEO role, the announcement of a new midterm plan, and large-scale M&As overseas. And I believe that through the frank dialogue, investors were able to confirm our strong governance system and how our outside directors were involved in the decision-making processes. Later in the ordinary Board of Directors meeting held in the same month, we received reports from the outside directors who participated in these small meetings. Here in Japan, COVID is spreading rapidly, mainly due to the Omicron strain. But so far, our group business is doing well, and RoboSoft was added to our consolidation in Q2. In addition, as a non-cash item, the probability of exercising the put option granted to the 49% shareholder of Helios in Singapore has decreased considerably. So we reversed the entire amount of the put option liability of approximately 1.9 billion yen at fair value. So due to a significant increase in profit, we revised our full-year guidance upward. And since we commit to an annual dividend payout ratio of 50%, we also increased our year-end dividend forecast and plan to pay a slightly higher annual dividend than last year. Of course, our engineers may be affected by infections or the third round of vaccinations, and the number of operating days may be lower than expected, or sales and recruitment activities may be somewhat affected, but we do not expect the strong demand we see to change drastically. I will now provide an overview of the first half results and key KPIs using the slides. Phase two is an overview of our performance. Net sales for the first six months were 86.3 billion yen, up 8.7% from last year. GP was 21.8 billion yen, up 18.1%. Mainly due to an increase in the number of engineers in operation in the domestic business, expansion of the project type service business, and the consolidation of Robosoft as a subsidiary, the GP margin was 25.3%, an improvement of 2 percentage points versus last year. Core operating profit was 9 billion yen, up from the same period last year. In the second half, we expect to see less YOY growth in core profit because the expenses to implement the mid-term plan, which has been pushed back a little, will be booked in full-fledged. Operating profit for the first half was 11 billion yen, up 14.4% versus last year. Again, this was due to a gain on the reversal of the Helios put option liability, which was approximately the same amount as the 1.8 billion yen government subsidy for continuous employment we received last year. According to the agreement signed off at the time of the acquisition, the put option could only be exercised if the cumulative EBITDA over the five-year period, including the year of acquisition, reached a certain level. Later, Helius' performance deteriorated rapidly due to skews in customer base and immigration restrictions, which led to recording an inevitable impairment loss in the fiscal year ended June 2019. Later on, Helius' performance started to recover. but its growth was dampened by the pandemic. Though Helios continued to be profitable post the acquisition and did not fall into the red ink, it was unable to accumulate sufficient profits as originally planned, leading to this accounting treatment. As you will see in the following slide, Helios' recent performance has been steady, and we do not expect to see another impairment loss. The next slide shows the operating profit bridge for both the full year revised guidance and the first half results. In the others line, we added the impact of RoboSoft and the put option reversal. RoboSoft's contribution to operating profit is after deduction of amortization of PPA assets. approximately 75 million yen per quarter. In the revised forecast, the annual cost of implementing the mid-term plan, 1.72 billion yen, remains unchanged. As we made our transition to normalization in the first half, the increase in recruitment cost and others was covered by the GP improvement, and this is a trend we also saw in Q1. But the progress of investments to execute the mid-term plan is still only at 32% progress rate against the full-year plan, although we made more progress in Q2 than Q1. So in the revised full-year guidance, our assumption is that we will catch up in the second half and fiscal budget will be fully consumed. On page four, we have the quarterly trends of sales and operating profit. And on page 5, we have GP, SG&A, and core operating profit. Also, please confirm the KPI assumptions for the domestic business as a part of the second half guidance on sales. On page 6, we have segment results for the first half. And on page 7, we have results just for the single quarter of Q2. We have been guiding our investors to focus on GP margin improvement during the new midterm plan. and we have now added the GP for each segment to demonstrate the progress of the domestic R&D outsourcing and overseas segments, where high margin solution businesses mainly belong. In the Factbook available on our website, we have more information dating back up to two fiscal years. Originally, we would have liked to present the solutions business, P&L, separately or maybe create a new segmentation. But for now, we will continue to disclose in this style because in the actual organization, the staffing business and the outsourced project type businesses are still mixed. For your information, the GP margin of RoboSoft, which uses an offshore delivery model, is approximately 50%, so it has contributed greatly to the increase in the GP ratio of the overseas segment. Although this is simply an M&A effect, we are starting to see progress in the strategies set forth in the midterm plan. CEO Yagi will also discuss the relation between the solutions business and the GP margin in his part. Page 8 shows the balance sheet and cash flow status. When you look at the balance sheet, cash flow status, and commitment line of credit, you can see the impact of several things we mentioned. The bridge loan for the RoboSoft acquisition made permanent by the bond issue, less goodwill and increased PPA assets due to the finalization of RoboSoft's PPA asset amount, and finally, the reversal of the put option liability at Helios. Please refer later to the table of risk assets on page 20.

