JGC Holdings Corp

TSE:1963

Earnings Call Transcript 2023-Q2

[Shinichi Taguchi, executive]

This is Taguchi, General Manager of the Group Finance and Accounting Department. I will explain the financial results for the second quarter FY 2022.

Please turn to Page 3. First, this slide shows the highlights of the second quarter. In total, Engineering business, due to the steady execution of overseas project, progress improved. Sales in the second quarter exceeded the quarter results of the last few years, and it was on the rising trend. Second, sales and profit increased year-on-year, both by segment and consolidated basis. Third, based on the conditions up to the second quarter and reviewing the second half figures, we revised upward the full year earnings and dividend forecast.

Please turn to Page 4 for consolidated income statement. H1 showed the first half total. Net sales were JPY 267.2 billion, up JPY 49.3 billion year-on-year. Gross profit was JPY 32 billion, up JPY 11.2 billion year-on-year. And profit ratio was 12%, up 2.4 points year-on-year. Profit ratio increased due to the additional profit with steady project execution and the depreciation of yen. Operating profit was JPY 18.9 billion, up JPY 8.5 billion despite the increase in SG&A expenses. Ordinary profit was JPY 30.4 billion, up JPY 17.8 billion due to the nonoperating income, including gain on foreign exchanges. Profit and loss attributable to owners of the parent was JPY 20.7 billion.

Please turn to Page 5 for segment information. In Total Engineering segment, net sales were JPY 241.8 billion, up JPY 46.1 billion year-on-year, and segment profit was JPY 17.3 billion, up JPY 8.1 billion. They were mainly boosted by LNG project in Canada, oil refinery project in Iraq and the floating LNG project in Mozambique. In Functional Materials Manufacturing segment, net sales were JPY 23.4 billion, up JPY 2 billion year-on-year and segment profit was JPY 3.8 billion, up JPY 0.1 billion year-on-year. Exporting oil refinery catalyst, among others, increased. And high-level production and sales continue in fine chemical products, whose demand has been robust. Others are as shown here.

Page 6 shows consolidated balance sheet. Current assets were JPY 587.8 billion, up JPY 54.5 billion from the end of the previous fiscal year due to the increase in cash and deposit. Noncurrent assets were JPY 170.3 billion, up JPY 9.4 billion due to increase in investment securities, and total assets were JPY 758.2 billion. Current liabilities were JPY 301.8 billion, up JPY 47.9 billion due to increase in contract liability with the received advanced payment. Noncurrent liabilities were JPY 47.2 billion and total net assets were JPY 409.2 billion. Shareholders' equity ratio was 53.9%. JGC portion of off-balance sheet joint venture cash was JPY 237.6 billion, down JPY 1.9 billion.

Next, Slide 7 on cash flows. Operating cash flow was a positive JPY 88.9 billion, thanks to the quarterly net income as well as the advance payment for the construction orders, et cetera. Investment cash flow was negative JPY 4.9 billion, mainly due to the acquisition of tangible fixed assets. Cash flow from financing activities was down JPY 10.5 billion due to the dividend payment and the repayment of the borrowings, et cetera. Cash and cash equivalents as of the end of September was JPY 371.6 billion, up JPY 83.5 billion from the beginning of the year. For the second half, due to the redemption of the trade bonds and the payment for the construction progress to be covered by the advanced payment we have received, cash and cash equivalents are expected to come down.

Next, outline of contracts on Slide 8. Total Engineering contracts from April through September was JPY 416.1 billion for overseas, JPY 47.2 billion for domestic. Total was JPY 463.4 billion. Major new contracts are: Gas oil separation unit in Saudi Arabia; VCM, PVC and OSBL expansion in Thailand.

Now Slide 9 on outstanding contracts. Total Engineering outstanding contracts stood at JPY 1,592.5 billion as of the end of September. By business area, oil and gas accounted for 56%; LNG, 23%. By region, the Middle East was 54%, Americas & Others, 19%. Major outstanding contracts include: LNG in Canada; oil refinery modernization in Iraq; and gas oil separation in Saudi Arabia.

