Kanadevia Corporation (7004) Earnings Call Transcript & Summary

This is Michi Kuwahara from Corporate Planning headquarter. I will go through the financial information. Please turn to Slide 4. This is a brief summary of the consolidated financial results for the fiscal year that just ended. Order intake, net sales and profit all achieved the initial target, and all business segments generated profit. Please turn to Page 5. In the table, the column at far right, (c)-(b), indicates what I just presented with numbers. The order intake exceeded the initial forecast by JPY 19.4 billion, net sales by JPY 8.5 billion. The outperformance of the operating income, ordinary income and net income to the plan is also outlined on the slide. The fiscal year that just ended obviously was impacted by COVID-19. But the fact that we were able to beat the initial projection despite adversity is something that we assess highly. It is not indicated on the slide, but it's worth noting that we booked an extraordinary loss of approximately JPY 5 billion, including impairment loss. But we're able to offset that impact with an improvement of JPY 4.3 billion in our operating income. I believe it's fair to state that we have built a solid fundamental earnings power and achieved an ROE of 3.5% for the year. From Page 6, I would like to cover the segment information, mainly addressing the year-on-year change. For fiscal '20, order intake was JPY 429.4 billion in total, down by JPY 24.7 billion year-on-year. This was mainly due to the impact of our business from COVID-19. Machinery segment was particularly hit with a year-on-year decline of JPY 24.8 billion. Demand from the private sector was significantly impacted for products such as press machines and process equipment. On the other hand, the order intake for Environmental Systems segment was up by JPY 14.3 billion owing to the large EPC contract won by Hitachi Zosen Inova and environmental EPC in the domestic market. Order intake for Infrastructure segment decreased by JPY 11.9 billion partially due to losing the shield machine opportunity. But we do not see a meaningful change in the market dynamics, and we believe that the segment will recover to a normal level in fiscal '21 and beyond. Page 7 is the outline of net sales by segment. Total sales were up by JPY 6.1 billion year-on-year to JPY 408.5 billion. Environmental Systems segment was up by JPY 15.1 billion largely driven by Hitachi Zosen Inova business. Due to COVID-19, the operating environment, like the on-site construction in particular, was extremely challenging. Sales decline are for Machinery and Infrastructure segments, but all the 3 business segments delivered fairly good results in this challenging environment and overachieved the initial guidance, which have given us more confidence in what we are doing. Please proceed to Page 8. This slide shows the operating income by segment. Total operating income increased by JPY 1.5 billion year-on-year to JPY 15.3 billion. The main drivers for higher profit were Machinery and Infrastructure segments, which grew by JPY 3 billion and JPY 2.4 billion, respectively. And the improvement stemmed mainly from the absence of major loss-making factors, which were booked in fiscal '19. They were the process equipment business in Uzbekistan for the Machinery segment and the flap gate type breakwater guarantee work for Infrastructure segment. An absence of these factors was the major driver behind the improvement. In Environmental Systems, despite the recovery at Hitachi Zosen Inova, the operating income declined year-on-year by JPY 3.2 billion due to the weakness in the electricity power wholesale business. Please turn to Page 9 for the factors behind the changes in the operating income from fiscal '19 to fiscal '20. The first item presented on the slide is the profit improvement of Hitachi Zosen Inova business by JPY 1.3 billion. As I alluded to earlier, the absence of the one-off trouble costs drove up the profit level for the process equipment and infrastructure business by JPY 4.5 billion. We also enjoyed cost reduction benefit of roughly JPY 300 million. On the negative side, for the Environmental Systems segment, the cost for the new product increased by JPY 1.8 billion. Our electric power wholesale business was also hit by 2 factors. We have a PPS business where we source the electricity from the waste incineration plant that we have constructed. To cover for the imbalance, we procure part of the electricity from the market, and the business was impacted by the abnormal spike in the market price at the outset of the year. And that had a negative impact of approximately JPY 1.3 billion. Another factor was the bankruptcy of our customer. The wholesale electricity at the Ibaraki plant and the customer we were serving, F-Power, went bankrupt and filed for civil rehabilitation process. Subtracting the aforementioned JPY 1.3 billion from the total impact of JPY 2.8 billion, this and other factors together had an impact of negative JPY 1.5 billion on the operating income. Page 10 illustrates the net nonoperating income and expenses as well as the extraordinary