Persol Holdings Co Ltd

TSE:2181

Earnings Call Transcript 2023-Q4

[和田 孝雄, executive]

Hello. I am Wada, CEO of Persol Holdings. Thank you very much for coming to the financial results briefing for fiscal year ended March 2023. I would also like to share the Medium-term Management Plan that we created.

The first highlight is the financial results for fiscal 2022. Net sales were JPY 1,223.9 billion, up 15.4% year-on-year. Operating profit was JPY 53 billion, up 10.2% year-on-year, marking significant growth. Current net profit after adjustment on which dividends are based was JPY 40.9 billion, up 3.7% year-on-year. We intend to increase annual dividend to JPY 61 per share, rising from JPY 42 per share in fiscal 2021. The payout ratio rose to approximately 35%, up from approximately 25% in fiscal 2021. We acquired treasury shares worth approximately JPY 10 billion by March 31, 2023, and completed cancellation of all acquired shares in April 2023.

The second highlight is about changes in SBUs, including establishment of a new BPO SBU in fiscal 2023 and introduction of IFRS. Also, Professional Outsourcing SBU has been changed to Technology SBU, and the structure has been changed partially. IFRS will also be applied starting in Q1 of fiscal 2023. This is due to the increase in number of overseas investors, and it makes it easier to compare us to other overseas companies. At the same time, our business overseas is growing, and we wanted to make it convenient for investors to compare our overseas businesses.

The third highlight is financial forecast for fiscal 2023. As we created the Medium-term Management Plan at the same time, we'd also like to inform you that our earnings forecast for 2023 is JPY 1.34 trillion in revenue, up 7.8% year-on-year and adjusted EBITDA of JPY 75.5 billion. Annual dividends are forecast to be JPY 86, up JPY 25 year-on-year. Annual payout ratio is expected to be approximately 50%. We formulated the Medium-term Management Plan until 2026, and I will be explaining about it later.

First, let's begin with the financial outline by CFO, Tokunaga.

[Junji Tokunaga, executive]

Hello. I am Tokunaga CFO of Persol Holdings. I will explain the summary of financial results for fiscal 2022 and the forecast for fiscal 2023. The presentation material has just been uploaded on our web. And as we'd like to secure as much time as possible for our CEO to explain about the Medium-term Management Plan, I will make my part concise. However, if you have any questions about investor relations, I will be happy to answer any questions you have later on.

Starting with the overview. Sales in fiscal 2022 were JPY 1.2 trillion. Operating profit was JPY 53 billion, the same as our forecast on April 11. Adjusted net profit, which is the basis of our dividends was also the same as our forecast on April 11 at JPY 40.9 billion. This is net sales by SBU. Career SBU in the middle increased sales by roughly 40%. Other SBUs also increased sales, as you can see. This is operating profit by SBU. Career SBU grew profit substantially throughout the last fiscal year. The core Staffing SBU's profit declined slightly, which I will touch on later.

This is analysis on increase/decrease in operating profit. Gross profit grew more than JPY 40 billion in fiscal 2022. In order to continue to scale based on the gross profit, we are enhancing hiring and marketing. The following 3 pages show full year net sales, operating profit and EBITDA. Please refer to them by yourself. As it is the end of the fiscal year, we have a consolidated balance sheet. As was announced in April, there was impairment loss of goodwill, but other than that, there were no major changes year-on-year. Our equity ratio was circa 45%, maintaining a healthy status. This is the balance of goodwill. As I just mentioned, there was impairment loss posted mainly in Asia Pacific SBU, reducing it down by approximately JPY 10 billion to JPY 52.3 billion.

This is the consolidated cash flow statement. In fiscal 2022, cash flows from operating activities were JPY 52.7 billion. In addition to the capital investment of JPY 13 billion, we have done a small M&A worth a few billions of yen, making the cash flows from investing activities dropped to negative JPY 22.5 billion. This is about our capital efficiency, showing our ROIC and ROE. ROIC remains to be high, exceeding 15%. Because of the impairment loss, ROE was 11% accounting-wise, but excluding this, it continued to be high at 17%.

From this slide onwards, we have the results by SBU. The core Staffing SBU's net sales rose 7.4% year-on-year and gross profit increased steadily. On the other hand, operating profit decreased 8.1% due to a decrease in orders related to COVID-19 and the adverse effect of the revision of the act on social insurance premiums in the second half of last year. As is described at the right bottom, I would like to reemphasize that businesses are firm as staffing business grew 7.6% year-on-year. And excluding COVID-related orders, sales grew 15% in BPO.