Lastly, I will touch upon the full year forecast for FY '22. Slide 10, please. We revised our forecast going through the progress made up until the second quarter, FX situations as well as the order situations. But we have not changed new contracts target of JPY 840 billion. Net sales is now JPY 630 billion, up JPY 10 billion from the last forecast. Gross profit is now JPY 62 billion, up JPY 5 billion. Operating profit also went up JPY 5 billion to become JPY 34 billion. Ordinary profit, taking into account FX gains and others, is now JPY 46 billion, up JPY 10 billion. Profit attributable to owners of the parent is now JPY 30 billion, up JPY 6 billion. With these numbers forecast based upon our shareholders' return policy of 30% in payout ratio, now dividend per share becomes JPY 36, up JPY 7 in our forecast.

Here, now we are assuming the Japanese yen to the U.S. dollar now changed to JPY 140 from JPY 130. What's the impact from one in fluctuation vis-a-vis the U.S. dollar? Just for your reference purpose, our calculation shows JPY 2.8 billion for net sales, JPY 500 million for gross profit and JPY 1 billion for ordinary profit. The right-hand side shows the second quarter achievement, vis-a-vis the target. Net sales being 42%. We expect our net sales will grow in the second half, driven by major contracts. Ordinary profit is approaching 70% in terms of the progress. The major reason for the growth is having to do with the nonoperating FX gains, which were recorded in the first half.

As of the end of September, it became JPY 144.81 to the U.S. dollar, but we assume that the yen will become JPY 140 to the dollar in the second half, making the FX gain smaller.

With this, I'd like to conclude my explanations on the outline of the financial results.

[Masayuki Sato, executive]

This is Sato, Chairman and CEO. I will talk about the recognition of the current market environment and the future direction of our group. As for the market environment surrounding the current JGC Group, the recovery trend is increasingly prominent. Oil majors and national oil companies in oil and gas producing countries are resuming the capital investment in full-fledged manner, along with the move to diversify the procurement of natural gas and LNG backed by the drive to stop using Russia energy in Europe, in addition to the energy demand recovery along with the resumed economic activities globally in the eased COVID pandemic impact.

In Functional Materials Manufacturing segment, despite the increasing future uncertainties in global economy and the semiconductor market, customers' demand in semiconductor production equipment-related products and power semiconductor-related products were firm, and adverse impact was limited. Considering the planned market recovery, we set the order target for FY 2022 as JPY 840 billion, 2.6x of order results in FY 2021. Orders received in the first half was approximately JPY 463 billion due to orders in a large gas oil separation plant project in Saudi Arabia, and the chemicals production expansion project in Thailand. And the progress is over 50%.

In the second half and next fiscal year, we focus on the highly feasible project among many projects. And we will be selective to focus on the project where our group can share value with clients, not driven by price competition so that we will achieve the order targets. As for business results, with depreciation of yen, the solid and stable project management in the Total Engineering segment and firm product demand in Functional Materials Manufacturing segment, the company is steadily moving forward to achieve the full year forecast.

On the other hand, the future uncertainty in global economy is growing due to the prolonged inflation and the tight money policies. Through our communication with clients, including oil majors, we have not observed major changes in the active capital investment stance lately, but we deem it necessary to monitor the development closely.

Now as I mentioned earlier, while the COVID-19 impact is easing off, but the world is now faced with the urgent challenges how to meet with the immediate needs of energy demand. On the other hand, in order to realize a sustainable society, it has become imperative for us to accelerate decarbonization efforts on the mid- to long-term perspectives. And the world is now faced with these 2 conflicting issues.

I believe JGC Group is in a position based on our technology capability and to be able to make its contribution to possible solutions to these conflicting problems. JGC is one of the few equal partners who can offer realistic solutions to the various stakeholders who are under pressure now to solve these problems, be it countries or customers. In other words, we need to fulfill our role as a collaborator to these issues.