From page 9 onward, I'm going to explain main KPIs for our domestic business. First, the graph shows a trend of number of engineers on the operation rate. The average of operation rate in the first half was 95.6%. We are expecting the full year average to 95.7%. 820 new graduates are expected to be on board this April. Therefore, the number of engineers will increase significantly in the month and pushing down the operation rate temporarily, but then it will recover towards June, which is a normal cycle. The next slide explains hiring and retirement. With the backdrop of a strong demand, we are able to hire 734 middle-career engineers in Q2, following 700 in Q1. As I mentioned in the financial result briefing in Q1, it is more and more difficult to hire experienced and talented engineers. In the environment where there are not sufficient number of engineers to meet the demand in Japan, we have been internally discussing the necessity of recruiting candidates more actively based on their potentials and conditions that we are going to train and educate them. We have an engineer training system that we claim to be the best in Japan, and we have many alliances with partners whom we can cooperate with in relation to human resources development. That's one of our factors which differentiates ourselves and gives us competitive advantage. In addition to this, the expanded solution business can create more OJT opportunities. It will create a great favorable cycle On the other hand, the turnover rate of full-time employees in Q2 was 7.1%, making the turnover rate for the first half 7.4%, which is below our target rate of 7.5%. We are going to continuously make the effort to keep this trend. Page 11 shows the number of active engineers per technical domain, and page 12 shows the number of engineers per customer industry, but I'm going to skip my explanation for that. Page 13 shows the trend of monthly average unit sales price, which was up 3.4% year-on-year. In addition, unit price per contract for existing dispatch to engineers is 2.1% up year-on-year. The margin of increase is on the rise. Contract negotiation in March gives us a great opportunity for charge-up or shift-up, so we are planning to negotiate more aggressively to improve the price this year, unlike last year when our main focus was to renew the contract. Page 14 shows the situation of our overseas subsidiaries, which we disclose every six months. Business in China seems that its profit rate decreases year-on-year, but 17% of open margin this fiscal year is a sufficient level even when the increased wage of last fiscal year is being included. The revenue is on the rise and new orders being obtained. It is also on the growth trajectory for both revenue and profit. The stagnant growth in Singapore is being complemented by the growth in India and Thailand. We are planning to establish a new subsidiary in Vietnam this year and trying to roll out engineer staffing businesses from multiple points in Southeast Asia. Furthermore, as we explore offshore delivery model which is committed in our mid-term management plan, we will continue to recruit talent to promote this business. Orion is updating record high quarterly performance consecutively, especially their profitable recruitment business is being successful. There's a remaining uncertainty of pandemic in the UK, but with sufficient savings from previous fiscal year, we expect to achieve our full year budget. Page 15 shows the situation of Robosoft, which financial year closes in March. EBITDA from April to December last year was 1.17 million yen, up 75% year-on-year, making the EBITDA margin 35%. Nine-month period of Robosoft P&L from October last year to June this year will be reflected in the consolidated P&L. Even with the PPA asset amortization cost, they contribute to the profit significantly. Every deal on the graph excludes the transaction expense, which is owned by sellers, adjusted by the second stock acquisition price after it was once incurred at Robosoft. The transaction expense amounted for around 100 million yen from the period of October to December last year, which is deducted from the profit of consolidated P&L. Page 16 and 17 show the revised full-year guidance on the figures per segment. The cooperating profit in the second half is expected to be below the first half, producing around 300 million yen of negative impact in the full year compared to the previous year. But we are going to spend the cost which is necessary to achieve the medium-term management plan, aiming to exceed the last year's performance. Page 18 shows a trend of dividends paid as a shareholder return. 20 yen of interim dividend was resolved at today's board meeting. The year-end dividend is forecasted to be 42 yen according to the revised full-year guidance, making the largest increase of annual dividends since the lesson. Page 22 onward is a compilation of data which is appreciated by investors to help them understand Japan's engineer staffing service market and labor market. We updated two points in our usual slides. First, please have a look at page 28. In past, we have presented the data which said 450,000 IT engineers would be in shortage in Japan. in 2030. This time we replaced the data with a graph which breaks down traditional technology and advanced technology. This external research separates traditional IT engineers who work on project contract development or maintenance operations and the advanced IT engineers who can contribute to the improvement of productivity by value creation and innovative efficiency as a new business leader who can respond to the fourth industrial revolution such as AI, big data, and IoT. As you can see, the traditional IT engineers will become oversupplied around 2026, while the advanced IT engineers will be in shortage due to the increased demand for digitalization. This research was conducted in 2019, and now that the COVID pandemic has manifested the delay of digitalization in Japan, the gap between them must be expanding. Another graph shows the trend of number of university graduates per department. According to the Ministry of Education, Culture, Sport, Science, and Technology, the number of universities of students who study science and technology is on the decline, accounting for only 18% of total graduating in 2020. As these two graphs show clearly, engineers are always required to shift their skills. It also points out the necessity to involve students with the background of liberal arts to make up for the shortage of IT engineers, which means Increasing importance of education, training, and OJT opportunities, as we continue to create value as a private company, we'd like to strive even harder to help solve this kind of social challenge. That is all from me. Thank you very much.