This is Career SBU, which grew significantly last fiscal year. Performance continued to be very strong throughout the year. Net sales increased circa 40%. Operating profit almost doubled. Sales of placement business grew almost 40%, and job recruitment media grew 30%. Both businesses enjoyed brisk sales. We are seeing strong performance in April as well.

This is Professional Outsourcing SBU. As described at the right bottom, despite the tight hiring market in Q4, we were able to increase hiring of engineers by more than 30% year-on-year. We see the firm situation continuing as the operating rate was maintained high, exceeding 95%.

This is Solution SBU. This SBU continues to be in investment phase and the results are as shown here.

This is Asia Pacific SBU. Profit grew in fiscal 2022 compared to the previous year and operating profit remained steady at JPY 2.5 billion throughout the year. We plan to grow profits by promoting the APAC Medium-term Plan announced last August. This is net sales, operating profit and EBITDA breakdown of Asia Pacific SBU into PERSOLKELLY and Programmed. I would like to admit explaining about the financial results of others and adjustments today.

Next is changes in segments. And then CEO Wada will explain the new Medium-term Management Plan. Based on the strategy of the plan, we newly established BPO SBU in April. To be specific, BPO business was separated from Staffing SBU and Professional Outsourcing SBU and was established as a new SBU. The new SBU structure is as shown on the slide. This is about transition to IFRS. As was explained by CEO Wada at the beginning, in order to respond to globalization, to make it more convenient for investors to compare, we will shift to IFRS this fiscal year.

The schedule for the transition is described here. Using fiscal 2022 actual, this slide shows the transition from JGAAP-based operating profit to IFRS-based operating profit to adjusted EBITDA, which will be the most important KPI for us from this fiscal year onwards. First, last fiscal year's JGAAP-based operating profit was JPY 53 billion. Then if you reverse goodwill amortization and accrued paid leave, which is the increase in provision for paid leave in the future and add impairment loss, you will come up with the IFRS-based EBITDA of JPY 73 billion.

On the other hand, depreciation includes lease depreciation and amortization of office rent. Therefore, if we exclude this out of the adjusted EBITDA, which show our business abilities, then our business is a type of business where staffs keep increasing, which means there will be accumulation of accrued paid leave. And if we reverse staff compensation and nonrecurring profit, IFRS-based adjusted EBITDA last fiscal year would have been JPY 75.2 billion.

This is the fiscal 2023 financial forecast. On the left, we have fiscal 2022 results converted to IFRS. In the middle, we have the forecast for this fiscal year based on IFRS. Revenue forecast is JPY 1,340 billion. IFRS-based operating profit would be JPY 54.5 billion. Adjusted EBITDA is expected to be JPY 75.5 billion. We are expecting net profit after adjustment to be JPY 39 billion, which would be the basis of dividends.

This is full year financial forecast for fiscal 2023 by SBU. We are planning roughly 10% increase in revenue for the core Staffing SBU to be JPY 597 billion. For BPO, we are assuming very big revenue decline related to COVID and thus expect negative 9.3% to JPY 104 billion. We expect Technology SBU to increase by 9% to JPY 102 billion. For Career SBU, which is continuing to perform strongly, we are expecting 30% increase to JPY 137 billion.

This is full year operating profit by SBU. For the core Staffing SBU, we are expecting increase by 20% year-on-year to JPY 26.8 billion. For Career SBU, where we expect significant growth, JPY 21.8 billion, an increase of 30% is planned. This is adjusted EBITDA by SBU. As the trend is similar to IFRS-based operating profit, I would like to omit explaining.

This is dividends. As for fiscal 2022, the amount of year-end dividend per share will be JPY 40, as was explained by CEO Wada at the beginning. The annual dividend will be JPY 61. As for fiscal 2023, based on the dividend policy of 50% payout ratio announced in April, we expect annual dividend to be JPY 86 with JPY 43 as interim and year-end dividend, respectively. The following 2 pages show formula for calculating adjusted EPS and adjusted EBITDA. Please refer to them by yourself.

This slide shows total shareholder return during the 3-year period of the previous Medium-term Management Plan. Compared to the total return of approximately 150% for the Nikkei 225 and TOPIX, our total shareholder return was 270%. We will continue to track total shareholder returns as an important KPI going forward. This is all for the results of fiscal 2022 and the forecast for fiscal 2023.

[和田 孝雄, executive]

I would like to explain about the Medium-term Management Plan, 2026. First, we developed an image of the world in 2030. Based on our vision of Work and Smile, we aim to become a company creating work well-being by materializing the idea of making your work decision on your own in 2030. For this Medium-term Management Plan, we backcasted from our vision in 2030 to create the plan for 2026. We are aiming to evolve into a technology-driven HR service company in order to respond to diverse needs of working people that are constantly changing. We aim to become a company well recognized for creating work well-being.

