Mirait One Corp

F:5FO

Earnings Call Transcript 2022-Q2

[Nakayama Toshiki, executive]

Thank you for attending today's meeting. I would like to take this opportunity to give you an update on the results for the second quarter of the fiscal year ending March 2022. We will start on Page 3. Orders received was up by JPY 20.5 billion or 8.9% year-on-year to JPY 249.6 billion. We achieved strong results despite experiencing some constraints in activity due to COVID-19 following last year. In the telecommunications-related businesses, we continue to win orders for advanced wireless network projects [indiscernible]. Telecommunications carriers' investments in 5G base stations also gained full momentum. Regarding the non-telecommunications businesses, in the Environmental and Social Innovation business, we witnessed an increase in orders, centered on electrical work. In addition, orders increased for LAN wiring and data centers in the ICT Solutions business, sales of goods and mobile-related products also increased.

Net sales increased by JPY 20.1 billion or 10.5% year-on-year to JPY 211.8 billion. This is the fifth consecutive year of increase in sales. The strong results are reflective of the robust orders. Net sales increased across all business categories, except for environmental and social innovation, which resulted in record high first half sales. I will now go into details for each of the businesses.

I will start from the NTT business on Page 5. Capital investments by NTT East and West are on a downward trend, but we were able to expand our business in advanced wireless network projects as well as facility management or maintenance work, which we have promoted over the recent years. As a result, net sales increased by JPY 6.9 billion year-on-year to JPY 75.2 billion.

In addition, we have continued to develop multiskilled engineers, enabling us to utilize fixed communication engineers to inspect mobile base stations across Japan. This has allowed us to secure the necessary workforce and to achieve a certain level of cost reduction.

Next, I will discuss the Multi-Carrier business on Page 6. The 5G-related strategies differ across the carriers, and certain carriers have faced some delays in construction work due to disruptions in delivery of parts and other reasons. However, overall, construction of 5G base stations have picked up momentum, and as a result, the business category saw net sales increased by JPY 6.7 billion year-on-year to JPY 46.5 billion. Work to strengthen CATV networks also expanded on the back of increase in telecommunication demand, similar to what we observed for the NTT business. As we mentioned in the last meeting, we reorganized the mobile-related group companies under MIRAIT Corporation in July this year in an effort to enhance efficiency of operations through business consolidation.

Page 7 is on the Environmental & Social Innovation business. Net sales in this business category was down by JPY 3.4 billion year-on-year to JPY 22.4 billion. Results in the first half were down due to the solar power business shifting from large scale to medium- and small-scale projects. We also saw the reactionary impact from the strong sales in air conditioning work, which we enjoyed in the same period last year. On the other hand, electrical and water utility work is increasing. Having said that, orders have been strong this year, and we will continue to make efforts to grow sales in the latter part of the year. Focus areas will be environmental products that cater to the decarbonization of the society, such as work to install EV chargers and self-consumption solar power systems.

The next page is on the ICT Solutions business. Net sales increased by JPY 9.9 billion year-on-year to JPY 67.6 billion. LAN cabling and data center work increased due to the boosted demand to strengthen telecommunication networks in order to facilitate teleworking and online classrooms following the pandemic. Furthermore, the businesses at our Singaporean subsidiary, Lantrovision, which faced a stronger headwind from COVID-19 than those in Japan, have also shown signs of recovery. In addition, sales of mobile-related products increased with the full-scale pickup in 5G construction work.

Please turn to Page 9 for details on profit trends. Operating income was up by JPY 4.3 billion or 64.2% year-on-year to JPY 11.0 billion, recording a historical high for the first half. Operating income ratio was 5.2%, up by 1.7 points from the 3.5% recorded in the same period last year. Operating income increased due to 2 reasons: one, increase in net sales; and two, improvement in gross profit margins on construction work. The MIRAIT Group has strived to improve productivity, positioning profitability improvement as the top priority agenda.

We achieved net sales growth in the ICT Solutions business, which is a high-margin business. Our efforts to improve efficiency has led to margin improvement in not only the telecommunications-related business, but also in the non-telecommunications businesses. The increase in SG&A ratio has been marginal despite higher personnel costs. We will continue to take on initiatives for cost reduction. Please note that there was a positive impact of JPY 300 million on operating income due to changes in accounting standards regarding revenue recognition.

This page shows trends in net income. The MIRAIT Group has been reducing policy shareholdings on its balance sheet. The sale of policy shareholdings is positive on the net income line given that gains on sales are recorded as profits. On the other hand, such operation leads to a reduction in dividends received, therefore, is negative on the net income line. However, net income in the first half of the fiscal year was up by JPY 3.1 billion or 66% year-on-year to JPY 7.8 billion, thanks to the increase in operating income.

Next, I would like to speak on the full year forecast for the fiscal year ending March 2022.

