DMG Mori Co Ltd
TSE:6141
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Hello, everyone. Today, I'd like to report on the financial results of the first quarter of fiscal year 2021.
Here's today's content. Consolidated order intake has significantly recovered to over JPY 100 billion. It was higher than the original plan of JPY 85 billion. We have around 1,000 sales representatives across the world, and they submit monthly order intake progress at the beginning of each month. And for the past 4 months, the results of each month outperformed the forecast at the beginning of the month.
The machine tool demand is steadily growing worldwide. The order backlog surged to JPY 124 billion from JPY 96 billion at the end of December 2020. It is time to start thinking about delivery schedule of next year. We intend to further increase order backlog and prepare for 2022.
Operating income increased from the same period of last year, too. Thanks to the speedy vaccination in China, we had a big new exhibition in Beijing exclusively for Chinese customers.
Looking at the overseas market. Tianjin factory as well as Davis factory are running smoothly. Although imported machines from Japan and Germany are selling well in China, we should further advance local production there. Therefore, we plan to start production of a few more models in China to capture the growing local demand. With an export license from Germany, we will construct the second plant in Pinghu near Shanghai. We will also expand the Tianjin factory.
We are advancing SDGs and in particular, carbon neutrality initiatives, following the preceding activities in Europe. We have also formulated road map to 2030. We also revised full year business forecast upward.
Here's income statement summary. Consolidated order intake, JPY 101.4 billion; sales revenue, JPY 81.1 billion; operating income, JPY 4 billion; operating income margin, 4.9%. We have well managed the breakeven point with lower fixed cost. We also limited discount and as a result, the gross profit margin was improved further.
Income before taxes, JPY 3.1 billion; net income, JPY 1.8 billion. The effective tax rate will be almost normalized this year after reorganization of subsidiaries. Concerning FX rate, weaker yen against euro benefited us.
Next, operating income bridge. We compared this year's and last year's Q1. It is worth comparing as we had high order backlog at the beginning of Q1 2020. We have continuously cut personnel expenses, and it brought positive effect of JPY 1.7 billion. JPY 1.3 billion gain of FX due to weaker yen, JPY 0.9 billion due to SG&A cost reduction through digitization. For example, we switched from physical to digital exhibitions. We also reviewed less profitable projects and strictly manage the cost of each machine and turnkey solution with measures and gained JPY 0.5 billion. However, lower sales volume compared to the same period last year has led to a negative effect of JPY 3.7 billion in operating income. In total, the operating income was JPY 4 billion.
Next, quarterly financial results. We marked the highest performance in Q4 of 2018. Compared to that, the sales revenue was still low at around JPY 80 billion, but recovering. We are confident of our current approach given that we achieved 5% operating income margin despite the severe market condition. When the quarterly revenue surpass JPY 100 billion, we would be able to achieve an operating income margin of 10%.
Next, cash flows. Down payment has improved in proportion to an increase of orders. Unfortunately, the free cash flow in first quarter was minus JPY 1.8 billion. However, we already have order backlog for half the machines to be sold this year. And after checking the cost and sales prices of each order backlog, we are certain we can achieve JPY 10 billion of free cash flows for the full year 2021.
Balance sheet summary. The equity ratio dropped slightly since the end of last year because of the increased inventory, but I believe it will improve towards the year-end.
Full year forecast. I am certain we can achieve more than JPY 400 billion in order intake. As for sales revenue, JPY 345 billion is a minimum target. Operating income will be JPY 14 billion. The operating income margin is currently expected to be lower than that of Q1, 4.9%, and we are trying to improve it. The dividend amount is not disclosed here yet, but we will include it once we have a clear insight for the economic recovery, probably at the end of Q2.
We are strictly controlling the breakeven point. Due to the recent economic crisis, we reduced average annual salary for employees in Japan from around JPY 8 million to JPY 6.43 million last year. This year, it will be improved to JPY 7.1 million. We have encouraged our employees to take all the paid holidays and eliminate overtime work, combined with improvement in employee productivity per hour. We are now trying to reward the employees for the improved productivity.
We have approximately 4,000 employees in Japan and 8,000 in other countries. 5,000 employees in Europe and the United States show higher productivity than that of Japanese. Chinese people are quite time efficient, too. So for the past few years, we've been trying to streamline the business processes in Japan. We imitated the drive productivity-oriented culture in Europe and other countries. It eventually bore fruit, and now the productivity in Japan has improved.
Moving on to the business environment. You can see the order intake development of DMG MORI in blue and JMTBA in red. We outperformed the results of JMTBA and that of 7 major machine tool companies. We have been successfully involved in the government projects in the United States and seized the recovering demand in Europe. It was only realized with direct sales and service network and growing membership of our portal site, my DMG MORI.
