Mirait One Corp

F:5FO

Earnings Call Transcript 2021-Q2

[Nakayama Toshiki, executive]

Thank you very much for joining today's meeting. I am Nakayama, President and CEO of MIRAIT Holdings Corporation. I would like to make my presentation based on the presentation slides shown here. As you can see, we have changed the format of the presentation quite drastically from what we used in the past. The purpose is to make the presentation simple and easier to comprehend. However, there may be some items that you may find less clear given the discontinuity of the format. If anything is unclear, feel free to contact us, and we would be more than happy to address any questions that you may have.

Please turn to Page 4. Net sales increased by JPY 8.8 billion to JPY 191.7 billion, achieving a record high for the fifth consecutive year. We faced some impact from COVID-19, but the telecommunication carriers continue to build out their infrastructure, which is considered essential social infrastructure. The MIRAIT Group continued with its construction activities taking utmost care to mitigate the risk of infection. As a result, aside from the Environmental & Social Innovation business, which saw a drop in sales with the absence of large projects recorded in the previous year, all other categories achieved sales growth, leading to record high sales at a group level.

Please turn to Page 5. Operating income was up by JPY 1.8 billion to JPY 6.7 billion, which was also a record high.

Please turn to Page 6. This page shows you the breakdown of changes in operating income. In addition to the increase in net sales, gross profit margin improved by 0.5 points, and the SG&A ratio improved by 0.3 points due to our efforts to improve operational efficiency. The MIRAIT Group acquired 3 companies in the fiscal year ended March 2019, and the results show that the synergy effects from these mergers are gradually coming through.

In the following pages, I would like to explain the situation in each business category in more detail. On Page 7, we discuss the NTT business. Net sales in this business category was up by JPY 2.6 billion to JPY 68.3 billion. We faced some headwinds from COVID-19 and some projects were delayed. However, we continued to see growth in facility management operations. Also, with the COVID-19 outbreak, the demand to build out the environment to facilitate remote working was robust. As a result, access work increased within the NTT business category.

On Page 8, we discussed the Multi-Carrier business. Net sales in this category was up by JPY 1.1 billion to JPY 39.8 billion. At the beginning of the fiscal year, we witnessed some impact from COVID-19, such as delays in parts delivery, limitations on on-site visits as well as delays in negotiations with clients. However, we adopted the policies set forth by the telecommunications carriers and the situation has normalized more recently. Our business with each of the telecommunication carriers is mixed, but it is worth mentioning that projects for the new customer, Rakuten, spanned throughout Japan, driving sales growth for this period.

On Page 9, we discuss the Environmental & Social Innovation business. In this business category, net sales decreased by JPY 700 million to JPY 25.8 billion. This was due to the absence of mega solar projects recorded in the previous year. In addition, some non-telecom clients decided to suspend orders or construction work in light of the spread of COVID-19. On the other hand, work to build new 5G facilities increased. We also witnessed an increase in air conditioning work in the backdrop of COVID-19. In addition, Tokaikoei is a new subsidiary that became part of the MIRAIT Group last year, with a strong track record in work for the Tokyo Metropolitan Government. The company achieved growth in work to build water utility infrastructure. Water utility work is a business that we have high expectations for as the next growth driver following mega solar.

Please turn to Page 10 for ICT Solutions business. Net sales in this category was up by JPY 5.8 billion to JPY 57.7 billion. This category was most affected by COVID-19, including overseas. However, the so-called with COVID or new normal environment was a tailwind, leading to significant growth in domestic LAN, Wi-Fi, good sales and software businesses. Lantrovision, which is headquartered in Singapore, faced a decrease in sales due to constraints on construction activities with the lockdown in Singapore and other markets from the beginning of April to the beginning of June. However, the impact on the profit line has been limited with the use of subsidies from the government and other measures. The Lantrovision business is a key focus area for MIRAIT Group and continues to grow steadily, even under the current COVID-19 environment.

Please turn to Page 11 regarding net income. Net income increased by JPY 1.4 billion to JPY 4.7 billion, also achieving a historical high. This was due to strong results at the operating income level in addition to the contribution of nonoperating income and extraordinary gains from the unwinding of policy shareholdings.

Next, please turn to Page 13 on the revised forecast for the fiscal year ending March 2021. Actually, before we explain this page, I would like to mention that when we announced our initial full year forecast in the early spring of this year, there were significant uncertainties regarding the impact of COVID-19. Therefore, our initial forecast did not quantitatively reflect the impact of COVID-19, but rather reflected the MIRAIT Group's management's intention to achieve financial results in line with the previous year. Of course, we cannot be optimistic about the outlook for COVID-19, but in the 6-months since we released our initial forecast, our first half results have come in relatively strong.