profit and loss. The nonoperating expense was JPY 3.6 billion and improved by JPY 0.8 billion year-on-year. The improvement was mainly driven by the absence of the JPY 2.5 billion nonoperating expense booked in fiscal '19 as the compensation paid for not meeting the delivery date at Inova. The extraordinary loss was JPY 4.9 billion due to the asset impairment loss that I explained earlier. After this total amount, JPY 4.5 billion was on the electricity wholesale business, including the business at Ibaraki plant. We also amortized the remaining goodwill of JPY 400 million on the U.S. company that we acquired in 2013. This is the subsidiary that is engaged in the engineering of storage and transporting equipment for spent nuclear fuel. In total, the extraordinary loss was JPY 4.9 billion for the year. Page 11 is the consolidated balance sheet, and there were no major changes to the balance sheet. The shareholders' equity ratio was 29.4%. Page 12 is the snapshot of cash flow and interest-bearing debt. One extraordinary item to note on the cash flow is that in fiscal '19, cash flow from investing activities was positive JPY 6.1 billion. And this was due to the sales of Kashiwa and Sakai plant in fiscal '19. Cash flow activities in general normalized in fiscal '20, and the total interest-bearing debt was JPY 98.1 billion at the end of the fiscal year. Let me take you through the forecast for fiscal year 2021 on Page 13 onwards. Page 14 shows an overview of the forecast for fiscal year 2021. We have order intake of JPY 450 billion, net sales of JPY 400 billion, operating income of JPY 14 billion, ordinary income of JPY 9 billion, net income of JPY 5 billion and ROE of 3.9%. I would like to explain the breakdown of the performance by segment on Page 15 onwards. Page 15 shows the forecast for order intake. Environment Systems is expected to grow JPY 11.3 billion to JPY 315 billion. This year, Hitachi Zosen Inova expects to receive an order for a large project in Dubai on top of EPC projects in the U.K. and other areas. So this year, growth is mainly driven by Inova. Machinery and Infrastructure also expects a recovery this year of JPY 7.7 billion. Page 16 shows net sales by segment. The total net sales is JPY 400 billion, of which JPY 265 billion is generated by the Environment Systems segment, which is JPY 4.4 billion lower than the previous year. Despite the increase in sales at Hitachi Zosen Inova, we expect a decrease in sales this fiscal year due to the declining EPC and after-sale O&M business in Japan because the business is in an off-season period. As a result, sales in the Environmental Systems segment are expected to decrease by JPY 4.4 billion. In the Machinery and Infrastructure segment, we expect a decrease of JPY 5.8 billion, reflecting weak orders in the previous fiscal year. Page 17 shows the breakdown of operating income. Operating income is expected to be JPY 14 billion this fiscal year, a decrease of JPY 1.3 billion from the previous year. The main reason for this decrease is a JPY 1.6 billion decline in the Machinery and Infrastructure segment. As I have already mentioned, we expect net sales for fiscal year 2021 to decline year-on-year due to the weak orders received in the previous fiscal year affected by the COVID-19 pandemic. In the Environmental Systems segment, despite Inova's contribution, as mentioned earlier, due to the decline in domestic sales, the improvement is limited only to JPY 400 million. Please refer to Page 18. This is the breakdown of operating income variance between FY 2020 and FY 2021. We expect an increase of JPY 1.6 billion to come from the Inova Group. In addition, we expect an improvement of JPY 1.8 billion in the Environmental Systems, which is now free from the new product-related costs incurred at the biogas plant last year in fiscal 2020. The electric power wholesale business is expected to improve by JPY 2 billion. I mentioned earlier that there was a deterioration of JPY 2.8 billion in fiscal 2020, and we expect a rebound of only JPY 2 billion within this fiscal year. This is because as I mentioned earlier, after the filing for an application of civil rehabilitation scheme, we have identified no stable buyer yet. And as a result, we made a conservative forecast for electricity sales. That's the reason why we do not expect a full recovery within this fiscal year. Next, Environmental Systems. EPC in Japan is declining by JPY 2.6 billion. After-sales O&M in Japan is decreasing by JPY 2.4 billion. As shown in the black box, this is due to a decrease in large-scale projects in the EPC business and a decrease in sales and profitable projects in the after-sales O&M business. Furthermore, in Machinery and Infrastructure, as I mentioned earlier, it is down JPY 1.6 billion due to the slump in orders in the previous year. As a result, we are forecasting an operating income of JPY 14 billion for FY 2021. Details by segment are shown on Page 19 onwards. Page 20 is Environmental Systems. Starting this year, the Inova Group is reported as an independent segment. The business is shown in green. As shown clearly here, in terms of order intake, net sales