Hitachi Zosen Corp
TSE:7004
Earnings Call Analysis
Q2-2024 Analysis
Hitachi Zosen Corp
The company has presented a robust order backlog in the environment sector, totaling approximately JPY 1.3 trillion, with long-term operations accounting for JPY 686.1 billion, indicating a consistent growth. In the second half of FY '23, the company anticipates JPY 310.5 billion, securing JPY 542.6 billion for the year. A noteworthy change has been the improvement in Q2 operating income by JPY 1 billion year-on-year, driven by gains in power sales, long-term operation business, and the Innova Group. However, it is important to highlight that environmental EPC faced a decline by JPY 3 billion, primarily due to two underperforming biomass projects.
The financial health indicates a decrease in total assets and liabilities, with total assets dropping by JPY 20.1 billion and liabilities by JPY 22.2 billion. Despite this, the net assets experienced a boost of JPY 2.1 billion. The company has faced a significant reduction in cash flow from operating activities by JPY 21.4 billion due to note valuation impacts. Nevertheless, the commitment to achieving revised upward fiscal projections for all sales and profit items in Q2 demonstrates a resilient strategy aimed at long-term growth.
A major strategic shift is the announcement of changing the company name to Canadevia, starting from October 2024. This rebranding reflects a broader mission to blend technology with a commitment to environmental harmony, leveraging the company's long history since 1881. The new identity embodies a vision for a sustainable growth path aligned with long-term objectives set for 2030 and 2050, symbolizing an era of innovation and diverse tech-led solutions aimed at a harmonious society.
The company has secured substantial orders for waste-to-energy plants and operations, including a 15-year project in Kanoya City and a 20-year operations order in Mutsu-Ogawada. Notably, overseas expansions like Innova's 25-year orders for waste-to-energy plants in the U.K. and ventures in Germany for biogas purification and liquefaction underscore a strategic push for recurring income and international reach.
Despite global challenges such as COVID-19 and supply chain disruptions, the company successfully completed the New Herst, U.K. project on schedule. Nevertheless, Rockingham, Australia's project has experienced delays due to the pandemic, though the majority of the associated impact has been accommodated in the company's guidance, showcasing adaptability and a proactive response to unforeseen obstacles.
The environmental business, excluding the Innova Group, continues to operate without significant changes in the domestic waste treatment and water business sectors. However, the company is addressing cost overruns in biomass power plants this fiscal year, with a confidence in mitigating the impact through the overall environment business strength.
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This is Kimura speaking. Thank you for attending our second quarter results briefing for the fiscal year ending March 2024. We would like to take this opportunity to thank you for your daily support and understanding towards our company operations.
Today, I will provide the financial data, including the overview of the second quarter results and the future business outlook. Please turn to Page 4. The key highlights for the second quarter of fiscal year 2023 are -- following the Q2 performance of the previous fiscal year where the operating income turned into black, we achieved profitability at the ordinary income and net income levels for the first time in 11 years. We made an upward revision of our forecast net sales, operating income, ordinary income and net income. Regarding the two biomass power projects, which delivery has been delayed, we completed the delivery of one plant as of end of September and plan to make delivery of the other plant in December. We are seeing steady progress in other domestic and overseas projects in each segment, leading to the upward revision of the full year forecast.
Let me give more details by turning to Page 5. This page covers the overview of the actual performance. As for the revised full year forecast of fiscal year 2023, details are shown at the bottom of the slide. Order intake is up JPY 27.9 billion from the first half of the previous fiscal year to JPY 346.7 billion. In the first half of this year, Innova won two large-scale O&M projects at Slough and Earls Gate in U.K.. We are seeing a steady progress in winning AOM orders after sales service operation and maintenance, excluding Innova, and the orders are remaining at the high level continually. We have also received an early O&M order for the onshore wind project in Mutsu Ogawara Omori prefecture.
Based on such progress, we made an upward revision of the full year order intake to JPY 620 billion at the point of the first quarter results announcement. So far, the progress rate of the order intake versus the revised full year forecast is 56%. Net sales were JPY 232.1 billion, up JPY 24.9 billion year-on-year, mainly due to the increase in the environment business. The progress rate of the net sales versus the revised forecast is 43%. Operating income improved by JPY 1 billion versus the previous fiscal year to JPY 1.1 billion. Ordinary income also improved by JPY 4.6 billion year-on-year to JPY 1.9 billion due to the improvements in gain and losses on investment by the equity methods and the foreign exchange. Net income attributable to shareholders of Hitachi Zosen improved by JPY 3.5 billion year-on-year to JPY 300 million. ROE forecast in fiscal year 2023 is shown below the chart at 9.0%.