Mr. Ishizuka, our President, will explain this in details later. But we decided to build a new operations center in India with its purpose to expand our capacity, to execute and complete our projects, anticipating expansion of planned markets with expanding energy needs. In terms of contributing to decarbonization, JGC in a global -- as overseas EPC company, has its plan to newly create a dedicated organization to address sustainability. With this, we intend to further strengthen our capability to receive orders and execute them fully.

For Japan, as we have recently announced through the newspaper, together with Cosmo Oil and Revo International, we will establish a company for manufacturing in the supply of SAF. We will initiate to construct SAF, sustainable aviation fuel plant, and we are to be engaged in our efforts to realize large-scale SAF production first in Japan in FY '25. Furthermore, in order to realize a sustainable society, in order to realize a stable supply of food, we are working on a POC for land-based fish farming system as well as to develop production technology for commercialization for cultured meat. We are making a steady progress in planning seeds for our non-EPC business defined in our long-term management vision, 2040 Vision.

We will continue to make our best efforts to deliver our target for contracts for FY '22 as well as to deliver our full year forecast. We will fulfill our role to work as collaborator to solve the global issues. By doing so, we would like to further improve our corporate value, so please help and support us.

This concludes my explanation. Thank you indeed for your kind attention.

[Tadashi Ishizuka, executive]

Hello, everyone. This is Ishizuka, the President and COO. I will explain the business overview.

Please turn to Page 2. I will follow these contents. First, as for the orders results in the first half, as Taguchi mentioned, out of the target of JPY 840 billion, we have already received JPY 463 billion, 55% of progress. Overseas orders target is JPY 670 billion, and we received JPY 416 billion. Against the domestic target of JPY 170 billion, we received JPY 47 billion. As for overseas, as mentioned before, gas facility in Saudi Arabia and the PVC project in Thailand, among others, were main orders received. In Japan, low molecule drug manufacturing plants and maintenance service were included in JPY 47 billion.

Please turn to Page 4. Chairman Sato already commented on the overview, so I'd like to talk about some topics to deepen your understanding. As for overseas, at the beginning of September, Gastech Conference was held in Milan, Italy, a venue to exchange views among engineering companies and clients. In the financial results meeting in May, I said that after Russia-Ukraine war, energy industry drastically shifted from the diversion to clean energy to energy security. This time, I heard the same thing again. And in order to achieve lower carbon LNG, and as it was in Europe, hydrogen was a popular topic as well.

When we talked with clients, many clients highly appreciated JGC's delivery-focus policy to ensure delivery, and they urged us to join their project. IOCs and NOCs also talk to us. The other day, senior management of a leading Middle East NOC have come all the way to visit us to invite JGC to join the project of oil and gas and ammonia and hydrogen for sustainability. So put it simply, we have many jobs to do.

As for domestic project, as mentioned before, we received orders of JPY 47 billion in maintenance and pharmaceuticals, among others. From now on, in pharmaceuticals, one of the key topics is vaccine. Regarding vaccine, as you may know, government aid for 7 vaccine projects were decided the other day. We'd like to be involved in some of these projects. And we announced the other day that we decided investment into the project with Cosmo Oil for SAF facility using used cooking oil. Its process capacity is 30,000 kiloliters, but the government target of SAF is much higher, like 1 million kiloliter or so. Therefore, to achieve the target, more SAF facilities will be required, not based on the used cooking oil, but alcohol or bio-based alcohol, and we had several offers already. There are many jobs related to energy security, sustainability, SAF and ammonia and there we'll be able to make contribution. This is a market environment outlook.

Please turn to Page 5. Second half order sort include FEED, and many projects will continue in FY 2023. As for LNG project in North America, we are having the final negotiation with the client. And one LNG project in Southeast Asia is also sought after. For FEED order in Oceania, negotiation is currently ongoing. North America job is for ethylene project. In infrastructure, solar power business is also included. As for domestic, as mentioned before, vaccine-related plans and blue hydrogen production demonstration are included.

