MIRAIT ONE Corporation (1417) Earnings Call Transcript & Summary

Good morning. I am Suzuki, President of MIRAIT Holdings. Thank you for calling in today for the meeting on the financial results for the fiscal year ended March 2020. Unfortunately, we have had to change the format of the meeting this year. But I will do my best to explain the results as usual. Thank you again for your support and for participating in this conference call. I would now like to start my presentation. Please refer to the page numbers shown on the bottom right-hand side of each page. If anything is unclear, please feel free to let us know. Please turn to Page 3 for a summary of the financial results for the fiscal year ended March 2020. This is the main table representing the company's full year results. As you can see, we achieved historical highs for orders received, net sales, operating income and ordinary income. We achieved growth in both sales and profits. However, net income dropped year-on-year. This was due to the absence of extraordinary gains that were recorded in the previous fiscal year ended March 2019. In that year, we acquired 3 companies namely: TTK in the Tohoku region, Solcom in the Chugoku region and Shikokutsuken in the Shikoku region. Net income, therefore, dropped year-on-year with the absence of extraordinary income due to the mergers. Having said that, the operations of the company remain firm. Please refer to the table on the left-hand side. Orders received was JPY 446.5 billion, an increase of JPY 53.9 billion. The breakdown by the 4 business categories are as shown in the table on the right-hand side. All categories, except for Environmental & Social Innovation, continue to see strong growth in orders. Net sales was JPY 441.1 billion, up by JPY 65.2 billion. As you can see from the breakdown, all business categories achieved net sales growth for the year, partly thanks to the mergers. Even Multi-Carrier achieved growth despite by a smaller margin. Operating income was JPY 21.9 billion, up by JPY 1.3 billion year-on-year. In summary, the business operations of the company continue to be strong. However, please note that these results include the impact of the mergers. For your information, we have disclosed the results for the former MIRAIT group that is the total for MIRAIT, MIRAIT Technologies and Lantrovision on the following page. The former group has seen a slight drop in operating income, but that was more than offset by the positive impact of the mergers. Lastly, I would like to touch on construction account carried forward, which will affect the business for the fiscal year ending March 2021. As of the end of March 2020, construction account carried forward was JPY 150.3 billion, JPY 5.4 billion more than as at the end of the previous year. This is a high level by historical standards. Please turn to Page 4. These are the results for the former group that I mentioned earlier. Net sales reached a record high at the former group level as well, but operating income was JPY 16.9 billion, a slight JPY 700 million decrease from the previous year. This was due to the provision for losses on unprofitable projects as well as loan losses. We took a stringent approach in order to mitigate the risk of unprofitable projects in the future, which resulted in a slight deterioration at the income level. Overall, however, we can say that the performance of the former group remains steady as well. Next, please turn to Pages 5 and 6 that explain the factors behind the changes in net sales and operating income for the fiscal year ended March 2020. The left-hand side of Page 5 shows details of changes in net sales. NTT was a significant JPY 28 billion increase. This was due to the merger of a company, which generates 70% to 80% of its revenues from the fixed communication work, as well as the increase in facility management and maintenance business. Multi-Carrier was a positive JPY 4.7 billion. Some products were delayed due to the lack of supply of high-voltage-related components. This was a significant negative factor. However, this was offset by the increase in work for Rakuten as well as cable TV-related work. Environmental & Social Innovation contributed a positive JPY 10.4 billion. This was due to the increase in completed mega solar projects and the increase in civil engineering electrical and lighting work. ICT Solutions was up by a significant JPY 22.1 billion. As shown in the table on this page, land PBX work may sound somewhat dull, but we actually steadily accumulated sales in this business. We also saw growth in good sales due to the pickup in work for Rakuten and other mobile work, as well as those for cultural and educational facilities. Of course, the net sales growth in the ICT business is also a result of our efforts thus far around the data center business and the success in bringing Osaka data center to full operation. In total, we achieved strong net sales growth of JPY 65.2 billion year-on-year, JPY 11.1 billion more than the initial forecast. Please turn to the right-hand side for a breakdown of changes in operating income. The increase in net sales had a positive JPY 8.2 billion impact on operating income. On the other hand, provisioning for possible losses on unprofitable projects was a negative JPY 3 billion impact. Another JPY 3.9 billion negative impact came from the increase in SG&A. However, we should note that the SG&A ratio improved. Overall, operating income for the full year came in at an increase of JPY 1.3 billion year-on-year and JPY 400 million above forecast. Operating income ratio was in line with our initial forecast at 5.0%. So that was the summary of the financial results for the company for the fiscal year ended March 2020. Please turn to Page 8 on shareholder returns. As for shareholder returns, the company will continue to make comprehensive decisions based on its basic policy to pay dividends consistently and its total shareholder return target of more than 30%. For the fiscal year ended March 2020, the company will pay annual dividends of JPY 40 per share as planned. In addition, the company executed share repurchases twice during the year. More specifically, the company repurchased a total of JPY 10.4 billion of own shares in May and September. As you can see in the table below, dividend payout ratio was 