Please move to Page 6. Here are the results of order intake, net sales and operating income by segment in the second quarter. I would like to explain the year-on-year comparison. First is the order intake. Environment segment increased by JPY 25.7 billion year-on-year. positive factors were the increase of Inova Group by JPY 31.3 billion, offsetting the decline in non-Innova EPC and electricity sales. The increase in the Innova group is due to winning the large-scale O&M orders as explained earlier. The large-scale orders of Innova and non-Innova environment EPC are both expected to be received in the second half. Machinery & Infrastructure business is down JPY 6.6 billion on a year-on-year basis.
Press machine was brisk in the first half at JPY 10.2 billion, up JPY 1.7 billion year-on-year. On the other hand, we saw a large decline in Precision Machinery and semiconductor-related business due to the sluggish market condition. Carbon Neutral Solution business was up JPY 12.3 billion year-on-year. Engine increased JPY 3.6 billion. Process Equipment declined JPY 3.1 billion and wind power increased JPY 10.6 billion.
Next is net sales. Environment business increased by JPY 26.1 billion year-on-year. On the other hand, delivery delay of biomass projects led to a drop of JPY 6.1 billion. Electricity Sales and Operations business declined by JPY 7.1 billion as a result of optimizing the balance between the power source procurement and supply. These declines were offset by the other EPCs and the AUM. However, the overall environment business, excluding Innova, dropped by JPY 4.5 billion.
Meanwhile, the Innova Group had a steady progress in the construction schedules, leading to an increase of JPY 30.6 billion. Machinery & Infrastructure business increased by JPY 1.7 billion year-on-year. Press machine was up JPY 1.7 billion, infrastructure up JPY 3.2 billion, while Precision Machinery went down JPY 2.2 billion and others declined by JPY 800 million. Carbon Neutral solutions business increased by JPY 400 million year-on-year. Engine dropped by JPY 1.2 billion, but process equipment decarbonization systems and wind power, et cetera, increased by JPY 1.8 billion. Let me explain the operating income later when we get to Page 13.
Next is Page 7, our business forecast for fiscal year 2023. With the second quarter results announcement, we made an upward revision of net sales by JPY 20 billion and operating income by JPY 1 billion. The segment breakdown of the upward revisions in net sales and operating income are shown in the defense column A, which is on the right side.
On Page 8, the same column shows the breakdown of the revision for the overall environment business. I would like to skip the details.
Now I will explain the full year forecast of this fiscal year 2023 by segment using the following pages. Please go to Page 9. I First is the environment business, excluding Innova. The order intake was affected by the selection of new biomass power projects and the lost EPC projects in the first half leading to a decline of JPY 13 billion. On the other hand, we received four projects of improvement in retrofit, including the plant in Otara City Hokkaido as well as four projects of long-term O&M, including the plant in Kanoya Kagoshima Prefecture. Leading to an increase of JPY 13 billion.
As the drop in sales from EPC biomass power projects was offset by the increase in orders in the AOM business, net sales were up by JPY 1 billion. operating income was down by JPY 1 billion. This was mainly driven by the cost overruns in the EPC biomass power projects, which had a drop of JPY 2.4 billion. In the AOM business, long-term operations and AUM grew while the electricity sales improved due to lower market procurement costs, leading to a JPY 1.4 billion increase in income.
Next is the Innova Group. Order intake increased by JPY 79 billion. There was a decrease of JPY 24 billion by reviewing APC projects and an increase of JPY 103 billion in continuing operations, including an upward revision of JPY 90 billion in the first quarter. Net sales increased by JPY 19 billion. The Auto EPC experience delays in some construction projects like Rockingham and Moscow due to factors such as the COVID-19 and Ukraine situations, also delays in order booking happen. But this year, the projects such as Riven Hall and Riverside 2 are making good progress. And supported by the weak yen, we were able to see the revenue increase of JPY 17 billion. Even in continuing operations, subsidiaries revenue increased by JPY 2 billion, Steinmuller, which we acquired last year, is also contributing to orders and sales. Operating income increased by JPY 2 billion. EPC's profit increased by JPY 2.5 billion due to the steady progress of construction profit from AUM business decreased by JPY 500 million.
We have revised the exchange rate applied to the full year forecast from JPY 130 to JPY 155 per Swiss Franc, as shown at the bottom right. And this effect is included in the change amount. So the impact by the FX rate revision was JPY 36.9 billion for the order intake, JPY 32.3 billion for net sales and JPY 1.8 billion for operating income.
