DMG Mori Co Ltd

TSE:6141

Earnings Call Transcript 2021-Q3

[Masahiko Mori, executive]

Hello, everyone. I am Masahiko Mori, President of DMG Mori Company Limited. Let me report on the financial results of the third quarter 2021. Here are today's content.

First, financial summary of January to September 2021. The order intake trend is continuously positive. Consolidated order intake from January to September was JPY 340.3 billion, up by 65% year-on-year. October order intake remains strong. The momentum is likely to continue until December.

The third quarter consolidated order intake was JPY 122 billion, increased by 72% year-on-year. The machine order backlog has significantly increased from JPY 96 billion in December 2020 to JPY 168 billion. This will lead to stable sales revenue in 2022.

On the other hand, we need to think about how to share rising costs with customers for materials such as semiconductor, sheet metal and casting as well as those [ for price ] and other logistics. Also, automation and full turnkey business tend to extend deliveries volume. We must consider how to turn order backlog into sales revenue in a timely manner. Those will be our major challenges in 2022 and '23.

We have revised our full year order intake, sales revenues and profits forecast upward again. The European market is active. We had successful open houses in Pfronten and Milan. We will continuously utilize large events like EMO as well as small-scale private shows to gain more orders.

We have raised our product and spare parts prices by a few percent. However, we strive to reinforce our automation and process integration solutions, which would more than offset customers' inconvenience. In addition, our products work efficiently for 10 years or longer. In this way, we are certain that customers' cost per hour or cost per workplace would be more competitive and it would eventually lead to customers' understanding. From SDGs' perspective, we would like to establish a long-standing, sustainable relationship with suppliers to further stabilize our supply chain.

Income statement summary of January to September. Consolidated order intake, JPY 340.3 billion; sales revenue, JPY 274.3 billion; operating profit, JPY 16.7 billion. Net financial costs were reduced to JPY 2.5 billion because of additional share purchase of DMG Mori AG in April last year. Profit before income taxes JPY 14.2 billion; net profit for the period, JPY 9.9 billion. Unfortunately, we could not reach JPY 10 billion. We aim for a better figure in the fourth quarter.

Operating profit bridge. The operating profit boosted due to increased sales volume, FX gain as well as consistent efforts for profit margin improvement. On the other hand, the cost increased in two fields. First, we are gradually restoring personnel expenses, which was substantially cut in 2020. Secondly, logistics cost has increased. So all in all, the operating profit grew to JPY 16.7 billion.

Quarterly financial results. The operating profit margin in the third quarter climbed to 6.8%. In order to achieve a similar margin, we needed sales revenue of JPY 136.4 billion in 2019 fourth quarter and JPY 118 billion in 2018 third quarter. In contrast, we reached this figure only with JPY 96 billion in the third quarter. We will limit cost other than personnel expenses, implement a tight breakeven point control and aim for 10% or higher operating profit margin in the near future.

Cash flows. The amount of down payment has increased in line with the order intake growth. We only record orders with an acceptance of down payments. This was one of the reasons for improved free cash flows. We aim to achieve the annual free cash flows of JPY 20 billion, almost the same level as 2019.

Balance sheet summary. The total amount has increased. Ideally, the total assets or liabilities and equities should be the same level as sales revenues. Currently, those are 30% larger than the sales revenue. There are 2 measures to take: one is to establish a leaner operation, and the other is to enhance sales revenue. Our goal is to achieve JPY 500 billion, both in balance sheet and sales revenue by 2023.

Fiscal year 2021 full year forecast. Consolidated order intake, JPY 450 billion or more; sales revenue, JPY 380 billion; operating profit, JPY 23 billion; net financial costs, minus JPY 3.5 billion; profit before taxes, JPY 19.5 billion; net profit, JPY 13 billion. The annual dividend will increase to JPY 30 per share: JPY 10 for interim and JPY 20 for year-end dividends. These are the minimal goals. Besides, we are committed to meeting the delivery days to further enhance the sales revenue.

Midterm financial performance outlook. This year's order intake will be around or over JPY 450 billion. That means 2022 sales revenue should be at least JPY 420 billion. Otherwise, the delivery time will be too long for our customers. Lately, system solutions and full turnkey solutions are becoming standard. We need not only to deliver products or systems to customers but also to receive acceptance from customers after completion of installation and hands-on training to operators. Otherwise, we will not be able to recognize sales revenues and collect payments. Our target is to accelerate this process and achieve more than JPY 420 billion and possibly JPY 450 billion. Although there's a lot of uncertainty, we expect JPY 440 billion in sales revenue and 10% in operating profit in 2023. We will make steady efforts to achieve these figures, catching the recent momentum for higher profits.