We also revisited each of the businesses in more detail. And in light of these results, we have decided to slightly revise our full year forecast. The revised forecast is as shown on Page 13. The forecast for orders received has been revised upward by JPY 20 billion to JPY 450 billion, net sales up by JPY 10 billion to JPY 445 billion, operating income up by JPY 1 billion to JPY 23 billion, and net income up by JPY 0.5 billion to JPY 16 billion.

Please turn to Page 14. We revised the forecast for orders received, up by JPY 20 billion in response to the strong order trends in the first half. This is primarily due to robust good sales for 5G-related products. Strong orders for work to resolve a 700 megahertz TV reception interference and extremely strong orders at the new company in Singapore involved in electrical, civil engineering, namely YL Integrated Pte, which we acquired in April this year. These are reflected in the JPY 11 billion increase for the ICT Solutions business. In addition, we revised the forecast for the NTT business by JPY 7 billion in light of the government's initiative to build out advanced wireless telecommunications network and the anticipated increase in work for 5G.

Please turn to Page 15 for the changes in net sales forecast. Given the abundant projects completed in the first half of the year, we revised the forecast up by JPY 10 billion. The reasons are generally the same as those for orders received. In addition, the completion of work to cater to the rapid penetration of teleworking and the GIGA School concept for elementary and middle schools following the outbreak of COVID-19 as well as sales of 5G-related products remains strong. As a result, the forecast for the ICT Solutions business has been revised upward by JPY 8 billion. In addition, we expect the completion of projects for telecommunication carriers to increase by the end of the year. In total, we have revised the forecast up by JPY 10 billion.

Please turn to Page 16 for the forecast on operating income. We have revised the forecast up by a slight JPY 1 billion to JPY 23 billion. In addition to the growth in net sales, we successfully achieved SG&A cost reductions in the first half of the year. We intend to continue the efforts to streamline the management of construction processes and risks to achieve year-on-year growth in operating income for the full year. We also revised the net income forecast by JPY 500 million.

Please turn to Page 17. As for dividends, we are planning to pay JPY 45 per share for the full year. This is a JPY 5 increase from the previous year, a JPY 2.5 increase for both interim and year-end dividends. This reflects the increase in sales and profits that we achieved in the first half of the fiscal year and the upward revision of the full year forecast. We also took into account that this year is MIRAIT Group's tenth anniversary. The dividend payout ratio is expected to be 30.3%.

In the following pages, I would like to share with you some recent key topics regarding the MIRAIT Group. Please turn to Page 19. The first topic is on the development of multi-skilled engineers. In order to achieve integrated fixed and mobile telecommunication construction work, we are making the effort to develop multi-skilled engineers. We anticipate 5G base-station work to gain full momentum going forward. Therefore, we established tower construction training facilities in East and West Japan, namely Kobe “Hyper Techno Port” and Ichikawa Training Center, as shown in the slide. These facilities will enhance the training of multi-skilled engineers to strengthen the MIRAIT Group's capability to handle combined fixed and mobile telecommunication work. This is our effort to achieve more efficient operations and to overcome the issue of labor shortage.

Please turn to Page 20 for a topic related to local 5G. The MIRAIT group is promoting a comprehensive solutions package to create wireless areas, targeting corporates that are considering adopting local 5G. The package solution that we are offering supports companies from the consulting, design and construction of wireless networks to the obtaining of licenses necessary to operate the networks. We are also offering services to improve wireless areas by using reflective boards, which is a technology developed by an electrical company in the United States, namely Metawave. Today, we also put out a press release regarding our joint project with NTT DOCOMO. Specifically, the project is to establish a local 5G network at our Shinkiba building. On the slide, the location is mentioned as 5G Labo, But basically, it is a solution co-creation labo.

Please turn to Page 21 for another topic on solutions using local 5G. The topic is titled 5G Golf. The purpose of this initiative is to showcase the potential of 5G and to promote the use of 5G-related services to golf course operators. As part of our initiative to grow this business in the future, we will hold an experience-the-next-generation golf event at Nihon Country Club, which is a golf course operated by our group company in Saitama Prefecture. This event will take place on November 27. Details can be found on our website.

If I should take this opportunity to introduce some highlights, we are planning for high-resolution live broadcasting at the first hole using local 5G, as shown on the top left-hand side of this page. At the 13th hole, the players will be able to see the results of landing spot forecasting on their smartphone, as illustrated on the top right-hand side of this slide. In addition to these, we plan to have many other services available for participants to enjoy and to experience. By leveraging 5G in golf playing and services, we believe that we can contribute to overcoming some of the major challenges faced by operators in managing golf courses, such as increasing player turnover and improving on user satisfaction. That will be the purpose of the golf event.

