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Below are the main questions and answers from the financial results meeting for Q2 of FYE 3/'24, held on October 26, 2023.

Financial results for Q2 and full-year forecast for the FYE 3/'24

Despite strong orders, the full-year forecast remains unchanged. Is this because you see risks such as delays in civil engineering work? Also, which business segment will be affected by these effects?

Those orders received in the current fiscal year and scheduled for sales within this fiscal year are mid- to small-scale projects that do not involve major civil engineering work and are not affected by other construction projects. On the other hand, among the projects included in the order backlog at the end of the previous fiscal year, especially in the plant engineering business segment, there are some projects the sales of which have already been identified to be shifted to the next fiscal year or later due to delays in civil engineering works. We are taking measures such as applying the percentage-of-completion sales approach for these projects, and the impact on the current fiscal year will become clearer around December or January.

What is the impact from the delay in the civil engineering work on the construction schedule, including costs, for the next fiscal year and beyond?

As for costs, for example, increased storage costs in warehouses are a risk. Going forward, it is necessary to consider the overall process based on the assumption of possible delays in civil engineering work to minimize the risks. The civil engineering and construction industry is one of the industries that will be affected by the so-called "2024 problem". We need to think this issue not only for our company, but also for the entire industry.

Your company's order volume is at a higher level than in the past. Is this due to the market growing as municipalities place more orders, or is your company's market share increasing?

Orders received were at a level of 120-130bn yen in 2018-2019 and have increased to around 150bn yen in recent years with the advancement of PPP projects and other factors. Tasks previously carried out by local governments, such as planning, management, and operation, are gradually being given to the private sector, and we have been focusing on this area of business.

In the PPP business, while there are fewer competitors than in the EPC market, I think there are many large companies. What are the strengths of your company in this market, and what areas do you intend to develop and maintain your superiority?

We believe that our greatest strength lies in our sales force with its ability to build relationships of trust with our clients. Since PPP project is a 20-year joint operation, we believe that building a trusted relationship with our clients is utmost important. We will continue to bid on projects with a focus on the details, such as proposals that integrate mechanical and electrical technologies, as well as the structuring of SPCs.

You mentioned that you have factored in the impact of 500mn yen in sales fees and research expenses in the overseas business. Was this anticipated from the beginning of the fiscal year?

We had assumed this from the beginning of the year.

Last November, you released information on the joint development of a PFOS/PFOA adsorption treatment system with Maeda Corporation. Please tell us about the progress.

Due to a nondisclosure agreement, we are unable to comment, but we are currently studying the effectiveness of the system and the possibility of its application to other projects.

In response to the concentration of construction work at the end of the fiscal year, who should work on leveling the construction work during the year, the local government or the contractor? Also, what, if any, improvements in profitability can be achieved by leveling the construction work?

Starting in FY2024, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) will have jurisdiction over water supply as well as sewage. First, the MLIT and local governments need to work together to formulate policies and budgets for construction leveling, while contractors need to formulate construction plans that can accommodate such leveling, but I think it will be a tough road ahead. If the benefits of construction leveling (cost reduction, etc.) are recognized on both sides, it could be possible in the future, in some individual projects.

Blue Bond Issuance, Financing and Capital Policies

I assume that the purpose of the Blue Bond issue is to diversify funding sources. However, maintaining the current dividend payout ratio will result in a structural decline in ROE. Can you confirm whether the 10% ROE level set forth in the current medium-term management plan can be maintained, along with thoughts on dividend policy and shareholder returns, including appropriate capital adequacy and dividend on equity ratios, as well as other indicators?

We would like to set the 10% ROE as one of our objectives, but in case the ROE declines due to the water PPP initiatives mentioned earlier and other factors, our basic policy is to raise the dividend amount while keeping the target dividend payout ratio of 30%. In this context, we will review and examine the total return ratio, including the dividend on equity ratio and the treasury stock.

The funds from the Blue Bond issue will be used for investments and loans for PPPs, concessions, and other projects - 10bn yen seems to be a large amount of money. Do you have any specific projects or new business models in mind?

We adopted the issuance of Blue Bonds this time because stable funds will be needed over the long term as development at overseas group companies as well as the increase in projects such as the "Water PPP" announced by the Japan Cabinet Office in June.

Could you give us an update on the status of the Impact Neutralization Trust?

The scheme started last December and was intended to be completed by the end of November this year with 10% of the shares traded on that day sold. However, we anticipate that it will take until the end of December or even a little into January.

Next Mid-Term Management Plan

I assume that the internal plan for orders for the current fiscal year is at around the 170-180bn yen level. In the next medium-term management plan spanning three or five years, will sales also approach the level of orders and rise steadily, or will sales lag the level of orders?

We are currently evaluating various aspects of our next mid-term management plan. Regarding the period, we are considering FY2027, the 20th anniversary of the company's establishment, as a milestone.　 As for orders, we are aiming for an increase due in part to the water PPP mentioned earlier, but we expect that sales will be recorded with delays due to many projects with long delivery times.