DMG Mori Co., Ltd. (6141) Earnings Call Transcript & Summary

[Interpreted] Hello, everyone. I am Masahiko Mori, President of DMG Mori Co., Ltd. I'd like to report the financial results of the first half of 2021. Here's today's content. First, I will talk about the financial summary of the first half of 2021. First half order intake was JPY 218.4 billion, increased by 61% year-on-year. The quarterly order intake was JPY 117 billion, doubled from the second quarter in 2020. It was also significantly higher than the original plan of about JPY 100 billion. Machine order backlog in the macro recovery increased, too. Accordingly, we have revised the full year forecast upward. I will explain the detail later. Although it is still not sufficient, we plan annual dividend of JPY 30 per share, increased from the original plan of JPY 20, JPY 10 for interim and JPY 20 for year-end dividend. We issued convertible bonds of JPY 40 billion. With new capital, we are accelerating carbon-neutral solutions and growth in China, U.S.A. and other emerging markets so we can meet the demands in a timely manner. Concerning our climate change actions, we declared adherence to TCFD. We will proactively disclose relevant information in the future in accordance with the TCFD proposal. First half's consolidated order intake was JPY 218.4 billion; sales revenue, JPY 178.2 billion; operating profit, JPY 10.2 billion; earnings after tax, JPY 6.1 billion. Although we have not reached the level of 2019, we have seen a rapid recovery. In addition to the upward trend of order intake, there was a positive impact from the weaker yen against euro. We will utilize this opportunity to further reinforce our financial structure. Operating profit bridge. The positive factors were JPY 5.1 billion by higher business borrowing, JPY 2.5 billion by foreign EX gain, JPY 1 billion by gross margin improvement driven by high value-added solution with higher sales price per unit. On the other hand, the marine freight has spiked and led to increased cost of JPY 800 million. As a result, the first half operating profit was JPY 10.2 billion. Quarterly results. The sales revenue in the second quarter was JPY 97.1 billion, a little less than the same quarters in 2018 and 2019. However, you can see a significant improvement in operating profit. Stringent management in SG&A and continued efforts to improve productivity since last year have borne fruits. We plan to increase personnel costs to reward our employees' hard work, but I'm confident that we can minimize the impact of cost increase with our reinforced financial structure. Cash flows. Due to the increased order intake, we have received more down payment, especially in Europe, Asia, China and the U.S. In China and Asia, we only count order intake after receiving down payment. It is one of the reasons for better cash flows. In the second quarter, the free cash flow was JPY 10 billion. With CapEx proceeding as scheduled, we expect the full year cash flow to be JPY 15 billion, although it is rather a conservative forecast. Balance sheet summary. Inventory increased a little bit in preparation for expected sales growth in the remaining year. But we should be able to reduce the amount soon, and I will explain how shortly. Stronger financial basis. In addition to the convertible bonds, we will raise JPY 30 billion at maximum through hybrid capital. We have issued JPY 40 billion of convertible bonds on July 16, and we'll issue JPY 30 billion of perpetual subordinate bonds by September 2, which will be used for loan payment. In addition to the investment in carbon-neutral manufacturing, we are now building product development center. It is located in front of JR Nara Station and is only 30 to 40 minutes away from Kyoto and Osaka. The exterior was designed by Mr. Kuma Kengo. The grand opening is planned in June 2022. We are also building a new factory for manufacturing green casting in a beautiful historic city of Izumo, Shimane Prefecture. The new facility will produce recyclable casting components with its cutting-edge electric furnaces. It uses carbon-free energy, too. We are aiming for smaller carbon footprint throughout the supply chain of our machine tools. As for the investment in growing markets, we are building a new factory for 5-axis machines in a city near Shanghai, China under the permission of BAFA. BAFA is an export control authority in Germany. We are also spending JPY 4 billion to expand the Tianjin plant, which is operated under the approval of Japanese government. We implement 1.5 shifts a day and produce 500 units per year, but we will raise the production capacity to 1,000 units. For the first time as DMG Mori and a machine tool maker, we will build a factory in Africa. The new plant in Egypt will be mainly built on government funds, and DMG Mori will share the know-how. We plan to produce vertical machining centers and horizontal turning centers there. They will be simple but precise and robust. It will hopefully contribute to the development of local operators and Africa's industrialization. The full year forecast. Given the favorable pace of orders, we should be able to achieve at least JPY 420 billion in order intake. We are expecting JPY 365 billion in sales and JPY 20 billion in operating profit, both of which are a little conservative. We strive to seek much higher figures. The mid-term profit outlook. We lowered the