Thank you, CFO Mr. Hagiwara. Now, we would like to have our CEO, Mr. Yagi, deliver his presentation on the business environment and progress of the mid-term plan. Mr. Yagi? Yes, I am Yagi, CEO of TechnoPro Holdings. Thank you for your time today. In my part, I will talk about the current business environment, the progress of the medium-term management plan, and finally, our initiatives for sustainability management. On slide two, we have the update on contract renewals, a current KPI we present every six months. The bar graph shows the number of active engineers at the end of each quarter from September 2019, and the number of those whose contracts are about to be renewed is shown in light gray, and the number of those who have returned to work after their contract expiration is shown in dark gray. The line graph shows the quarterly contract renewal rate. The renewal rate at the end of December last year was 93.5%, 0.7 percentage points higher than December last year. The next milestone is March, but we continue to see no deterioration due to the pandemic, and the renewal rate is expected to be 90.4%. Now, March is a month when many projects end as most customers close their fiscal year, so usually the number of renewals is the lowest compared to June, September, and December. But this year's projection is not bad compared to 89.3% in March two years ago and 89.5% in March 2019. Although we will have to wait until the end of February to see the actual renewal rate, Since a month's notice is required to terminate a staff, we continue to see a chronic shortage of engineers, especially in IT fields. And at this point, our clients are not curbing their R&D expenditures or making major cancellations. On the other hand, about 1,500 contracts will be terminated at the end of March, and about 820 new employees will join in April. Therefore, while the utilization rate will be at its lowest in Q4 seasonally, we will focus on sales activities to promote the assignment of returning engineers and that of new engineers and work on increasing shift-ups. On slide 3, we show the quarterly trends in new orders. The bar graph shows the number of orders and the line graph shows the year-on-year growth rate for each field. Now, in the IT field, which enjoys the largest number of orders, the impact of the pandemic was hardly seen and demand continued to be strong. Now the machinery field is recovering after the drop in Q4 of FY20, that is right after the COVID outbreak, and orders in Q1 and Q2 was roughly the same as last year. Although the order level is similar to last year, we do see a stronger shift into more cutting edge technologies recently. Although the absolute volume in the chemical and biotech fields are still small, the year-on-year growth rate in Q1 and Q2 was quite high, so against this backdrop, the assignment of new grads in the chemical field this April is progressing quickly. In the construction field, there were concerns for a decrease in orders after the Tokyo Olympic Games, but demand continues to exceed last year, And the key to growth in the construction field is hiring successfully. Now, on slide four, this shows that number of mid-career hires by quarter. In order to fill new orders and converting that to earnings and growth, the key really is how many of them can we hire? In each field, you can see a V-shaped recovery after bottoming out in Q1 of FY21 when we basically froze new hiring. While we continue to focus on hiring with quality, we have been able to improve our pace to about 250 heads per month. Nevertheless, the intensity of this war for talent is increasing, especially in the IT field. So we will continue to focus on attracting and retaining people. And we are going to introduce the engineer training system as well so that we can increase the persuasion level and the satisfaction of our customers based on the market value. Our customers continue to demand for experience and high skills, and our current policy of avoiding mismatch in hiring is conducive to less retirements. So we are not relaxing our hiring standards, and this focus should help us gain better return on costs as well. However, as CFO Hagiwara just mentioned, To find ways to overcome the absolute shortage of personnel in the mid to long term, we have started internal discussions on whether we should increase hiring in some fields with more education and training. And we are working to identify the key talents and qualities we need. On slide five, well, this one is a new one that we added. and it shows the composition of IT engineers by industry. Naturally, it's quite high in the information industry at 97.5%, obviously, but also it's over 40% in