Human Creation Holdings,Inc. Q1 FY2025 earnings call

• Overall 1Q Results: Total revenue hit a record high 2.013 billion yen (22.1% YoY), operating profit was 212 million yen (51.7% YoY), EBITDA was 244 million yen (43.7% YoY), also an all-time quarterly high. Gross margin rose 1.2pp YoY to 29.4% driven by improved utilization, while selling, general and administrative (SG&A) expenses grew 16.9% YoY to 379 million yen, with SG&A as a percentage of revenue falling 0.8pp YoY.
• Operational Milestones: Entered a business partnership with Pair Capital, an M&A intermediary firm, to strengthen the company's M&A growth push. Formed a dedicated new M&A promotion team, and has already secured exclusive negotiation rights and is conducting due diligence for one target company, with initial progress on track.
• 2nd Stage (2025-2027 September Fiscal Years) Strategic Transformation:
  1. Human Resources Strategy: Scale up mid-career hiring and business partner utilization, moving beyond over-reliance on the company's internal

1. Strategic Domain (consulting, contracted development/operation): Revenue of 667 million yen, 32.8% year-over-year growth, accounting for 33.1% of total revenue. The segment saw strong growth as sales efforts leveraging accumulated project results from the second half of the 2024 September fiscal year entered full swing, recovering from prior period plan misses. 2. SES (engineer staffing services): Revenue of 1.346 billion yen, 17.4% year-over-year growth, accounting for 66.9% of total revenue. Growth was driven by an 11.6% year-over-year increase in headcount and improved utilization compared to the prior year period where hiring led to delayed project assignments and low utilization. Average contract unit prices grew 3.9% year-over-year and 1.2% quarter-over-quarter.

• 2025 September Full Fiscal Year Guidance (maintained, no revision): Targets 20.1% YoY revenue growth to 8.606 billion yen, 1.9% YoY EBITDA growth to 773 million yen. The plan prioritizes accelerating revenue growth while maintaining profit levels similar to the prior year through front-loaded investment for long-term expansion.
• Full Year Assumptions: Stable full-year utilization for SES, after the 2024 September fiscal year saw low utilization in H1 and recovery in H2. Continues expanded hiring and business partner utilization to drive SES revenue growth, with a projected slight decline in gross margin due to the lead time between hiring and full deployment. Expects SG&A to increase year-over-year from higher hiring costs and strengthened management infrastructure.
• M&A-Related Guidance: M&A-related costs are not included in the current full year plan. If a deal closes in the current fiscal year, one-time transaction costs will create downward pressure on full year profit relative to the initial plan.
• Long-Term Targets: 2nd Stage (through 2027 September fiscal year): target 120 billion yen in total revenue, with a focus on scale expansion and business structure transformation. 3rd Stage (through 2030 September fiscal year): target 1000 yen EPS (pre-stock split, 500 yen post-split) and sustained ROE above 30%, with a focus on return on investment, synergy realization and EPS growth. The 4-scenario simulation for 1000 yen EPS shows the target is achievable if M&A with synergy and organic growth are delivered (simulated 1016 yen EPS under the M&A synergy scenario, 1850 yen under the full organic growth add-on scenario, though these are illustrative simulations not committed targets).

• Internal growth barriers: Slow headcount growth, limited cross-selling and upselling activity across the organization, and historically narrow M&A activity that has constrained faster growth.
• Profit pressure: Continued aggressive hiring creates a lead time between new employee onboarding and full deployment, which puts downward pressure on SES gross margin. Planned SG&A increases for hiring and organizational expansion also pressure near-term profitability.
• M&A-related uncertainty: Any closed M&A deal in the current fiscal year will require one-time transaction costs that will push full year profit below the initial planned level. No deals are guaranteed, and synergy projections for M&A are based on simulated assumptions with no guarantee of realization.
• Valuation discount: The company trades at a single-digit PER despite outperforming peer group profitability, ROE and growth, requiring sustained improvement in business, financial and IR activities to close the valuation gap.

Q: How solid is the feasibility of the 1000 yen EPS long-term target? / A: Management released four layered simulation scenarios to respond to investor uncertainty about the target. Even in the worst-case stagnant growth scenario (Scenario A, no revenue expansion), optimized capital structure and share buybacks would deliver 564 yen EPS over 6 years, doubling current EPS. Adding annual M&A of one small to mid-sized firm pushes EPS to 748 yen, adding annual 5% revenue synergy and 0.1pp margin improvement from M&A hits 1016 yen EPS, meeting the target. Adding 10% annual organic growth from existing subsidiaries pushes EPS to 1850 yen, but all are illustrative simulations, not binding commitments.

Q: What is the core logic behind the 40% maximum equity ratio capital strategy? / A: The company has a strong balance sheet with over 600 million yen net cash, 44.8% equity ratio at end-2024 September fiscal year, and generates ~480 million yen free cash flow annually with no need for large fixed upfront investment. Even mid to large M&A can be funded with existing borrowing capacity, so holding excess idle cash reduces capital efficiency. If no attractive investment opportunities emerge, excess capital will be returned to shareholders via share buybacks to maintain equity ratio below 40% and boost EPS. The strategy balances retaining reinvestment dry powder and improving returns to shareholders.

Q: What is the current progress of the 2nd Stage strategic transformation? / A: A dedicated M&A team has been formed, and the company already has an exclusive due diligence process ongoing for one target, so initial progress is solid. A revised evaluation system to encourage upselling/cross-selling has launched on a trial basis at the Hokkaido branch, with initial tangible results already emerging that will be standardized and rolled out to other branches. Hiring strategy has shifted to accelerate headcount growth by expanding mid-career hiring and external partner use, moving beyond reliance on internal graduate training. The transformation is progressing on schedule.