91福利

Below is a summary of the key questions and answers from the FYE 3/'23 financial results briefing held on April 26, 2023.

The FYE 3/'23 financial results and full-year earnings forecast for the FYE 3/'24

Regarding the FY 3/'24 forecasts for sales and operating income, what is the breakdown of the plant engineering business (hereafter PE business) and the service solutions business (hereafter SS business), as well as the international business within the PE business, and the PPP business within the SS business?

Regarding the plan for the FYE3/'24 period, the PE business is expected to generate sales of approx. JPY 90bn and the SS business approx. JPY 65bn, as well as operating profit of approx. JPY 4bn and JPY 6bn respectively in the PE　and the SS businesses.
International business within the PE business is expected to generate sales at the level of JPY 24bn and operating income of JPY 2bn; PPP business within the SS business is expected to generate sales at the level of JPY 34bn and operating income of JPY 2.7bn

Could you also tell us about the results of the international and PPP businesses in FY3/'23?

Sales from the International business were JPY 26bn and the PPP business were JPY 35.7bn; operating income was JPY 1.7bn and JPY 2.0bn, respectively.

Why was the international business in FY3/'23 better than expected and how do you see this continuing forward?

This was due to our overseas subsidiaries having anticipated shortages of necessary components and parts and secured inventories. Normally, there are cases where orders are turned down in cases when shipment cannot be made due to the delivery delays, but this time we forecasted the market situation ahead of time and turned it into a sales opportunity, which contributed to our business performance.
As for future growth, we believe that we will continue to grow steadily with special and competitive products such as cross-media filters and ceramic membranes.

How should we understand the FYE3/'24 forecast for the international business, which is a decrease in sales and an increase in profit?

Overseas subsidiaries will be slightly more subdued in FY3/'24, whereas the international projects being carried out in Japan will contribute to profits due to the robust momentum.

What is the background to the PPP business in FYE3/'24 of declining sales but increasing profits?

Metawater Services Ltd, which is included in this business, is expected to see a turnaround in profit growth, in part due to improved utility costs.

What are the prospects for K.K. Mizumusubi Management Miyagi. in the PPP business in the FYE3/'24?

While sales are not expected to change much, profits are expected to rise slightly.

Orders received in FYE3/'23 were very strong, over how many years does it take to build up to sales?

Taking the City of Osaka case explained earlier as an example, sales in the first year are nearly zero; in the second, third and fourth years, sales on a percentage of completion basis are recorded, say JPY 5 bn or JPY 10 bn, and the completion of construction is five-and-a-half years away.

A provision for loss on construction contracts was made in FYE 3/'23. Is there a risk of this occurring in the future?

This was due to the performance maintenance and cost deterioration for the equipment delivered approximately five years ago, and is attributable to the specifics of this case, with no impact on other construction work.

Medium to long-term performance outlook

On the explanatory slide, it says that the order receipts have increased in the medium to long term, whereas there have been increases and decreases in single years. What are the prospects for medium- and long-term growth of domestic business and the sustainability of the market environment, with a view to achieving sales of JPY 200 bn?

Regarding the medium- to long-term market conditions in Japan, the budgets of municipalities in the domestic water and wastewater business, as well as the resources and environment business had declined since five or six years ago and have remained flat for the past two to three years. Under these circumstances, orders are being placed for DBOs and PPPs, in which projects traditionally carried out by municipalities are entrusted to the private sector. That said, there has been no significant change in the total category of water supply and sewerage projects. Our business performance has increased by receiving orders for these DBOs and PPPs, and we expect these projects will continue to increase in both number and size. We aim to achieve our growth by steadily winning these orders.
In the FYE 3/'28, which marks the 20th anniversary of the company's establishment, we are aiming for sales of JPY 200 bn. We used to say the breakdown of 160 billion yen in sales through organic growth and 40 billion yen through M&As. We have higher visibility in our target of JPY 200 bn sales with organic growth of 170 billion yen and M&A of around 30 billion yen.

