MIRAIT ONE Corporation (1417) Earnings Call Transcript & Summary

This is Nakayama, President of MIRAIT Holdings Corporation. Thank you for attending our financial results meeting today. I would like to go through the financial results using the presentation materials. We will start on Page 3 regarding the overview of the financial results. Please turn to Page 3. Orders received increased by JPY 28.4 billion, up by 6.4% year-on-year to JPY 474.9 billion. Mega solar projects made its round in the Environmental & Social Innovation business, which is shown in yellow in this graph. However, orders increased in all other business categories shown in blue, red and green. Face-to-face sales activities were constrained due to the COVID-19 pandemic, and we started the fiscal year with strong concerns about the uncertainties in the external business environment. However, the company's earnings ended the fiscal year on a strong note. We witnessed a strong demand to build advanced wireless networks. In the Multi-Carrier business category. We enjoyed orders from our new customer, Rakuten as well as the full fledged momentum and investments in 5G base stations by the major carriers. In the ICT Solutions category. Demand increased in work for educational facilities, including those related to the GIGA School project. In summary, the strong orders received reflects the fact that MIRAIT was able to reap the benefits of the tailwind from COVID-19 and the related government-led initiatives. Please turn to Page 4. Net sales was up by JPY 22.6 billion or 5.1% year-on-year to JPY 463.7 billion, recording a historical high for the fifth consecutive year. As was the case with the orders received, sales increased in all business categories outside of Environmental & Social Innovation. Net sales growth was particularly strong in ICT Solutions, shown in green in the chart. As a result, the company achieved record-high sales. I will discuss more details in the following pages. Please turn to Page 5. In the NTT business, investments by our major customers, NTT East and West, are on a downward trend in the medium to longer term. Therefore, in this business category, we are faced with a challenging environment for sales growth. Despite the situation, however, we were able to achieve a slight increase in sales to JPY 157 billion. The steady sales momentum was a result of the fact that we continue to make progress on access work projects to meet the strong demand on the back of the penetration of remote working, while taking appropriate measures to prevent infections at the construction sites. Civil engineering work decreased. But on the other hand, facility management operations, or maintenance work, increased. As a result, sales increased slightly on a net basis. Please turn the page for the Multi-Carrier business. Construction work to build out 5G base station networks for major carriers is picking up momentum. As a result, net sales increased by JPY 1 billion to JPY 98.2 billion. Business with each of the carrier is different situation, partly because the carriers have employed different strategies in expanding 5G networks, but also because of some delays in construction work due to delays in the delivery of materials and equipment. However, similar to the situation with the NTT business, construction work has continued despite the outbreak of COVID-19 on the back of strong demand for our telecommunication services. We continue to enjoy demand for CATV and other work to enhance communication networks. Please turn the page for the Environmental & Social Innovation business. This business category was the only category that experienced a decrease in sales. Specifically, net sales dropped by JPY 8.6 billion to JPY 58.1 billion. The absence of large projects for electrical work as well as the decrease in mega solar projects that was the growth driver over the last few years, were the main causes of the sales decline. In solar power, there has been a shift to mid- to small-sized solar power projects following the slowdown in mega solar projects, given the tapering of the Feed-In Tariff scheme. On the other hand, air conditioning work for 5G-related facilities increased with the expansion of 5G. We also engaged in water utility work for Tokyo Waterworks Bureau. All in all, our view is that this business category is undergoing structural changes. The decrease in sales in the previous year was in line with our expectations. However, going forward, we would like to actively but selectively take on large projects while controlling risks in areas such as EMS or energy management systems, and smart cities or what we call smart civil engineering, which are expected to drive growth for the company in the future. Lastly, I will explain the trends in the ICT Solutions business. Net sales increased by a significant JPY 29.5 billion to JPY 150.3 billion, driving overall net sales growth for the company. Unfortunately, Lantrovision, which leads our global business, recorded a drop in net sales for the year, due to the more severe COVID-19 impact on the Asian markets compared to that in Japan. However, in Japan, teleworking or remote working as well as remote classrooms became the norm with the outbreak of COVID-19. In other words, we witnessed structural changes in the society. Our ICT Solutions business enjoyed significant growth, thanks to the boost in demand to enhance telecommunication facilities as a result of these societal changes. More specifically, demand for LAN and Wi-Fi work was strong. Sales for goods also searched for mobile-related materials as well as equipment such as PCs for educational facilities. ICT Solutions is a focus business for the MIRAIT Group, and a business that we expect to drive the overall growth of the company into the future. Next, please turn to Page 9 for highlights on operating income. Operating income increased by JPY 8.2 billion