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

Hello, everyone. These are the financial results for the fiscal year 2021 of DMG Mori Company Limited. Please look at the table of contents. First is the financial summary. Consolidated order intake amounted to JPY 456 billion in fiscal year 2021, which was an increase of 63% compared to the previous year. This was also above the original plan, and we are convinced of a strong recovery. Machine order backlog increased to JPY 164 billion. Last year, we started our business with a low order backlog of JPY 96 billion, but it built up a strong backlog through the year, on which basis we started into the fiscal year 2022. We want to continue to turn orders with long delivery times of 10 to 12 months into order backlog and certainly collect the down payments to also reduce any profit fluctuations. Free cash flow greatly improved to JPY 30.4 billion. This improvement was driven by the increase of down payments, thanks to the increasing number of orders. Receiving down payment is already a well-established practice overseas, including Europe, the Americas and China, and we are finally able to get down payments here in Japan as well. Only when we receive the down payment, do we count the order, especially in case of long-term orders, properly receiving the down payment also helps avoid cancellation and benefits our cash flow. Increased gross profit by process integration, automation and digitization. First, process integration. Processes split across 5 to 10 machines are integrated into 1 machine, such as 5-axis and mill-turn machines. The same counts for automation where automated handling of workpieces and pellets leads to higher efficiency. And finally, everything is monitored digitally. Everything works together in a consistent cycle. As for decarbonization, our European site takes on a leading role, and we are advancing our efforts as one group. Based on our results, we paid back our debt, while we also raised the year-end dividend plan per share to JPY 30, leading to the full year dividend plan of JPY 40. This is the financial summary for the fiscal year 2021. Please see the table for the detailed figures. I will only cover the most important message. We purchased additional AG shares in April 2020, which resulted in a reduction of financial costs. Furthermore, the effective tax rate was normalized, thanks to improved profits in almost all of our group companies. We are devoted to continuing the improvement of our net profit. Business performance. We could revise our numbers upwards several times over the course of last year. However, as for this fiscal year, we would like to commit more to our forecasted numbers. We are now able to better assess the impact of COVID-19 on the manufacturing industry and our customers' investment plans. So as mentioned before, apart from the projects with short delivery times, we are especially devoted to those long-term projects of more than 6 months or 1 year in order to further stabilize our sales revenue and profits. Here, you see our quarterly financial results. As for sales revenue, we have the target of reaching a full year result in 2022 on the same level as 2018. This target has already been proven possible by our result of 2021. This is the waterfall chart of the operating profit growth analysis. The first major contributor is the increase of sales volume as well as growing need for process integration and automation alongside the improvement of gross profit. The foreign exchange gains have also developed in our favor. Next, please look at the salary conditions as shown on the top. Average salaries for domestic employees were at JPY 8.08 million in 2019 and JPY 6.43 million in 2020, as a result of the COVID-19 pandemic. However, in 2021, we lifted them again to JPY 7.20 million. We conducted this salary rise in our whole group, affecting all 12,000 employees. This cost increase shows as minus JPY 7.0 billion in the chart below. The number of full-time employees remains almost the same from the previous fiscal year. Another factor is transportation cost. The container prices from Japan to Europe have increased threefold. In the U.S., many goods still wait at the West Coast and cannot be processed because of the labor shortage. We expect the situation to continue. Next, cash flow. The situation has improved substantially. Due to the COVID-19 pandemic, we had to change our business activities, including more efficient sales and marketing development, minimizing discount rates, switching to lean production by process integration and managing our suppliers in a more appropriate manner. Furthermore, the earlier collection of accounts receivable as well as smart product acceptance brought great benefit to our cash flow. As for the future under consideration of stable sales revenue, we want to further improve our cash flow to an even better level. Here, you see the balance sheet summary. Compared to last year, there is an increase in our numbers, but we will reduce the total balance sheet to around JPY 500 billion in accordance with JPY 500 billion in sales revenue. Next, I will explain our financial forecast for 2022. First, we expect order