Hitachi Zosen Corp

TSE:7004

Earnings Call Transcript 2021-Q2

[Sadao Mino, executive]

Good morning, everyone. My name is Sadao Mino, President and COO of Hitachi Zosen Corporation. Thank you for coming to the results announcement for the second quarter of FY 2020 amidst your busy schedule. Without further ado, we would like to start our explanation. Please see Page 2 of the presentation material. Today, as stated in the table of content, we would like to explain the overview of the consolidated financial results for the second quarter of FY 2020, forecast for FY 2020, details by segment and the topics for the second quarter of FY 2020. We will not use the supplementary material today, so please look at it when you have the time. First of all, we will provide an overview of our consolidated financial results for the second quarter of fiscal 2020. Please refer to Page 4 showing the key points of the second quarter results. In the first half of the fiscal year, order intake exceeded JPY 200 billion for the second consecutive year to JPY 221.2 billion, marking a 10% increase year-on-year. We will explain this in detail later. Public sector demand, which accounts for most of our business, has not been significantly affected by the COVID-19 infection. However, some of our Machinery segment, comprising primarily of private sector demand, has begun to be affected by our customers' industries' wait-and-see attitude towards capital investment. We will keep a close eye on the situation. Profits improved significantly from the previous year. As described, Hitachi Zosen Inova turned black, eliminating last year's negative factors such as compensation for the new product in the Infrastructure segment and increased costs for overseas construction in the Machinery segment. Although Inova has incurred significant losses on U.K. construction projects over the past few years, those projects have been completed and delivered. We made progress on management and governance reforms, so Inova will continue contributing to the group's earnings from this year. The increase in costs due to risks and problems that emerged in the previous year's Infrastructure segment and Machinery segment was temporary. However, we will minimize risks and issues by improving the accuracy of estimates and conducting a more rigorous design review, cost and process control. Please refer to Page 5, which shows the second quarter results. Order intake increased year-on-year by JPY 21 billion to JPY 221.2 billion. Net sales were down year-on-year by JPY 1.4 billion to JPY 166.8 billion. Operating income rose year-on-year by JPY 5 billion to minus JPY 1.3 billion. Ordinary income increased year-on-year by JPY 4.4 billion to minus JPY 2.4 billion. There was no extraordinary income or loss. Net income improved year-on-year by JPY 8.7 billion from minus JPY 10.6 billion to minus JPY 1.9 billion. Next, please turn to Page 6, which shows a breakdown of order intake by segment. Orders in the Environmental Systems & Industrial Plants segment were up by JPY 50.9 billion to JPY 166.3 billion. In contrast, the Machinery segment's orders dropped by JPY 14.7 billion to JPY 40.9 billion. And order intake in the Infrastructure segment decreased by JPY 13.9 billion to JPY 9.8 billion. Combined with the JPY 4.2 billion in Others, the total order intake was JPY 221.2 billion. We will explain the details of each of these segments later in the presentation. Next, please turn to Page 7, which explains the breakdown of net sales by segment. Sales in the Environmental Systems & Industrial Plants segment were JPY 106.3 billion, about the same level year-on-year. And the Machinery segment's revenue was up by JPY 1.3 billion to JPY 44.3 billion. Sales in the Infrastructure segment was JPY 12.1 billion, a year-on-year decrease of JPY 1.2 billion. And the Others were JPY 4.1 billion. The sales in total were JPY 166.8 billion, which was almost the same level as last year. We will explain the details later. Next, please turn to Page 8, which shows a breakdown of operating income by segment. The Environmental Systems & Industrial Plants segment was down by JPY 800 million to minus JPY 1.3 billion. The Machinery segment increased by JPY 3.3 billion to JPY 100 million. The Infrastructure segment improved year-on-year by JPY 2.9 billion to minus JPY 100 million, resulting in an overall minus of JPY 1.3 billion, a year-on-year improvement of JPY 5 billion. A breakdown of the changes in operating income is shown on Page 9. Inova's profitability improved by JPY 2.3 billion. There were JPY 2 billion costs for overseas construction of process equipment last year and JPY 1.7 billion in compensation costs for new products in the Infrastructure segment last year. These negative factors are absent this fiscal year. The other pluses and minuses total resulted in minus JPY 1 billion, resulting in an improvement of the overall operating loss by JPY 5 billion. Page 10 shows the nonoperating income and extraordinary profit and loss. In the previous year, we posted an extraordinary loss of JPY 7.2 billion due to a settlement of a lawsuit related to construction using a shield tunneling machine in the U.S. In the current fiscal year, we will not record an extraordinary loss. Next, please look at the consolidated balance sheet on Page 11. At the end of March this