Will the growth rate of sales be smoothed out by the increase in protracted projects, not just large projects?

There is a tendency for construction periods to lengthen, as budgets for municipalities to be executed in the relevant year become tighter. Some construction projects that previously took two years now take three years, and there is a considerable difference between projects. If we accelerate the progress of construction, our cash burden at the end of the year will increase due to the shortened payment period for subcontractors under the Construction Business Act. Most important, even if sales growth moderates, is to implement a system that is able to generate profits by firmly promoting cost reductions, promoting internal rationalization and reducing inefficiency.

You mentioned that the gross margin on projects has improved slightly over the past few years, and the overseas business has turned around, which I think is a factor in the increase in profit. In the FYE 3/'24 plan, can we expect to see an improvement in the profitability of projects and a turnaround in overseas business?

In Japan, we have broadened our business scope to include a wide range of operations, such as concessions, and although there are some challenging projects in terms of profitability, we are pursuing a strategy of expanding into new business areas. Regarding the international business, our strong products, such as cloth-media filters and ceramic membranes, have given us an advantage, while we believe that the FYE 3/'23 results were better than we had expected. For FYE 3/'24, we will have to closely monitor the situation.
We are currently evaluating some M&As, which had not progressed during the pandemic, and we believe that by actively promoting our international business, including the expansion of the sales channels, we can achieve steady growth in the medium to long term.

The company's operating profit has grown by an average of 5-6% per year over the past five years. What is your view of profit levels for the next three to five years?

Orders have been strong, and sales are steadily increasing, so we hope to increase operating profit to over JPY 10 bn. We expect the operating margin to remain around 6.5% to just under 7% for the time being. There are also investment in human capital as well as depreciation costs associated with the renewal of the core system, so we do not expect a significant improvement in the next mid-term plan, but would like to aim for more than 7% in the long term.

Capital policies

Why is not all of the treasury stock cancelled?

About half of the shares are cancelled, bringing the shareholding ratio below 5% of the total number of shares outstanding. We are now studying a system for allocating shares to employees in addition to incentive remuneration for directors and officers. The 'employee base increase and compensation improvement' mentioned earlier is mainly aimed at general employees, while for managers we would like to make effective use of treasury shares as incentive remuneration.

Your company's balance sheet is net cash and the equity ratio is around 40-50%. Do you think you should increase the financial leverage to increase ROE in the future?

Due to the nature of our public works business, we would like to maintain the equity ratio of over 40% as an indicator of managerial soundness and safety.It is also necessary to improve the efficiency of capital, so we keep a balance and think in flexible ways.

Under your business model, I think it does not require that much assets. Given that the equity ratio is to be maintained at the current level, would that mean that interest-bearing debt would increase and leverage would be applied, as profits are accumulated every year?

Considering our business going forward, we will need to take certain measures to expand our business, and we expect our interest-bearing debt to increase.

We are aware that the Impact Neutralization Trust was intended to liquidate the shares of major shareholders under this scheme. However, following the announcement, the share price slumped, and the company recorded a loss on the sale of investment securities, while minority shareholders also suffered losses. Could you please explain why the company has chosen this scheme and what is the management's view on this situation?

To increase the volume of shares in circulation, the Impact Neutralization Trust was introduced. The scheme is designed to have as little impact on the market as possible by selling 10% of the day's volume to the market, but as a result it had an impact on the market and the share price slumped.
In the event of a similar case in the future, we will not adopt this scheme.

Did the board discuss about potential share price declines well in advance?

We discussed the risks in view of other precedents. We saw that it would be limited for a certain time period, but the decline was more significant than we had imagined.

In the future, when the two major shareholders sell their shares of METAWATER, do you have any thoughts on how to handle this, such as involving a share buyback to reduce the impact on the market?

To avoid causing so much trouble for our existing shareholders, we will reflect on this failure and carefully consider the next step. There may be various alternatives, including share buy-backs, with which we would like to inform everyone that we will not adopt the Impact Neutralization Trust in the future.