Our goal for 2030 is to expand the potential of people and deliver good working opportunities for 1 million people. Under the slogan of Work and Smile, we will continue to pursue the path to provide value to diverse people by expanding their potential. Our group vision is Work and Smile. We'd like to create a world where all working population will be able to work and smile. We are creating a business plan, especially from 2 perspectives of people and technology. Against the backdrop of various important perspectives we need to consider, including environments surrounding us. People are changing, and we are transforming into an era where each individual is seeking well-being. Against such a backdrop, co-creation by people and technology are much more needed.

We assume that the world would transform and thus, created our Medium-term Management Plan based on this assumption. We aim to become a company that creates work well-being by expanding the potential of each individual and their freedom to work, we'd like to create a world where the well-being of individuals and the society can be maximized. For your reference, I'd like to describe how we define work well-being. Gallup identified 5 factors of well-being as physical, financial, social, community and career. We interpreted this career well-being, as work well-being, meaning people feeling joy and value of working. This can be realized by each individual deciding their own work, which would enable them to feel they are contributing to the society. We believe this would be the key. Therefore, we are going to create value focusing on this point.

To that end, on top of our existing business model, we are going to utilize technology to offer technology platform and technology services to add digital platform to our existing workforce business to offer more options to more people in work and value to realize the world we aim for.

This is the future vision in 2030. Currently, Staffing SBU is the core, supporting solid business regardless of changes in the environment, including the pandemic, as the pillar of our revenue source. On top of Staffing SBU, Career SBU will become another major pillar of revenue, driven by major growth during the next Medium-term Management Plan. And then in the next phase, we plan to put our utmost effort on Technology SBU and BPO SBU. These 2 businesses will become the group's another major pillars. And ahead of that in 2030, APAC SBU should be the other pillar, realizing a business where we have 5 major sources of revenue.

Our to be state at the time is to be a company that provides better working opportunities to 1 million people. Currently, we are serving 380,000 people. During the medium-term Management Plan 2026, we'd like to expand to serve 500,000. And in the next Medium-term Management Plan, expand to 700,000 to 800,000 and achieved 1 million people in 2030. Based on this vision, I will review the previous Medium-term Management Plan. As we set the sales and other performance targets during COVID pandemic, we were able to achieve all of them.

Looking at our results, we believe we were able to adapt to major changes in the society and were able to catch up and capture opportunities when things turned better. And during this Medium-term Management Plan, we set 5 major policies based not only on economic indicators but also on social indicators and took initiatives. We cherish social values. For example, we want our staff to become our fans. We want them to become our loyal customers. As such, we are measuring fan indicators. In terms of careers, we wanted to increase the number of independent individuals who take ownership of their own careers.

Through such efforts, we took measures to improve social values. Our 5 SBUs also took initiatives and made achievements. Economic indicators, as I mentioned, also made achievements as I explained, and we successfully managed the transformation of the SBU structure. We are now ready to advance ahead for the next phase. We had 2 major goals of identifying growth opportunities and strengthening our technology business. However, in the previous Medium-term Management Plan, we could not achieve our plan to realize a large M&A as we could not encounter any good opportunities. We were also planning to strengthen technology and to make use of it, but we have just completed the preparation phase. As such, we have again incorporated these 2 strategic initiatives as a part of the latest Medium-term Management Plan.

This is the overview of the group Medium-term Management Plan. At the basis our philosophy of creating employment, developing people and contributing to society. We will create value at 5 SBUs we have, become a technology-driven HR service company to maximize working opportunities to unlock the potential of workers to achieve the goal of creating the value of well-being to 1 million working population. We'd like to be a company that is recognized for creating work well-being inside and out and create a world full of people who work and smile, and 2026 is a milestone to achieve this ideal world.

We selected 8 materialities. There are 4 high-level items that are absolutely essential for sustainable growth, such as, for example, human rights, data governance, utilization of diverse human resources and addressing climate change. We are taking initiatives in these perspectives as well. Furthermore, through our business, we aim to offer value to the world and contribute to solving social issues. This includes creation of working opportunities. For corporates, we will take initiatives to improve work productivity and offer value. For individuals, we will provide diverse work styles, offer learning opportunities and expand the working options. We aim to lead our initiatives to realize the world of work and Smile.