intake of JPY 480 billion and sales revenue of JPY 430 billion for fiscal year 2022. Operating profit and profit before income taxes are planned to be JPY 40 billion and JPY 36.5 billion, respectively. Net profit will be JPY 25 billion. We consider these figures to be the lowest line and strive to be able to revise business outlook upward during the course of the year. Operating profit for the current fiscal year would be able to renew the peak profit since our listing in 1979. We planned dividend per share of JPY 60 divided into JPY 30 midterm and JPY 30 year-end. These are the focus topics for fiscal year 2022. First, comprehensive profit management by company division. All sales companies worldwide are split into smaller entities to make sure we secure at least 5% operating profit from each of them. They are split into Japan, Canada, the U.S.A., Mexico, Brazil and so on. All European entities are securing high operating income as well. In China, the operating margin was at a low level in the past, but now they are delivering 3% as a sales company. In India, we also achieved breakeven. And in Asian countries, we are already close to 10% operating margin. We will continue to monitor this strictly. Same applies to the production company, processing company, head office and the group companies, where proper management on basis of the company division will result in higher profitability. Internally and externally as well as in product proposals towards customers, we promote process integration, automation and digitization. We will continue to process integration in any field, whether technical or office fields to improve our operational efficiency. Now to the next topic. In 2000, 40% of our order intake came from the automotive industry. Last year, automotive-related orders only made up 15% and half of them were related to EV. So we can see that industries and technologies keep changing. So we will tend to a broad range of industries to stay flexible, not only in Japan and China, but the whole world. And on the topic of industries in the year 2000, the space industry made up 0% of order intake. Now the industry lies at 7%. We can see that emerging industries are using our latest machine tool technology. We will continue to analyze the situation and diversify our customer base. Recently, we see a growing demand from established small- to medium-sized companies of the industrial machinery sector, manufacturing components such as pumps for SPEs, separate films for batteries and others. And such companies have only 20 to 30 employees. All these companies are eager to modernize their production, and we can provide them with our process integration and automation solutions. By that, we want to stabilize our own revenues and that of customers. From this year to next year, we will build Iga Campus to the largest machine tool production center in the world. Building constructions are already finished, and we are now installing the interior equipment. Nara Campus will no longer take care of assembly. Instead, it will serve as the world's biggest system solution center specialized in automation and digitization. It will be the base for customers' automation projects. The Nara product development center is almost complete and will start operations from this summer. Situated in the heart of Kansai, we will develop Nara PDC into a workplace, where talented new graduates and veteran engineers from all over Japan come together. We want to focus on recruiting of experts with advanced software skills, including robot, PLC and NC programming. In 2022, we will also formulate a solid midterm business plan for the next 3 years. We plan to release the midterm plan around October. At this moment, we plan to see JPY 450 billion in sales and JPY 45 billion in operating profit with over 10% of operating profit margin for fiscal year 2023. For fiscal year 2024, JPY 480 billion in sales and JPY 50 billion in operating profit. Here, you can see our new function-based organization. At the top, we have the sales and service companies that have been dedicated entities for 10 years already. They are jointly managed by Japan and Germany. Below in pink, we have the head company. In here, all sections are incorporated that are allowed to hold inventory for more than 1 year as well as sections that need to do long-term planning and development. The development of a new machine tool takes around 3 to 4 years, all related departments belong to this category. The spare parts division also needs to keep inventories for 20- to 30-year-old machine models. Engineering, the setup of an automation project in our factory might take 2 to 6 months, but the installation and setup at the customers' factory takes another 6 months. So this section also needs to think ahead by more than 1 year. Quality control. Quality control needs to look into the history and also needs to guarantee quality in the future, so also long-term work. So to summarize, everything that belongs to the head company in pink deals with mid- and long-term assets. On the opposite, there are the machine tool production companies who cannot have inventories over 1 year and ideally only have inventories up to 6 months