Mirait One Corp

F:5FO

Earnings Call Transcript 2023-Q3

[Tsukamoto Masakazu, executive]

I'm Tsukamoto, Director and CFO of MIRAIT ONE Corporation. Today, I will speak on the following 2 points. First, on the third quarter financial results and then on the downward revision of our full year guidance, which we announced today.

First, on the third quarter financial results. First, on orders received. Due to the addition of Seibu Construction, orders for the environmental and social innovation business increased. On the other hand, the ICT Solutions business and the 2 businesses in the telecommunication infrastructure domain, that is the NTT business and Multi-Carrier business, decreased, but overall resulted in an overall increase of 2.9% or JPY 10.4 billion year-on-year to JPY 368.6 billion.

From the latter part of last fiscal year, the pace of orders received had slowed down because of investment restraints by some telecommunication carriers as well as negative impacts from issues such as semiconductor shortage and supply chain disruptions. Even into this fiscal year, this trend has continued because of issues such as the situation in Ukraine. But from the second half of this fiscal year, we have seen signs of improvement in the order situation in our non-telecommunications area, that is the corporate, environmental and social infrastructure domain.

As a result, when we look at the breakdown between the telecommunications and non-telecommunications business, the latter, the non-telecommunications business was 52%, exceeding that of the telecommunications business for the first time. Also, the percentage of MIRAI future domains, which we have defined as areas to strengthen and intend to concentrate our management resources, exceeded 30% of orders.

Next is net sales. As was seen with orders received, Environmental & Social innovation business, in which Seibu Construction joined, increased. But ICT Solutions business and the 2 businesses in the telecommunication infrastructure domain, that is the NTT business and Multi-Carrier business, decreased, resulting in a year-on-year slight decrease of 1.2% or JPY 3.8 billion to JPY 320.7 billion. The ratio from MIRAI domain reached our target 30%. I will explain more in detail for the 4 business segments.

From this fiscal year, we have changed the order of our explanation, and we'll be starting our explanation from the non-telecommunications business. First is the environmental and social innovation business in the corporate, environmental and social infrastructure domain. Revenue of this segment increased year-on-year from the previous fiscal year by JPY 35.3 billion to JPY 71 billion and was the only one of the 4 business segments to post an increase in revenue. Seibu Construction, whose performance will be contributing to our full year results from this fiscal year, it was their civil engineering, construction and renovation work, which was a major driver of our performance.

Next is the ICT Solutions business. The sales of goods, which handles telecommunications equipment, declined significantly due to inventory adjustments by some carriers. Also, the land-related construction work was affected by the reactionary fall from the Olympic, Paralympic and other events in the previous fiscal year as well as delays in construction due to the late delivery of some equipment, resulting in a year-on-year decline of JPY 16.1 billion to JPY 85.1 billion. On the other hand, global and software, which comprise the MIRAI domain, posted steady growth in net sales.

Next is the telecommunication infrastructure domain. First, about our NTT business. Starting this fiscal year, we have moved the NTT DOCOMO related business from the Multi-Carrier business and booked them under the NTT business. Now for the mobile business, there was the impact of restrained investment from the telecom carriers. Also, as the work to build advanced wireless networks in Hokkaido, Tohoku and Chugoku region were mostly completed by last fiscal year. There was a reactionary fall this fiscal year.

Because of these factors, both mobile and fixed line business decreased and net sales decreased JPY 19.5 billion year-on-year to JPY 123.3 billion. We expect that capital investment in telecommunications carriers' infrastructure is on a downward trend in the medium to longer term, and the areas will shift to that of solution-based type of investment. The company will further accelerate its efforts to improve productivity and reform our business structure by making our engineers multiskilled and also reforming our value chain.

Finally, the Multi-Carrier business. From this fiscal year, the Australian business has been moved from the Multi-Carrier business to the ICT Solutions business, while the construction of reception measures for the 700 megahertz TV broadcasting has been moved from the ICT Solutions business to the Multi-Carrier business. Although there are differences amongst the different telecom carriers, the 5G maintenance work for which orders were strong in the previous fiscal year was generally completed smoothly and resulted in an overall increase in sales.

On the other hand, due to the reactionary fall in works to build advanced wireless networks from cable TV companies and also impacted by the decline in the broadcasting related business, which mostly completed last fiscal year, impacted the total amount of multi-carrier business and resulted in a decrease of JPY 3.5 billion from the previous fiscal year to JPY 41.3 billion. We will continue to make efforts to improve our productivity by consolidating operations and making them more efficient.

As for operating income, we got off to a tough start with a loss of JPY 1.1 billion in the first quarter, but returning to the black posting JPY 2 billion in profit in the second quarter. In the third quarter, operating profit was a positive JPY 5.2 billion, so JPY 6.1 billion of profit for the cumulative 9 months. But comparing this figure to the JPY 19.1 billion of operating income of last year to JPY 6.1 billion this year, this was a significant decline, a very severe result. I will explain the details on the next page.

The factors behind the large decrease in profit are shown in the waterfall chart, and they are the following 3 factors: one, gross profit for the corporate, environmental and social infrastructure domain fell by JPY 1.8 billion; two, gross profit for the telecommunication infrastructure domain fell by JPY 6.2 billion, a total decrease of JPY 8 billion in profit; three, in addition to that, there was an increase of JPY 5 billion in SG&A expenses. The decrease in gross profit was mainly due to a significant change in the sales mix this fiscal year, specifically the good sales business, which handles telecommunications equipment declined.