Page 10 shows the changes in the Machinery & Infrastructure business forecast from the beginning of the fiscal year. order intake will remain unchanged, although there will be some ups and downs within each segment. Net sales increased by JPY 4 billion due to the after sales service for price machines, precision equipment due to a large scale food and pharmaceutical equipment project in China and increased orders from group company IMF and infrastructure sales from water gates and stacks. Operating income remains unchanged.
In slide 11 shows the changes in the forecast for the carbon neutral solution business from the beginning of the year. Order intake remained unchanged from the revised JPY 10.5 billion in Q1. Net sales decreased by JPY 4 billion. mainly because of a JPY 4 billion decrease in revenue after reviewing the Mutsu Ogawara wind power generation process. Operating income remains unchanged for the division as the deterioration in engines caused by the increased material cost for overseas procured items due to weaker yen was offset by increased profit pressure vessels and nuclear power in the process equipment.
Page 12 shows strength in order backlog and sales by year. The order backlog at the end of September 2023 was JPY 1,478.7 billion. The order backlog for the environment is approximately JPY 1.3 trillion, of which JPY 686.1 billion is for long-term operations, which is steadily increasing. Looking at the order backlog breakdown by year, the second half of FY '23 will be JPY 310.5 billion. And when combined with the second quarter sales, we've secured sales of JPY 542.6 billion for the year.
Page 13 is a breakdown of changes in operating income for Q2 Operating income improved by JPY 1 billion year-on-year. This included an increase of JPY 2.2 billion due to improvements in the power sales business and long-term operation business in the environment AOM business, JPY 1.4 billion due to improvements in our Innova Group Steinmuller. And a JPY 400 million increase in Machinery & Infrastructure due to an increase in infrastructure profits. On the other hand, environmental EPC, excluding the Innova Group decreased by JPY 3 billion, but this was mainly due to the deterioration in two biomass projects.
Page 14 shows the quarterly plans and results for net sales and operating income. Our domestic business is centered on public projects and as per the fiscal cycle, earnings are concentrated in the second half, especially in Q4 -- but operating income turned positive in Q2 due to growth in overseas business, revenue and improvements in other businesses. This fiscal year, although we struggled in Q1, both sales and operating income exceeded our plans in the second quarter.
Page 15 is nonoperating income and loss and extraordinary income and loss. Nonoperating income and loss was JPY 800 million due to the improvement of JPY 900 million in equity method investment profit at Niki Ship building and JPY 2.2 billion improvement in FX gain and loss.
Page 16 is a consolidated balance sheet. Total assets decreased by JPY 20.1 billion from the end of previous year to JPY 259.5 billion due to decreases in trade loans, accounts receivable. Cash and deposits were JPY 85.2 billion. Interest-bearing debt was JPY 86.9 billion. And as stated below the table, net interest-bearing debt was JPY 1.7 billion. Liabilities decreased by JPY 22.2 billion to JPY 316.1 billion due to a decrease in notes and accounts payable after abolishing some notes and an increase in contract assets.
Net assets increased by JPY 2.1 billion from the end of previous year to JPY 143.4 billion due to an increase in noncontrolling interests. The shareholders' equity ratio at the end of Q2 was 30%.
Page 17 is the consolidated cash flow statement. Cash flow from operating activities for the first half decreased by JPY 21.4 billion year-on-year to JPY 8.2 billion. mainly due to the impact of JPY 13 billion from the evaluation of certain notes. Cash flow from investing activities was negative JPY 16.6 billion, due to expenditures of JPY 6 billion for NAC's acquisition of NAP Niagra Energy Products business and JPY 5.1 billion in time deposits with terms of more than 3 months.
Other increases and decreases marked with star are the JPY 3.5 billion capital increase through third-party allocation from Imabari Shipbuilding to Hitachi Zosen marine engines. Combined with changes in cash and cash equivalents and the balance at the beginning of the period, the balance at the end of the period was JPY 78.4 billion, a decrease of JPY 9.4 billion year-on-year.
Page 18 shows the results of financial information from FY '20 to FY '22 and the forecast for FY '23. As I have explained so far, we've revised upwards all order, sales and profit items in Q2 of the first year of fall '25. The entire company will work to achieve the new business forecast for fiscal 2023. We look forward to your continued guidance and support. Thank you very much for your attention.
This is Mino, President of Hitachi Zosen. First, I would like to thank you for attending our financial results briefing out of your busy schedule today. Also, I would like to extend my appreciation for your interest in and your support for our company. we have announced the change of our company name to Canadevia, starting from October 2024 as we embark into a new journey. I would like to once again explain the background of this change using this occasion. From the inception of the company, Hitachi Zosen group has worked to establish social infrastructure and solve environmental issues with its technology and sincere approach and has contributed to building a Prosper society. This is also based on this period of our founder, EH. Hunter and the company history of challenging to meet the needs of each era. When the Shipbuilding division spun off in 2002, we had the ambition to become the top company and continue providing hit business and products, which led to the company name Hitachi Zosen with a nickname of hits as we try to explore various business opportunities.