up 36.9% year-on-year to JPY 30.1 billion, achieving a historical record. Moreover, the operating income ratio improved by 1.5 points to 6.5%. On the following page, we illustrate the factors behind the significant increase in operating income. I, together with my staff, took a closer look at why we were able to record such strong results for the fiscal year ended in March 2021. The first factor is the increase in net sales, primarily driven by the growth in the ICT Solutions business, which flowed down to the bottom line. The second reason is the higher gross profit margin, and the third factor is the improvement in the SG&A ratio. I would like to highlight the second point, which is higher gross profit margin, which resulted in a JPY 6 billion increase in operating income. MIRAIT has placed utmost priority on profitability across all business lines and make efforts to enhance productivity and thereby profitability. We promoted initiatives to make operations more efficient, and as a result, margins improved across all business categories. Even the Environmental & Social Innovation business, which saw net sales drop for the year, still contributed to growth on the profit line. In addition, the SG&A ratio improved by 0.2 points. Although the amount of SG&A increased by JPY 500 million, the improvement in the SG&A ratio supported the strong results in operating income for the overall group for the fiscal year that ended in March 2021. Please turn to Page 11. In As a result, net income for the period increased by JPY 9 billion, up by 59.2% year-on-year to JPY 24.2 billion. In addition to the increase in net sales and operating income as well as the improvement in profit margins, the company recorded gains on sale of policy shareholdings, which also contributed to the higher net income on a year-on-year basis. Please turn to the next page for a comparison of the results versus the targets set forth in the medium-term plan. Fiscal year 2020 was the second year under our 3-year medium-term plan which began in fiscal year 2019. Fiscal year 2020 started off under significant uncertainties with the outbreak of COVID-19 and the subsequent declaration of the state of emergency in Japan. However, the telecommunications carriers continue to build out their communication infrastructure despite the COVID-19 pandemic. Also, in the solutions-related businesses centered on ICT, we enjoyed a tailwind from boosted demand to facilitate remote working, leading to strong earnings results for the fiscal year. On this page, on the left-hand side, we list the 4 quantitative targets set forth under the medium-term plan, specifically, net sales of JPY 450 billion, operating income of JPY 27 billion, operating income ratio of 6% and ROE of more than 8%. You can see that we outperformed all of our targets by a large margin, 1 year ahead of schedule. Next, I will speak on the full year forecast for the fiscal year ending in March 2022. Please turn to Page 14. As you can see on this page, our forecast for the full year is JPY 480 billion in orders received, JPY 470 billion in net sales and JPY 30.5 billion in operating income. In the previous fiscal year, both sales and profits increased dramatically, and the company achieved sales growth for the fifth consecutive year despite the uncertainties in the business environment. This was possible partly because of tailwinds coming from government initiatives amid the pandemic, such as that to promote the creation of advanced wireless networks and the GIGA School concept. The current fiscal year also started off under extremely uncertain and rather unstable business conditions. As the state of emergency and measures to prevent the spread of the virus have been redeclared in many prefectures, including those in the Kanto and Kansai areas. Under such conditions, the MIRAIT Group will strive to position the previous fiscal year's strong earnings, which exceeded the medium-term targets as its true potential. We want to prove that this is the true potential of the company. Furthermore, we will continue to develop our business into the future beyond the fiscal year ending in March 2022. The full year forecast for this fiscal year, shown on this slide, reflects our commitment to do so by striving to further strengthen our management base. Please turn the page for shareholder returns. We intend to increase dividends and repurchase shares, as highlighted on this page. The company has disclosed in the financial statements and other materials that it intends to make comprehensive decisions on shareholder returns based on the basic policy to pay dividends consistently and the company's total shareholder return target of more than 30%, while taking into consideration the business results and cash position of the company. However, over the last few years, our total shareholder return ratio has exceeded 50% on average. Our intention is to continue to further enhance shareholder returns. For the current fiscal year, we will increase dividends from JPY 45 per share to JPY 50 per share. We have also made the decision at the beginning of the fiscal year to repurchase JPY 3 billion of our own shares during the year. This reflects the company's increasingly proactive stance toward shareholder returns. Next, I would like to discuss 4 specific topics. Please turn to Page 17. The first topic is on our initiative to develop multiskilled engineers. This is part of our overall initiative to improve our productivity. At present, the telecommunication carriers are accelerating their efforts to build out 5G base station networks ahead of schedule. At the MIRAIT Group, we have been training multiskilled engineers that can handle work for both fixed and mobile, to prepare for the full-scale pickup in demand for 5G-related work. We have since deployed fixed communication engineers to engage in mobile-related work across Japan. The picture