year, we built up a larger-than-usual balance of cash and deposits to prepare for unexpected situations caused by COVID-19. Although down slightly from there, we continue to maintain a high level of cash and deposits of JPY 40.5 billion at the end of September. Page 12 shows the consolidated cash flow. Cash flows from operating activities were JPY 12.4 billion. Cash flows from investment activities were minus JPY 5.6 billion. Cash flows from financing activities were minus JPY 9.5 billion. The net change in cash and cash equivalents was minus JPY 2.5 billion. The term and balance, therefore, decreased by JPY 2.5 billion from JPY 41.5 billion at the beginning of the year to JPY 39 billion. Page 14 and the subsequent pages show the full year forecast for FY 2020. We have not changed our forecast for orders, sales and earnings from those announced in August. As shown on Pages 15 to 17, there has been no change to the forecast for orders, net sales and operating income by segment since our August announcement. We will now explain each segment. Page 19 shows the state of Environmental Systems & Industrial Plants segment. From the top, the bar graphs show order intake, net sales and operating income. The actual results for the first half and the full year of FY 2019 are indicated on the left. The first half of FY 2020 is shown on the right in darker colors. And the August announcement and the current full year forecasts are shown in lighter colors. The Environmental Systems & Industrial Plants segment posted more orders year-on-year in the first half of the fiscal year, thanks to Inova's overseas projects, new domestic EPC projects and operation and maintenance service in Japan. In the second half of the fiscal year, we will need to pay particular attention to COVID-19's impact on overseas markets. Net sales increased in the U.K., Turkey and other parts of the world due to progress in large Inova projects. But in Japan, large projects decreased compared to the previous year. Despite the Inova improvement, operating income declined year-on-year by JPY 800 million due to additional costs incurred for new products in Japan and decreased profit from Japan's operation and maintenance service. There is no change in the full year forecasts for order intake, sales and operating income, as shown, since the announcement in August. Page 20 is the Machinery segment. Order intake decreased year-on-year by JPY 14.7 billion. Filter presses and other machines trended favorably with orders received. However, the rebound from marine diesel engines' solid performance last year, the absence of large orders for nuclear power-related equipment in the current fiscal year and a delay in the timing of orders for press machines and process equipment due to the effects of COVID-19 proved negative. The full year forecast remains unchanged at JPY 85 billion as we expect orders for press machines and process equipment shift from the first half of the year to the second half. Net sales increased year-on-year by JPY 1.3 billion, thanks to orders from marine diesel engines received in the previous year. Operating income improved year-on-year significantly by JPY 3.3 billion to JPY 100 million, thanks to the absence of increased expenses in the process equipment business for overseas projects and improved earnings in the precision machinery business. We have not changed our full year forecast announced in August. Page 21 describes the Infrastructure segment. Order intake declined significantly due to various factors, including the absence of large projects for bridges and steel stacks during the current fiscal year. However, we expect to receive large shield tunneling machine projects and others in the second half of the fiscal year. As a result, we continue to forecast JPY 35 billion in sales for the full year. Net sales decreased year-on-year by JPY 1.2 billion mainly due to the decrease in large bridge construction projects. The full year forecast remains at JPY 30 billion. Operating income improved year-on-year by JPY 2.9 billion compared to the previous year due to the absence of compensation costs for new products. There is no change in the forecast for the full year. This concludes an explanation of the figures related to the second quarter results. Now I'd like to move on to the topics for the second quarter of FY 2020, starting on Page 22. I would share with you the following topics: domestic and overseas order intake; in the Environmental Systems & Industrial Plants segment, the status of Inova's major projects, the Istanbul project situation and the in-house operation of the methane fermentation plant in Sweden. As a new business in Japan, we are working on methanation technology using the CO2 discharged from energy from waste plants. In the Machinery segment, the development of deep ultraviolet LED air sterilizers, the AI-based ultrasonic phased array inspection system winning the grand prize in the second Deep Learning Business Utilization Award. Please turn to Page 23, which shows the domestic order intake. First, we received an order for a hydrogen generation system from the Yamanashi Prefectural Enterprise Bureau. The equipment will be used in the demonstration project running from FY 2016 to the end of FY 2020 for P2G system technology development to help building a CO2-free, hydrogen-based