breakeven point in 2020, and we intend to keep the cost structure to achieve a record-high operating profit in 2022. However, it also depends on how fast we can turn the order intake into sales revenue in 2022. Delivery of some components, including semiconductors, is often delayed lately. Marine traffic is busy, too. The building construction around the world is also 2 to 3 months behind schedule, and sometimes our customers fail to accept our machines on time. At [ IOA ], our plan is to achieve JPY 420 billion to JPY 430 billion in 2022 and JPY 450 billion to JPY 500 billion in 2023. As a generic tendency in the machine tool industry, the next economic adjustment phase may come in 2024 or '25, but we will survive the phase by lowering the breakeven point as in 2020. We will continuously strive to pay dividends to shareholders as well as to repay debt from profits. We also work on increasing compensation for employees in proportion to profit. Financial targets. We aim for the shareholders' equity ratio of 52% by the end of 2023. The remaining question is how to deal with hybrid capital. I will continuously discuss with internal and external parties how much hybrid capital we should keep in the future. In 2024 and '25 and beyond, we will need to invest more in the future business growth and M&A. Therefore, we must achieve these goals and reinforce our financial structure by 2023. Business environment. The red line shows the total order intake of JMTBA members. The black line is the sum of 7 major machine tool builders excluding DMG Mori. And the blue line is DMG Mori. Looking back the past 13 years, the blue line has been gradually keeping larger distance to the red line. After reaching a record high, our order intake declined from 2018 to 2020. However, this time, we could limit the decline compared to the industry average and our peers. Also, our order intake is recovering more quickly than average. I am convinced that our business strategy to promote 5-axis machines, process integration, automation and product solutions directly to the customers over the world, not limited to major markets, will certainly bear fruits in 2022 and 2023. Order intake by region. Our Q3 forecast is rather conservative, but we will be able to receive at least the same level of order intake as Q2. Usually, our order intake in August remains low due to summer vacation. But this year, our forecast for August looks quite positive. This is because many companies are forecasted to adjust their investment planning as a result of worldwide spread of COVID-19 during the last year. We have a strong order intake in July. Based on these facts, I'm certain that our Q3 order intake will exceed the result of Q2. Next, transition order intake by region. As you see, Germany and Europe are very important markets for us with a quick recovery. Order intake from Americas remained very stable. Chinese market is growing. I expect our order intake from China in 2023 or '24 will be almost at the same level as Americas. Asia is recovering and growing steadily. Our goal is to achieve JPY 10 billion order intake per quarter and JPY 40 billion per year. I assume the market volume in Japan will trace the historical trend. Order intake composition, first by industry. Order intake from machinery, SMEs and semiconductor industries have been growing continuously. Order intake from automotive decreased from 30% in 2000 to 12%. Over 50% of them are investment for producing electric or hybrid cars. The demand from die and mold is increasing. The market needs new types of die and mold to produce home appliances and automotive. Medical has been growing continuously. Looking at the machine model. Over 70% of the demand comes from the machines suitable for automation, 5-axis, mill turn and horizontal machining centers. We will maintain our leadership in these segments, promote automation and differentiate ourselves from peers. Looking at our customers by company size. Most of our customers have less than 500 employees. Last year, we produced only about 5,000 machines. This year, we will produce 8,000 machines and next year 10,000. We deliver our machines to high-end users, and our machines' average price is high. This means we do business with customers who deal with advanced cutting-edge machining solutions. Even the world's largest manufacturers do not buy 5,000 units of machine tools per year, but thanks to our customers, we are accumulating rich know-how in machining technology, installation and operators' training. We will deliver this accumulated know-how and experience back to our customers together with machines, and we will grow together as reliable technology partners. This is our strategy. Average price of order intake. Due to the impact from worldwide spread of COVID-19, our order average price dropped in the fourth quarter of 2020. But since then, we have been recovering steadily in both Japanese and euro basis. The latest average price is coming back close to record high. Transition of order intake and backlog. Our order backlog is increasing again. Ideally, our order backlog should be maintained between JPY 150 billion to JPY 200 billion in order to keep the delivery time at about 10 months. The delivery time should not exceed 12 months. We will produce efficiently and keep our stock machines at minimum. We will shorten the time for machines production but invest more time for adjustment