Kanadevia Corporation (7004) Earnings Call Transcript & Summary

Good morning. I am Satoshi Kimura from the Corporate Planning Headquarters. I assume the position of Senior Managing Executive Officer of the Corporate Planning headquarters from this April. Thank you for attending our financial results briefing today. I will walk you through the summary of our FY 2021 financial results and our forecast for FY 2022. Since this is my first time to give the briefing, I might not be able to cover everything. If there are any points that are unclear, I will be more than happy to answer your questions. With that, let me begin my explanation of our financial information. Page 5, please. This captures the main point of our FY 2021 financial results. We received large-scale overseas projects and long-term O&M orders, which led order intake to exceed JPY 670 billion. Order backlog surpassed JPY 1 trillion. Please turn to Page 6. As mentioned earlier, order intake far exceeded our initial forecast, thanks to the large-scale overseas projects, and we posted a record high figure of JPY 677.9 billion, up about JPY 250 billion year-on-year. The main factors contributing to this increase are Inova's heightened competitive advantage and the emergence of new markets outside EU, both of which led Inova to record order intake of JPY 317.8 billion, which is JPY 104.9 billion registered in FY '20. Order intake of Machinery and Infrastructure also increased by JPY 22.8 billion due to an increase in orders for process equipment, precision machinery and press machine. Both net sales and operating income exceeded the initial forecast by approximately 10%. Net income after tax increased 86% year-on-year, landing at JPY 7.8 billion. This is the first time since FY 2013 that net income exceeded JPY 7 billion. As a result, ROE improved significantly to 6.1%, exceeding 5% for the first time in 5 years. Page 7 shows FY '21 results by segment. Please look at the column and title difference, C- A, which is a year-on-year comparison. First, order intake, environment was up JPY 225.7 billion due to the JPY 212.9 billion increase in orders received by Inova for large projects in Dubai and Westfield. Machinery and Infrastructure was up by JPY 22.8 billion, the increase of JPY 4.9 billion in press machine, JPY 10.3 billion in process equipment and JPY 7.5 billion in precision machinery were the contributing factors. Next, net sales. Environment was up by JPY 37.8 billion. Inova's net sales increased by JPY 29.4 billion, while that of electricity sales rose by JPY 5.5 billion. Net sales of Machinery and Infrastructure was down by JPY 4.6 billion. While net sales of precision machinery increased by JPY 3.5 billion. Sales in Process Equipment and press machine decreased by JPY 5 billion and JPY 2.1 billion, respectively. Operating income of environment was almost flat year-on-year. Details will be explained later on. Page 9. Machinery and Infrastructure remain unchanged as well. The increase in processed equipment was offset by the decrease in press machine. Page 8, order backlog. Please look at the column entitled end of March 2022. Total exceeded JPY 1 trillion for the first time, up 33% year-on-year, recording JPY 1.018 trillion. In particular, the order backlog of long-term operation increased 63% to JPY 486.2 billion. Of this amount, Inova registered about JPY 155 billion, the majority of which is attributable to long-term operation orders received along with the EPC booked in FY '21. Page 9, breakdown of changes in FY '21 operating income, a positive contribution of JPY 1.2 billion was made by environment, domestic O&M. In particular, electricity sales, which booked a loss in FY '20 due to a rising fuel price and the bankruptcy of an offtaker made a turnaround and recorded an increase in operating income, given its capability to provide power during winter when the demand was very tight. Inova's operating income was up by JPY 800 million, while that process equipment increased by JPY 400 million. Operating income was pushed down by JPY 2.4 billion by environment domestic, given the absence of profitable water business recorded in FY '20. Decrease in press machine sales pushed down the operating income by JPY 300 million. Page 10, please. Nonoperating profit and loss deteriorated by JPY 1.2 billion year-on-year due to FX losses of Inova and other entities but gaining loss on investment by equity method improved by JPY 800 million offsetting the negative impact to remain at JPY 200 million. Extraordinary profit includes a JPY 3.8 billion gain on negative goodwill from Inova's acquisition of Steinmuller. Extraordinary loss includes 2 impairment losses in the energy-related business, one being Ibaraki works impairment loss of JPY 1.6 billion. For the electricity sales business, we have secured a new offtaker to replace the offtaker who went back up last year. In our future profit plan, we have factored in the profit from the