The fiscal year started off amid much uncertainty with the government declaring a state of emergency and other measures to contain the spread of COVID-19. We set our initial full-year guidance to achieve both sales and profit growth versus the previous fiscal year, in which we achieved the medium-term targets ahead of schedule to prove that the strong results achieved last year is the true potential of the MIRAIT Group. Since earnings have remained strong in the first half, moreover, we expect the demand to build out telecommunication networks to remain robust with the development of 5G-related services and the penetration of teleworking. ICT-related demand should also grow with the move towards digitalization. Hence, we have revised upwardly full-year forecast to orders received of JPY 490 billion, net sales of JPY 480 billion, operating income of JPY 32 billion and net income of JPY 22.5 billion.

This page is on shareholder returns. The company's policy regarding shareholder returns is to return to shareholders consistently based on the total shareholder return target of more than 30% and taking into consideration the business results and cash position of the company. However, the company's total shareholder return has far exceeded 30% over the last few years on average. The company intends to be increasingly proactive in returning to shareholders. We announced at the beginning of the year that we intend to increase dividends from JPY 45 to JPY 50 per share for this current fiscal year. In light of the strong earnings results in the first half and the subsequent upward revision of the full-year forecast, we have decided to increase dividends by another JPY 5 to JPY 55.

In addition, we repurchased shares of an amount of JPY 3 billion in the first half of the fiscal year. We will continue to flexibly embark on share repurchases, taking our business results and cash position into consideration.

In the following pages, I would like to discuss 2 recent topics. Please turn to Page 16. The first topic is regarding the certification as DX certified business operator by METI, which we achieved in June this year. The certification is awarded by METI to identify companies that have strategies and systems to promote the digital transformation. The certification is valid for 2 years, and we are 1 of the 209 certified companies at present. We believe we achieved this certification because we are recognized as a leader in adopting initiatives for digital transformation.

The picture on this page shows example image, using our point cloud service that provides accurate 3D point cloud data for buildings and natural surroundings. This is a service that leverages our know-how in applying 3D technologies to assess various environmental settings. The MIRAIT Group offers many other DX-related services such as electronic shelf tags. We will continue to offer various services to contribute to the digital transformation of the society and enterprises.

The second topic is on the JPX-Nikkei400 Index. The MIRAIT Group was selected as a constituent for this index in 2021. As you may be aware, the JPX-Nikkei400 was launched in 2014, and this is the second time following 2014 that MIRAIT was selected to comprise this index. We will continue to make the effort to be selected on a continuous basis.

Next is Section 4, regarding the progress on the tri-party merger and the management strategy for the new MIRAIT Group after the merger. As we have explained in previous meetings, we have been pushing ahead with the One Team Initiative this fiscal year, in which we are encouraging a group-wide cooperation of certain businesses that can be executed ahead of the merger. Regarding the timing of the merger, we have mentioned that we are targeting for early fiscal year 2022. We are now moving toward a more specific target of July 2022. Under the new group structure centered around a new merged entity, we intend to improve on profitability by enhancing collaboration across the 5 core group companies, including the regional entities TKK, Solcom, Shikokutsuken as well as Lantrovision which is the overseas entity in Singapore. Please note that we are currently considering the restructuring of the software business as a strategic subsidiary as shown in red in the diagram. I will go into more details when I discuss our new growth strategy later in this presentation.

This page illustrates the framework of the management strategy to achieve growth following the launch of the new group structure. The new MIRAIT Group will aim to transform into a corporate group that can make significant contribution to resolving various societal issues that relate to a broad range of social infrastructure. As such, the 14,000 employees and the management team of MIRAIT Group are working together to reconfirm, discuss and redefine our P&M, or purpose and mission, ahead of the establishment of the new group. Based on the redefined purpose and mission, we are working to formulate the management vision out to 2030. We hope to disclose more details on the framework and initiatives at the next results meeting, which will be held in May next year.

Today, I would like to explain the important societal issues to be addressed or materiality for the new MIRAIT Group. I will also discuss the outline of the new growth strategy that will be the basis of our 2030 management vision.

First, I would like to discuss our materialities. Businesses are increasingly being required to take on initiatives to contribute to resolving various societal and environmental issues, such as decarbonization and others represented by the SDGs. Against this backdrop, the MIRAIT Group has revisited and redefined its materialities based on the key theme of creating and preserving that the group companies have strived to realize since the founding of the MIRAIT Group. Specifically, we have defined 9 items under 4 areas. Under E, we have 2 items to create and preserve an environmentally friendly society. Under S, we have 2 items to create and preserve a safe, secure and prosperous society and 2 items to create and preserve a society that respects and promotes diversity of people and cultures. Under G, we have 3 items to create and preserve a fair and transparent corporate group. We will make group-wide efforts to achieve these materialities and to enhance further our corporate value.