old. This means Davis, Tianjin, Iga and Nara. Under components manufacturing, we have Fabtech for sheet metal and Castech castings and Precision Components for spindle and ball-screw production Furthermore, we have our important group companies, Watanabe Seikosho, Magnescale and SAKI. Together, we will continue to aim for further growth. Here, you can see an overview of our company's mission. In the rectangle on the left, you can see the core machine tool business. After the machine system installation, we will additionally do monitoring through IoT, powered by my DIA MORI and utilize that to optimize the entire factory of our customer. Based on that, we go back to our core business and improve our employees' education. Our business is changing to long-term relationships with customers. To stay competitive in this industry, we need to stay connected with our customers for 10 to 20 years after the product shipment and think about how to improve customers' production on the long term by utilizing IoT. This overview shows you the benefit of utilizing 5-axis and mill-turn machines. Imagine that you want to process a complex workpiece, like you can see on this slide, for example. The machining of such a workpiece entails gear hobbing, shaft cutting, cam grinding and boring. Conventionally, for such a workpiece, you need multiple processes to make each part of the workpiece separately. In the end, all pieces need to be put together by veteran workers using shrink fitting and manual measuring. For the gear parts, at least 3 machines. And for the shaft parts, at least 3 machines are necessary. For the cam grinding, you also need 2 machines. And for the rim parts as well. So in general, you need about 10 machines to make such a complex workpiece. And for the finishing, you additionally need an assembly station and shrink fitting station. On the other hand, with our mill-turn machines such as NTX, we are integrating all these processes into one and can machine even complex shaped workpieces on a single machine. So what needed 10 machine units in the past can be done on only 1 machine today. To run a line with 10 machines, you need work-in-process inventories for each machine. With process integration, the work-in-process inventory can be drastically reduced. For 10 machines, you also need several operators, maybe even 1 person per machine, so 10 in total. With a mill-turn machine, only 1 operator is required. When we go into more detail, we also realize that machining with 10 machines requires a high number of tools for cutting and different fixtures to clamp all the workpiece parts inside the machines. Also having to switch between multiple machines and conducting many setup changes will inevitably lead to low accuracy. However, with a machine capable of fully processing in single chucking such as NTX, you can achieve the highest volumetric accuracy from beginning to end. Using 5-axis and mill-turn machines automatically leads to automation and process integration. In the past, the programming for 5-axis and mill-turn was very difficult. But now we have 3D CAM software with 3D simulation and the machines will move exactly like defined in the program. So we are currently experiencing a revolution of machine tool technology that reduces intermediate inventory as well as required human resources and improves working capital. In the end, every workpiece is processed in single chucking and accompanied by a robot or loader for loading and unloading. The technology is completely different from that of 20 years ago. Our company will continue to bring this revolution to customers. Next, the mid- and long-term stabilization of sales revenue. This concerns not only DMG Mori, but the whole machine tool industry as well. In the past, when we faced the global financial crisis, our sales revenue dropped by 66% from the previous peak. Recently, we were partly affected by the trade dispute between U.S.A. and China and are now dealing with the global pandemic. However, this resulted in a drop of only 33% since the last sales revenue peak. So the effects are reduced by half. This is thanks to our long-term machine tool investment projects and business relationships we have with customers worldwide. We have reduced our short delivery and high sales discount business as much as possible. Assuming for example, that we reach a peak of JPY 600 billion in sales revenue, we would contain the next drop to just JPY 500 billion to JPY 400 billion; or if we reach JPY 500 billion, we would only have a decline to JPY 400 billion. For the coming years, we will strive to contain any sales revenue fluctuations within minus 20%. In order to achieve this, we will focus on customers with long-term business plans and work together with them on projects over a span of 1 to 2 years, which will lead to continuous down payment and stabilized sales revenues. In this way, I would like to standardize a long-term business model in our company as well as the whole machine tool industry. To further strengthen our business on the long term, we will reorganize our Iga and Nara campuses. We have selected Iga and Nara as our production and research basis because of their ideal location