of automation and peripheral equivalent. We will fully utilize our system solution plan and facilities to capture growing demand for turnkey projects. Focused topics. First, process integration. It is a single machine, NTX1000, but combined with IMTR, in machine traveling robot, it can replace 3 units, 2 turning machines and 1 vertical machining center and automatize the machine process. Previously, we needed 3 operators for 3 units and parts in progress, fixtures, shafts were waiting to be set up between the 3 machines. Such production line is expensive, too, approximately JPY 70 million in total. NTX1000 with IMTR are not cheap either, but they can reduce the footprint and finish all the processes in one machine. Previously, we tried to improve dimensional accuracy of each process, but by completing all processes into one, we can minimize the volumetric distortion and eventually improve the volumetric accuracy. Please see this video. [Presentation]

[Interpreted] IMTR can be customized. FANUC and Nachi-Fujikoshi are standard, but we can offer Yaskawa, KUKA, and ABB if requested. As shown in the video, it can machine a gear-shaped part. This system can eliminate the parts in progress stuck between machines. We learned one thing during the 15 months of COVID-19 pandemic. We used to participate in major tradeshows in Tokyo, Chicago, Hanover and Milan. In such events, we exhibited dozens of machines, each of which costed several million yen. Including the activity in machine transportation and setup costs, we spent around JPY 10 billion annually. Since COVID-19, we have switched to weekly private shows. We used the machines in each showroom, so the cost was minimal. We invite several customers at a time, 20 to 30 customers at maximum, to the weekly shows. We have held such events in Iga and Tokyo in Japan, Davis in the U.S., Tianjin in China, Pfronten and Seebach in Germany and Bergamo in Italy. It has been very effective from the customer's viewpoint and also motivated our sales and factory staff and encouraged discussion between different parties. This experience once again made us realize the importance of having a direct close communication with each customer. We don't have to invest too much in major shows. Instead, we can share our products' basic information on Digital Twin Showroom and hundreds of our YouTube clips. Basic technical trends and machining conditions can be checked through these digital contents. If customers are willing to see test cuts or demonstrations, they can come to our showrooms. We will continue to combine these 2 approaches in the future. With the factories around the world, we are confident that we can meet each customer's requirements. Next, digital content. Together with Mr. Saito from Iriso Seimitsu, a leading company in ultra-precision products machining, we created this digital textbook called 100 examples of 5-axis indexed machining. It gives a sense of how the 5-axis index and simultaneous machining work and helps the beginners introduce 5-axis machining without hesitation. my DMG MORI, our portal website with 40,000 members, started to give online courses, too. Digital twin test cut is one of our new innovations. Taking the dynamic and static characteristics of machines and workplaces into account, it can almost perfectly simulate a real-life machining. Of course, the final acceptance should be done with actual machines. But with this new technology, we can complete test cuts in 2 to 3 days instead of the previous 1 week or sometimes even 1 month before inviting the customers to showrooms for final acceptance. Next, recent trend of EV market. Please see this video. [Presentation]

[Interpreted] EVs require less parts, but their manufacturing metals are totally different from conventional parts. EVs need a very robust battery case combined with the floor. They have a motor case very similar to a machine tool spindle. To reduce weight, present plastic dies are often used, too. Large-sized [ die boxes ] machines are suitable for such applications and are becoming popular among EV makers. We have mostly completed the renovation of Iga campus, and now we are moving stand-alone machines assembly area from Nara Campus to Iga. We will start such a location this autumn. This will make Iga Campus the biggest machine tool assembly and core components plant in the world. Spindles, bolts, screws, magna-scale products will be continuously produced in Iga. On the other hand, Nara will be fully renovated to system solution plant. We will expand the current system solution plant, and it will be 4x bigger than the current gross space by the end of 2023. The current facility sales system solutions were JPY 10 billion per year, excluding the machine body sales. By the end of 2023, the sales value will rise to JPY 40 billion. We will invite potential turnkey customers from all over the world, give them factory tour during the weekdays and Nara and Kyoto tour over the weekend in their mother language and offer operator training in this facility. Less complicated, standardized automation system can be manufactured in Davis or in Tianjin, too. We have another high-end system solution factory for German-made machines in front end. And other neighboring plants can also offer simple automation systems of several million yen. Our German factories will share technical know-how with the new factory in Cairo, Egypt, which will