shows an engineer inspecting and installing a base station on a utility pole. 5G base station work is smaller in scale and larger in number. Hence, efficiency is important. The development of multiskilled engineers will also help us overcome the labor shortage issue. Please turn to Page 18. The next topic is our initiative to achieve efficiency through the consolidation and integration of our mobile-related operations. The idea is to reorganize the mobile-related functions within the MIRAIT Group. Specifically, the related functions within the headquarters and subsidiaries will be transferred and be organized under MIRAIT mobile west and MIRAIT mobile east, shown in the middle of this page. Through this reorganization, we will yield benefits such as streamlining of workflow, improved productivity and enhanced operational efficiency. In addition, we will strengthen governance and our ability to hire under the new organizational structure. Please turn to Page 19. This is an example of an initiative related to local 5G. Specifically, we participated in a verification test for an eSports event using local 5G. The MIRAIT Group is aiming to become a leading company in 5G. To realize the potential of 5G-related businesses, we are providing solutions to companies that are considering the adoption of 5G. The example mentioned on the slide is an eSports event, linking Tokyo and Hokkaido, which was held as part of our local 5G evaluation program conducted by the MIC and led by NTT East. We were involved in the creation of the local 5G environment and the technological tests for this event. We intend to support the creation of optimal 5G environment for eSports that will allow for the streaming of multi-angle images and to provide better functionality at the facilities. We believe that we can contribute to revitalizing local communities through such initiatives. Please turn to Page 20. The last topic is regarding the launch of a new service offering, antibacterial and antivirus coating using drones. As you are aware, under the pandemic, it is increasingly difficult to hold indoor events. Hosts are spending significant time and effort to sterilize the facilities to ensure a safe environment for visitors. At the MIRAIT Group, we have been expanding our drone-related businesses through our subsidiary, MIRATECDRONE. As part of this initiative, a new service to provide antibacterial and antivirus coating was launched in April this year. By sprinkling chemicals with high antibacterial and antivirus properties, indoor facilities can be sterilized to secure a safe and comfortable environment. This service can also reduce the time and resources that would be necessary to do daily manual sterilizing because recoating is required only once a month. This service has attracted much attention from the media, such as newspapers and TV. Please turn the page. Lastly, I would like to provide an interim update on the progress we have made on the initiative to accelerate the transformation of the business structure. Specifically, the proposed restructuring and merger of the 3 companies, which we announced at the first half earnings results meeting last November. Please turn to Page 22. As the first step, as shown on the left part of this page, we commenced the one team initiative for the Solutions business in April this year. MIRAIT and MIRAIT Technologies are now operating the solutions business under a common sales strategy and business plan. In addition, we are accelerating the integration process by bringing some parts of the sales and construction work operations together in the same office and location. Regarding the global business, shown in the middle part of this diagram, management operations at the subsidiaries will be integrated in July to achieve efficiency. We will work to strengthen the business development functions to further expand on our global business. Furthermore, in October, we plan to implement the one team initiative in new business fields, which we refer to as the frontier businesses. By focusing the use of human resources and other resources, we will boost our capabilities in generating businesses in areas such as 5G, digital twin, energy management and smart cities. Moreover, shown in pink in the diagram, in July, we will set up the new company preparation office to prepare for the establishment of the new company in fiscal year 2022. As you can see, we will be accelerating the preparation process to deploy the new group organizational structure. Please turn the page. Lastly, I will explain the proposed outline of the new company. As described on the top of this page, we are considering to adopt a division company system. Each division company will hold a high degree of autonomy. In other words, we will be a single organization, but each of the division companies will run their businesses with agility and flexibility, aiming to maximize sales and profits. In the solutions business, the businesses at MIRAIT and MIRAIT Technologies will be integrated into 1 division company to strengthen the sales functions and to expand the business domains. In the carrier business, we will aim to achieve efficiency in full scale and thereby improve profitability by integrating fixed and mobile work and consolidating overlapping office locations. We will also aim to establish an organizational structure to provide services with a focus on each region and customer. To realize this, we plan to establish separate division companies to cover East and West Japan. In terms of back office and common functions, we will, of course, streamline the various functions as much as possible to achieve ultimate efficiency. These initiatives will allow us to strengthen the management base and to accelerate the transformation of the business structure. This will be the end of my presentation. Thank you for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]