26.7%. Total share repurchases was JPY 10.4 billion. And therefore, consolidated total return ratio was 95.4%. ROE was 7.4%. We should also mention that we redeemed all 100% outstanding convertible bonds as of the end of December 2019. Given that we allotted treasury shares, there was no change in the issued number of ordinary shares. In other words, there was no dilution. The current state of the balance sheet and various financial metrics are shown on Pages 33 and onward. Please refer to them later at your convenience. One point to highlight is that the company's shareholder equity ratio stood at 61.2% as of the end of March 2020, up from 59.3% at the end of the previous year. We believe that the shareholders' equity ratio of more than 60% reflects financial soundness of the company. Moving on to Page 9. This section is regarding the business plan for the current fiscal year ending March 2021. As for the business performance for the fiscal year ending March 2021, and as everyone would agree, it is difficult to predict the changes in the business environment that we may face over the next year at this point in time. However, we would like to aim to achieve the results that we achieved in the previous year. In light of the construction account carry forward and by monitoring new orders closely, we are targeting operating income in line with that of the fiscal year ended March 2020. Having said that, it is uncertain at this point in time as to when COVID-19 will be contained. And moreover, the Tokyo Olympics/Paralympics Games have already been postponed. Going forward, there may be delays in construction projects due to supply chain disruptions and a slowdown in new orders due to a deterioration in the investment sentiment among customers. We have not reflected these in our forecast given that it is difficult to reasonably forecast such impact at this point in time. If we are able to reasonably assess such impact, we will disclose any deviations from the initial forecast as appropriate. As for dividends, we plan to pay JPY 40 per share, which is flat from the previous year. The business plan for fiscal year ending March 2021 is, as mentioned on Page 10, our target for the year is orders received of JPY 430 billion, net sales of JPY 435 billion and operating income of JPY 22 billion. We are forecasting net sales to come down slightly from the previous year. But our forecast for operating income is in line with the JPY 21.9 billion that we achieved in the previous year. Please refer to the diagram on this page. Here, we summarize the key points for each of the 4 business categories, namely: NTT and Multi-Carrier as the base domains, and Environmental & Social Innovation and ICT solutions as the frontier domains. In the NTT business, the key focus will continue to be on enhancing productivity. Especially with the mergers of new subsidiaries, we will implement cost reduction measures by way of benchmarking. Also with the penetration of 5G, we believe that the demand for fixed communication work will change. So we will embark on cost-cutting to improve on profitability in light of such developments. Going on to the Multi-Carrier or Mobile business, all of the mobile carriers are expected to focus on building 5G networks. Therefore, we are expecting a significant increase in demand for base station work. We also expect Rakuten-related business to pick up. In addition, as 5G penetrates, we expect peripheral businesses or solutions-based businesses to emerge. So the idea is to position 5G at the core of our strategy and to strengthen our business around 5G. We should emphasize that as we strive to expand the telecommunications businesses, it will be important for us to train our staff and engineers to become multiskilled. We will make the effort to develop the talent that we have in order to strengthen the foundation to achieve growth in the telecommunications businesses in the future. In the Environmental & Social Innovation business, we expect many new projects for the coming year. But it will be increasingly important to be selective in terms of profitability, as well as growth potential. More specifically, we expect mega solar or power station like solar power projects to decrease somewhat, while metal solar and rooftop solar projects should remain strong in demand. This reflects the shift from selling of power to self-consumption of power being generated. We also expect to shift from construction to operation and maintenance, or O&M, of power generation facilities. We also expect EMS, or energy management systems, to be in stronger demand with the focus on the environment. Going on to the right-hand side on ICT Solutions. We expect substantial growth and changes in this business. In light of such situation, we will strive to expand new businesses. Specifically in 5G, local 5G is expected to grow. And therefore, we will provide solutions for local 5G networks. Also, with the current situation, we expect to witness changes in demand for creating teleworking environments. We will also handle demand to support the Giga school concept. All in all, growing the solutions-based businesses will continue to be a key focus for the MIRAIT group. As we show at the bottom of this page, across all of the 4 business categories, we will focus on generating synergies through integration within the 5 group companies. We spent the last 1 year to make preparations such as to develop IT systems. In the next 1 year, we intend to accelerate the efforts to generate synergies and to improve productivity, while adjusting to changes in the business environment. That will be a key initiative. The other key initiative would be to promote DX, or digital transformation, within the group to enhance work efficiency. In summary, strengthening productivity will be a very important part of the group's business strategy as we move forward. Of course, there are uncertainties regarding the prolonged impact of COVID-19 and the Tokyo Olympic/Paralympic Games to be held next year. In that situation, we believe it is important to stay on top of the current business environment and to continue to promote group-oriented management, including our subcontractors. We will keep a close eye on the finances, management structure and human resources of the company in this environment, while also aiming to bring