Meanwhile, our business environment has largely shifted in the past 20 years. Firstly, the global environment issues have become an imminent challenge. And secondly, our company started to expand our business globally, leading to an increased responsibility to meet as an organization towards achieving sustainability in the society and global environment. Against this change in environment, we decided to set our group-wide mission, taking on the challenge through the power of technology to create a world that lives in balance with nature. Based on this direction, we unfolded many discussions for the company name that would reflect the group appropriately and finally decide on the new name as announced previously.
The new company name, Canadevia, is a coined word, combining a Japanese word Canaderu for playing music in harmony and a Latin word Via for way or method. Each company in the Canadevia Group will respect diversity and strive for technological innovation in order to build a way that brings harmony between mankind in nature, just like the Harmony played by an orchestra.
Building away means challenging ourselves in the unexplored world, which also represents courage and fortitude. Since the company was found in 1881, our predecessors accumulated efforts have led to our 143 years of history. The change in the company name will enable a sustainable growth to achieve both our long-term 2030 vision and our sustainable vision, which goals are set by 2050.
Under the new name Canadevia, we will strive to build a society with harmony between mankind in nature for a future that brings universal happiness. We will use the blessing of nature, support its work and will be well prepared for threats in order to bring smile to the next generation. We will continue to adopt technological innovation to meet various changes, maintain a strong growth and unlock our future, which is full of possibilities. We sincerely appreciate your continued support.
Let me now explain our actual order intake in the first half of fiscal year 2023 and give some color for each business. The main orders in the first half of this fiscal year are shown on Page 21 for domestic projects and Page 22 for overseas projects. For the domestic waste-to-energy plants, we won the order for 15-year operations for the plant in Kanoya City, Kagoshima prefecture as well as the improvement in retrofit plants in Joyou City, Kyoto prefecture as well as Otaru City, Hokaido.
In the carbon neutral solution business, we won the 20-year O&M order for the onshore wind project in Mutsu-Ogawada, Aomori prefecture, which we are working with Itochu Corporation.
On Page 22, we have the overseas business by Innova, our group company, who won 25-year O&M orders for two waste-to-energy plants in U.K. Inova has been working to expand the O&M business in order to secure a stable and recurring source of income, which efforts are starting to bear fruit. In Blankenheim, Germany, we have a joint venture with Biogen, a German energy company for the purification and liquefaction of biogas. Under this scheme, we will not only supply equipment, but also sell the purified and liquefied biogas as well as the CO2, which is separated and removed in the purification process.
Page 23 shows the main projects of the environment business, excluding Innova. We have updated the progress of each project. But would like to skip the details today as there are no major changes from the financial results presentation back in May.
Next is Page 24, where we have the main projects of Innova Group. The fifth project from the top is New Herst, U.K., which completed its construction in May this year since the start in 2020. Although we faced the increased cases of COVID-19 pandemic and a supply chain disruption due to the war in Ukraine, we were able to complete delivery on schedule. On the other hand, the fourth from the top is Rockingham, Australia. Where we faced a large delay in construction due to the impact from COVID-19, and we are now discussing with our clients and consortium partners the potential pushback of delivery. There is a progress in the discussion to form agreement and the majority of the impact to the EPC business is already factored in the guidance. Let me now explain the business update.
Page 25 is the environment business, excluding Innova. As for the domestic waste treatment facilities and water business, there is no major change in the business environment. As explained in the financial section earlier, we have some cost overruns in the biomass power plants in this fiscal year, which we expect to offset with the overall environment business. In the electricity sales, the profitability deteriorated in the previous fiscal year due to rising JPX market prices. In this fiscal year, we are striking a better balance between the contract amount of electricity sold and procured and have turned profitable due to a stable market pricing. We will continually manage an appropriate balance between the procurement and sale of electricity going forward.
Page 26 shows the update for Innova Group. We continue to be the market leader in Europe and Middle East for the EPC projects of waste treatment facilities. Our market share of received orders has been over 50% since 2020. At the same time, we aim to achieve 50% net sales from AUM out of the total group sales, which is one of the important initiatives in our midterm management plan. In Innova Group, we are also aiming to accumulate various projects from small orders such as supply of equipment to large O&M orders such as those in the U.K. that we won in the first half.
The profitability is expanding in Steinmuller, the company acquired in February, while we are also seeing a steady progress in the expansion of AOM business. I will explain the biogas business later on, Page 29.