capacity market that is scheduled to open in FY '24. However, when the bid for FY '25 was held, we faced a dramatic fall in unit price. Given this, we revisited our cash flow plan and decided to recognize an impairment loss on fixed assets. Accordingly, Natural Energy Japan booked an impairment loss of JPY 2.1 billion. Furthermore, the procurement of food waste, which is used as the fuel for the biogas facility owned and operated in Akita prefecture by Natural Energy Japan was less than planned. Under such a backdrop, we review our cash flow plan. As a result, the book value of the asset was reduced to its residual value. Page 11, balance sheet. Cash and deposits remained high at JPY 67.2 billion. Interest-bearing debt amounted to JPY 91.9 billion. Net interest-bearing debt, which is the net of cash and deposits is shown at the bottom of the chart. Net interest-bearing debt decreased significantly to JPY 24.7 billion from JPY 50.8 billion posted in FY '20. Shareholders' equity increased by JPY 4.9 billion, but the shareholders' equity ratio declined 0.9% to 28.5% due to the increase in total assets. Page 12, cash flows. I will focus on cash flows from investing activities. The investment cash flow consists of proceeds from the sale of investments in [indiscernible], mainly the investment in [indiscernible] SBC and an increase in cash and deposits due to the acquisition of Steinmuller, which was rich in cash and deposits. In addition, a decrease in the purchase of tangible fixed assets resulted in a positive cash flow of approximately JPY 15 billion year-on-year. Next, forecast of FY 2022. Page 14, please. Order intake is expected to be JPY 500 billion. In FY '21, there were some special projects such as the Dubai project. In the absence of such projects, FY '22 order intake is expected to decrease year-on-year, but a high level will still be maintained. Net sales is expected to remain flat year-on-year at JPY 440 billion, and operating income is forecasted at JPY 20 billion. Net income is expected to be JPY 10 billion and ROE to improve to 7.4%. Page 15, FY '22 order intake, net sales and operating income by segment. Details will be explained on Pages 18 and onward. Before going into the details, however, let me explain the breakdown of changes in FY '22 operating income using Page 16. A JPY 2.9 billion increase is expected from environment domestic EPC, driven by higher sales of energy from waste facilities and lower trouble costs. A JPY 2.8 billion increase is anticipated from Inova due to higher EPC sales and improved profit of subsidiaries, O&M business. Both press machine and process equipment are expected to increase operating income by JPY 300 million, a JPY 1.5 billion reduction in operating income is forecasted to arise from environment, domestic O&M given the decrease in retrofit and refurbishment and profitable long-term operation work. Operating income from infrastructure is expected to fall by JPY 400 million due to the decrease of large-scale marine projects that existed in FY '20. Next, details by segment. Page 18 environment. Order intake in FY '22 is forecasted to be JPY 350 billion, with Inova remaining at a high level. Domestic is expected to decrease slightly, but environment domestic EPC is forecasted to increase. Net sales is expected to decrease year-on-year, but Inova is making a steady progress. Looking back, in FY '20, Inova's net sales was JPY 82.3 billion, and it exceeded JPY 100 billion for the first time in FY '21, reaching JPY 111.7 billion. In FY '22, it is expected to record JPY 115 billion, a slight increase year-on-year. The environment domestic is also anticipated to perform well. Operating income of FY '22 is expected to be JPY 16.5 billion, up JPY 4.1 billion. Although, Inova has been increasing its operating income after a large loss in FY '18, the actual result for FY '21 was JPY 2.7 billion, which was JPY 800 million less than the JPY 3.5 billion initially forecasted. This is due to the deterioration of the market environment, including the prolonged impact of the pandemic as well as the increase in material and logistics costs especially between January and March. Nonetheless, compared to FY '20, operating income increased by JPY 800 million. In FY '22, we expect an improvement in businesses other than Inova, in particular, an increase in profit from higher sales of environment domestic EPC. Page 19, results of the former Machinery and Infrastructure segment. Order intake in FY '21 showed a recovery trend in press machine and process equipment and an increase in precision machinery order for marine, diesel engine remain at a high level, although it decreased in FY '21 due to the absence of large auto that existed in FY '20. Net sales of press machines and process equipment decreased due to the decline in order intake in FY '20 that our precision machine increased, operating income increase in process equipment, Precision Machinery and