for export. Both campuses have direct connection to the Expressway and are close to the ports in Nagoya and Kobe. In the next 2 years, we will build on this foundation and reorganize both campuses. Iga Campus will be made into the world's biggest production center for machine tools and Nara Campus into the biggest system solution plant in the machine tool industry. One of the most desired parts in the manufacturing industry are semiconductor lasers. We use them, for example, for our laser scale made by our group company, Magnescale. To secure our semiconductor laser supply, we plan to invest JPY 3 billion to build a new factory for the in-house production of semiconductor lasers. Once we successfully internalized the production of semiconductor lasers used for high-precision measuring, we will expand the production to high-power semiconductors necessary for our laser tech machines with direct energy deposition and selective laser melting. So in the future, we will utilize the factory to produce 2 semiconductor parts. Next, our new Nara Product Development Center. Below, you can see the office building at day and night time. The building is directly next to JR Nara train station and can be reached in just 30 minutes from Kyoto and Osaka. Nara PDC will surface our R&D base where our talented researchers and engineers come together. We will connect Nara PDC with Nara Campus and Iga Campus by shuttle bus every 30 minutes and create a flexible work environment with free movement between our locations. Nara PDC will be equipped with high-end technology for high-speed Internet and high-speed working. Our offices in Iga and Nara are well connected to other Japanese cities. So we will also focus on recruiting more talented engineers from all over Japan, especially software experts with unique skills in the field of robots, PLC and others. We are looking specifically for programming specialists. The Kansai region is also home to many good universities with promising new graduates who we will invite to work for us. In Tokyo, we already have our Emerging Technologies Laboratory, where around 20 excellent students work for us and develop new technologies. We want to establish the same in Kansai at Nara PDC. Next, the midterm sales revenue forecast. Here, you can see our minimum targets for the coming years. In 2022, the target is sales revenue of JPY 430 billion and operating income of JPY 40 billion. In 2023, we will aim for sales revenue of JPY 450 billion and operating income of JPY 45 billion. And in 2024, our aim is JPY 480 billion in revenue and over 10% operating margin. We are already capable of reaching 10% operating margin in a scenario with sales revenue of JPY 450 billion. This year, our most important to do is to unleash and demonstrate the potential. If we reach our targets, we are planning to gradually raise the dividend from JPY 60 to JPY 80 towards 2024. Let me explain how we intend to utilize our free cash flow. We will gradually reduce interest-bearing debt and properly manage our hybrid capital. At the same time, we will gradually increase the dividend to reach a balanced allocation until 2024. We are also aiming to definitely reach over 50% in the shareholders' equity ratio by 2024. Next, business environment. Here is the order composition by region. We expect at least JPY 120 billion to JPY 130 billion in the first quarter of 2022. Looking at 2018, we exceeded JPY 140 billion in the first quarter. Therefore, although we are currently recovering, we are not fully on par with past performances. Also, we'd like to increase our market share. Our share is 20% in Europe, 10% in Japan and the United States and only 5% in China. There's still great room for improvement. Order intake per region. The market momentum is indicated by the red arrows. It's very strong in Americas and EMEA with the exception of Germany. Germany is always conservative during winter, but we expect a recovery in spring onwards. Please see the order intake by product type. 5-axis machines and mill-turn centers are very popular. By industry, the precision equipment and semiconductor industries, EV, die and mold, space as well as medical show robust trends. By customer type, as mentioned before, the manufacturing companies of general machinery are quite active nowadays. Average order price per unit has consequently increased in line with the growth in automation, digitization and process integration. Here, you see the order backlog transition. To achieve JPY 500 billion in sales revenue, we aim for JPY 240 billion to JPY 250 billion as machine order backlog. Our highest record was the backlog of JPY 238 billion in the third quarter of 2018. In parallel, keeping the delivery times we committed towards our customers is crucial. Climate change is an urgent issue and requires immediate attention. As a company based in Germany and Japan, we would like to take on a pioneering role in the machine tool industry. We will follow the strict European regulations and make solid improvements in our operation. We have actually discussed this matter for a long time. The discussion was initiated by Germany around 2010, and we have taken measures at our major bases in