In addition, a reactionary fall from what was a kind of special demand last fiscal year, such as work to build advanced wireless networks and impact on investment restraining behavior from some of the mobile carriers, affected the mobile business. And so what we saw was that businesses with relatively high profit margins declined.

On the other hand, the Environmental & Social Innovation business grew with the addition of Seibu Construction this fiscal year. But as the gross profit margin of the Environmental & Social Innovation business has tended to have relatively low gross profit margins from the past compared to our other businesses, and this resulted in an overall decrease in profit.

Also, approximately 2/3 of the increase in SG&A expenses was due to the addition of Seibu construction, including the amortization of goodwill. Additionally, there were other onetime expenses such as branding costs due to the company name change in the first half of the fiscal year and integration-related costs such as integration and changes in our core systems. In light of these circumstances, we have revised our full year forecast.

Finally, on net income. In line with the large decrease in operating income, here, too, there was a significant decrease from the previous year's JPY 15.2 billion to JPY 3.3 billion. We have been continuing to sell our cross shareholdings. And while the company booked another JPY 1 billion in extraordinary income, JPY 300 million in business restructuring expenses were booked as extraordinary losses.

I would now like to explain our full year earnings forecast for the current fiscal year. As I've just explained for our third quarter financial results, we are seeing signs of recovery in orders for the non-telecommunications area, However, based on the third quarter results and current conditions, including the outlook for construction completion through the end of the fiscal year, we have decided to revise our full year forecast downward.

As shown in the table, the revisions are as follows: orders received revised downward by JPY 40 billion from JPY 540 billion to JPY 500 billion, net sales revised downward by JPY 60 billion from JPY 540 billion to JPY 480 billion, operating income revised downward by JPY 10 billion from JPY 30 billion to JPY 20 billion, net income revised downward by JPY 5 billion from JPY 20 billion to JPY 15 billion.

On the next slide, I will explain the main factors behind the revisions. For this fiscal year, we had the merger of 3 companies and the establishment of a new group in July, and we reflected on the fact that many of our employees' time was taken up by somewhat inward-looking operations in the first half, such as preparation for the integration and the new organization. So in the second half, the entire company worked together to recover the business performance.

As we enter the third quarter, we have started to see gradual recovery in orders, especially in the non-telecommunications business. But in the Environmental & Social Innovation business and the ICT Solutions business, the decline in investment sentiment due to higher construction costs associated with soaring raw material prices and delays in the progress of construction work due to delays in the delivery of construction materials are expected to continue into the fourth quarter.

In the telecommunications business, in addition to the impact of cost controls by some telecom carriers, a reactionary fall from the works to build advanced wireless networks that was almost completed by the previous fiscal year and construction delays due to a shortage of parts and materials are expected to affect the overall full year forecast for both net sales and profit, which is expected to be lower than that of our previous announcement. Despite this business environment, the balance of construction work carried forward as of the end of December 2022 stood at JPY 257.5 billion, up JPY 49.1 billion from the end of March 2022. And there is no change in the situation, whereas in the past, many construction projects are scheduled to be completed in the fourth quarter.

As we progress towards the end of the fiscal year, all employees will work together until the last minute to improve business performance by streamlining operations, completing construction within the fiscal year and reducing SG&A expenses without exceptions.

On shareholder returns. When we announced the new medium-term management plan last May, we announced that we will be revising our previous policy and that we will, through stable dividend growth and flexible share buybacks, set the total payout ratio at the 50% level. For the current fiscal year, we have already announced a forecast to increase the annual dividend per share by JPY 5 (sic) [ JPY 55 ] to JPY 60, and we intend to maintain this policy. Also, we have already repurchased JPY 2 billion of shares in the first half of this fiscal year. In this second half, we are currently purchasing an additional JPY 2 billion of shares of which we announced. As a result, the current fiscal year's total payout ratio is expected to be 66%.

We also announced our policy to consider canceling treasury stock that has no intended use. The company has decided to cancel 5 million shares equivalent to 4.62% of the total number of shares issued and outstanding at the end of February. Shareholder returns will be implemented in line with the new policy while keeping a close eye on business performance and funding trends.

Finally, I would like to discuss the progress of the strong foundation for ESG management of our MIRAIT ONE Group Vision 2030 announced in May. Since July, we have been formulating various nonfinancial policies and declarations related to ESG, which were announced at the time of the announcement of the new mid-term management plan in May and have been publicizing them on our website and in other media.

In the third quarter, we established and announced the green procurement guideline for environment-related activities. In December, we announced the Smart Work/Life Declaration and the Diversity & Inclusion Declaration MIRAIT One style. It took us some time that this is because we went through the process of conducting a survey of all employees in order to ensure that these are made from the perspective of the workers. In addition, other nonfinancial indicators will be enhanced in the future and actively disclosed in the integrated report and on our website.

That was the overview of the third quarter financial results and the business forecast for the full year.

Regarding our business environment. There are areas where we expect improvements moving forward, but also issues that need to be closely monitored. In any case, we will announce the earnings forecast for the next fiscal year on the day of the earnings announcement in May.

Thank you very much for your attention.