Page 27 is the Machinery & Infrastructure business. And with regard to press machines for automobiles as the shift to electric vehicles accelerates, there are concerns that demand for large press machines will decline due to the standardization and reduction of parts we are expanding our lineup of value-added products, such as laser blanking equipment that can meet diverse customer needs. In Precision Machinery, recovery in the semiconductor manufacturing equipment market is lower than expected, but we expect it to recover from the second half of 2024. In the infrastructure business, although the market order volume for bridges in 2023 may be slightly lower than the previous year. our order volume in the first half has remained steady.
We will explain the establishment of a new company for water gates in Thailand on Page 31. In addition, in our life science related business, which is positioned as one of our growth businesses, we have developed in collaboration with new protein, the world's first device to automate the raw material manufacturing process for producing cultured meat without using genetically modified raw materials. By leveraging our technology cultivating in manufacturing requirement for pharmaceuticals and food and beverages, we aim to expand our business in the life science field, including drug development, regenerative medicine research and the food.
Page 28 is about carbon neutral solution business. Six months have passed since the establishment of Hitachi Zosen marine engine, which is the spinoff of the engine business. The effects of a collaboration with Imabari Shipbuilding are expected to be seen in our business results from fiscal 2024 onwards. In the process equipment, capital investment in petrochemical plants is expected to recover to pre-COVID level. Regarding nuclear power-related equipment, the decommissioning of nuclear power plants in the United States has been postponed from the perspective of decarbonization and demand for [ CASK ] and canisters for transporting and storing spent nuclear film is expected to increase as they restart operations in Japan.
Regarding decarbonization systems, we are participating in demonstration projects such as the Green Innovation Fund project to utilize hydrogen. We also deliver hydrogen production equipment to public and private sectors and our equipment is used in demonstration experiments at our customers. Through these demonstrations, will continue to the early social implementation of hydrogen and methanation. In the wind power business, following an EPC order in March for onshore wind power in our more prefecture, we received a EUR 20 O&M order in June.
Furthermore, in the area of offshore wind powers starting this year, we'll be working with Kyoshi University through the NADA leading research program to solve technical issues for introducing and expanding large-scale floating offshore wind power, including understanding the wake phenomenon and mutual interference phenomena unique to floating wind turbines and developing predictive evaluation technology. From here, let me introduce recent developments and business topics.
Please take a look at Page 29. In our midterm management plan, forward 25 our group has announced a plan to invest approximately JPY 75 billion in business over 3 years. The focus of this will be on biogas for which demand is increasing in Europe and the United States. The European Commission has announced the need to increase the utilization rate of renewable energy an increase biomethane production capacity from the current 3 billion cubic meters to 35 million cubic meters by 2030.
So through Innova, our group will actively promote the Biogas business that we own and operate. As the first step, we've decided to start a biomethane supply business in Italy using the DFB method, which will carry out everything from plant design, financing, construction, ownership and operation. In Japan, in May of this year, we entered in a business partnership agreement with TRE Holdings, which handles industrial waste stream and resource recycling. We aim to build a rational and consistent treatment system by promoting public-private collaboration for municipal waste and industrial waste, which have traditionally been collected and treated separately by providing a one-stop service from collection and transportation to ash recycling and disposal will contribute to the validation of a recycling R&T society, which is the common Gulf of both companies.
Page 30 shows the progress related to carbon neutral solution business. At the top right, there is a graph about the conversion of marine engines to clean energy. In a station of future market changes, we are proceeding with orders for green methanol compatible test engines and production of methanol compatible engines. The bottom half is about the global expansion of the nuclear equipment business. In June, our U.S. subsidiary, NEC International acquired the manufacturing and sales business of dry storage containers for spent fuel and radioactive waste from nuclear power plants from Canada's Niaga Energy products. In Canada, Nuclear power generation is positioned as an important power source from a decarbonization perspective and demand for dry storage containers is expected to continue in the future. After the acquisition, the company will be based in Ontario, where most of Canada's nuclear power plants are located and will actively develop technology for the introduction of next-generation small module reactors.
The top half of Page 31 is about the establishment of a joint venture company for water gates, which is related to safe and prosperous urban development as a growth business. We established a joint venture in Thailand in August with an eye to expanding our water gate business in Southeast Asia. Southeast Asia has many large rivers and will construct river gates and dams with hydroelectric power plants as flood countermeasures, as well as respond to future demand for water gate equipment. We have delivered water gate equipment to approximately 30 locations in 11 countries overseas. Utilizing this track record, we'll continue to expand our water gate business overseas, including not only ODA projects but also local projects. The bottom half contains topics related to export 2025 Osaka, Kansai. We are supporting the future society showcase project, Future Life [indiscernible], future city.
