Azbil Corporation (6845) Earnings Call Transcript & Summary

Thank you very much for joining Azbil's Fiscal Year 2025 Second Quarter Financial Results Briefing. We appreciate your time and interest. I am Yamamoto, President and CEO of Azbil Corporation. I will try to provide a clear and comprehensive explanation of our financial results and initiatives. Let me begin by outlining the key points I will cover today. First, consolidated financial results for fiscal year 2025. Orders received and net sales declined year-on-year due to the impact of the divestiture of our subsidiary, Azbil Telstar, in the previous fiscal year. However, operating income saw a significant year-on-year increase driven by growth in the Building Automation and Advanced Automation businesses exceeding our initial plan. Excluding the impact of the divestiture, both orders received and net sales increased on a real basis. Second, consolidated financial plan for fiscal year 2025. Based on the first half results and our outlook for the second half, we have revised our original consolidated financial plan upward. While net sales are expected to slightly decline due to the previous year's divestiture, operating income is projected to increase for the fifth consecutive year. Third, shareholder returns and investments in human capital. There are no changes from our previously announced policy. We plan to increase dividends for the 11th consecutive year, targeting an annual dividend of JPY 26 per share and a DOE of 5.6%. In addition to acquiring and canceling treasury shares, we have also utilized treasury shares to invest in human capital. Lastly, progress in implementing our medium-term plan. Under the theme of evolution and co-creation, we are actively investing in areas such as human capital to expand sales and improve profitability through our group's unique business model. We have made steady progress during the first half of the fiscal year. Today's presentation will cover the topics shown here. To begin, I would like to present the consolidated financial results for the first half of fiscal year 2025. Orders received increased in the Building Automation business. However, due to the divestiture of Azbil Telstar in the previous fiscal year, orders received in the Life Automation business declined significantly, resulting in a total of JPY 165.0 billion, a year-on-year decrease. Net sales increased in both the Building Automation and the Advanced Automation businesses. However, the decline in the Life Automation business led to a total of JPY 132.8 billion, also representing a year-on-year decrease. Excluding the impact of the divestiture, both orders received and net sales increased on a real basis. Operating income reached JPY 17.7 billion, exceeding both the previous year and our initial plan, driven by initiatives to strengthen profitability, including cost pass-through measures. Ordinary income totaled JPY 18.3 billion, surpassing both the previous year and our plan, thanks to the increase in operating income and foreign exchange gains. Net income attributable to owners of the parent increased year-on-year to JPY 13.4 billion, also exceeding our plan despite the absence of gains from the sale of investment in our U.S. subsidiary. Here is a summary of the financial results by segment. From the next section onward, I will provide a more detailed explanation of each business. Let me start with the Building Automation business. In Japan, demand for new office buildings and urban redevelopment projects has leveled off at present. However, the overall market outlook remains robust and demand is expected to continue at a high level. Retrofit demand continues to be strong and overseas investment remains robust. Under these conditions, orders received increased to JPY 100.6 billion, a year-on-year rise. This was driven by growth in the existing buildings, an increase in overseas business thanks for large-scale projects and steady performance in the service business despite fewer multiyear service contract renewals. Sales totaled JPY 64.5 billion, exceeding both the previous year and our plan. While overseas sales declined due to large projects recorded in the previous year, the new buildings segment maintained a high level and steady growth in existing buildings and services supported by load leveling initiatives contributed to the overall increase. Segment profit reached JPY 8.3 billion, significantly exceeding the previous year in our plan. Although R&D expenses, personnel costs, DX-related expenses and outsourcing costs increased, the higher revenue and enhanced profitability measures, including cost pass-through, led to a substantial improvement. Next, the Advanced Automation business. The process automation market in Japan continues to perform firmly, particularly in maintenance and refurbishment demand. In contrast, the factory automation market shows signs of recovery in some areas, but the pace remains subdued and varies by region and sector. With regard to orders received, while the domestic process automation market remains strong, the recovery of the factory automation market was delayed. In addition, large overseas orders had already been recorded at the end of the previous fiscal year. As a result, orders received declined to JPY 47.0 billion, representing a year-on-year decrease. Sales increased to JPY 52.9 billion year-on-year driven by growth in process automation both in Japan and overseas. However, due to the delay in the recovery