Next, please turn to Page 22. This is our DX-related initiative on electronic shelf tag systems. This product has been mentioned in the media, but it is a system for retailers, in this case, a consumer electronics retailer. By linking product prices shown on the retailer's e-commerce website and those at the physical stores, the retailer can strategically adjust prices based on changes in demand and supply or do limited time sales. The system allows for prices to be adjusted real time, and the retailer can drive customers to its e-commerce site using smartphones or update prices for more than 100,000 items simultaneously at the physical stores. In the past, the store staff needed to print out new tags on paper and replace each of them manually. However, this new system will allow for this to be done electronically, which will help reduce the use of paper and to save on labor. We are currently working with Bic Camera, a large consumer electronics retailer in Japan to implement the system at all of its stores. Going forward, we will sell the system to other retailers such as home centers.

Lastly, please turn to Page 23 for initiatives in EV charger installment. The MIRAIT Group has built a track record in installing EV chargers, primarily on highways, in large shopping centers and in convenience stores. We are one of the top Japanese companies in terms of track record for EV charger installment work. Starting from this fiscal year, we have been awarded a project to install EV chargers at NTT's facilities as part of its initiative to switch all of its company cars to electric vehicles. Recently, the new Suga administration declared that Japan will aim to become carbon neutral by 2050. We believe that we can contribute to realizing this policy through such activities.

That would be all for my quick run through on the presentation regarding MIRAIT Group's second quarter financial results. For the remaining part of the presentation, I will explain the section regarding MIRAIT Group's management initiatives for the future. In addition to the announcement of the second quarter results, we issued a press release on November 12 regarding the group's intention to consider and prepare for a potential restructuring and merger of MIRAIT Holdings, MIRAIT and MIRAIT Technologies. I would like to take this opportunity to explain the background behind this. I am sure that many of you are aware of our history, but I would like to take this opportunity to briefly remind you on Page 26. This slide is titled history of the MIRAIT Group. On the left-hand side, you can see that 10 years ago, in October 2010, we established a new holdings company called MIRAIT Holdings Corporation. Under the holdings company, 3 companies came together, namely Daimei Telecom Engineering, Todentsu and Commuture to form the MIRAIT Group. 2 years later, Daimei and Todentsu were merged to form MIRAIT Corporation and Commuture changed its trade name to MIRAIT Technologies, to become the 2 operating companies under MIRAIT Holdings. This was in October 2012. In 2016, the MIRAIT Group added Lantrovision as limited based in Singapore to expand its global business. Further in October 2018 and January 2019, the group added TTK in the Tohoku region, SOLCOM in the Chugoku region and Shikokutsuken in the Shikoku region to form the current MIRAIT Group.

Please turn to Page 27. This page explains our understanding of the developments in the business environment in which the MIRAIT Group operates. There are 2 key messages: first, the data shown in the graphs on the slide are the reasons why the MIRAIT Group has a very strong sense of crisis in terms of the future business environment. In the top left chart, we have companies A, B and C. Company A is a mobile carrier, and Companies B and C are fixed telecommunication carriers. We plot the average annual CapEx amount for 3 6-year periods from 2002. The mobile carriers' average CapEx has dropped JPY 250 billion from JPY 850 billion to JPY 600 billion. The 2 fixed telecommunications carriers' aggregate CapEx has dropped by JPY 240 billion from JPY 800 billion to JPY 560 billion. This shows that the carriers' CapEx amount is likely to continue to come down in the medium term. Furthermore, the graph on the right-hand side illustrates the changes in the telecommunication carriers business mix. In other words, the mix in CapEx spending has also changed, with a larger proportion being allocated to the building out of services and solutions. At the mobile carrier shown here, the blue bar represents the operating income from basic mobile services such as packet voice communication, which has dropped from more than JPY 4 trillion to around JPY 3 trillion. The decline in income in the mobile business has somewhat been offset by the growth in the business represented by the red bar or services and solutions. This shows that the mobile carriers are transitioning their business structure drastically and at a very rapid pace. Also, the construction industry, in particular, faces a chronical issue of labor shortage. It is clear that the labor-intensive way of operations will reach its limits and impede the growth of the industry at some point in the future. On the other hand, there are positive changes to the business environment as well, which are areas of potential growth, partly benefiting from the COVID-19 situation. First is the X and the remote economy. Initiatives to run the economy remotely, including the management of companies using remote tools, is accelerating on the back of COVID-19. Second is the new Suga administration and its policy to turn carbon neutral. The use of renewable energy, such as solar and wind power is expected to accelerate under the new government's policy. So those are the positives that we have identified.