Next, I would like to discuss the outline of the new growth strategy. We have identified the 5 changes or 5 areas of business transformation as the pillars to support our growth strategy. More details on each of the 5 changes will be shared with you in May next year, together with the 2030 management vision. However, today, I would like to take this opportunity to briefly explain change 1, people-centric management; change 2, acceleration of business growth; and change 5, strong foundation for ESG management. I would first like to explain Change 1, which is people-centric management. The MIRAIT Group does not own assets such as factories or telecommunication facilities, meaning that the businesses of the Group do not rely on tangible assets to generate revenues. Rather, the revenues are reliant on the hard work of each of our employees and the employees at our partner companies. The bedrock of our business is our people, and that is our basic understanding. Hence, the company's business needs to be built on the foundation of safe management and healthy management as shown at the bottom of this diagram. As a layer on top of this foundation, we need to provide the optimal working environment for each function, offering the best mix of online and offline.

We will promote the smart work and work style reform with COVID-19 environment and aim to be an excellent company that can provide the best and comfortable working environment for its employees. Furthermore, the MIRAIT Group will launch the MIRAI University, meaning Future University in the spring of next year. Through this initiative, our employees will attain new skills to adapt to changes in the business environment. We will also develop talent that can drive the growth of our businesses. We will strive to become a group of talented human capital that can change the future of this company.

Ultimately, we want to achieve a people-centric company full of excitement, in which each employee can develop to drive business transformation and accelerate business growth of the MIRAIT Group.

Next, I would like to discuss Change 2, acceleration of business growth. The idea is to redefine the business domains that we want to grow and to which we want to allocate more resources. In the past, we have categorized our business domains as base domains and frontier domains, as shown on the left-hand side of this page. However, the frontier domain was a mix of legacy businesses such as PBX and lighting as well as new businesses such as renewable energy and data centers. As such, the areas of potential growth were not necessarily made clear. Under the new growth strategy, we will redefine and clarify the growth businesses as future domains. We will organically combine and concentrate the resources that we have in the communication foundation domain centered on the carrier business and the enterprise/environmental and social foundation domain centered on the solutions business in order to drive growth of the future domains, shown in the yellow shaded box. So the question is, what businesses should be defined as future domains?

First, we will strengthen the businesses that contribute to community creation or regional revitalization. We will also strengthen businesses that will help accelerate Enterprise DX and Green Transformation or GX. Second, we will seek to enter the Green Power business to support the move towards decarbonization. Third, we will make our software business a strategic subsidiary to strengthen our capabilities in responding to the DX needs of our customers. Fourth, we will strengthen our global businesses in data centers and infrastructure sharing. On the vertical axis, we have indicated our intention to shift to a full-value model.

In the past, we often provided services on a stand-alone basis for telecommunications, electrical, civil engineering and so on. Going forward, we will aim to provide these services in an integrated manner and to offer services across the value chain from planning to maintenance and operations, thereby, promoting the full-value model.

This page is regarding the Green Power business that we mentioned briefly in the earlier slide. The MIRAIT Group has built know-how in the construction, maintenance and operation of solar power plants through the many projects in which it has been involved across Japan. Leveraging such know-how, the Group will launch the Green Power business from the second half of the current fiscal year. In other words, the Mirait Group will enter the PPA business that involves the generation and selling of green power. The green power that is generated will be partly consumed by group companies, which will contribute to the MIRAIT Group's overall effort to achieve carbon neutrality. We would like to contribute to the green transformation of the society through the launch of such new businesses in the field of renewable energy.

This is another topic mentioned earlier, which is the launch of a strategic subsidiary for the software business. Within the MIRAIT Group, the software business have been handled by the SI Business Division within MIRAIT Corporation as well as MIRAIT Information System, a subsidiary of MIRAIT Technologies. We will consider integrating these 2 groups to launch a new software company as a strategic subsidiary. The importance of the software business has increased with the promotion of Enterprise DX and the creation of virtual infrastructure, such as virtual networks. By launching a new subsidiary, we aim to bring together the valuable management resources and software, including human resources and to build a sophisticated and specialized team. This will allow us to grow the business and to have more flexibility to quickly respond to our client needs.

The launch of the new subsidiary is scheduled for July 2022, the same date as the tri-party merger. The new subsidiary is expected to support the data insight management and infrastructure virtualization of the new MIRAIT Group, while also contributing to the DX and business transformation of our customers.

The last page is on Change 5, strengthening the foundation for ESG-based management. As the first step, we established the ESG Management Promotion Committee in September this year, chaired by myself as the CEO. The committee defined the important societal issues to be addressed, or materialities, which I discussed earlier in this presentation. The committee will be responsible for compiling the overall ESG strategy for the group as well as specific ESG initiatives. Furthermore, the MIRAIT Group adopted the TCFD recommendations in October this year. The MIRAIT Group will evaluate the risks and opportunities associated with climate change and the potential financial impact based on the recommendations, and we'll disclose such information in an appropriate manner. That would be all for the presentation. Thank you for your kind attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]