Infrastructure. Page 20, comparison between the new and old segments of Machinery and Infrastructure. Machinery and Infrastructure segment will be newly categorized into Machinery and Infrastructure and Carbon Neutral Solutions segments. Engine SCR process equipment, electrolysis P2G and wind power will come under Carbon Neutral Solutions segment. Page 21. FY '22 forecast of the new Machinery and Infrastructure segment. Order intake is expected to fall by JPY 7.1 billion year-on-year due to the decrease in precision machinery and other machinery, given the absence of large orders that existed in FY '21. Press machine is expected to register JPY 17 billion, flat year-over-year due to the uncertain recovery in the demand from automobile industry. Both net sales and operating income are expected to increase driven by press machine. Page 22, FY '22 forecast of the new Carbon Neutral Solutions segment. Order intake is forecasted to increase by JPY 9 billion. While order for engines is expected to be sluggish, order for wind power is anticipated to reach JPY 14 billion with the closing of the contract in FY '22 for the onshore wind power project that had been underway in our motive perspective for some time. Net sales is forecasted to increase by JPY 5.1 billion due to the recovery of orders in FY '21, mainly from petrochemical process equipment. Operating income is expected to decrease by JPY 100 million for that or process equipment is expected to increase and that of engine to decrease. This is the end of my explanation of financial information. Let me conclude with the summary, which includes some business information that will be explained later. But domestic environment business is a mature market. Going forward, the demand will be mainly around rebuild. And in the long run, the demand is expected to be flat or to drop at a moderate pace in line with the decrease in population. On the other hand, given the backdrop of decarbonization, we began to work on new technology demonstration projects, such as building a carbon cycle model by converting CO2 capture from waste-treatment plants into energy resource. While Inova continues increasing revenue and profit from energy from waste, we will work on expanding biogas, O&M and its related services. For the group as a whole, we attained order backlog of JPY 1 trillion, and we'll be achieving operating income of JPY 20 billion, which are major milestones in FY '21. We posted some record high financial figures as compared to 10 to 20 years ago and figures for FY '22 will follow the same trajectory. Thank you for your attention. Let's move on to the management and business information presentation by President and CEO, Mr. Sadao Mino.

Good morning. I am Sadao Mino. Thank you for taking time at up your busy schedule to attend our financial results briefing. I would also like to take this opportunity to thank you for your continued interest in and support of our company. Let's proceed with the explanation of our management and business information. Page 30 shows the targets of our mid-term management plan for 22, the results up to FY 2021 and the forecast for FY '22. As in the case of 2 previous years, order intake and net sales are expected to far exceed the JPY 400 billion level set in our medium-term management plan. In particular, order intake in FY '21 reached a record high JPY 677.9 billion, thanks to the large projects that Inova was able to win in Dubai and the U.K., including long-term operation contracts. [indiscernible] management reform has proven to be successful and its performance is steadily recovering. Net income for FY '21 was JPY 7.8 billion, and ROE was 6.1%. In FY '22, which is the final year of the medium-term management plan, we forecast operating income of JPY 20 billion and an operating margin of 4.5%. However, we will continue our efforts to achieve the medium-term management plan goal of an operating margin of 5%. Page 31 and 32 shows the progress and the major achievement of the medium-term management plan. As for the enhancement of the added value products and services, demonstration test for automated operation of energy from waste plant achieved over 2-week fully automated nonmanual operation. And the stable operation result combustion deterioration over 1 month, showing the global top level results. Besides the environment business, IoT and AI are utilized in many businesses. In new products and new business models, we established P2G Square and facilities and 3 projects were adopted for NEDO's Green Innovation Fund project. As for the collaborations with overseas group companies, including Inova and Osmoflo, in addition to the project collaboration in Dubai and Iraq, we began to deliver in international procurement and joint development. In achieving work style reform by improving operational efficiency and productivity, as human resource development is cushioned as a top management priority, we are implementing the