the company to the next level of growth. From Page 11, we discuss the trends in each of the business categories. I will touch on only the highlights as there are a lot of details in these slides. On Pages 11 and 12, we discussed the trends in the NTT business. The left-hand side of Page 11 shows the trends in net sales. We expect sales to drop slightly this year, but we would like to make sure that we achieve stable profits in this business. We intend to do this by developing multi skilled engineers and by using AI and ICT for maintenance and inspection work. This will allow us to enhance the efficiency and safety of operations. We will also aim to strengthen margins by consolidating branch offices and generating synergies amongst the 5 joint venture companies. We will adapt the changes in the market as we move ahead in this business. On the right-hand side, we show a table of the key initiatives, some of which are explained on the following page. On the top left-hand side of Page 12, we discuss our initiatives in developing multiskilled engineers. We are facing an issue of the aging population, while the NTT East and West businesses is expected to grow in the fixed communication area. In light of the situation, the idea is, as illustrated on the right of the section, to develop multiskilled engineers. Specifically, we aim for those working on-premise to work on business and networks, while also building skills for both fixed and mobile communication work. That is the basic strategy of the MIRAIT group regarding talent development. By enhancing the skills of our staff, the company will be able to operate more flexibly, and thereby, be more productive. Technology is advancing rapidly as well. The equipment are becoming increasingly advanced and smaller in size. More sophisticated smart tools using AI, IoT and robotics are also being introduced. The MIRAIT group intends to take advantage and monetize on such technological advancements. The bottom left-hand side discusses our efforts in advanced facility inspection operations. We have made progress in implementing the area-round method in the West Japan region. Under this method, regular inspections are done in 5-year cycles for each area in order to reduce cost for the customer, while providing all necessary maintenance services. This is an initiative to change the quality of the service that we provide. We are also working to improve on the quality of inspection work by using ICT and AI to remotely measure the angle of utility pools or identify the location of faulty equipment. This is another initiative that is in the works. On the right-hand side, we discuss our continued efforts to consolidate branches and to upgrade the work environment. These initiatives are in line with our efforts to achieve work style reforms and to enhance productivity. We believe that much of the plan will be concluded by next year. So we will accelerate our efforts over the next 1 year. We are also moving ahead with the integration of operations at the newly added companies, Solcom and Shikokutsuken. The bottom right-hand side touches on our efforts to strengthen group-oriented operations. The first point is regarding disaster recovery. In the previous fiscal year, the group responded flexibly to disaster recovery efforts in Chiba prefecture following typhoon #15. This is an example of where we were able to prove our capability to respond flexibly to such events, and we will make the effort to further strengthen our capability to work as a group. The second point is on enhancing efficiency through system integration and by implementing KAIZEN initiatives across the group. We will make steady progress here as well. The third point is benchmarking. Each group company may be working on similar tasks, but taking a slightly different approach. We think that we can significantly cut cost by making comparisons across group companies. The fourth point is integration of systems. By making progress here, we think we can achieve an even healthier operation. Please turn to Pages 13 and 14. This section discusses the trends in the Multi-Carrier business. Please note that we have provided details on the scheduled developments and allocation of frequencies for 5G on Page 29. So please refer to that page later at your convenience. In any case, 5G is expected to gain full momentum in fiscal year 2020, and therefore, a shift from 4G to 5G is expected. We also expect work for Rakuten to pick up for the year. Meanwhile, the MIRAIT group has added new companies, and therefore, the focus will be to achieve group-wide collaboration to improve on profitability. Unlike the fixed communications business, net sales in the mobile business is expected to continue on its steady growth trajectory. On Page 14, we discuss the key initiatives for the Multi-Carrier business. Expansion of 5G service is scheduled, as shown in the graph, regarding the number of base stations to be installed by 2024 as announced by the major mobile carriers. This implies a strong increase in demand for base station work. The initial launch of 5G service is in the metropolitan areas, but we expect this service to be expanded to wider areas from the latter half of this year. We have high expectations for the business to grow in 5G. As shown at the bottom left-hand side, we also have high expectations around the building of local 5G networks and the penetration of services that combine mobile infrastructure and solutions. We understand that many companies are joining the effort to expand services in this area, and we would also like to participate as an engineering company. One example is our golf solution. This will not only offer interesting services to golfers, but it will also benefit golf course operators as the system will improve the efficiency of golf course management. We are currently undergoing verification tests with the system. This is just one example of projects that we have already started in 5G and solutions. We are also actively participating in DOCOMO's Open House collaborative initiative. Also to note is that antenna technology is advancing with 5G and local 5G networks. We are currently participating in verification tests for the development of new technologies, including that to build local 5G environments inside buildings using reflective boards. The