Japan, Germany and the United States since then. In 2010, we started our initiative by replacing our old portal machines with simultaneous 5-axis machines and advancing process integration at our factories. At the same time, we installed solar power generators to some overseas locations. From then, we purchased certified credits in Germany and applied them to the whole group, thus conducting the shift towards carbon dioxide-free electricity relatively fast. In 2021, we committed to TCFD and gained approval by SBT. Next, we will install solar panels on our factory roofs in Iga and Nara. In the future, 50% of our electricity shall come from self-generated solar power. At Watanabe Seikosho, we will make casting production green by introducing electric furnaces and carbon dioxide-free electricity. Together with our suppliers, we are also making carbon dioxide emissions in our supply chain more transparent. We also visualize carbon dioxide emissions by customers through monitoring machine operations with my DMG MORI. Doing so, we can closely manage how much carbon dioxide emissions are reduced. However, we want to provide even more value for our customers. We want to help customers reduce their complete production emissions by providing them with optimal solutions for replacing their old machine lines and reducing their inventories with automation and process integration. Here, you can see the general idea how to reduce carbon dioxide emissions in Scope 3 downstream, so emissions caused when customers use our products. We take the carbon dioxide emissions of the year 2000 as 100%. Those of the year 2010 is 80%, and our current emissions at 65%. What is important next is to utilize my DMG MORI to visualize customers' carbon dioxide emissions and help them to reduce emissions. For example, electricity consumption can be reduced by replacing plating processes with additive manufacturing for high speed and high accuracy surface processing. 60% to 70% of the machining process is dedicated to removal of mist, coolant and cutting chips. So involving peripheral equipment by applying artificial intelligence and digitization in these areas, we can significantly reduce the electricity consumption. Combined with automation and process integration, we want to achieve a reduction of carbon dioxide emissions to 45% in Scope 3 downstream processes. We have been working on taking increased social responsibility in our supply chain. For example, when it comes to protecting human rights of workers as well as our own employees. We have introduced the platform INTEGRITY Next, which is widely accepted in Europe and provided by the German company IntegrityNext to monitor all of our suppliers. This relates to 225 of our suppliers in Japan. In Germany, we have already introduced the platform since 2019 and 307 suppliers are already part of the initiative and monitored by us. We will do the same in Japan and pay attention to hearing items such as sustainability, product safety, business information, data security and measures against COV19 and many more. The health of our employees is very important for the success of our business. Therefore, we make sure that our employees take their paid holidays and strictly adhere to work hour regulations. Japanese companies might be known for extreme working hours, but at DMG Mori, we pay attention to work-life balance so that employees can come to work fully energized. Apart from that, we provide comprehensive medical guidance to our employees through our experienced in-house doctor who has led a hospital in Nara in the past. We also provide training programs, and we have renovated our company cafeteria to a restaurant that provides healthy freshly cooked meals as an answer to the recent trend of a rising number of employees living by themselves without a partner. Lunch at the company's becoming the most important meal of the day. HR development. We placed importance on our employees' education and have built up a rich learning infrastructure that also includes e-learning courses. From now, we'd like to share such know-how with Japan's engineering students as well. A few years ago, we heard that Nara Women's University is planning to establish a faculty of engineering, the first engineering faculty at a women's university and decided that we would like to cooperate closely with them. Nara's Women's University is only 10 minutes away from our new Nara Product Development Center. So we are looking forward to welcoming students to our office and providing them with on-site trainings. Corporate governance. The Supervisory Board in Germany is well balanced in terms of nationality and gender. This balance is reflected from top to bottom and can be seen on both management and employee level. In Japan, we are striving to achieve the same, and we are placing great importance on making our Board of Directors more diverse in terms of external director ratio, nationality, gender and field of expertise. In the coming years, we will try to find new external directors who can contribute to our company. We will also increase the number of female and non-Japanese directors. This concludes my presentation. Thank you for your continued support.