To be specific, we defined 8 materialities. We will create good working opportunities for 1 million people by 2030 through initiatives we take collectively to realize the goal to create value. What is the path we take to climb this mountain. What strength are we going to use? We set 3 strengths and engines to enhance our growth. We have 3 competitive edge we should bolster. We want to enhance our strength further to establish a solid position in the market to differentiate compared to others. We are strong in attracting talent, connecting people and work. And as we understand our customers' business thoroughly, we will further build up our capability to design work.

Through such efforts, we will be able to drive the value of our services. To that end, we will take initiatives to set 3 themes of human capital, technology and learning. We will set these themes as common themes to improve for the SBUs. I would like to focus on the details of the 3 growth engines. Starting with human capital, needless to say, we are already a main player here, not only our employees, but also including the staff that work for us. We are considering how to realize work well-being for all. We plan to address this squarely. We are considering ways to attract more people and to develop talent smoothly. By example, advancing our career technology, penetrate the policies among our employees and staff to enhance well-being, at the same time, offer reskilling, upskilling opportunities for talents with expertise through schemes and educational programs to enrich opportunities.

In order to take such initiatives, we will promote diversity, inclusion and equality efforts. This is not just about women participation but also encouraging men to take child-rearing leaves. We will squarely promote such efforts to prepare an environment which offers attractive working environment for all so that we can create a world where everybody will be able to achieve well-being through work. This will be a major pillar for human capital.

The second is about technology. We will start with hiring of talents with expertise. By having more experts, we will be able to prepare a mechanism for center of excellence, which will lead to promotion of digital usage by employees and enhancement of user experience through improvement of UI/UX. Also, by introducing more personalization, we will be able to offer more convenience. We will advance ahead with such efforts. And ahead of those, we plan to prepare a technology platform, utilizing our own technology, create technology products and utilize them to lead to a leap in our business to develop the basis of growth.

Furthermore, learning is a very important topic nowadays. Companies that are able to create learning mechanisms that can offer reskilling and upskilling opportunities will be the ones to grow that enables employees to exert their full potential and attract talents. We, therefore, would like to create such opportunities. Nowadays, Japan is set to be one of the countries that learn the least. We want to contribute to improvements by exerting our capabilities to demonstrate that by learning, for example, wages would go up. People can become happier, live their own lives, and that learning provides such opportunities. We'd like to realize this through cooperation with other companies.

We are able to realize this because we know specifically what the needs of the companies are and also because we understand that businesses are changing. As I mentioned a number of times already, how do we, as Persol Group become stronger? We have clarified each businesses roles and positions to relaunch this in the latest Medium-term Management Plan this time. I'd like to reemphasize that our staffing business has very strong business foundation as we have been able to weather through economic volatility and the pandemic. We will continue to grow this business as a foundation of the group. And Career business is an area where we can expect highest revenue growth during this Medium-term Management Plan.

Going forward, we expect to see significant scaling of both placement and career change markets. Thus, we'd like to maintain a strong position. We will be proactively making investments in this area. BPO market is also growing. Including work-style reform and the pandemic, we are seeing sea change in working environment and others. We will be up-to-date creating new organization, creating new units to accumulate the latest know-how. And by utilizing technology, we will enhance our expertise, build our competitive edge and create an environment where cutting-edge technology can be utilized through our focus on technology.

Also, we have already announced a Medium-term Management Plan for APAC before. We are creating the basis for next growth in the next Medium-term Management Plan now. Things are progressing in line with the current plan, which should give you a sense of security.

Turning our eyes to R&D. We have been changing from SBUs before, and we are ready to make investments for future growth. We want to plant seeds for future development. In terms of ambidextrous management, it consists of evolution and exploration. We will steadily explore and embody functions such as 0 to 1, at the same time, incubate new businesses and maybe incorporate them into SBUs. We would like to take such initiatives in the future.

Now talking about changes in fiscal '25 portfolio, we believe that how we look may change slightly with the growth of Career SBU. The growth is expected to be on par with or even exceed the growth of Staffing SBU. I believe this is something that can be realized during this medium-term management plan.

I'd like to talk a little bit about Career SBU. Freelance area will grow, but not only that, we believe there lies a great opportunity in high-class area, meaning people with annual income of JPY 6 million or more. We would like to enhance the direct recruiting area. We are aiming for a revenue of JPY 210 billion in 2025. We are planning for a great leap during this Medium-term Management Plan to achieve adjusted EBITDA of JPY 43 billion scale. We have special strength that we'd like to have all of you recognize. We have job board for recruiting, which is unique to us. We have end-to-end database, which is our strength. Our service lineups are not disconnected independent services, but rather they are connected in multiple layers. This enables companies to search in any way they want so that they will be able to secure resources they seek. And from the individual's perspective, they will be able to find the best match out of the variety of options. We have such a mechanism in place at our Duda database.