initiatives of next-generation management resources development, global talent development and the DX business leaders development. Considering the pandemic of COVID-19 and the promotion of work life balance, various efforts are being made to improve working environment and unleash full potentials of employees by promoting work from home and developing childcare leave systems. Please turn to Page 32. As for the promotion of business selection and concentration and the allocation of resources to growth areas. In business portfolio management, we review the production basis to be in line with the business transformation and the integrated Shield machine business with Kawasaki Heavy Industries. And we reviewed the portfolio and promoted optimized resource allocations by adding the long-term assessment from a sustainability perspective onto the quantitative assessment of profit and others by business. As for the expansion of operation and maintenance business, in addition to the domestic environment business, we are focusing on global and other domain O&M businesses as well to enhance profitability. We started to deliver by receiving orders for EPC and long-term O&M in UAE and U.K. and expanding maintenance business in marine engines and process equipment. We continue these initiatives, enhance profitability and expand business domains both in upstream and the downstream of value chains. Please turn to Page 33. As for initiatives for sustainability, we announced the support for TCFD recommendation in March 2021 and established sustainability promotion office in October to strengthen the promotional structure and review the sustainability-related rules. Please turn to Page 34. In line with the growth of overseas business, in July 2021, we established a global headquarters, which consists of administration department and global management unit that supervises 3 separated regions to centralize the management operations of overseas group companies and basis. We are working on to expand the group synergies to expand overseas business, strengthen governance and risk management globally. In April 2022, we established carbon-neutral solution business headquarters to contribute to the decarbonation through product and services. It covers clean energy generation and supply business, including wind power generation and power to gas business, fewer shift to Marine Engine and the process equipment which are related to decarbonation. We will develop the carbon-neutral solutions business into the major business in the group. Through the collaboration between business headquarters and group companies with carbon neutral solution business headquarters as a key driver. We continue and develop initiatives in FORWARD 22 to connect to the FY 2022 long-term vision hit 2030 vision. Page 36 shows orders received in Japan, and Page 37 shows global orders during the second half of FY 2021. Page 37 also shows orders received by Inova in April 2022. Page 38 and 39 shows orders received during the first half of FY 2021 as referenced. I will skip the explanation of each project, and please turn to Page 40. This slide shows environment business major project, except those of Inova. In Japan, majority of projects are DBO type, which covers build and operate. Due to COVID-19, there were some delays and tightness in logistics, but they did not affect the process substantially and each project is proceeding steadily. Page 41 shows major project of Inova. In every project in France, due to design change by client and the influence of COVID-19 project schedule is being reviewed. Let me explain the project conditions in Moscow, Istanbul and Dubai later. I'll explain the update of business. Page 42 shows environment business. In FY 2022, recovering orders is expected Energy from Waste EPC. And we aim to achieve profitability of energy from waste EPC separately. In electricity series business, demand as auxiliary power source will continue for the time being, but we consider the shift to clean fuel and the use of summer power plant in technological development. In Water business, we aim to work on increasing the private sector outsourcing of O&M. Globally, we enhance collaboration with local companies for growing demand in China and Southeast Asia. As for the increase in steel prices and others, we have not been materially affected so far, but as prolonged cost inflation is expected, we will closely monitor the situation and continue to strive to reduce costs. Page 43 shows the update of the Inova business. Orders in the previous fiscal year exceeded JPY 150 billion both in EPC and O&M services. Orders in FY 2022 will be lower than the previous year, but the dominance in European and the Middle East market is sustained and high level of orders, over JPY 100 billion in EPC will continue in FY '22. Inova had the issue of volatility due to concentration of large projects but it is transforming to the sustainable and stable earnings