91福利

Below is a summary of the key questions and answers from the FYE 3/'23 Q2 financial results briefing held on October 28, 2022.

Q2 financial results and full-year earnings forecast for the fiscal year ending March 2023

The full-year forecast for orders to be received, which was announced in April, was 140 billion yen. In the briefing, it was said that this figure is on track to reach 150 billion yen, according to internal plans. What is the background behind this?

It is a result of our sales department actively taking on the challenge of out-of-budget projects for this fiscal year's initial budget. We are confident that we are on track to achieve our internal plan of 150 billion yen.

What is your view of the level of orders for the next financial year and beyond?

In recent years, the number of large-scale projects, including DBO (Design, Build and Operate) projects, has been increasing in tandem with the order amount per project. Thus, our forecast is upwards of 150 billion yen. The number of large-scale projects, including DBO projects, is three to four per year, and this figure fluctuates each year. In looking at trends, it is necessary to look at about a 3-year average.

Your overseas subsidiaries, especially in the U.S., are doing well. What are their strategies for customers and price setting?

The U.S. subsidiary (Aqua-Aerobic Systems, Inc.) has its own strong products. They have a bargaining power in negotiation. For example, they can offer speedy delivery to customers by sourcing some parts and materials before receiving a formal order from customers. This way, they can control parts and materials costs amid the rising prices.

Is the strong performance of the North American operation sustainable?

Inquiries for a tertiary treatment filtration system called "Cloth Media Filter," a product of Aqua-Aerobic Systems, Inc. have been brisk. As there is a large order backlog, we expect this trend to continue next year and beyond.
Amid soaring raw material prices, we have the advantage of strong commercial products, and have been successful in taking risks and procuring ahead of time. With the growing U.S. population, the amount of water treated is steadily increasing. Thus, we expect this market condition to continue. On the other hand, the operation in Europe is facing tough challenges. Growth in the European business would further improve our overseas businesses overall.

What are the forecasts for sales and profits for overseas business in two to three years?

Our forecast for overseas sales in our plan for this term is about 20 billion yen, up from about 18 billion yen in the previous fiscal year. We aim for 30 billion yen for the time being, and 40 billion yen to 50 billion yen including M&A in FYE 3/'28.
We hope to increase profits to about 1.2 billion yen to 1.3 billion yen.

Net sales for 1H increased 7.2 billion yen year on year. How much was from the Public-Private Partnership business?

About 3.4 billion yen were from the Public-Private Partnership business.

How about sales and profits of K.K. Mizumusubi Management Miyagi?

We cannot disclose the results of K.K. Mizumusubi Management Miyagi due to its relationship with Miyagi Prefecture. The company plans to announce its results in November. All we can say is that sales were about 1.6 billion yen to 1.7 billion yen in the Q1 results that have already been announced, and the total for Q1 and Q2 is about two times that. They are making a profit.

The presentation materials describe the risk factors that are surfacing. How would you evaluate the first half of the year within the company?

We were worried about challenges beyond our control, such as supply chain disruptions and delays in civil engineering work. Nevertheless, the results were more or less in line with our internal plans. Through collaboration among the design departments, partner companies, and the local governments, we were able to carry out the processes in an appropriate manner, thereby demonstrating a high level of resilience.

The full-year results for the fiscal year ending March 2023 shows a decline in non-consolidated earnings, partially due to changes in the composition of projects. Will the contribution of group companies offset this decline?

I think it will. On a non-consolidated basis, our company will be affected by rising prices and slight delays in deliveries. There may be several hundred million yen's worth of events that make projects less profitable as they make progress. Nevertheless, we intend to work on cost reductions and other measures while offsetting the decline of profitability with our overseas and Public-Private Partnership businesses.

Provisions have not risen much during the first half of the fiscal year. Has the cost of the projects currently remaining on the order backlog been raised?

Provisions for costs are made when there is a concern that a substantial loss will be incurred, or actual complaint has been made for a project. However, no such projects are currently underway.

The cost of materials and the labor for the current order backlog are likely higher than when orders were received. Isn't there any risk that high costs will surface at the time of project completion?

We conduct project reviews on a regular basis, but there are no projects that have come to light at present. Meanwhile, there are projects for which we negotiate with the local government, if necessary, for reviewing the relevant contract after identifying the slide clauses, or revising the design and changing the specifications. The construction period of projects has become longer now, as shown in their completion three or four years after receiving the order. On the other hand, there are more opportunities for negotiation, thereby preventing any serious issues from arising at this point in time.

In the past, I believe there were many orders for renewal and capacity expansion in response to aging facilities. Have recent increases in utility costs led to stronger customer demand for energy conservation, leading to further competitiveness of your company's products?

Energy saving has been our key theme for decades. We are a company that combines 'mechanical' and 'electrical' technology. Our greatest strength is the ability to offer comprehensive electrical control that maximizes the characteristics of a machine. Facing the demand for decarbonization, we see this as an opportunity to differentiate ourselves from our competitors.

Capital Policy and Midterm Business Plan 2023

When net assets increase as profits grow, maintaining ROE at the current level will be challenging. What is your capital policy to address this issue?

We will maintain a dividend payout ratio at around 30%. Our Midterm Business Plan 2023 sets the ROE target at 11%, and we are also actively pursuing M&A.
In addition, we believe it is necessary to apply ROIC (return on invested capital) to assess the efficacy of investments, as we increase interest-bearing debts by investing in growth areas. At present, the companywide ROIC is 9% and the cost of capital is 5-6%. ROIC in growth fields will be challenging at the beginning, but we intend to manage ROIC in four segments in our next Midterm Business Plan.

You conducted a partial cancellation of treasury stocks last year. You still have half of them. The company policy was to use the proceeds for M&A. Have you made any changes to this policy?

No. We will use the proceeds for M&A. We are also considering using some of them as incentives for executives and employees.

Could you comment on the achievement of the operating income target of 10.5 billion yen in the final year of the Midterm Business Plan 2023?

The order backlog is steadily increasing, and we are aiming for net sales of 150 billion yen or more against the target of 145 billion yen. This will lead to growth in operating profit. We will make an official statement on this at the financial results briefing in April next year, following a compilation of the budget in February to March.