In the following 10 years, we will pay most attention to machining accuracy required for carbon neutrality. The manufacturers worldwide are calling for higher processing accuracy, geometric accuracy and surface accuracy. Therefore, high-speed and high-accuracy simultaneous 5-axis machines or mill turns as well as digitization and automation are in strong demand. I believe we are fully in line with such technological trend.
Order intake by region. China shows gross demand. EMEA is doing well, too. Especially, Turkey is quite active in capital investment. Japan is being conservative.
As for the recent trend in Japan, we have been approached by companies with unique and internationally competitive products, such as robots and bioenergy related equipment. They are trying to upgrade their processing, geometric and surface accuracy by replacing 20-year-old models with the latest machines with automation and digitization. It happens not only in Japan, but also in other parts of the world.
OI development by region. As you can see, Europe is recovering. China has continuously exceeded JPY 10 billion. Americas is growing, too. We hope to see the recovery in Japan soon.
Order composition. Looking at the share by product type: 5-axis machines, mill turns, horizontal machining centers account for 74%. Even with turning centers and vertical machining centers, we have promoted automation and turnkey solutions. Our cutting-edge laser machines on ultrasonic machines are quite popular for the aerospace and semiconductor customers who machine hard-to-cut materials like silicon carbide.
As for industry, one of our main customers has long been automotive. Lately, the demand comes from the preceding steps of the hydrogen and battery electric vehicles production.
Some small-sized companies of less than 1,000 employees with unique technology are now busy producing paper or textile manufacturing equipment or their components. These paper and textile machines were considered old fashioned, but they are well in need for such high-end vehicles. Since we have a strong tie with SMEs, we have successfully captured these demands. This trend shows in the chart where general machinery and SMEs shares are quite high.
Also in the first quarter, we received the largest order intake in the automotive industry from the world's biggest electric vehicle maker in California. Many components of electric vehicles still have to be machined, such as car body molds and die cast for chassis supporting structures.
Please see the share by the number of employees. Despite the worldwide economic crisis, SMEs are staying resilient and smart and taking risks for further growth.
Average price per unit. In fourth quarter of 2020, the average price dropped slightly because of promotion of stock machines. However, it recovered in Q1, both in Japanese yen and euro basis, thanks to the increasing demand for automation and turnkey projects.
Order backlog. We have consumed most of the order backlog last year, but the order backlog is showing the sign of recovery now. We don't want to make our customers wait for over 1 year, like we did in 2018. To this end, we have improved productivity in front in Germany and expanded production capacities of Iga factory.
We have also strived to expand production capacity of in-house components with improved accuracy and developed new machining methods. From now on, we will increase the order backlog but keep it to less than JPY 200 billion in order to shorten the delivery time. JPY 140 billion to JPY 150 billion will be ideal.
Next, China. Here, I want to show you the video of CIMT 2021. This time, our Chinese employees handled this exhibition by themselves. Dr. Beermann was also involved, our top manager stationed in China. The rest was up to Chinese. You can also see Mr. [ Peter ] on the screen, our General Manager in charge of China. Digitalization is advancing fast in China. We can exchange information with visitors and collect visitors' information without physically contacting them.
For China, we are, of course, applying stringent export control. This means there are limitations for spindle movement and positioning accuracy. For example, 3 plus 2 axes instead of simultaneous 5-axis machining. So their machine performance is lower than that of machines used at Germany and Japan, but enough for general users in China.
Let's look at the first quarter. Value-wise, order intake in China was on a record high, EUR 85 million or more than JPY 10 billion. The red dots show sales and service hubs. As for production, a site in Shanghai will complement Tianjin factory in the future. In China, we partly rely on dealers for sales. However, most of the cases are direct sales and serviced by more than 330 employees.
At Tianjin, we have around 140 employees, and we don't pay them low salaries. Instead, just like foreign affiliated companies in [indiscernible], we are an attractive employer in China. We attract the young and motivated with our state-of-the-art technology and a fulfilling profession that encourages personal growth.
Manufacturing in China is progressive. So customers don't hesitate to introduce automation and digitization. This encourages us to learn from them and build win-win relationships. We also see how reducing CO2 is becoming more important in China, therefore, we increased local production to reduce our carbon footprint in the whole supply chain.
Here, you can see our factory to be built in Pinghu at the outskirts of Shanghai. The area covers 70,000 square meters. Here, we will produce DMU 50 and 70, very popular and relatively high-end models with China specifications. At first, we will produce 1,000 units per year. Our investment will be JPY 6.3 billion. Negotiations with local government about incentives are ongoing. But regardless of the amount, we will invest JPY 6.3 billion at the maximum. Operation will start in 2023.