transportation equipment. This is mainly automobiles, which indicates that the themes in R&D is shifting to automated driving, EVs, and IoT, and the orders that are coming in are changing accordingly. To improve our ability to respond to this cross-industrial shift to IT and digitalization, we are focusing on education and training for IT skills, not only in machinery, electronics, information, and IT, but also in the chemistry and biotech business units. Next, I would like to explain the progress of Evolution 2026 our midterm plan. We included concrete data in response to our investors' opinion that we should be disclosing information that demonstrates the progress of our solutions business. So on page 7, here we show the GP margins for both the R&D outsourcing and international segments. The GP margins here are based on LTM to eliminate seasonality. And we believe that by tracking the improvement in the GP margins as the mix of solutions business goes up, it will help us assess the progress of this business. Most recently, we saw an increase in R&D outsourcing to 24.2% and in the overseas segment to 24.8%. And RoboSoft, which provides solutions through offshore delivery, enjoys a GP margin of approximately 50% and its consolidation for three months has already been effective to the overall figures. Now, in the broad definition, the solutions business includes project-based services with conventional technologies. But here in the definition in the mid-term plan we announced last year uses the narrow definition as shown in this matrix. Although the solutions business mainly consists of project-based services using advanced digital technologies, It also includes some services using the staffing business model. Slide 8. You have seen this one in the deck when we announced the mid-term plan. It shows the flow as to how we provide solution services to customers in various industrial fields by combining digital technologies listed in the bottom with the solution offerings listed in the middle. Slide 9 shows further details on the quarterly sales, average number of engineers on assignment, and average unit sales price per month by major digital technologies and solution areas. We'd like you to especially focus on the average unit sales price. As CFO Hagiwara explained, the average monthly unit sales price for the first half was 650,000 yen, while most of the technologies and solutions listed here enjoyed 700,000 yen or more. And some of them are well over 1 million yen, as you can see. In the mid-term plan, sales of the solutions business for FY21 were ¥27.8 billion, comprising 17.2% of total sales. But in FY26, the final year of the mid-term, the solutions business is expected to achieve ¥57 billion in sales, comprising as much as 22.8% of the total. Based on the same definition as the mid-term plan, Solution sales for Q1 and Q2 this year were 8.1 billion yen and 8.5 billion yen respectively, and the mix has risen to the 19% level. Slide 10 shows the track record of training engineers who can play an active role in new technological fields through partner certification from major IT companies and alliances with startup companies. As a result of promoting high value-added services throughout the previous midterm, we were able to train a total of 1,056 AI machine learning engineers, data scientists, cloud engineers, and ERP engineers as of June and last year, and further trained 814 engineers in the first half this year. In addition, the number of qualified engineers for G certification and E certification related to deep learning used in fields such as image and voice recognition, Python, often used in AI development and data analysis, and cloud certifications such as AWS increased in six months from 651 as of June end last year to 936 as of December end. We will continue to leverage our competitive advantages such as the unrivaled massive pool of IT engineers, the best education and training programs in the industry and our track record in building ecosystems to train and increase engineers who can provide solutions to our customers and raise their charges. The results of this initiative will be communicated continuously going forward.

Slide 11 is also from the midterm plan presentation deck.

The greatest competitive advantage for the group in growing the solutions business is that we have around 20,000 engineers working for over 2,000 clients at any given time. Unlike strategic consultants and system integrators, we can capture real issues because we work on the ground with our customers, provide meticulous and optimal delivery, not just for planning and proposal phases, but all the way through to design and implementation.