be built by the autumn of 2023, mostly on our partner, AOI's plant. This plant will produce relatively simple vertical machining center and turning centers. It will be our gateway to Africa. By developing operators and producing basic machines there, we would like to contribute to the industrialization of Africa in the mid to long term. Now let's talk about our new innovation, large capacity tool magazine. Such product is very popular in Americas and Northern Europe, where the productivity is higher than other regions. Our tool management and scheduling software can handle up to 4,000 tools. This product is already up and running in Germany, Sweden and some other countries. The list prices are around JPY 1 billion, and we deliver around 2 to 3 sets every month. This slide shows the hardware only, but the software has great features, too. It can be connected to the customer's ERP system, for example. It is a highly sophisticated system that enables both hardware and software alignment with the existing production system. More and more customers proceed with automation. We developed a new product, built-in mist collector zeroFOG, to eliminate fog or mist during the automated machining process. Customers no longer have to purchase a separate mist collector. The compact device is integrated in the machine, saves energy and creates a safe and comfortable working environment. I wondered why it took me so long to identify the need for this solution. This solution is very effective and supports customers to reach their goals for sustainable development and CO2-free production. We will deliver this solution as standard to our machines. We are ready to deliver this even to users of other manufacturers' machines. DED stands for Direct Energy Deposition. DMG Mori offers 2 types of manufacturing machines: SLM or powder bed type machine and DED. We develop them in both Japan and Germany. Our Japanese engineers are specialized in DED machines based on mill turn machines. All the emerging companies in space travel industry are our customers. Our DED machines are indispensable for production of rocket motor and nozzle. This is Ms. [ Hirono ]. She is in charge of the development of this machine and gives you a brief introduction.

This is the brand-new AM machine, LASERTEC 3000 DED hybrid. We just finished our assembly, and I believe this would be the world standard turn and mill AM machine. We will have a live Q&A session. So don't hesitate to ask anything about the axis manufacturing. Please continue to enjoy. Thank you.

[Interpreted] We showed this video at an economic convention. U.S. customers use this machine for production of rocket parts. Currently, many Japanese customers use DED technology for repairing existing parts. However, we see a growing demand for applying DED for die roller production. Electric vehicle and battery production or semiconductor industry require thin parts sliced by die rollers. And here, Japanese companies with accumulated know-how in dealing with films and textiles have an advantage. With the DED machine, you can build solid and durable knives on the die roller by combining additive and precision cutting technologies. This is a very promising market. Next topic, sustainability. First, we support the TCFD recommendations. We have already been doing our efforts before, but now we declare our joint commitment as Co. and AG. We will further enhance the disclosure of information on climate change in accordance with TCFD recommendations. Carbon neutrality is another major topic. The idea is that 50% of our currently consumed power will be provided by solar energy. And this does not mean purchasing such energy. Iga and Nara Campus are relatively vast so that we can cover 70% to 80% of our roofs with solar panels. Of course, the amount of power generated differs according to the weather condition, but the target is that we provide 50% of our used power with solar energy. Also, we will reduce our power consumption by 25% over the next 5 years. We will do so by process integration and energy saving technology. The remaining 25% are reduced by purchasing carbon-free energies such as solar, wind or hydroelectric power. This will make us 100% carbon neutral. Finally, health management. We pioneered in carrying out workplace vaccinations. In Nara, we also offer public officials of the local government a chance to receive their shot at our facility. We are moving at a very good pace. On August '20, 95% of all employees in Japan have received their shot. We have learned a lot from the vaccinations. We fostered very good relationships with private universities in West and East Japan that is in Nara and Nagoya as well. Therefore, we prepared sufficient medical staff during vaccinations. But some tasks will remain. For example, the side effects for especially young people after the second vaccination. We want to continue to provide a special leave to ensure that no one has to worry. Also, we regret that our vaccine rollout was too slow in Asia. Some employees choose not to get a shot. Under such circumstances, it is necessary to consider how to operate our business. We will proceed with our initiatives in this regard group-wide. As one of the biggest communities in the society, we will continue to invest more in health management. That is all. Thank you very much for your attention. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]