society. In the area of energy from waste, an order was received for the reconstruction and operation of a plant from the Saga Prefecture, Uki Wide Area Confederation as well as for the rebuilding of a plant from the Tokyo Metropolitan Area, Clean Authority of TOKYO. In the Machinery business, though not mentioned on the slide, orders were received as well for 52 filter press machines with a total value of approximately JPY 3 billion. Next, Page 24, order intake for the overseas markets. In energy from waste, Inova, jointly with a local company, had signed a contract to build 4 plants in the suburbs of Moscow. And following the first plant in the previous year, in the first half of this fiscal year, we received orders for the remaining 3 plants. In addition, we will supply key equipment for the construction of the energy from waste plant in Shanghai for which our licensee was awarded a contract. In China, an order was received for a large fiber filtration treatment system for combined sewer outflows. This is our first order outside of Japan, and we expect to receive more orders in the future. Next, on Page 25, these are main projects of Inova. This fiscal year, we received 3 orders for the Moscow project I mentioned earlier. As for the pipeline, we have one project in Slough, the United Kingdom; and another in Dubai, UAE. We will continue to monitor the impact of COVID-19 as we try to secure more orders. In the AOM service and biogas businesses, as shown in the table below, orders are growing steadily, and we will continue to strengthen our human resources through external hiring and other measures and M&As to secure long-term stable earnings. In the biogas business, we are investing in businesses in the U.S. and Sweden and working to build a new business model to secure long-term stable earnings by entering into operation services of methane fermentation plants. I will discuss our activities in Sweden later in my presentation. Next, please turn to Page 26. I would like to give you an update on the progress of Inova's Istanbul project. This is a joint venture with a local general contractor where Inova is responsible for design, procurement and equipment supply. And after the construction, the JV is supposed to provide O&M services for a period of 1 year. The progress of construction is 80% so far. Due to the delay in civil engineering caused under the control of the JV partner as well as the impact of COVID-19 on the local workforce, the project is expected to be handed over in September 2021 after a delay of 5.5 months. We are planning to ask the city of Istanbul, our customer, to extend the delivery window. Page 27, please. As an example of the group's strategy of promoting recurring businesses such as O&M services that generate stable earnings and expanding high value-added businesses, I would like to explain the status of Inova's efforts to operate its own methane fermentation plant in Sweden. Inova owns the technology to generate methane from food waste, such as green waste, in a relatively short period of time. They have the best track record in Europe in the construction of methane fermentation plants under the brand name of Kompogas. The methane fermentation facilities operated by the Inova Group include the wet-type methane facility in Akita, Japan; and San Luis Obispo in California, which Inova has owned and operated since 2018. As another recurring business of O&M, a facility in Jönköping City in Southern Sweden will be fully operational in December this year. This is an old methane fermentation facility in the city, which we took over from the city of the former owner in February 2019, where we built a new and more efficient Kompogas plant while operating the old one. Biowaste, such as food and green waste, will be procured from public and private operators under long-term contracts. The existing operating facilities in Akita and San Luis Obispo use the resulting methane to generate gas power. However, the new plant uses the technology from HZI subsidiary, HZI BioMethan, to increase its purity to a composition roughly equivalent to that of natural gas and sell it as fuel for buses and other public transportation. Next, please turn to Page 28. This is a project commissioned by the Ministry of the Environment and has been studied since 2018 as a model project for a carbon recycling society, and the demonstration will be carried out at the Environmental Business Center and waste incineration facility in Odawara City. The project will demonstrate the generation of methane, which is equivalent to the main ingredient of natural gas, by capturing CO2 from the flue gas of the energy from waste facility and effusing it with hydrogen, thus proposing new possibilities for the use of waste incineration plants as energy plants. We are a global leader in both energy from waste and the methanation technologies globally and are committed to using these technologies to contribute to the realization of a carbon recycling society. Next, please turn to Page 29. This is our product, air sterilizer that uses deep ultraviolet LEDs. For many years, we have been manufacturing feeding machines for food and pharmaceutical products, such as beverage, bottles and infusion bags. And in recent years, we have developed an electron beam-based sterilizer for regenerative medicine. We