and operating income, the business is on upward trends. In the past, the Inova Group has been affecting the overall earnings of the Hitachi Zosen Group negatively due to some unprofitable large projects, but it has finally entered a stage where it can make a positive contribution to the group's sales and profits. Please refer to net sales figures for fiscal year 2020 and fiscal year 2021. As I mentioned earlier, in Japan, we expect net sales to decline by JPY 12.1 billion in total from JPY 187.1 billion in FY '20 to JPY 175 billion in FY '21. As a result of these factors as well as changes in sales mix, including fewer high-margin large-sized projects, operating income in Japan is declining from JPY 10.7 billion in FY '20 to JPY 9.5 billion in FY '21. Page 21 shows the details of Machineries and Infrastructure segment. I would like to draw your attention to operating income and loss. In FY 2019, we had large loss-making projects in the process equipment and infrastructure sectors involving guaranteed construction work and incurred significant losses. But when these factors have been resolved, we were able to post an operating income of JPY 2.6 billion for fiscal year 2020. Nevertheless, in FY 2021, the dark blue portion of order intake of the Machinery business is increasing from JPY 89.5 billion for FY 2020 to JPY 93 billion for FY 2021. But net sales is decreasing by JPY 6.7 billion from JPY 101.7 billion for FY 2020 to JPY 95 billion for FY 2021. Order intake of JPY 89.5 billion for FY 2020 represents a significant decline from the year earlier. This is the main reason for the decrease in net sales for fiscal year 2021. As a result of these factors, we project that operating income will be limited to around JPY 1 billion for FY 2021. This concludes my presentation on financial results. Thank you very much.

This is Sadao Mino, President and COO. Thank you very much for attending our result presentation despite your busy schedule. I would also like to express my gratitude for your ongoing interest and support to our company. From myself, I would like to present the management and business information. Please proceed to Page 23. First, let me cover the main orders we have received in the second half of fiscal '20. The upper half of the slide lists the major contracts won for the domestic business. Starting with the retail power sales, we signed a contract with Osaka prefectural government for their government office building at Otemae to supply power that is 100% renewable energy. The power supply started from this April. Second one is the energy from waste plant project for Nansatsu area's New Clean Center, and we won a DBO contract. Scheduled construction period is 3.5 years, and after the completion of the facility, we will offer the O&M service for 20 years. In Infrastructure, we received an order from Hanshin Expressway Company Limited for the steel truss and steel bridge project in eastern section of Rokko Island in the form of JV. The construction period is slated for 72 months, and we will work on the upper part of the steel bridge and steel piers. The table below is the track record of order intake in the overseas market. In December last year, Inova won an EPC contract for energy from waste plant in Slough, which is a suburban area near London. Together with the contracts awarded in the first half, Moscow 2, 3, 4, the annual order for Inova exceeded JPY 80 billion, achieving a record high. We also received a construction order for energy from waste plant from India, which will be a second project for us in that market after the one awarded in 2014. It's taking a long time for the India market to be established on a full scale, but we believe that we can uphold our expectation for India to become a huge market going forward. On Pages 24 and 25, we have a list of orders received in the first half, which was explained at our Q2 result presentation for your reference. So please have a look at your convenient time. Please turn to Page 26. This slide covers the status of the major projects being managed at Hitachi Zosen Inova. As I mentioned earlier, during fiscal '20, we received 3 orders in Moscow, Moscow 2, 3 and 4 and an order in Slough in U.K. We were expecting an order from Dubai at the end of the fiscal year, and I will touch upon this topic in more details later. Inova continues to enjoy upbeat order intake, so the number of projects underway is building up. Learning from the lesson of overloading with too much work, personnel in Japan are involved to regularly monitor the resource allocation and timing of taking in new orders. Inova is taking in new orders in a more planned manner. The impact of COVID-19 was limited on the projects that are labeled as under construction in the table, and they are making a steady progress. Please turn to Page 27. Let me give you more detailed information on our project in Dubai. We have already signed the EPC contract with the client, and we are waiting for the necessary process to be completed so that the financial contract can be finalized. We are waiting for that process. And once all the necessary work is completed, the project will