I cannot disclose the specific value, but in the first half, we received order of JPY 463 billion. And in addition to that, we were unofficially informed about the large petrochemical project and domestic sustainability-related project, and we have already started EPC for them. We are pretty sure that we will soon sign up the official contract. And with this included, we will have the contract value of about JPY 600 billion. So we believe we have secured in as much as JPY 600 billion as the latest number.

On top of it, as I mentioned this earlier, we have a large LNG project and others. Also here in Japan, target being JPY 170 billion versus JPY 47 billion actual. So we still have a large room for further growth, including pharma and others. So all in all, as Mr. Sato explained this earlier, I believe our target of JPY 840 billion is fully within our range.

Now please refer to Page 6. We are now engaged in several large projects. As you've seen here, we are now showing our showcase project. What you see here are the pictures of LNG in Canada, showing its progress. The picture on the bottom right is Qingdao, China. The modules have just been completed, and they are now carried on a special ship. Top left then shows those modules have arrived at Kitimat, in British Columbia, Canada. After arriving at the destination, they were installed and connected at the right locations. Actually, there are 2 train systems. By February or March, all the modules are to be arriving there. For information, we have already progressed no more than 70%.

Now please look at Page 7, Functional Materials. Since Mr. Taguchi already explained the actual performance for the first half, so I will not repeat what he said. As for the forecast for the full year, net sales being JPY 47 billion, segment profit is now revised to JPY 6.5 billion, up JPY 500 (sic) [ JPY 500,000 ] from the original JPY 6 billion. We are now having uncertainties in the once bullish semiconductor market. Demand for semiconductor manufacturing equipment and the ceramic products are still firm. The demand is also strong for high thermal conductivity silicon nitride substrate for EV-powered semiconductors. It will come up later, but we are now expanding our plans.

Please go to the next page, Page 8. This is also related to High Performance Materials. This is JFC, Japan Fine Ceramics located in Sendai. Following the decision to expand the facilities in June, in July, we decided to make investment, including the land of 2.5 hectares. We had a location announcement ceremony at Tomiya, Miyagi Prefecture. We plan to invest as much as JPY 10 billion going forward. Major investment will be made for ceramics and for semiconductor manufacturing equipment, and the facilities for high thermal conductivity silicon nitride for EVs, which I earlier touched upon.

JFC acquired a ceramic business from Showa Denko Materials. And operations at the new company, JFC Materials Co. Ltd., has started. They are making structural ceramics, abrasive products for CMP, et cetera. So we believe that we are complementary with each other, so we can actually accept synergy.

Next, please refer to Page 9. This was also explained by Mr. Sato, One hot topic. We decided to invest to make a new location in India. This will be in our new operations center. We have a plan to have this new center to manage operation in the region, India and the Middle East included. Ultimately now, we would like to aim at about 1,000 employees in the year around 2040. But in the meantime, we will hire 250 engineers by March next year. We are currently super busy, so they can support headquarters operation. And of course, we will train them so that they can be fully prepared for the future. The location is Chennai, the former Madras. We can find truly quality engineers in Chennai. We also decided to go for Chennai because it is rather close in terms of distance to Japan.

Please look at Page 10. Besides the energy transition, we are naturally continuing to work hard for sustainability. Here in Japan, we have a plant to make and verify SAF and blue hydrogen. We also have a POC facilities for green ammonia production at Fukushima. So it is clear that we are going to be making our best efforts in this area.

Overseas as well, we are actually approached by many for hydrogen and the fuel ammonia. The same goes to SAF project, just like Japan. Under those circumstances, we made a sustainable solution company under JGC Global. This company is responsible now for the entire work for sustainable related work, as well as small module reactor, nuclear power business. Actually, the operation got started.

Page 11 shows the overall time line of those ideas for your reference purpose. This concludes my explanation. Thank you indeed for your kind attention.