of the factory automation market, results fell short of the plan. Segment profit increased significantly to JPY 9.0 billion, achieving our plan. Despite the increased R&D expenses, personnel costs, other expenses and investments in overseas market and DX, profitability measures including cost pass-through contributed to the improvement. Let me conclude with an overview of the Life Automation business. In the Lifeline field, which includes gas and water meters, stable demand is expected to continue in Japan, mainly driven by legally mandated meter replacements. In addition, demand for smart meters and data utilization is expected to grow. In July, we reached an agreement to collaborate with Kamstrup, a Denmark-based company known for its expertise and a strong track record in leak detection cloud services. In the residential central air-conditioning systems field, rising construction costs have had a negative impact on new housing starts. Orders received declined to JPY 18.1 billion due to the divestiture of Azbil Telstar. Sales also decreased year-on-year to JPY 16.0 billion and fell short of the plan. While water meter sales increased, gas meter sales did not meet expectations. Segment profit was JPY 0.3 billion, a year-on-year decline. Despite efforts to strengthen profitability and reduce costs, the impact of the divestiture, rising personnel costs and higher material prices led to a decrease, and results fell short of the plan even excluding the impact of the divestiture. I will touch on overseas sales by region. In the Building Automation business, sales declined in Asia due to the absence of large projects recorded in the previous year. In the Advanced Automation business, sales decreased in Asia and China but increased significantly in North America, resulting in overall growth. In the Life Automation business, sales declined due to the divestiture of Azbil Telstar. As a result, the overseas sales ratio stood at 18.2%. Please note that the graph and tables in this slide exclude Azbil Telstar to clearly show the impact of the divestiture on overseas sales. As shown here, this is our current consolidated financial position. Assets decreased because net sales concentrated in the fourth quarter of the previous fiscal year and subsequent collections progressed during the first half, resulting in a reduction in accounts receivable and related items. Liabilities increased due to the re-adoption of the trust-type employee shareholding incentive plan as part of our investment in human capital and employee welfare measures, leading to an increase in long-term borrowings. On the other hand, current liabilities such as income taxes payable and provision for bonuses decreased. Net assets declined due to the acquisition of treasury shares and dividend payments despite the recording of net income attributable to owners of the parent. Next, I would like to explain our consolidated cash flow status. Cash flow from operating activities remained at the same level as the previous year. Cash flow from investing activities decreased by JPY 3.7 billion year-on-year and free cash flow decreased by JPY 4.2 billion. This was mainly because we recorded proceeds last year from the sale of some investment securities and equity in our U.S. subsidiary while there are no such major proceeds this fiscal year. Cash flow from financing activities decreased by JPY 12.4 billion, primarily due to increased expenditures for the acquisition of treasury shares. Now I will explain our full year consolidated financial plan for fiscal year 2025. As announced on October 30, we have revised our initial financial plan upward. Here is our consolidated financial plan. Based on strong first half results and a robust market outlook supported by a healthy backlog of orders, we have revised our full year financial plan upward. Net sales are expected to decline year-on-year to JPY 298.0 billion, but operating income is projected to increase for the fifth consecutive year, reaching JPY 45.5 billion. Despite ongoing uncertainties such as inflation and rising costs, the business environment surrounding the Building Automation business remains solid. In the Advanced Automation business, recovery in the factory automation market has been slow, but a gradual recovery is expected in the second half. While we anticipate increased costs from inflation and personnel expenses, we plan to achieve profit growth through strengthened profitability measures and improved operational efficiency via DX initiatives. Net income attributable to owners of the parent is expected to decline compared with the previous year, which included a JPY 7.6 billion gain from the sale of Azbil Telstar. This slide illustrates our financial plan by segment. In the Building Automation business, following strong first half results and a robust market outlook supported by a healthy backlog of orders, we expect second half sales and segment profit to remain in line with our initial plan and have revised our full year financial plan upward. We now expect sales of JPY 154.0 billion and segment profit of JPY 27.0 billion. In the Advanced Automation business, supported by solid demand in the process automation market and a gradual recovery expected in factory automation during the second half, we aim to achieve our initial sales plan. Segment profit is expected to reach JPY 17.5 billion, revised upward because of profitability enhancement measures despite rising personnel costs. In the Life Automation