JGC Holdings Corp

TSE:1963

Earnings Call Transcript 2019-Q2

[Masayuki Sato, executive]

Ladies and gentlemen, thank you very much for your attendance despite your busy schedule. Let me first talk on the current project orders and the business outlook. For the project orders, we set the highest ever target JPY 1 trillion for fiscal 2018. In early October, the final investment decisions were made on the LNG Canada Project, which made JPY 630 billion worth of orders to us official, therefore, achieving JPY 1 trillion order target we set at the beginning of the fiscal year has come into sight. We'll keep working towards the goal, keep receiving orders for profitable project in and out of Japan so that we'll achieve JPY 1 trillion target. The business progress has been favorable, with the financial results of the second quarter well in line with the annual forecasts. The construction of the third train of Yamal LNG Project is currently underway. The first and the second trains of Ichthys LNG project were delivered to the customer, where they began producing LNG last month. Part of the project under construction have seen some deterioration of profit and so we find it necessary to maintain tight project control. The progresses on major project will be explained by Mr. Ishizuka as he addresses the business overview. Today, we made an announcement on top of the second quarter financial results that we are considering a new group management structure with a holding company. The aim here is to certainly achieve the group of companies that we aspire to be with a sense of speed and to enhance our corporate value. I'd like to come back to this topic later with more detail. This is all from me for now.

[Shinichi Taguchi, executive]