also have expertise in optical systems such as for lumens analysis for sterilization and disinfection and the knowledge of fluid dynamic systems cultivated over the years in the field of water treatment technology. As the spread of COVID-19 continues, we have developed this product to meet the needs of society. This product can inactivate 99.9% of the viruses that exist in 100 square meters area within 3 hours when operating at maximum wind power. Full-scale distribution is expected to begin this month. The product is planned to be installed at the Hitz Advanced Information Technology Center as well as at a hospital in Osaka City. Please turn to Page 30. Together with our subsidiary, Nichizo Tech, we have developed a system that uses AI to improve the efficiency of nondisruptive testing for heat exchangers used in various plants. This was introduced to you at last year's financial results briefing. And we are pleased to announce that the product was recently awarded the second Deep Learning Business Utilization Award, which is supported by the Ministry of Economy, Trade and Industry and the Japan Deep Learning Association and sponsored by Nikkei XTREND and Nikkei XTECH. In the past, inspection of multi-tubular heat exchanges required 300 hours of time and labor to visually evaluate just about 2 million different images one by one. So the development of this system should greatly improve the process efficiency as well as the inspection accuracy. We are very proud to have won this award because we took on the challenge of difficult development in the field of nondestructive testing where the use of deep learning has been lagging behind, and we've demonstrated that deep learning can transform Japanese manufacturing. We intend to use image processing and recognition technology as well as deep learning technology in a wide range of products, including our energy from waste plants. Starting on Page 31, I will explain the impact of COVID-19 on our business activities and how we are responding to the situation. First, our sales activities have been constrained by restrictions on sales calls and face-to-face negotiations, and some orders have been affected by reduced capital investments of our clients, particularly in the machinery sector, which is mainly centered on private sector demand. With regards to the impact on production activities at offices, manufacturing plants and construction sites as well as procurement locations, we are taking advantage of the telework program, both at the head office and the sales offices, to reduce the percentage of our employees coming to office to about 30%. The core business system, SAP, had begun to operate already, and we were in the process of introducing various ICT tools. So we were able to make a smooth transition to telework, satellite offices and other arrangements of remote work. At plants and construction sites, where it's difficult to introduce telework, we have continued production activities while taking infection control measures. In overseas offices, as a temporary measure, all of the experts were repatriated to Japan while continuing to provide support remotely from Japan so that local employees and customers can continue their activities. As for the work site, we are promoting social distancing by setting up additional break areas for workers in Japan. And so far, there has been no major impact from the pandemic. Overseas, however, there were some infections at Inova's construction sites located in Europe and the Middle East. However, since we are proceeding with the construction work in accordance with the guidance of local governments in each country, all the sites are working well without major disruption. In addition, wherever our employees are unable to travel overseas to help overseas suppliers in construction or inspection work, we are providing support remotely from Japan so that they can continue to work. Work on press machines in various overseas countries was temporarily suspended but is now gradually resuming. Although procurement of materials has been partly affected, we have been able to respond to the situation by adjusting the delivery dates, and we have not experienced any significant delays or impact from the process. Please refer to Page 32 for with corona and after corona initiatives. As I explained earlier, there are still restrictions on face-to-face sales activities at the moment. For this reason, we are focusing on those sales activities that are unconstrained by conventional way of working, such as the dissemination of information through SMS and the participation in virtual exhibitions. In terms of business continuity, we are actively promoting initiatives that make use of ICT. For example, if we -- travel restriction prevent us from going to the site, we provide support from Japan to facilitate local construction. For example, we were unable to dispatch a supervisor to the site in Thailand due to the impact of the pandemic, but by sharing images of the site sent by smart glasses, as shown in the photo, we were able to provide support from Japan and ensured that construction work was not delayed. We are using smart glasses not only in overseas countries but also in Japan to support our work from remote locations. This concludes my presentation. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]