The future society showcase project aims to provide export visitors with an experience that gives them a sense of future and we plan to express the future city that we are aiming for through Society 5.0
based on the concept of a world tree that connects the past and presence to the future and expectations for the future we are planning an exhibition that allows you to experience and feel the connection between people and the city of the future. This concludes my presentation.
Now we will have a Q&A session. The first question is from Mr. Ito of Mizuho Securities.
This is Ito speaking from Mizuho Securities. I have two questions. The first question is a clarification of your project regarding biomass and the impact from the Swiss franc currency. During the 3 months in the second quarter, how much was the impact from the delayed delivery of the biomass power project in terms of costs. Regarding Swiss franc, how much impact did you have on income in this quarter compared to the same second quarter of the previous fiscal year. If you can provide some figures, that would be helpful. This is my first question.
This is Min speaking. I would like to answer your question regarding biomass. These biomass power projects are the first large-scale projects for our company with a very difficult condition, including the introduction of overseas technology. In the test run, it took longer time than expected to meet the steam requirements to run the overseas turbine. In addition, we faced some issues, including the leakage of high-pressure steam, which led to a delay in the delivery process. Among these two projects, delivery is completed for one of them, and we plan to deliver the other project by end of this month after a continuous test operation for another 2 weeks or so. Regarding your question around the cost of this delay, the total cost of the two projects combined as of the first half this year was JPY 3.4 billion. That's all.
Mr. Ito, could you repeat again your question around the foreign exchange rates? If we can clarify, that would be great. Thank you.
Yes. My question was how much Swiss franc impact did you have on your operating income as of second quarter in this previous fiscal year. as well as the previous fiscal year.
So your question was the impact coming from the difference between the Swiss franc in Q2 of this year versus last fiscal year. Is that the question?
Yes. Well, rather than the difference of exchange rate itself, could you explain how much positive impact on operating income you had in the second quarter or the first half of this fiscal year? .
You mean the first half of this year versus the first half of the previous year?
Yes, that's correct. Thank you for the clarification.
The exchange rate was JPY 139 against Swiss franc last year, and it is JPY 159 in this fiscal year on average. Thus, the yen is around JPY 20 weaker this fiscal year. The impact on Inova in the previous year was approximately JPY 460 million. I hope that answered your question.
Do you mean you had a positive JPY 460 million impact?
Yes, it was a positive impact.
That figure then is annualized into JPY 1.8 billion positive impact because of the initial forecast of the stronger yen, is that right?
Yes, it's because of the initial JPY 130 versus the revised JPY 155 and yes, that is the annualized number.
The next question comes from Mr. Taninaka of SMBC Nikko Securities. .
Yes. This is Tanaka from SMBC. First is regarding your biomass power project. I believe the remaining one project is going through test run. But is there a risk of additional cost overrun during this pilot period. Secondly, will you implement any countermeasures to avoid a similar situation while continuing to win such large-scale projects? Or do you think this is the last large scale projects, and there will be no large orders going forward so the market can expect the cost overrun risk to be [indiscernible]?
Let me summarize my question. Could you elaborate the risk additional risk of additional cost overrun of the current biomass project and explain your thoughts around winning biomass projects in the future.
As explained earlier, the remaining one project is expected to complete its delivery at the end of this month. We have already booked allowance for the additional cost based on current estimates. However, we are still continuing our negotiations with our clients. And for a safe and stable operations in the future, there might be correction or adjustments so we cannot deny the possibility of additional cost in the future. Regarding the large-scale biomass projects we have won another project, which is scheduled to be delivered in April 2025. This is the same combination as the recent project in terms of the facility made by the overseas manufacturer. So we would like to use the experience from the current project or planned to work on the construction in advance in order to make sure we hit the delivery schedule on time. . Regarding the future projects. We expect these large-scale biomass projects to decline. Additionally, we hope to use domestic equipment or materials rather than imported equipment or materials from overseas to deal with future Lima projects. Hope this answered your question.
Yes. My second question is regarding the wind power diversified business. I believe the initial guidance of net sales are revised down by JPY 4 billion, while the guidance of operating income remains unchanged. But can you explain why that is the case? Also, when I hear about the review of schedule. One thing that comes to my mind is a risk of additional cost similar to the biomass project. So once again, can you explain why the operating income is not revised and whether there is a risk of additional costs of the Wind power project?
Yes. Thank you for your question. This is Kimura speaking. Regarding the wind power project, we had a delay in receiving order Thus, the initial plan was reviewed based on the discussions with the local construction companies. Regarding the cost, we have estimated the amount based on the reviewed schedule. And that amount is reflected in our contracts. Thus, we do not expect any change in the cost due to the change in schedule. That is all for me.