I will now outline the second quarter financial results for fiscal year 2018. I will follow the agenda shown here. There are 2 highlights for this quarter. One, despite a decline in our net sales due to the impact of less outstanding contracts until last fiscal year, our profits are proceeding smoothly. And second, due to tentative factors, our cash level has declined, however, we still boast a strong financial foundation. Let me start off with our consolidated income and consolidated comprehensive income. For the period, fiscal 2018 second quarter, on a consolidated basis, due to the impact of decline in outstanding contracts up to the end of our last financial year, we see a decrease in both sales and profits. Net sales stands at JPY 278.3 billion, a JPY 66.5 billion minus on a like-for-like basis. In accordance with the decline in net sales, gross profit is now JPY 20.5 billion, a minus of JPY 4.1 billion. Operating income is JPY 10.3 billion, and ordinary income is JPY 15.9 billion. As for profit attributable to owners of the parent due to the impact of higher effective tax rates because of an increase in tax expenses as we have explained at the beginning of the term, the result was JPY 7 billion, a minus of JPY 5.3 billion. Some projects improved, some deteriorated, but all in all, we are progressing steadily with the profit ratio of 7.4%, which is above our initial forecast. Let me move on to our segment information. We have 2 segments. Above is our total engineering segment. Due to the drop in our outstanding contracts, net sales and profit declined. Net sales JPY 253 billion, segment profit JPY 5.7 billion. Our functional materials manufacturing segment remains strong. Hydrogenate and chemical catalysts are doing well, and semiconductor business and our fine products progressed and resulted in a gain in both sales and profit. Net sales JPY 22.5 billion, and segment profit was JPY 3.8 billion. Next, our balance sheet. Assets at a like-for-like basis was more or less on par at JPY 681 billion. On the right with net assets, you see the impact of the minus in dividend payouts, a positive impact in quarterly net profits and a positive impact from valuation differences on available-for-sale securities due to higher stock prices, and all in all, an increase of JPY 5.2 billion, resulting in JPY 401 billion. Our equity ratio is 58.7%, and there has been no major change in the state of our financials. Next, cash flows. Cash and cash equivalents as the end of FY '18 second quarter was JPY 179.1 billion, a decrease of JPY 56.2 billion from the beginning of the fiscal year. For operating cash flow, specific conditions of money deposits for machinery expenses pertaining to the Algeria project have burdened our capital, and the impact of payment investments for the Ichthys LNG project have resulted in a minus of JPY 45.3 billion. Investing cash flow was a minus JPY 2.5 billion due to the requirement of tangible fixed assets. Financing cash flow was a minus JPY 8.3 billion due to dividend payouts and working capital borrowings for overseas subsidiaries. Cash and cash equivalents balance of JPY 179.1 billion is the augmentation of JPY 139.1 billion cash on the balance sheet and JPY 40 billion of investment products recorded as short-term loans receivable, subject to cancellation at any given time. Joint-venture cash held by JGC Corporation not on the balance sheet is JPY 116.5 billion. Next, the outline of contracts. New contracts for the period fiscal 2018 second quarter, on a consolidated basis, due to our new contracts for our chemical project in Southeast Asia and others, the total was JPY 176 billion. The investment decision made in October for the major LNG plant construction project in Canada will be acknowledged in quarter 3 and is not included in these numbers. We are proceeding steadily to attain the JPY 1 trillion forecast in new contracts for the full year. Next is outstanding contracts. As of end September 2018, outstanding contracts was JPY 804.3 billion, a decrease of JPY 82.3 billion from the previous fiscal year. Breakdown by business area and region remained almost unchanged. By business area, outstanding contracts LNG related was 27%, oil and gas development 25%, chemical increased to 14% share. On the right is by region, and Japan and Africa are now, respectively, 28%. Next is forecast for fiscal year 2018, and here some amendments have been made. Based on the performance up to the second quarter, we have reviewed the progress of each project. Thus, for net sales, we have decreased our announced initial forecast by JPY 60 billion to JPY 640 billion. For gross profit, in light of our decline in net sales, it is now JPY 43 billion, a decrease of JPY 2 billion. Operating income slightly reflects our efforts to curb SG&A, and it's now amended to JPY 22 billion, a decrease by JPY 1 billion. Ordinary income and net profit stays the same. The dollar-yen exchange rate applied for this forecast is JPY 110 to the dollar. Purely for reference, the impact of JPY 1 on the foreign exchange is JPY 3 billion for net sales, JPY 800 million for gross margin, and JPY 1 billion for ordinary income. Lastly, let me cover the current status and risks of the Ichthys project. This project for Ichthys LNG, which is a subsidiary of INPEX, is executed by a joint venture between KBR, Chiyoda and us, JGC, the leader company. Orders commenced in 2012. The plant completion and handover was implemented in Q2. We have already heard from our client that LNG production and shipment had commenced. With the projects that we undertake, there are always various risks, but normally the majority of such risks diminish as the handover date nears. However, for this project, risks remain regardless of the handover and it is apparent that it will take some time to mitigate these risks. I would like to take this opportunity to outline to you the details of these risks. The first risk pertains to the client. Based on our contract, we are requesting cost reimbursement or fixed-cost adjustments, but some parts of the costs are being disputed and currently the subject of arbitration. The second risk pertains to the construction of the combined-cycle power plant, which is within the scope of this project. Based on a fixed contract cost, the subcontractor agreed to the construction but walked away from the agreement. We are requesting reimbursement of costs incurred by the joint venture to complete this construction, and these costs are currently in dispute and also the subject of arbitration. We believe our claims for reimbursement to the client and subcontractor are deemed fit. However, based on discussions with our accountants, legal counsel and third parties, we are incorporating a conservative feasible recovery amount on our financials. From a cash flow perspective, most of the advanced payments have been acknowledged, and from hereafter, the focus will be the extent of what we can recoup. Based on our current financial state, we believe that we can properly absorb the impact of the risk. This will conclude the outline of second quarter financial results for fiscal year 2018. Thank you.

[Tadashi Ishizuka, executive]