be officially booked as order intake. The location of this plant will be in Warsan District, which is roughly 15 kilometers east from the central part of Dubai. Some of the key points of this project is that this is going to be the very first energy from waste plant in UAE with an annual capacity of being able to treat 1.9 million tons of waste, one of the largest scale in the world. Inova has been involved from the early stage of business development for this project. And the EPC contract is awarded to the JV with BESIX, who have a strong track record in the Middle East. As our responsibility, we will be in charge of supplying the main equipment for the plant and dispatching supervisors to the project. And BESIX will be responsible for the civil work. Both Inova and BESIX have some stake in the SPC, which will be the key vehicle for the project. And upon the completion of the plant, O&M service will be provided for the following 35 years. For Inova, such long-term contract will be the second one after the project in Rockingham, Australia, which is now under construction. The scope of work is not limited to EPC. And offering the O&M service as well will help enhance the profitability and stability of Inova, which is very much aligned with the overall business strategy. Hitachi Zosen has been involved in the EPC work of many desalination plants in the Middle East, and we are also involved in this first energy from waste plant in UAE with the largest scale in the world, working closely with Inova and serving some roles. Next, I would like to explain our medium- to long-term strategy on Page 29. Fiscal '20 was the first year under the current midterm management plan Forward 22, and there were concerns over how COVID-19 would impact our business. Yet as Mr. Kuwahara explained in his part, order intake, net sales and operating income all exceeded the initial guidance set forth at the outset of the year. However, looking closely at our business, in the Machinery segment, which is mainly private sector-driven, we see a trend of customers scaling back on their capital expenditure. With the year-on-year decline in order intake for fiscal '20, the sales and operating income for fiscal '21 will be impacted, and we are projecting an operating income of JPY 14 billion for fiscal '21. For fiscal '22, which will be the final year under the current midterm management plan, Inova should see further profit growth, and we expect to enjoy the fruit of actions taken under the midterm management plan outlined in the table. Furthermore, as we announced yesterday, we intend to grow the overseas business through a close coordination with the head office and the local entities overseas to achieve an operating margin of 5%. Page 30 illustrates one of the measures underway, an integration of the shield machine business with Kawasaki Heavy Industries. We are reviewing our business portfolio to explore different options for other existing business in addition to the shield machine business. There are multiple discussions taking place. But as there are counterparts involved, we cannot offer you details on which business, when such talks will be put into action and how we will execute the different options. As I have been explaining for some time, we review each business with multiple yardsticks, including quantitative factors such as profit as well as the future direction of the business, alignment to the company vision and being attentive to the social trend with a long-term perspective. This is how we are striving to augment the business portfolio as a group and to optimally allocate our resources. As for the mid to long-term direction of the business, I should note Prime Minister Suga's statement from last year in which he declared that Japan will aim to achieve net carbon neutrality by 2050. That has triggered an accelerated shift to decarbonization in Japan. Starting on Page 31, I would like to introduce some of our initiatives in climate change, including new technologies. First, please turn to Page 31. We have been claiming for some time that the future directions of our businesses and products are aligned with the SDGs. And recently, we have announced our support for the TCFD recommendations. Through our business as a technology-driven company, we have always aimed to be a solution partner that contributes to the realization of a sustainable, safe and secure society. We will continue to analyze risks and opportunities posed by climate change on our business over the time and run the business accordingly while making timely disclosure to our investors. In addition to this, we will continue to study how we can contribute to the Japanese government's 2050 carbon neutral target. From Page 32, I would like to explain 3 of our new technologies that must be of great interest to investors. The first is the wind power generation business. We are involved in both onshore and offshore wind power generation. And today, I will mainly talk about offshore wind power generation. Our business model is to participate in the development of project from the initial stage and, if necessary, to acquire an equity stake in