Yes. Let me clarify once again. So do you mean there is no risk of additional costs that I should bear in mind?
No. So far, there is no additional cost from the construction.
Yes. Okay. Thank you very much.
As for the future risk, there is cost inflation in the construction business. So we will make sure to have a good risk management system in place. Okay. Thank you again.
The next question is from Mr. Odaira of Tokai Tokyo Securities.
Yes. This is Odaira speaking. Thank you for this opportunity. Yes. I have two questions today. First is regarding the net sales of Innova. Looking at Page 9 of the presentation, which shows the net sales of Innova Group. You have revised the full year guidance from JPY 168 billion to JPY 187 billion, an increase of nearly JPY 20 billion. Listening to your earlier comment around the impact from the foreign exchange the majority of this increase should be coming from the ForEx, which implies that the actual demand is slightly weaker. Is this the right assumption? That's my first question. .
I believe your question was around net sales. Yes. As you pointed out, the net sales in this fiscal year are down trending compared to the initial forecast when you excluded the ForEx. That is due to the delay in receiving orders as explained earlier in the presentation, as some of the scheduled projects are pushed back to later timing. . On the other hand, there are other projects which we have won outside of these existing projects, which is offsetting the decline in the second half of this fiscal year. Therefore, we have factored these project delays in our guidance today. So could I clarify your comment I guess it does not matter whether it is the initial or revised guidance. But does the guidance factor the projects that you initially plan to receive orders and book sales within this fiscal year, and those are the projects which are now pushed back. When making the initial guidance, I guess you have a certain visibility of potential sales based on various projects in the pipeline.
And thus, is it just a simple delay of the schedule or not?
When making the initial guidance, we forecast the potential sales based on the construction progress, at the works that we received orders during the fiscal year on percentage of completion basis and include potential orders that are before receiving but are likely to be received. And those expected orders are now being pushed back.
Just to repeat my question, is it true that the construction itself is not delayed due to some reasons.
That is correct. There is no delay in the construction itself. We are just not able to book expected sales due to the delay in orders. But as explained, we are steadily winning orders in other projects, which are expected to impact the second half of this fiscal year. Thank you.
The next question might be minor. But looking at Page 27 of the presentation, the press machine in the Machinery & Infrastructure business, had orders of around JPY 10 billion in the first half. While the full year guidance is JPY 19 billion. Does it mean that the second half might have some risk of weakness compared to the first half? Or is it because you just wanted to keep the guidance from revising to avoid the hassle. Can you explain your views around depressed machine in the second half of this fiscal year? So that is my second question. .
Yes. Just as you noted, the order intake is increasing, but the guidance is not revised.
So in actual -- are you receiving continued strong inquiries in the second half as you did in the first half.
Yes, we are receiving strong inquiries. That's correct.
Okay. Now Mr. Taninaka, please.
This is Taninaka from SMBC Nikko Securities. Can you hear me okay?
Yes, we can hear you.
Regarding Innova, so with the Innova group, you have made the upward revision of operating income by about JPY 1.5 billion. What is the reason for this? So excluding FX, the top line is supposed to be slightly weaker, you'll see the improvement in profitability. Can you explain the reason.
So regarding the other group, so we are seeing some special situations because Innova has been using IFRS. For the retirement benefit, I mean there is a difference in actuarial difference that will be posted as an unrealized gain. So it's not affecting the profit loss directly. But according to Japanese standards, the realized gain will need to be depreciated in 10 years to fill the gap. So because of that, we see an improvement by about JPY 1 billion.
I see, I have one more question. as you're changing the company name, I'm sure you're expecting certain costs? And how much should we expect like a few hundreds of millions of yen? Or would it be more than that? Billions over billions? Do you have any hint on those sides of the cost?
Are you talking about the impact on this fiscal year?
Well, either this year or the next year, either way is fine.
Well, for this year's we're not expecting a major cost related to the company name change. So next June, at the shareholders' meeting, we expect to receive an approval to make a change of the company name as of October 1 next year. So that's why we are not expecting the impact this fiscal year. For next year, we'll consider how we will communicate this externally. So probably, it will be the cost for about a few hundreds of millions of yen.
Mr. Ito, please.
So on a related note on the previous question. So the reason for the upward revision for Innova this fiscal year, the impact of FX was about JPY 1.4 billion for EPC Innova. In addition, the exterior difference. Would that be the razor or are you explaining as the main factor for the FX impact. This is explained as aerial difference. So we explain this as another different factor.
So the profit for the Innova group, EPC, it was revised upward by JPY 2.5 billion. Of that JPY 1.4 billion was due to FX and a little around JPY 1 billion will be due to the bacterial accounting difference. Is that correct? .