business, although full year results are expected to show a year-on-year decline in both sales and segment profit, we anticipate achieving our initial plans of JPY 34.5 billion in net sales and JPY 1.0 billion in segment profit, mainly driven by growth in the Lifeline field. This slide provides a detailed financial plan by segment. It provides further details on the business environment of each segment discussed earlier. It would be appreciated if you could take a look at your convenience. Next, I would like to explain our approach to shareholder returns and investment in human capital. Based on our basic policy of enhancing shareholder returns, investing in growth and maintaining a sound financial base, we continue to operate our business and make investments, conscious of the cost of capital. We are actively investing in business development, R&D, capital expenditures and promoting DX and human capital. Regarding dividends, there is no change to our plan announced in May to increase dividends for the 11th consecutive year. We will proceed with the interim dividend for fiscal year 2025 as planned at JPY 13 per share. In terms of share buyback, we repurchased our own stock with a value of JPY 14.9 billion and canceled treasury shares worth JPY 20.0 billion. As part of our investment in human capital, we readopted the trust-type employee shareholding incentive plan, utilizing the treasury shares worth approximately JPY 6.5 billion acquired from the market. This graph illustrates the trend in shareholder returns. The dividend on equity, or DOE, is expected to reach 5.6% by the end of fiscal year 2025. Now I will explain the progress in implementing our medium-term plan. Our medium-term plan for fiscal year 2025 through 2027 is built around the theme of evolution and co-creation. Through the Azbil Group's unique business model, we aim to achieve both sales growth and improve profitability while actively investing in human capital and other key areas. Our ultimate goal is to contribute to the well-being of society and our employees through sustainable growth. Building on the results of our profitability enhancement initiatives in the previous medium-term plan and leveraging our long-standing relationships with customers, we will pursue further growth by investing in new business domains and proactively allocating resources to strengthen human capital, product competitiveness and promoting digital transformation. As mentioned earlier, the strong performance in the first half of fiscal year 2025 has led us to revise our full year consolidated financial plan upward, marking a solid start to the first year of the medium-term plan. This slide explains the unique business model of the Azbil Group. We aim to expand our business through two pillars: in our core businesses, built on strong relationships with a broad customer base established over many years; and the growth businesses, which address emerging societal challenges such as carbon neutrality and leverage technological advances in areas of semiconductors. In our growth businesses, we are focusing on strengthening product competitiveness to expand into overseas market and enhance our competitiveness. By expanding our customer base through the growth businesses and improving sustainability and profitability in the core businesses, we aim to create a cycle of continuous expansion, cycling from the growth businesses to the core businesses and back to the growth businesses again. This slide outlines the business strategies and performance targets for each segment. We are implementing tailored measures based on the business environments and characteristics of each business and region with the goal of achieving sustainable growth. Here, we introduced initiatives related to product development and business expansion that were announced via news releases earlier this fiscal year. Progress has been made in both the growth and the core businesses, including the launch of new products and increased customer adoption. We are also advancing collaborations with other companies. The following slides provide highlights and examples of these announcements. For more details, please refer to the News Release section on our corporate website. This slide highlights a recent news release introducing a new series of control valves, an area of strength for the Azbil Group. This slide showcases examples of our recent product installations at customer sites. In the Building Automation business, green transformation, one of our key initiatives, is showing solid results particularly through our energy service company, or ESCO projects. This slide highlights our efforts in business development initiatives through business alliances and investments. As mentioned earlier in the financial results section, we have agreed to collaborate with Denmark-based Kamstrup in the Life Automation business. Through this collaboration, we aim to contribute to addressing Japan's water infrastructure challenges and drive business growth. Finally, I would like to briefly introduce our exhibition activities. We have participated and will continue to participate in various exhibitions both in Japan and overseas, where we showcase the Azbil Group's products, services and distinctive solutions. While some events have already concluded, we warmly invite you to visit us at future exhibitions to gain a deeper understanding of our company. That concludes my presentation. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]