Please turn to Page 28. In light of these changes in the business environment, we believe that we urgently need to transform our business structure. A through C on this slide are the key themes and initiatives: first, we must build the solutions and new businesses or what we call the frontier domains as core businesses of the group; second, given that the telecommunication carriers are unlikely to increase their capital investments in the medium term, we must enhance the productivity and thereby, strengthen the profitability of the existing carrier business; lastly, we must strengthen the management base as the foundation to achieve a and b, including the promotion of group management and brand management. The key to our transformation will be to follow through on these initiatives.

Please turn to Page 29. This slide illustrates the transformation that we intend to achieve in numerical terms. In the pie charts, the blue portion represents the existing telecommunication-related construction business or the carrier business. In fiscal year 2019, that was 57%. On the other hand, the solutions and new businesses represented 43%. We aim to bring the red portion to more than 50% as soon as possible. This is the transformation and business structure that we aim to achieve. This change is not just about growing in absolute terms, but it will also require a drastic change in the business model. When our core business was telecommunications-related construction work, our client base was limited to the 4 or 5 major telecom companies or slightly more than 10 at most, counting the cable TV operators. However, the solutions and new businesses are B2B, meaning that we need to approach many companies and public sector entities directly or through various channels. In other words, we need to update and transform our sales model as well.

Please turn to Page 30. This page discusses in more detail the new businesses that we will target as we transform the business structure. The 4 circles represent the 4 pillars. First, in blue, is ICT or more specifically, IoT and 5G. Second, shown in green is energy management in light of the transition to carbon neutral that we discussed earlier. Third, in orange, is the building of smart cities. We already have significant track record in civil engineering work in the telecommunication area, so we believe we can grow further in this area. Lastly, in purple, is global engineering, which we intend to strengthen further. As we mentioned in the center, the strength of the Merit Group lies in our front-line capabilities and our experience in both telecom and electrical construction work. We intend to combine our unique Xs or competitiveness with our strong frontline capabilities to grow these 4 pillars.

On Page 31, we have specific examples of new businesses. I'm sure you are familiar with them, so I will go through them very briefly. In the ICT area, we have already launched a datacenter business. We have a drone business to do facility inspections and to train drone pilots. We are providing various solutions for golf using 5G. In energy management, we have created a business around VPP, or virtual power plant, which is a system that combines power generation and charging to manage electricity within the whole community. In civil engineering and smart cities, we are introducing a smart system to manage and maintain old water utility infrastructure using AI. We are also using digital visualization technologies to replace underground infrastructure. In global, Lantrovision runs data center businesses across 13 countries, primarily in Asia. Recently, in China, the company launched a sharing service for telecommunication towers. We will strive to further strengthen our global business centered around Lantrovision.

Please turn to Page 32. The MIRAIT Group will remain focused on creating and protecting social infrastructure, such as telecommunication and energy infrastructure into the future. We will leverage the experience that we have accumulated to remain a trusted construction company that can help create new infrastructure and protect them for the benefit for the society.

From the next section, I would like to comment on the proposed restructure and merger of the 3 group companies. The aim is to accelerate the transformation of our business structure. Please turn to Page 34. As the first step in the process in fiscal year 2021, we will make our solutions and new businesses one team. Specifically, we will bring the solution-related resources at MIRAIT and at MIRAIT Technologies together and develop a new common business plan, share resources and deploy common construction services.

Step 2 is shown on the next page. In fiscal year 2022, we will merge the 3 companies into 1 single entity, as mentioned earlier. With the merger, the group structure will no longer be a pure holdings company structure. The new company will become a holdings and operating company under which TTK, SOLCOM, Shikokutsuken and the other companies will be positioned. This will be the new structure to execute on the new group management strategy.

The outline of the proposed merger is as is described on Page 36. The timing of the merger is scheduled to be early fiscal year 2022. This scheme will be an absorption-type merger with MIRAIT Holdings as the surviving company. This will be a merger of wholly-owned subsidiaries. So a short-form merger is possible. However, given that this merger will be subject to a change in business as described in the articles of incorporation from MIRAIT Holdings, we will propose this to the shareholders' meeting for resolution.

Please turn to Page 37. Lastly, I would like to reiterate that the purpose of the merger is to accelerate the transformation of the business structure. We will aim to build the solutions and new businesses as core businesses. Also, we will strengthen the profitability of the existing fixed and mobile communication businesses. And to support these initiatives, we will work to strengthen the management base. Specifically, we will consolidate back office and administrative functions to reduce costs.

That would be all from my presentation on the management initiatives. Thank you very much for your kind attention.