JGC Holdings Corporation (1963) Earnings Call Transcript & Summary

My name is Taguchi, General Manager of the Group Finance and Accounting Department. I'm going to give you an outline of the financial results for fiscal year 2019, which ends in March 2020. I will begin with a review of the highlights for the fiscal year 2019. Profitability was improved in conjunction with the steady progress of construction work in several projects, both domestic and overseas. Gross profit ratio increased by 1.7 points from the previous fiscal year. As for the spread of the new coronavirus, potential impacts have been reflected in the assessment of the project profitability. As a result, the gross profit for the year was affected by around JPY 8 billion. In terms of financial stability, we have maintained a robust financial base. In fiscal year 2019, cash and cash equivalents increased by approximately JPY 100 billion, mainly due to the large amount of positive operating cash flow, which has brought an improvement to our liquidity. Based on the above, the dividend per share has been maintained as announced at the beginning of the fiscal year. We move to the statement of income and the statement of comprehensive income. The results turned out to be almost in accordance with the revised forecast announced on May 12. Net sales have been affected by the reduction of the order backlog and are JPY 480.8 billion, a fall of JPY 138.4 billion compared to the previous fiscal year. Gross profit is JPY 43.3 billion, which represents JPY 1.6 billion decrease. The gross profit margin has improved by 1.7 points to 9%. Operating income is JPY 20.2 billion, which represents a fall of approximately JPY 3 billion compared to the previous fiscal year. SG&A expenses increased by JPY 1.4 billion due to reasons, including the change of the classification of direct department and indirect department following the transition to a holding company structure. Ordinary income is JPY 22.3 billion, which represents JPY 9.9 billion decrease compared to the previous fiscal year. Non-operating expenses have increased by JPY 7.6 billion due to foreign exchange losses caused by the appreciation of yen and allowance for doubtful debt. Profit attributable to owners of the parent is JPY 4.1 billion, which represents a decrease of JPY 19.8 billion compared to the previous fiscal year. Extraordinary income was recorded in the fourth quarter due to the sales of cross-shareholdings and business investment assets, resulting in pretax income almost as forecasted at the beginning of this fiscal year. On the other hand, corporate income taxes increased by JPY 13.4 billion from the previous fiscal year due to an increase in foreign income taxes. Comprehensive income was loss of JPY 14.2 billion due to negative effect of currency translation adjustment accounts caused by the appreciation of yen. Next is the segment information. In the Total Engineering segment, net sales decreased by 24.3% compared to the previous fiscal year to JPY 426.7 billion with the completion of large LNG projects such as Yamal and Ichthys LNG. Segment profit decreased by 12.4% to JPY 12 billion. Gross profit increased significantly in the fourth quarter due to factors such as conclusion of change orders in overseas project, drawdown of contingencies in completed project and other profit improvement in domestic and overseas project. On the other hand, in conjunction with the widespread of novel coronavirus, we have carefully examined the impact on the project that are underway, have estimated the additional costs that may arise due to the extension of the delivery date and the decrease in productivity, et cetera, and such risks have been factored into the project profitability in some projects. The profit margin slightly increased. In regard to the Functional Materials Manufacturing segment, although we were able to secure roughly flat sales compared to the previous fiscal year of JPY 46.6 billion, segment profit decreased by 8.9% to JPY 6.7 billion. Although oil, chemical catalysts and environmental protection catalysts showed good result, profitability declined due to a decrease in the fine chemicals field caused by the impact of the United States-China trade frictions. Next are the consolidated balance sheet. Total assets decreased by JPY 37.5 billion to JPY 671.2 billion. Noncurrent assets decreased by JPY 33.7 billion, mainly on decrease in investment securities from the sales of cross-shareholdings and business investment assets. In liabilities, noncurrent liabilities decreased by JPY 23 billion. The main reason for the decrease is that the transfer of JPY 20 billion corporate bonds to be redeemed this year to current liabilities. Net assets decreased by JPY 19.3 billion due to the payment of dividends and the negative currency translation adjustment accounts. The shareholders' equity ratio was 58%. The company's portion of JV cash was JPY 141.9 billion, and the funds have been managed well. Next are the consolidated statements of cash flows. Cash and cash equivalents increased by approximately JPY 100 billion this fiscal year, and the end-of-period balance was JPY 261.8 billion. Cash flows through operating activities became positive, JPY 92.4 billion due to the end of payments of the reimbursement cost in Ichthys LNG project as well as collection of receivables in Algerian project. Cash flow through the investment activities became positive JPY 19.3 billion. This has resulted from the sales of cross-shareholdings and business investment assets in conjunction with the review of the significance of their holding assets. The negative cash flow of JPY 7.6 billion from financing activities was mainly due to the payment of dividend. In addition to the cash balance, we have JPY 30 billion borrowing facility and a commitment