the projects as well as to design, manufacture and maintain the foundation structures. Our strength lies in the technology we have accumulated through our involvement in numerous offshore structures, our extensive lineup of assets, including both fixed and floating structures, and the know-how we have accumulated through NEDO's demonstration tests. In the field of offshore wind power, Europe is ahead of the rest of the world, but the majority of these structures are fixed type. And we believe that our accumulated expertise in the maintenance of floating structures, which are expected to become the mainstream in Japan, will be a major advantage in the future. In Japan, the government has set a target of introducing 10 million kilowatts of offshore wind power by 2030 and 30 million to 40 million kilowatts (sic) [ 30 million to 45 million kilowatts ] by 2040. Since the offshore wind power market is expected to be in full swing around 2030, we will build a production system that can meet the demand of such a market by 2025. Please refer to Page 33. I would like to explain about our power to gas or P2G business. We are mainly engaged in electrolytic hydrogen generators and the methanation plants. And we have the top-class technology in Japan especially in the field of methanation. These businesses were previously conducted at the Kashiwa plant. But in January this year, the functions have been consolidated into the Chikko plant in Osaka. And a new P2G business promotion office was established as an organization to oversee technological and business development. In Europe, Inova acquired ETOGAS in 2016, which had built one of the world's largest methanation plants for Audi. And in January this year, we signed an MOU for Aker, a Norwegian company that owns CO2 capture, utilization and storage technology, to jointly study CO2 capture from waste power generation and are working to expand our P2G business. Methanation is a technology that synthesizes methane, the main component of natural gas, by reacting CO2. The methane produced by the methanation reaction using hydrogen derived from renewable energy sources is carbon-neutral methane. The biggest advantage of this synthetic methane is that it can utilize existing infrastructure such as pipelines and gas tanks. And the government has set a goal of ingesting -- injecting at least 1% of synthetic methane into existing infrastructure by 2030 and 90% by 2050. In addition, in line with this government target, each of the gas companies, including those that are members of Japan Gas Association, have set their own targets for the use of methanation. On the other hand, the challenges for the widespread use of methanation are to increase the capacity of the planned facilities and to reduce the procurement price of hydrogen. And various demonstration tests are being conducted to increase the capacity and to reduce the cost of electrolysis equipment to produce hydrogen. Hitachi Zosen is also engaged in various demonstration tests. Last year, our project in China was selected by NEDO. And we are now evaluating the profitability of the project with a view to construct a demonstration plant with a capacity of 500 normal cubic meters hour. In order to produce synthetic methane by recovering CO2 discharged by large factories, facilities on the scale of several tens of thousands of normal cubic meters hour are required. We hope that this 500 normal cubic meter hour scale demonstration will help us understand the technological issues that need to be addressed before the plant can be enlarged and that it will pave the way for a larger plant. The government has positioned the period up to 2030 as a demonstration period for commercialization. Our company hopes to quickly establish the technology for large-scale production and commercialize it in the mid-2020s. Please refer to Page 34. I would like to explain about the all-solid-state lithium-ion battery that we are developing. The features of our all-solid-state battery include the fact that they can be used in a wide temperature range of minus 40 to plus 120 degrees Celsius, that it is highly safe with no risk of liquid leakage, ignition, smoke or explosion and that it can be used in the vacuum environment with almost no expansion. In February this year, we made a joint announcement with JAXA about the demonstration test in the space. And we plan to launch it to the International Space Station in the fall of 2021 or later and conduct the demonstration test for about 6 months from the end of 2021. In addition, as a recent development, we have developed an all-solid battery with a 1,000 milliampere hour cell, which is one of the best in the industry. We exhibited this product as a reference at the International Rechargeable Battery Expo held at the Tokyo Big Sight in March and received many responses from various companies. We are now shipping samples. We will first develop our business for special applications such as industry equipment and space equipment where we can take advantage of the features of all-solid-state batteries. This concludes my presentation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]