This is Ishizuka, President. Let me now talk on the business overview. I will explain on these 7 items in this order. As Chairman and Mr. Taguchi mentioned, we received JPY 176 billion in project orders for the first half of fiscal 2018, JPY 117.5 billion from overseas, and JPY 58.5 billion domestic. Orders have been diverse in Southeastern Asia, Thai chemical plant and a petrochemical project, which our Philippines local company received orders for and a domestic project for influenza vaccines factory, et cetera. As Chairman of the company stated, achieving JPY 1 trillion order target for this fiscal year is well in prospect, as shown at the bottom of this page. The first half orders amounted to JPY 176 billion and JPY 850 billion to date. JPY 850 billion consists of JPY 630 billion from LNG Canada, oil processing project, the order that our Saudi local company received and others. As for the remaining JPY 150 billion, we are currently pursuing large oil refiners' deals in Southeast Asia, Indonesia and Singapore. We hope to definitely receive these orders. The ethylene plant construction in Texas USA gave us losses in 2016, and so you might be interested or concerned whether LNG Canada would be all right. Given the large scale of this project, we examined various hypothetical situations as we prepared the estimates. And we went the length. Mr. Sato and I personally joined the thorough risk analysis conducted on business days as well as some holidays. While I cannot tell the dollar amount we have provided for contingency too, and the result is $14 billion in total. This type of local construction work for North American project may lead to huge losses, therefore, we're trying to minimize the local construction work through the use of modules. As you may know, we built large modules and took them to the site in Ichthys and Yamal. The modules were quite large, weighing about 3,000 tons each. The module for LNG Canada will weigh 10,000 tons each. We'll take dozens of those 10,000-ton modules to the site. By making these modules bigger, weighing 10,000 tons, not 3,000 tons, we're minimizing the local construction work, cutting the site workload to 1/3. We're just completing the Ichthys and the Yamal project. Project managers and most of the key staff members from these project plus our Vice President are assigned to the LNG Canada project, which we believe provides a perfect structure. Sitting in an abstract manner, this is an extremely big, tough project where failure will not be tolerated. Therefore, we are going to stay selective as to other deals until we better see how things will turn out with the design work for the LNG Canada. Future targeted project are picking up. Project exists in abundance. While I cannot mention them all, let me start with North American chemical project, using shale gas and the shale oil as raw materials. These are chemical and smaller type, not LNG, but we're hoping to target these types. There are LNG project too. The LNG Canada project I have been talking about indeed is for 4 trains. The contract so far signed is for trains 1 and 2. There's a plan for trains 3 and 4 as well. In Africa, there are onshore LNG project on the east coast as well as the west coast, and floating LNG project on the west coast were after these projects. There are oil refinery project in the Middle East and the Saudi gas processing project. Various project exist in the Southeastern Asia. Working with our local companies, we're pursuing oil refinery project in Singapore and Indonesia and LNG receiving terminals in the Philippines. Domestically, we hope to mainly pursue pharmaceutical and renewable energy-related projects. Since most of the project in execution have already been discussed, I'll mention just a few points. Yamal is in smooth progress. The third train is due for completion in next spring. We expect completion as scheduled. Ichthys project is completed, 3 LNG-loaded vessels already left the port according to the customer. The first vessel has arrived at the INPEX's LNG receiving terminal in Naoetsu. Two floating LNG project, 1 in Mozambique and the other in Malaysia. Fabrication is currently underway in South Korea. Oil refining project in Kuwait slightly struggling at the final stage of construction. We hope to maintain tight control. Also, oil and gas processing project in Algeria and a gas processing project in Bahrain, which has been completed. A mega solar project in Okayama prefecture is in the peak construction period. Mr. Sato will later talk about the holding company structure. One of the pillars for the businesses under the holding company is the overseas infrastructure business. We definitely wish to grow our overseas infrastructure business. Briefly speaking, we wish to pursue the businesses where we can take advantage of domestically developed technologies and our project management expertise, for example, energy infrastructure solar. We have already received orders in Vietnam. LNG, LPG, we're pursuing a deal in the Philippines. Waste power generation, we're pursuing deals in Singapore, Vietnam and the Philippines. Wind power generation, we're pursuing a project in Vietnam, which is onshore, not offshore. Industrial infrastructure nonferrous in Indonesia. Social infrastructure airports, we're partnering up with a certain general contractor in this regard. This is my last slide. Functional materials manufacturing business as explained by Mr. Taguchi. Functional materials were addressed in contrast with EPC. Simply put, there are 2 major companies in the functional materials business: JGC Catalysts & Chemicals and JAPAN FINE CERAMICS. JGC Catalysts & Chemicals, as the name tells, originated from the catalyst manufacturing. The company has developed its technologies to grow out of the conventional business of catalysts, which are based on silica and silicone and is now competent in the fine chemicals business, that is nanotechnologies with silica gel and silica sol. JAPAN FINE CERAMICS was initially launched as an industry academia partnership with Tohoko University. Having exclusive technologies, such as power unit heatsink for EV applications, the company has been rapidly improving its performance in recent years. Thank you very much for your attention.