line agreement with financial institutions. And at the current time, we maintain strong liquidity. The next topic deals with new contracts. Orders received remained at JPY 189.6 billion. The main project for new orders were domestic power generation and pharmaceutical-related project and others. In regard to LNG project in Mozambique, for which we expected to be awarded in the fourth quarter, the client has delayed their final decision on the investment. And the order has not been recorded. Next, we refer to our outstanding contracts. The order backlog as of the end of March 2020 was JPY 941.6 billion, which represents a decrease of approximately JPY 260 billion compared to the end of the previous fiscal year. The main project were LNG in Canada, FLNG in Mozambique, chemicals in Thailand and the domestic biomass power generation. Lastly, the forecasts for fiscal year 2020. This forecast has been prepared under the assumption that the impact of the spread of novel coronavirus will not significantly worsen and that our business environment will return to normal by the end of the fiscal year. New orders are forecasted to be JPY 670 billion, with a focus on projects that are anticipated to be feasible at this point. Assuming that sales from new orders will be limited, the net sales and the other items below have been forecasted mainly on the progress of project in the order backlog. Net sales are JPY 480 billion. Gross profit is JPY 43 billion. Operating income is JPY 20 billion. Ordinary income is JPY 23 billion. For the above items, the performance is the same as the previous year. Income attributable to owners of the parent is JPY 8 billion. In regard to the tax expenses, considering the situation that foreign tax credit may not be available, the forecast is based on the assumption to bear double taxation of foreign and Japanese income taxes. Extraordinary items such as asset sales and the impairment are not included in this forecast. The dividend per share is JPY 12. The dividend payout ratio is forecasted to be 37.5%. Our forecasts are based on the exchange rate of JPY 107 to USD. The effect caused by the exchange rate fluctuation per 1 yen basis is JPY 3 billion for sales, JPY 100 million for gross profit and JPY 300 million for ordinary income. This concludes our explanation of the outline of the financial results for fiscal year 2019.

Hello, everyone. I'm Sato, Chairman and CEO. I will speak on the current business environment of the group and the future management policy. I will not use slides this time. As for the market environment of the core oil and gas business in Total Engineering segment, as you know, the crude oil price began to fall at the beginning of 2020. And due to the reduced demand for crude oil triggered by the COVID-19 global pandemic, the decline in crude oil price accelerated. Due to global economic slowdown and the sluggish crude oil price caused by the spread of COVID-19, in oil and gas business, in particular, the final investment decisions of clients have been delayed. Therefore, as President Ishizuka, will explain shortly, the target project in overseas oil and gas business in FY 2020 will be rather limited. In Functional Materials Manufacturing segment, investment for semiconductors and 5G are being resumed but we need to cautiously monitor the market impacts by global economic slowdown and sluggish crude oil price. Currently, market environment is highly uncertain but COVID-19 pandemic will be over in the course of time. And when the global economy turns to the recovery track with the end of COVID-19, the current extreme level of crude oil price will be adjusted gradually. Bearing those in mind, I think overseas oil and gas business, which is at the bottom now, will return to pick up in FY 2021 or in the second half of FY 2020 in early scenario. Overseas oil and gas business is a main business of JGC Group. And as fossil fuel continues to be indispensable for human lives and economic activities now and in the medium and long term, it will continue to serve as the earnings pillar of the group for the time being. Having said that, global trend for low-carbon and decarbonation is now irreversible. Furthermore, the trend of new normal, which indicates new lifestyle and values in post-COVID-19 and the sluggish crude oil price this time will accelerate the move for low-carbon and decarbonization. And that will lead to the negative mindset for fossil fuel in the society as the expected global trend. Given these, we assume that our current main business of overseas oil and gas business model may peak out earlier than our projection. And we need to take actions proactively with agility with the forward-looking perspectives rather than simply waiting for the market recovery. In other words, in overseas oil and gas business, we need to accelerate the business deepening to build up a winning strategy by adopting the innovative EPC execution technologies, among others. At the same time, we will need to speed up in building the second, third or even fourth and fifth business pillar. As for the future direction, currently, we have been discussing to work out the long-term vision, which will be the basis for the next midterm business plan. We are in the process of discussion but President Ishizuka will share with you that direction later. In FY 2020, we'll be in the uncertain market environment, but we will make utmost effort to secure the orders and achieve the business target. At the same time, we'd regard this crisis as opportunity to move forward for the mid- to long-term growth. We take advantage of ample cash flows and take actions in solid and proactive manner. We'd like to meet expectations of shareholders and investors with such two-pronged approach. That concludes my presentation. Thank you for your attention.