right-hand side of this page discusses our initiatives to adopt IT systems to enhance productivity in the mobile business. We are focused on building a project management system to achieve better efficiency. We are considering automating processes using robotics and automation in combination with the new project management system, which will allow us to boost efficiency, not only in terms of project management, but also in terms of peripheral operations. What is most important is to keep in mind that mobile work will be more granular going forward. So the challenge for the company to grow the mobile business, in line with the rapid penetration of 5G, is to be able to efficiently provide on-site support for the many site locations. We will continue to work to improve on our on-site support system. At the bottom right-hand side, we summarize our initiatives to generate synergies in the mobile business across the group, similar to what we are doing in the fixed communication space. In the case of fixed communication, most of the business is with the NTT group companies. However, in the case of mobile, each of the 4 carriers, so DOCOMO, KDDI, SoftBank and Rakuten, have slightly different requirements for work and different systems as well. The challenge is, therefore, to cater to and manage the detailed requirements for work across the different construction sites in Japan. We believe that we need to collaborate and share information across the group companies to achieve this. In that effort, we are working to share and collaborate within the group regarding the use of resources, making on-site operations more efficient, collaborating in terms of common operations and developing human resources. For human resources, we are thinking not just within mobile, but across mobile and fixed communication or mobile and network and so on. Please turn to Pages 15 and 16 regarding trends in the Environmental & Social Innovation business. We are forecasting a slight decrease in net sales for this business. But this is a rather conservative forecast, taking into account the shift from large mega solar projects to self-consumption solar power projects and O&M, or operations and maintenance. We believe we can expand the business into building smart communities, such as installment of new energy-related facilities, including EV chargers, rechargeable batteries and solar power facilities. We also believe that there are opportunities to expand the business in water utility facilities work, especially as we have added Tokaikoei as a subsidiary. In summary, as shown in the graph at the bottom left-hand side, sales from the solar power work is expected to drop. But electrical and air conditioning, as well as civil engineering work is expected to increase steadily. On the left-hand side of Page 16, we illustrate the details in our initiatives in solar power. As we have mentioned already, we will focus on self-consumption solar power systems and O&M. We will also support the building of smart communities. As mentioned at the bottom left-hand side, we will also focus on water utility facilities work. In light of the issue of the aging of lifeline infrastructure, we expect the demand for water utility work to remain strong going forward. The right-hand side of this page shows our initiatives in underground power lines. As we have discussed before, the project in Ponto-cho in Kyoto City is an example of our capability to handle narrow streets. Another ongoing project is the one in Sanjo-dori. We are also making steady progress on the new national Route No. 1 project in Kanagawa prefecture. We will leverage our know-how to deliver on these projects. We are also undergoing a project to construct networks for a foreign carrier, as mentioned below. Please turn to Pages 17 and 18 regarding the trends in the ICT Solutions business. We believe that this business has strong potential, but our forecast is rather conservative with just a slight increase in net sales. As you can see in the chart on the bottom left-hand side, we expect steady sales growth to continue in land PBX work. We will make sure that we benefit from the continued strong demand for such work. Please see Page 18 for the key highlights. Regarding the global business in Singapore, the Philippines, Australia and Sri Lanka, it is uncertain as to what the impact will be from COVID-19. We intend to closely monitor the situation and developments in Asia. In Singapore, Lantrovision provides cabling work for data centers. Given that data centers are an extremely important infrastructure, we have not seen any cases where construction work for data centers have been suspended in our global business. Suspending such work would impede social activities. Having said that, the growth trajectory is uncertain at this time and margins may come under pressure going forward. We should also mention that Lantrovision acquired a company that engages in electrical construction work last year. We will continue to strive to expand Lantrovision's business to peripheral areas. But at the same time, we will monitor closely the changes in the business environment surrounding our global business. But all in all, we have not seen a significant impact from COVID-19 on the business so far. At the bottom left-hand side, we discuss our Drone business, or moving sensors. We have achieved strong growth in this business, and our efforts over the past 2 to 3 years are starting to bear fruit. We continue to expand this business through our training facilities or drone schools. We have also launched various systems and services using drones. And we are engaged in projects in alliance with the NTT group companies, Farm Eye and Kobe City Waterworks Bureau. This business therefore, looks very promising. For data centers, mentioned on the right-hand side, Osaka No. 1 data center is operating at full capacity. We will now take the business onto the next step, which is the building of network data centers. The last point is on SD-WAN initiatives in light of networks becoming more software-like. In short, this is an important environment for next-generation telecommunications and cloud systems to be used by corporations. So we intend to build this as one of the key businesses of our company. So that will conclude my presentation. Thank you very much for your participation.