Please have a look at page 12. An engineer who will recognize customers' challenges or pain points, report to our sales reps or our technologies consultant. At this stage, those challenges are still in early potential phase. That's what we call a quick report. Our sales reps and consultants make a tailored proposal for the customers utilizing lineups of solutions or use cases in service catalogs. The latest use case is compiled in the pool of use cases and reused for other opportunities. Customers' reliable needs are being escalated internally before other strategic consultant companies or our competitors catch their needs, which leads to a higher rate of exclusive orders and contracts. The exclusive order rate in the first half was 31%. Contract rate was 63%. That accounts for more than 600 million yen of revenue in just half a year. increasing the ratio of new projects, which is not just requiring additional engineers. This whole process is implemented in the system and operated efficiently. It works very functionally even in the midst of pandemic, when our sales activities were limited. We provide engineers with incentives to instill and penetrate this mechanism and promote proactive actions. Page 13 shows Robosoft's complete PMI plan. 12 billion yen of acquisition of Robosoft was the largest M&A in our corporate history. In response to a question from some investors whether we can control overseas business, Especially in India's business, PMI plan is proceeding smoothly under close communication with each other. Recent growth of Robosoft is largely credited to the current CEO. Therefore, the acquisition of Robosoft had another aspect of acquire. That's why we implemented an incentive plan to retain key talents, including the CEO. We have already initiated organizational sales activities to explore Japanese customers, and we started to get good reactions from major customers, although we have not confirmed orders yet. Furthermore, as we share the strengths which RoboSoft has and work on our research together, we will transfer the insights to our domestic businesses and cooperate with each other. Also, in order to expand our overseas business as a group, we are exploring a bulletin-type M&A opportunities. using Robosoft as the center force since it's been rolling out offshore delivery business in North America. Although the management standard of Robosoft was already high even before the acquisition since it was under umbrella of fund, we are addressing the internal control to have a necessary standard required for a listed group company. We appointed a person of our overseas department who was in charge of PMI at the end of January. He's a successor of a CFO who was one of the founder's family members and decided to resign when we acquired. The new CFO is going to be stationed in India as soon as COVID situation settles down to further strengthen our management and alliance. Page 14 explains a summary of the progress of our DX and its concrete schedule as we are often asked by shareholders on the point. In order to evolve our core business, we need to establish business model which utilizes data knowledge by further improving the talent management system which we started to work on from the previous medium-term management plan period. For the development of the new core system for our core business, we have planned to release functions step-by-step from the beginning of 2023, and we are on schedule. In order to expand solution business, we need different sales activities, different proposal approaches, marketing, delivery process from traditional staffing businesses, and we need a new system which manages balance sheet for projects. We have completed the last plan for that purpose and currently working on details and started a part of the development. In relation to the engineer development business, as we decided to replace our current LMS learning management system for a new system which enables sales and billing to external organizations, we are going to launch it by September 2022. With regard to DX promotion business, we are going to start development of AI engines, which will contribute to the maximization of engineers' lifetime value by the first half of 2022. We're working closely with the university lab to define the requirements. We also expanded the scope of usage of RPA to improve back office operation and productivity. There are three points we put our focus on with regard to a series of system development. First, priority is linkage to the business. We prioritize effectiveness in the field. Secondly, we make sure that optimization effort does not cover only a part of the system, so we form a cross-section project. Our third focus is to plan, to accumulate know-how and use cases to expand the sales utilizing our engineers as many occasions as possible. As we are certified as DX certified company last June, we will strive to promote DX for both our business and for internal management operations according to the strategy of our medium-term management plan and roadmap. The last part of my presentation is in relation to our commitment to sustainability management. Please look at page 16. As a company whose purpose is to contribute to the realization of sustainable society, we commit ourselves to sustainability agenda following the request from stakeholders. In the first half, we have completed creating internal system and foundation for that. and started to execute them in earnest. We newly established a sustainability committee chaired by myself, and in the committee we created relevant rules such as basic policies, discussed comprehensive report and the materiality. At the same time, we instituted our roadmap involving external appraisal. As we respond to TCFT, which is required to the companies who transit to prime market of Tokyo Stock Exchange in this April, we are going to discuss and implement them seriously using this sustainability committee. We updated our corporate website at the end of January and presented my own commitment to sustainability management and other more related information in detail. I hope you will visit it. Please move to page 17. Although we have already categorized our materiality into four groups, such as talent, technology, social responsibility, and governance, we significantly increased IT and quantitative index KPIs to balance out with our medium-term management plan. We also set as many targets as possible, taking the final year of the medium-term management plan into consideration, which is June 2026 fiscal year. In addition, we received same WA for the ESG score given by MSCI following the same score last year being included in the MSCI's ESG fund index. This kind of external evolution is important, but it is more essential that we don't fall into just a sustainability wash. Management efficiency heightens when business and sustainability are pursued together. We will aim to realize our purpose and improve our corporate value through our concept of expansion and reproduction, which is to solve social challenges through our business and return the profit of the business to invest into solutions of social challenges again. Page 18 and 19 show the KPIs and the target for concrete materiality. More diversity-related items, digital elements, and the number of engineers for environment-related areas are newly set as a target, as we announced in comprehensible report in last December. Going forward, we'll keep disclosing this kind of information not only for investors but also for our employees or job seekers as a way to improve retention rate and our hiring capability. For that, I'd like to conclude my presentation. Thank you very much.