We are constantly refining our matching logic and making improvements so that our services can be utilized in very convenient ways. Going forward, we do not intend to use our Duda database for personnel recruitment and placement only, but utilize it as opportunities for individuals to develop their own careers by finding growth opportunities and futures of their long careers to take advantage of this for a long period of time instead of just for onetime placement. By realizing such a platform, we will be able to maintain long relationship. I believe this will be the driver of growth for our career SBU.

As you readily know, BPO market will expand. We are overwhelmingly strong in customer attraction. We will enhance the design skills further as this is the key to win. We are targeting revenue of JPY 130 billion, adjusted EBITDA of JPY 12.5 billion. We will prepare ourselves this year to secure future growth. We will focus on work design capabilities. We believe that we will lead to valuable service lineup for the corporations if we are able to hire and develop such talents. Even now, projects, including work in progress are becoming sizable. We really feel the change in types of demand. BPO needs to be able to create an environment where we can capture this opportunity by offering value.

The key in technology is how to secure our resources, utilize them and develop their skills and how they would be evaluated fairly by corporates. Engineers take pride in their work. They have the mindset to create future standards. Many of our engineers have such passion, and thus, we believe we will be able to grow, combining the contract work and temporary staffing work through the cycle of hiring and developing talent. There is a synergy of valuable projects, valuable engineers and attractive initiatives established already. So as we get attractive work, good talents will gather. And when good talents gather, great work can be achieved. This cycle is already well established. This requires the fundamental platform, customer base and financial base.

Let us now take a look at the Medium-term Management Plan from a financial perspective. As for adjusted EBITDA, we aim to achieve JPY 100 billion in the fiscal year ending March 2026. As for financial discipline, we will manage our business with the criteria to achieve ROIC of 15% or more and ROE of 18% or more. In terms of financial soundness, our net DE ratio should be maximum 1x. Net debt EBITDA ratio should be 2x at maximum.

We would like to realize this considering the soundness of the business discipline and growth. As for future cash allocation, we believe we will be able to generate cash flow of circa JPY 200 billion in the coming 3 years. We will be allocating this appropriately. One of the keys would be shareholder returns. We would like to continue to realize payout ratio of 50% as a standard. And the reason why we believe we will be able to generate JPY 200 billion is because of adjusted EBITDA from fiscal '23 to fiscal 2025. We would like to realize JPY 100 billion in fiscal '25. We will also aim for an ROE of 18% or more and ROIC of 15% or more.

As I mentioned earlier, we can generate cash of JPY 260 billion in the coming 3 years. But naturally, there's tax. And after deducting that, against the remaining JPY 200 billion, we will need to spend around JPY 50 billion for software development. We are considering splitting the remainder into dividends and growth investments. We will be offering payout ratio of 50%. We would like to continue to have our shareholders support us.

Last of all, I'd like to touch on the group governance. We are introducing third-party views as well and believe we are evaluated as our engagement level is higher compared to other companies. On top of that, we have established sustainability committee. We are also reinforcing gender diversity committee and the well-being of our staff. These 3 committees are a part of our governance scheme. I'd like to repeat again that this is our future to be state. We have backcasted to create working opportunities for 1 million people. We aim to take steps in growing offering 500,000 work by 2025 first and then aim to grow to 800,000 work in the next Medium-term Management Plan. To that end, we will utilize the power of technology to become a technology-driven HR service company.

As for technology talent, we will be building a structure with 2,000 engineers during this Medium-term Management Plan, which will enable us to become more tech savvy.

Last of all, to wrap up, we have a vision of Work and Smile. I'd like to state that we will become a work well-being creating company to realize this. And in 2023, we will take a step to creating work opportunities for 1 million people and create a strong wave by accumulating small moves. We are once again committed to creating good working opportunities for people throughout the world that would definitely lead to Work and Smile.

To realize this vision, we need to use technology thoroughly and evolve into a company where we recognize ourselves and also be recognized as a technology-driven company. We are aiming for adjusted EBITDA of JPY 100 billion in 2025. We'd like to grow together with our shareholders and thus are aiming for a dividend payout ratio of approximately 50%.

This was the overview of the Medium-term Management Plan. We have more details of each SBU in the appendix. Please refer to them by yourself when you have time. We are not aiming low, but are chasing a high-stretched theme towards 2030. Having said that, we have also been able to map our path towards achievement. We are committed to realizing this. Therefore, we hope you will feel safe and would like to ask for your continued support. Thank you very much for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]