As for Tianjin factory, the production is currently very busy. We have already purchased land right next to the existing factory. In total, the site will cover 90,000 square meters. The new factory will offer 20,000 square meters of floor space. This production will focus on horizontal machine centers and automation, and the investment will be JPY 3 billion. The factory is scheduled to be completed in 2024 and start production in January 2025.
Next, marketing. Currently, marketing is shifting from real to digital. Here, we rely on our digital twin showroom with more than 50,000 accesses already. On the real side, we hold technology Fridays in Iga. Tokyo, unfortunately, was excluded from January to March because of the extended state of emergency. However, we are now increasing the number of participants in Iga, where crowds of people can be easily avoided.
Of course, contents are highly important. We released about 30 videos in Q1, for example, this video of tool visualizer. Machine operators have tasks apart from just machining, preparation of cutting tools and data. These tasks are very redundant and time-consuming, so we used our technical know-how to answer the needs of customers who want to see these tasks done inside a machine. Given the machines are depreciated over 7 to 10 years, depreciation cost for machines and tooling cost is almost the same. A machine worth JPY 100 million consumes cutting tools worth JPY 10 million each year. You see efficient management directly affects customers profit that is why we want to offer qualified support in this field, too.
Our digital twin showroom is constantly being enhanced. This platform acts as the first contact point for the customers. Then finally, we invite them to our physical showrooms inside our factories to discuss the details.
It is important to have showrooms all around Japan or around the globe. But whatever the number of showrooms, there will never be enough. Therefore, we started the 5-axis machining association in Japan. We've consigned 5-axis machines to selected customers, and then they can study about new technology as if owning the machine themselves. As of right now, there are 98 member companies. After having borrowed the machine for 1 year, they can purchase it.
This is a very long-time effort with weekly operating training. These qualified operators can graduate to become true 5-axis machinists. And this is not about selling a machine. It's about educating operators and building the new schemes. We do so together with the partners of this association. Machines and automation are getting increasingly complex, but these skills are not sufficiently taught at universities and colleges in Japan. So we want to fill this gap, that is educate machinists to acquire the skills that will be matter.
This is about my DMG MORI, a portal site for direct communication with customers. Now service requests can also be made online. In the past, customer has to make phone calls to our call centers. But now just like Amazon and others, they can directly contact us on their own machines. And this also applies to quotation for service and spare parts.
Lastly, the topic of sustainability. We have achieved carbon neutrality worldwide. This means from business activities and manufacturing processes from parts procurement to product shipment. Additionally, we have been studied by a third party. This is our action plan for the future. In 2019, we emitted 78 tons CO2 per machine. By 2030, we will reduce the amount by 30% to 55 tons.
For Scope 1 and 2, this equals 60% reduction; for Scope 3, 20% reduction. This process is accompanied by many events shown on the bottom. For example, one big milestone is in 2024 and 2025. The introduction of electric furnaces at Watanabe Seikosho, casting manufacturer of our group. The application of a new electric furnace will greatly reduce the net CO2 emission in our supply chain.
The corona pandemic has shown that our philosophy, play hard, study continuously and work together, is more important than ever. And to play hard, one must be healthy. We are actively promoting health under our DMG MORI health and productivity management declaration. The medical checkup we offer is quite thorough. I, myself, have taken such in-depth screenings because my father suffered from strokes. Now we offer this chance to our employees as well. This includes stomach camera examinations and colonoscopy, depending on the age and other factors. Then there is also regular health guidance. You see we attend to this with the same degree of care as to machine quality management.
PCR test equipment by Shimadzu Corporation is also planned at all our locations. Furthermore, we are partnering with Saka no Tochu, a venture company for low pesticide vegetables. This makes for healthier lunch at canteens.
As for paid holidays, we are encouraging our employees to take them during slow periods like last year. Only the Japanese have tendency of accumulating paid holidays. But for us, untaken holidays are recognized as liabilities in [ IFRS ]. So we urged employees to make use of them last year. This year, however, economy is recovering. Therefore, employees shall use 20 days off, slightly less than recently. Still, this is 100% of their annual proportion without carryovers from previous years.
The last topic of today, our new building, Nara Product Development Center designed by architect, Kengo Kuma. It is located across the JR station, JR Nara Station. It will be the same size of Tokyo Global Headquarters. The first and second floor are designed as test centers for new machines. The third floor will be our R&D headquarter. The fourth and fifth floor will be our second headquarter to complement Tokyo GHQ from Nara, where our company was founded. The sixth will offer social space for our employees. After COVID-19 vaccination, we will plan some events so they will have a chance to please go and meet here. From there, it only takes 30 minutes to Kyoto or Osaka. Talented people can easily access us from anywhere.
As for Tokyo, we have already collaborated with many universities and research facilities. Now we are also looking at West Japan and want to strengthen our local relationships to benefit R&D. This concludes my presentation. Thank you very much.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]