Financial targets. Given our midterm business focus in the previous page, we should be able to achieve over 50% in shareholders' equity ratio.

Next, business environment. Order composition by region. We have seen a healthier development. Chinese market is slightly slowing down. However, the U.S. and Europe, except for Germany, show a strong tone. Germany is being a little conservative due to the recent election and Chancellor Merkel's retirements, but it is still stable. Japan is recovering rapidly.

Order intake development by region. The thickness and direction of the red arrows show my subjective view on the recent market development. China and Germany are currently stable. But other European countries, Japan and Americas, are growing. Especially, we have seen a significant recovery in Japan and Americas. I am not so pessimistic about China. Chinese customers still have a lot of vintage machines of over 10 years old, most of them are simple 2-axis or 3-axis machines or sometimes horizontal machining centers made by local state-owned company. These vintage machines cannot achieve the machining accuracy required for carbon footprint reduction or the robustness necessary for automation.

1 million of those vintage machines will be replaced by 200 to 300 new and efficient machines in the coming decade. We intend to gain orders for 10% of them, which means 20,000 to 30,000 units in 10 years and 2,000 to 3,000 units per year. Given their increasing appetite for mill-turn and 5-axis machines and automation, the Chinese market grew slowly yet steadily grew. We will see the same modernization in Japan, Americas, Germany and Asia, but it should be the most apparent in China. In order to meet the demands, we will reinforce the Tianjin plant's capacity and build a new plant in Pinggu.

Consolidated order intake composition. Please see the items highlighted with red circles. First, order intake by industry. Machinery is strong. When you build a battery of an electronic vehicle, for example, you need a series of machines to make separate films, battery cases and powder material. These industrial machines, such as meters and film splitters, are produced by middle-sized companies with 100 to 500 employees. These middle-sized companies or their subcontractors purchase our machines.

Precision components and semiconductors are obviously growing. The share of automotive industry has declined from 30% to 12% in the last decade. And most of the 12% are EV-related customers. As for the aerospace, the commercial aircraft industry is finally recovering. Currently, the space industry is quite busy. Majority of the rocket motors of competitive space companies in the U.S. are now produced by DMG Mori's direct energy deposition models. Medical is also steadily growing because of the aging population and the recent surge in COVID-19 test devices demand.

Order intake by models. The Japanese and American customers try to understand the significance of 5-axis machines. 5-axis machines are optimal for process integration. And now that we are capable of developing processes for middle- to large-sized [ tiers ] and offer a measuring technology as well, our customers can replace specialized machines with our 5-axis models.

Order intake by customer's employee number. As I mentioned, middle-sized companies with 100 to 1,000 employees who produce unique industrial machinery are actively purchasing our products. Their suppliers, who are relatively smaller with up to 20 employees, are also buying our machines.

Average price per unit briefly declined at the last year-end, mainly due to the stock machine clearance, but it has been normalized again. The shortage of operators during the pandemic and increasing needs for nighttime and weekend operation have accelerated the automation trend. Automation requires monitoring and, therefore, facilitates digitization. 5-axis and mill-turn centers are also crucial for process integration.

Thanks to our extensive product lineup that covers all these demands and additional value we have offered to our customers, the average price has increased steadily. The initial cost might have increased, but we also have subscription services and installment options. In addition to that, we have extended the warranty period and make sure that our machine run with sufficient accuracy for 10 years or even longer. In this way, we will ensure that our customer's cost per hour or cost per workplace stays competitive. In this way, we are building a win-win relationship with our customers.

Development in order backlog. We will keep the amount to this level to avoid too long delivery times. Currently, our lead time is 10 months until delivery and 12 months until the runoff at the longest. We will continuously maintain this appropriate lead time. We are currently producing 8,000 units per year. Next year, it will be 9,000 units. We intend to keep the production volume to this level so we can continuously take care of each installation with sufficient care. In this way, we would like to continuously and fully satisfy our customers even with a complicated turnkey solutions.

Next focus topics. We held an open house event at Pfronten, the PRE-EMO show. It was a very fruitful event. Many customers visited us from all over Germany. Of course, we reduced the number of visitors per day to 1/10 compared to past in-house events and also took appropriate infection prevention measures. The event enabled us to give each customer the best personalized service by proposing automation and integrated solutions customized to each demand. We also prepared a stage program, connecting the real and digital world. Customers could join us directly or via livestream online. Here, you can see how we are presenting our Partner Award to the President of Siemens and other key suppliers at the show. The Indian and Japanese award winners could also participate through online connection. So all in all, it was a very successful event.