[Masayuki Sato, executive]

Lastly, allow me to explain to you the review now underway to our reforming JGC Group's management structure that we have announced today. There are 2 disclosed materials, the press release and the PowerPoint material. I will use the PowerPoint for today's explanation, but please reference the release as well. To embark on reform of our group management structure at our Board of Directors meeting held today, we have resolved the commencement of reviewing the transformation into a holding company effective October 1, 2019. This change will be based on the prerequisite that an approval is given at the general shareholders' meeting scheduled for late June 2019 as well as by the governing authorities concerned. First, let me illustrate the background and purpose of this review. Currently under our medium-term business plan, the 5-year duration starting FY 2016 and ending in FY 2020 dubbed Beyond the Horizon, we have the following focuses: in our main EPC business, our goal is to expand our infrastructure business and further strengthen oil and gas; and in our non-EPC business, strengthen our manufacturing arena. Through realizing a JGC Group underpinned by multiple pillars, we aim to further enhance corporate value. And in order to do so steadfastly and speedily, we are now beginning this review. As for the details of the group management reform, we will consider the possibility of shifting to a holding company along with operating companies. In order to ensure both a stronger profit and stability, we will give autonomy to our business units and enable a more independent and agile business operation. This will also lend way to overall optimal allocation of resources along with adequate governance. In detail, there are 4 objectives of this reform. The first is strengthening group management and governance. By separating management and execution, the holding company will focus on slating management policies based on a mid- to long-term perspective for JGC Group as well as function to overlook the entire management of the operating companies. Through optimally allocating management resources for the group, we will strive to enhance corporate value. Second is building a market responsive framework for EPC operations. The goal here is to establish a framework that will allow operations accommodating the different attributes of the domestic market and the overseas markets. We will consider the establishment of overseas and domestic EPC operating companies serving this purpose. By spinning out from JGC and establishing an overseas EPC operating company, our intent is to implement independent operations of our overseas oil and gas company and overseas infrastructure company. The overseas oil and gas company will embrace the evermore larger and complex projects responsibly, and ultimately, aim to further expand our overseas oil and gas business, positioning this as a main business for JGC. The overseas infrastructure company as depicted in our intent to expand our infrastructure segment business under our medium-term business plan, we will operate independently to accelerate expansion in the segment and contribute to further advancement of overseas infrastructure segment. For the domestic EPC operating company taking into account that it is a fairly stable market, JGC will be the splitting company and the 100% subsidiary, JGC Plant Innovation Co. Ltd., will be deemed as the successor company. JGC's domestic EPC businesses will be integrated into this company. By doing so, our goal is to enhance efficiency and competitiveness and hence, expand our segment and market share. The third is clarifying how manufacturing business is positioned. Currently, JGC Catalysts & Chemicals and JAPAN FINE CERAMICS, our domestic 100% own subsidiaries, undertake manufacturing of highly functional materials, represented by our fine products and fine ceramic products. We will position manufacturing as a focal business for the group and enlarge this business through optimal allocation of the group's management resources. The fourth is strengthening and nurturing our management resources. By dedicating authority to our operating companies, we must also create a foundation where management that will drive each of the businesses can be nurtured. Along with achieving the just explained 3 objectives, we will also focus on strengthening our management resources. After migrating to a holding company structure, this shows how the new group management structure will look like. Under the holding company, overseas oil and gas infrastructure companies will be positioned as overseas EPC operating companies. This combined with the domestic EPC operating company and multiple businesses, including manufacturing, will generate profit to promote sustainable growth and attain more corporate value. The schedule for transition to a new group management structure is shown here, and we plan to progress according to this. This will conclude my explanation.