Yes. Understood. Thank you.
So thank you very much for waiting. Mr. Nakamura from Nikkei Shimbun Newspaper.
I have one question. Regarding the full year forecast, so up through the recurring profits, showing the positive numbers year-on-year. But when it comes down to net income level, when it comes to the net income, then we see a drop in profit compared to the previous year. Can you explain the reason why? So regarding that number, last year, we had an extraordinary profit so that is the reason. I see.
Can you maybe explain what exactly the external profit was last year? Regarding the external profit for fiscal 2022, we had JPY 1 billion for the sales of assets that was JPY 90 billion, and we also have JPY 1.4 billion for the sales of shares of Onami, which is a logistics subsidiary in total, JPY 2.4 billion came out to be an extraordinary profit.
Our next question. Ms.Ike from Nikkan Kogyo Shimbun, newspapers.
This is Ike from Nikkan Kogyo Shimbun. Can you hear me okay?
Yes, we can hear you.
I have a couple of questions. First, on Page 27, regarding precision equipment and system equipment, the semiconductor manufacturing equipment is seeing excessive inventory in U.S.-China conflict and weaker economy in China. But you're expecting again, the steady growth coming back in the second half of '24. So is it because the manufacturing and semiconductor manufacturing equipment market is going to recover? Or you expect the growth of your products in the Chinese economy recovery, which is your expectation. So this deceleration, how much of an impact do you expect on the sales for the first half and for the full year?
Okay. So regarding your first question, that is about a recovery in semiconductor market. So this second half, we actually expected to see a recovery in this fiscal year, but it seems like it's still taking time for inventory adjustment. So the recovery in the market is going to be delayed into the next fiscal year. Regarding your second question, can I confirm once again.
So the deceleration in semiconductor market how much that is affecting the decline in the net sales?
So our semiconductor business is basically supply of vacuum valves. That is provided from VTEX, which is as a group company. And this year, the impact would be around JPY 2 billion on the net sales. That's what's expected. Minus JPY 2 billion? Yes, minus JPY 2 billion.
Can you also tell us the future forecast for overseas market? Not just for this fiscal year but also in a long-term perspective, expect to have overseas to take 50% of the net sales and operating income in fiscal 2030. And I believe three companies, Innova, [ Asmal flow ], [ NAC Iscar ] going to be quite important. So including this fiscal year, what is your view on the future forecast for these three companies in mid and long term? And regarding [ Osmo ] and NAC, what is your forecast on their net sales on a nonconsolidated basis for this fiscal year? Please share those numbers as far as you can.
So regarding the status of the overseas business, so Innova, it's going to be the most important business for sure. So the numbers will be shared later by Kimura. But regarding the current status of Innova business, in addition to the EPC for the waste-to-energy plant, which is our mainstay business, and they also have the operation of long-term operation business and the renewable gas business. So we are thinking of also entering into biogas market. And regarding NAC business, as we've explained earlier. So we have acquired Niaga Energy products in Canada. And we also acquired Filo technique, and we are trying to expand the business areas with this company.
And for water treatment or small flow business, so there are #1 in market share for the mine waste water in Australia. So we'll maintain this market share first, then we think about how we can expand this technology to other areas. So we're working together with Japan and try to find out where to forecast whether Middle East or South America, North America, what type of business to be provided, we are considering and studying all these details right now. In addition, so we ourselves. As I mentioned earlier, we are trying to enter in the Asia market like Thailand for Watergate business. And for waste-to-energy plant business, we are trying to enter in Southeast Asia and India. So we want to be proactively expanding the business in there. And the numbers will be explained by Kimura.
So let me explain on the numbers. For Innova Group, the net sales is JPY 187 billion. And NAC in the U.S. is going to be about JPY 14 billion. Small is about JPY 10 billion. And these are the forecast for this fiscal year. Thank you for your questions.
So since there's no other questions at this point. So now we want to have a closing comment for today's call from Mino.
Okay. So this is Mino speaking. Thank you very much for participating in this earnings call for the Q2 of 2023 at your busy schedule. And thank you very much for many questions and many feedbacks that you gave us. And we receive them as your expectations and encouragement for the group's growth. And we will try our best to meet your expectations by accomplishing this year's budget first, and creating new businesses and growing the existing businesses. So help receive your continued support for our future.
Also, even under the new company name, Canadevia, I have to see you supporting us in a continued manner. So we will accomplish our midterm management plan of '25 and realizing 2030 vision to continue growing the business. And I really hope that you continue to have expectations under Canavedia group for next year beyond. Thank you very much.
So this concludes today's earnings call. Thank you very much for your participation out of your busy schedule. Thank you very much.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]