Next, we took part at the EMO show in Milan. In the past, we exhibited many machines here, but this time, we only had 2 machines: the NZ, a joint development between our Italian and Japanese engineers; and the CTX 450 TC (sic) [ CLX 450 TC ], and entry mill-turn machine developed by our engineers in Bielefeld. 20 years ago, we luckily opened our office in Milan. So now we could utilize our Milan showroom to present 20 machines and welcome customers from EMO show there every day until 10 in the evening to give individual consultations. DMG Mori is the only machine tool manufacturer with a technology center in Milan, and we are also the biggest machine tool manufacture in Italy with 2 factories in total. By combining the exhibition with our showroom, we were able to use this opportunity to its full potential.

We also continue our small-scale exhibitions, Technology Fridays. Despite the pandemic, we were able to hold about 50 Technology Fridays each in 2020 and 2021 at our Iga and Tokyo showrooms with a total of over 2,000 customers. This contributed significantly to our order intake recovery in Japan. For 2022, each quarter, we'll have different exhibition contents, and we are planning to hold our small-scale exhibitions every day in the future. We also hope that the strict travel restrictions will be lifted soon so that we can welcome customers from around the world to our showrooms in Japan again, starting from next year, to introduce our customized solutions. We are planning to invite about 1,000 overseas customers for showroom tours with 10 to 20 participants, so 60 Technology Fridays in total. Of course, we also hope to invite many customers from countries such as the U.S. and Japan to our showrooms in Germany for individual consultations.

Here, you can see the new NZ platform, a joint development of our Italian and Japanese engineers. It is the most flexible turning center in the world, offering up to 4 turrets on the B-axes in one machine. Furthermore, customers can select a short or long version. So the productivity of this turning center is extremely high. With its flexible movements, it can process any type of shaft workpiece or any specialized gear, for example, for vacuum pumps. By adding a second spindle in the middle, it is also possible to process 2 pieces at the same time. So you can see that this is a highly productive and highly flexible machine. The programming of such a complex machine can be difficult. Therefore, we implemented our easy-to-understand dialogue-based programming. We hope that many customers around the world can benefit from this new series.

Next, we have developed WH-AGV 5, an automatic transport AGV system for factories. It is equipped with a collaborative robot by FANUC and Yaskawa Electric. The high-speed AGV itself was developed by DMG Mori. It can assist operator work or realize unmanned operations at nighttime. This transport system will cost about JPY 20 million. There are many customers who lack operators or wish to implement unmanned operations at their factories. So currently, we are selling this on trial in Japan, and we already received several orders by customers, so we can expect increased sales for the solution in the future.

So next, we have solutions for the 3 troublemakers of machining. This might be difficult to understand, so let me explain where the 3 troublemakers come from. During machining, workpieces are cut by metal. The cutting will cause metal chips as a byproduct, then we have the coolant to flush these chips away. Part of this coolant will vaporize as mist since the cutting tool is several hundred degrees hot. So the 3 troublemakers are chips, coolant and mist. And they will have a negative impact on your machine performance and possibly damage sensors, other machine equipment or even your workpiece. So it is necessary to handle these 3 troublemakers carefully, even more so with increasing automation, digitization and process integration.

So we have successfully developed 3 solid solutions: a chip removal system with AI processing, a coolant sludge remover and a mist collector that can be attached very easily to the machine and utilizes a direct fan for the most efficient mist collection. We will standardize these solutions and implement them in all our machines in the future to make long machine operations for our customers much easier.

Since machines are becoming more complex, we also want to provide customers with more learning material. For example, you bought a 5-axis machine but you do not know how to use it. Therefore, we are now offering digital learning material that also includes video guides for a selection of 100 workpieces. There, you can see what kind of tools and what kind of machining you need to achieve for a certain workpiece. You can access this data on our platform by DMG Mori. Customers, operators can study this material. And on top of that, they can also participate at our DMG Mori private lessons on the weekend for practical training directly on the machine. We will further extend our services to provide our customers with the best machining experience.

Next about high-end machining, test cutting on the machine is very important. However, the process takes up resources and time. So we use our digital twin virtual test cutting instead to test machining methods. And since recently, thanks to the supercomputer Fugaku, provided by RIKEN, we can process our test-cut simulations within only a few minutes. Based on the fast results, we can also make fast adjustments and provide each customer with the optimal cutting solution. We are very excited to use our new high-speed digital test cutting and expand our digital twin technology even further from now.