structure by strategically expanding small renewable gas facility project and O&M services. In Europe, we announced in March the target to double the renewable gas production in EU by 2030 to diversify energy procurement, given the fluid Ukraine situation. Renewable gas marketer continue to expand. And in North America, we developed the engineering base, expecting the large potential demand for renewable gas. Expansion of O&M services is shared policy across the group and Inova acquired Steinmuller and developed service footprint. In development of next-generation technology in EU, where the environmental initiatives are more advanced, we are promoting group-wide technological development, including clean hydrogen production, using power generated by energy from waste facility and capture and reuse CO2. Page 44 shows update of Machinery and Infrastructure business. Orders in press machines were under recovery trucks since the second half of the previous year. But due to Russia and the Ukraine conditions, the pace of recovery is growing increasingly uncertain, and our order plan is cautious. In precision machinery, to meet strong semiconductor-rated demand, we established the basis in China and Korea. In Infrastructure business, bridge orders are expected as 180,000 tonne comparable to the previous year. In water gate business, we development business of existing dam is revitalized as flat control measures, and we aim to increase orders. Page 45 shows carbon neutral solution business headquarters, which was made a new in this fiscal year. Orders in Engine were high in FY 2020 and '21, but we expect it to peak out in '22. Profitability continues to be difficult. But by eco-friendly products, including SCR systems and aftersales services, we'll strive to improve profitability. In process equipment, profitability is expected in this year with the recoveries in petrochemical products. In nuclear equipment, we respond to the decommissioning needs in Japan as well as in the U.S. As announced at the end of April, we are preparing to set up joint venture manufacturing of decommissioning-related products with TEPCO, targeting October this year. Details will be announced at the appropriate time. In P2G, towards social implementation, various demonstration projects are moving forward steadily, including green innovation project of NEDO. In wind power business, we aim to receive onshore wind power EPC project order in Mutsu-Ogawara [indiscernible], jointly working with ITOCHU Corporation and NS. Offshore wind power project in automotive prefecture is ongoing. Currently, it is deemed as promising sea areas. But by the end of FY '22, it will be designated as the promotion areas. From here, let me introduce latest business topics. Page 47 shows Inova project. Istanbul project was completed in October 2021. Inova has a contract of 1 year O&M after completion, and it is currently in stable operation. Dubai project order was awarded in June 2021, and currently, construction is progressing smoothly as shown by photo. Page 48 shows acquisition of Steinmuller. Share purchase was completed in February 2022 and the company was renamed to Hitachi Zosen Inova Steinmuller. This acquisition was implemented with the strategy to boost the O&M sales of Inova from CHF 100 million in 2021 to CHF 250 million or JPY 30 billion in 2025. As shown here, between Inova and the Steinmuller synergy can be expected both in terms of market and technology. As for market, maintenance demand for existing plants in Germany and Scandinavia, Steinmuller has a solid track record will be captured. And as for technology, leveraging boiler and midsized project technology will expand businesses. Please turn to Page 49. Where you explain the impact of Russia, Ukraine situation on our business. Inova undertakes a basic design and key equipment for energy from waste plants in Moscow suburbs. As of today, these facilities are not subject to economic sanction of U.S., EU, Switzerland and Japan and the construction on site is continuing. Progress as of March 2022 was 66% for all 4 plants combined, and it progressed further now. However, by the enhancement of sanction and the procurement and logistic disruption, delay in completion is expected. So we respond appropriately monitoring the situation closely. For the contract of this project, we used the insurance of Swiss public credit agency serve to cover risks including war and sanctions. Page 5 shows the project adopted by NEDO Green Innovation Fund project. Page 51 shows initiatives to achieve carbon neutrality. And Page 52 shows the initiatives to contribute to safe and secure society. They are all announced in press release. So let me skip their explanation today. Please refer to them at your convenience. This concludes my presentation. Hitachi Zosen will continue to strive to meet your expectation. So I'd like to have your continued support in the corporation. Thank you for your attention.