Hello, everyone. I'm Ishizuka, President and COO. I will explain the business overview. Please turn to Page 2. Today, I will talk about these 7 topics. Please turn to Page 3. As explained before, consolidated orders received in FY 2019 were JPY 190 billion, which fell in short against a target of JPY 800 billion. As Chairman mentioned, originally skewed orders in the second half was anticipated in FY 2019. But from the beginning of 2020 due to the overlap of the spread of COVID-19, global economic slowdown and the drop of crude oil price, clients' FID and the CapEx plans were delayed. And the target was not achieved due to the time lag. We concluded EPC contract for Mozambique LNG in October 2019. And we won the first negotiation right in Philippines LNG terminals. But unfortunately, we experienced delays in those projects. Please turn to Page 4. Target orders for FY 2020 was set as JPY 670 billion as Taguchi -- Mr. Taguchi explained. Breakdown is, JPY 400 billion for overseas oil and gas, JPY 140 billion for overseas infrastructure and JPY 130 billion for domestic EPC. Please turn to Page 5. Overseas oil and gas order target is JPY 400 billion. As we'll see here, Oil Refinery Modernization, LNG in Mozambique, which presented time lag and LNG expansion in Qatar are listed among others. In particular, we have high expectation for Oil Refinery Modernization project in Iraq, where we are in the final negotiation process. Please turn to Page 6. This slide shows order target in FY 2020 for overseas infrastructure and the domestic EPC. In overseas infrastructure, we adapt the account-focused strategy to be involved from the concept stage of clients' investment plan. And that began to materialize gradually. As shown here, target projects include non-Ferrous project in Indonesia, LNG Receiving Terminal in Philippines, Solar Power in Taiwan and Airport in Asia. Especially, we like to focus on receiving orders for non-Ferrous smelting project in Indonesia. As for domestic EPC, we'd like to increase orders in projects, so that we will be independent from the hydrocarbon dynamics and COVID-19 and crude oil price fluctuation by targeting Biomass Power, pharmaceuticals, hospitals, nuclear power decommissioning, we'd like to achieve the target order of JPY 130 billion. Please turn to Page 7. This slide shows present status of ongoing project, but rather than the progress of project, I would like to comment on the impact of COVID-19. Mr. Taguchi partially explained the COVID-19 impact before. But let me add some comments. Currently, we are executing about 25 projects in Japan and about 15 projects abroad of various sizes. In Japan, we were affected by COVID-19. There was a case of infection in pharmaceutical project site with an employee of a partner company infected. However, the control action was taken and the work resumed. In the other projects, we have been taking appropriate measures, and we judge the current condition is mostly under control. Next, as for the large project of LNG Canada, which may be of a concern as of today, engineering works are in Japan, Canada and the Philippines and the modules are constructed in China. Engineering work was affected to some extent, but we managed to work from home. On site, we are working in accordance with the British Columbia Provincial guidelines to control infection with no suspension of operation. Today, also close to 1,000 workers are working. Every morning, which is every evening there, I talk with the local head of the client's company to confirm the status quo and discuss the control action to take. We have set up the task force team for the COVID-19 impact assessment in accordance with agreement in constructive manner. In other overseas projects besides LNG Canada, works continue with control measures that fit national and regional conditions. Negotiation on COVID-19 impact is ongoing based on the contract agreement, and it will continue. Please turn to Page 8. As for Functional Materials Manufacturing business, in catalyst, conditions are favorable, mainly in fine chemicals and environmental catalyst. But due to the COVID-19 and oil price, demand of oil-related catalyst must be monitored closely. In fine chemicals and fine ceramics, demand for SPE key components show sign of recovery, supported by the demand growth for semiconductors and 5G. But we need to monitor the demand dynamics closely due to the impact by COVID-19 and U.S.-China trade friction. Please turn to Page 9. As Mr. Sato mentioned before, let me speak on exploring business and the deepening existing business in the long-term vision. We recognize that it is imperative to accelerate the speed in building the second, third or even fourth and fifth pillar of business as well as deepening the overseas oil and gas business. Since our shift to the group structure in the previous year, we have been discussing the long-term vision. Though we are still in the process of discussion, I would like to share with you the overview of the direction today. As a basis of our discussion, our cause is to help to solve social challenges through our business based on SDGs. First, in low-carbon and decarbonized engineering. We aim to create opportunities that combine oil and gas fossil energy with low-carbon technologies, including CCUS, Carbon Capture Utilization and Storage. Second one is new energy. We have so far built the Solar Biomass facility of 970,000 kilowatt, almost 1 million kilowatt. In addition to that, by focusing on hydrogen and ammonia as a hydrogen career, we'd like to create opportunities in new energy. Third one is resource recycling. Our initiative for waste plastic chemical recycling to combat marine plastic waste is new one, joining hand with Showa Denko, Ube Industries and Ebara Corporation. We have been additionally sounded for the waste tires and waste textiles recycling. We'd like to contribute to the resource recycling and the circular economies through these initiatives. Please turn to Page 10. As for health care and life sciences, already pharmaceuticals and medicals have become our major business pillar. And we'd like to evolve them further through biopharmaceutical manufacturing facilities. Fifth one is infrastructure, industrial innovation through water and transportation. In particular, we received inquiries on the airport project, where we can take advantage of our project management capability of managing huge and complicated project. We like to make it as one of the business pillars. Finally, the sixth one is related to our manufacturing business of catalyst, fine chemicals and fine ceramics. These 4 functional materials are increasing for carbon reduction and environmental needs. We'd like to explore and deepen these businesses. That concludes my presentation. Thank you for your attention.