On the other hand, we are also improving our internal processes. DMG Mori has 600 area sales managers worldwide, and each of them visits a customer 3 to 4 times. From now, they will utilize our new sales manual platform 2.0 to provide customers with the latest machine information and customized presentations. They will not just hand out standard catalogs and quotations anymore, but they will be in dialogue with customers to find the optimal solution based on each workpiece type.

The new service also includes videos and detailed information on each machining requirements. By this, consultations that took up to 4 visits for one customer can be finished in just one day. Our sales will be more efficient. We can avoid misunderstandings and provide the optimal information. The new sales menu platform is one important part of our digitization strategy. We are doing direct sales all around the world, especially technical consultations are conducted directly. In Japan, we also use distributors and trade companies for sales, but technical consultations are always handled directly by us. And the new service manual will be a powerful tool to make our services even better.

Repair and maintenance service is very important for a machine tool maker. Machine tools are expensive, but they can be used for decades. And their value stays higher with the right care, so they can be sold for a high price again. DMG Mori has about 2,000 service engineers worldwide, and we have finally established a service skill training center as a central training facility for repair and maintenance skills. As you can see, it's not only equipped with machines but also robots and automation systems. There's also a training area for safety. So our service engineers will receive the most comprehensive training to become the best service engineers in the world. We are also planning to welcome customers' maintenance staff to train them how to maintain DMG Mori machines by themselves in the best way.

At the end, I would like to present our recent initiatives. First of all, to improve our quality management and to stabilize our supply chain, we sell a lot and we buy a lot. By that, we can foster successful long-term partnerships with our suppliers, such as Siemens and FANUC. They will have an incentive to deliver a good supply because they know they can do good business with us. Furthermore, we have suppliers that support our machining and assembly not only in Japan and Germany but also in countries such as India or China. We will utilize our global footprint to generate the most optimal supply system for DMG Mori.

SDGs are also becoming an important part of the supply chain. For example, you need to check whether you have any underpaid minorities or any other inappropriate factors in your supply chain. Germany is very progressive in this area, and INTEGRITY NEXT is a leading German company when it comes to supply chain management. DMG Mori AG is already using their platform for supplier monitoring. I personally verified how useful their platform is. Therefore, we will also implement this in Japan from January next year for efficient supplier monitoring and further grow together with our suppliers.

We are also placing importance on carbon neutrality and sustainability. We hired several experts in this field and already achieved carbon neutrality for our Scope 1 and 2 activities. And our next goal is Scope 3 in relation to our customers. For example, we can help customers to reduce their machine units from 10 to 3 by using our process integration technology. By that, their electricity consumption, so their carbon footprint and necessary process materials, can be reduced. And the impact on the environment can be significantly lowered. So we will utilize our technologies, such as process integration, to contribute to customers' energy and environment-friendly endeavors.

Here, you can see how our experts explain carbon neutrality and how to achieve it and how we are achieving it based on transparent and traceable scientific tracks. Their role is not only to give customers advice but they also function as internal auditors to keep a critical eye on our own progress.

[Presentation]

[Masahiko Mori, executive]

So to summarize, we achieved carbon neutrality for Scope 1 and 2 in 2021. From 2023 onwards, we will aim to achieve carbon neutrality for all downstream activities of Scope 3. We already have the necessary technology, but the success also depends on the cooperation of our customers. For example, we cannot force customers to reduce their energy consumption. So in regard to Scope 3, the situation is not fully clear yet. This is also the case in Europe or the U.S. On the other hand, the trade with emissions certificates is becoming increasingly expensive in Western countries. So in the future, it will be inevitable for companies to introduce new measures to reduce their carbon footprint.

Our strategy or deadline has not been fully defined. But for now, we want to focus on small and mid-sized companies in the metal processing industry worldwide and support them to achieve carbon neutrality.

At the end, I would like to highlight our 16th cutting dream contest. Engineering teams of small to mid-sized, and recently also larger companies, compete here to set new machining standards. Here, you can see the high-quality workpieces they are able to achieve. This cannot be done just by cutting itself. High-level CNC processing, measuring methods and deep knowledge of material characteristics go hand-in-hand in order to make such pieces. As you can see, the global manufacturing industry is full of potential and has a bright future ahead of itself. New technologies will continue to emerge, and we have the cutting dream contest to witness this progress. We are sharing videos and all information on our website. So please feel free to take a look at these fantastic workpieces.

So this concludes my presentation for the third quarter of 2021. We will strive to deliver even better results in the fourth quarter. Thank you very much for your attention.

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