Earnings Call: Q2 2021

Aug 5, 2021

Hello, everyone. I am Masashi Kumarie, President of DMG Mori Company Limited. I'd like to report the financial results of the first half of twenty twenty one. Here's today's contents. First, I will talk about the financial summary of the first half of twenty twenty one. First half order intake was of JPY218,400,000,000 increased by 61% year on year. The quarterly order intake was JPY 117,000,000,000 doubled from the Q2 in 2020. It was also significantly higher than the original plan of about 100,000,000,000 yen of machine order backlog and recovery increased too. Accordingly, we revised the full year focus upward. Of the financial results. I will explain the detail later. Although it is still not sufficient, we plan annual dividend of 30 yen per share increased from the original plan of yen 10 yen for interim and yen 20 yen for year end dividend. We issued convertible bonds of yen 40,000,000,000 of with Snoo Capital, we are accelerating carbon neutral solutions and growth in China, of U. S. A. And other emerging markets, so we can meet their demands in a timely manner. Concerning our climate change actions, we declared adherence to TCFD. We will proactively disclose relevant information in the future in accordance with the TCFD proposal. Of first half's consolidated order intake was JPY218,400,000,000 sales revenue, JPY178,200,000,000 of Yoyuan. Operating profit, yen 10,200,000,000 earnings after tax, yen 6,100,000,000 Although we have not reached a level of 2019, we have seen a rapid recovery. In addition to the upward trend of order intake, there was a positive impact from the weaker yen against euro. Of we will utilize this opportunity to further reinforce our financial structure. Of operating profit bridge. Supported factors were JPY 5,100,000,000 by higher business volume, JPY 2.5 1,000,000,000 yen by 4 year EEX gain, 1,000,000,000 yen by gross margin improvement driven by high value added solution with higher sales price per unit. Of on the other hand, the marine freight has spiked and led to increased cost of JPY 800,000,000 As a result, the first half operating profit was JPY 10,200,000,000 of quarterly results. The sales revenue in the second quarter was JPY97,100,000,000 a little less than the same quarters 2018 2019. However, you can see a significant improvement in operating profit. Of stringent management in SGA and continued efforts to improve productivity since last year have gone fruits. Of we plan to increase personnel costs to reward our employees' hard work, but I'm of confidence that we can minimize the impact of cost increase with our reinforced financial structure. Of cash flows. Of due to the increased order intake, we have received more down payment, especially in Europe, of Asia, China and the U. S. In China and Asia, of the company's earnings release. We only count order intake after receiving down payment. It is one of the reasons for better cash flows. Of in the Q2, the free cash flow was JPY 10,000,000,000. Of the company's financial results. With CapEx proceeding as scheduled, we expect the full year cash flow to be JPY 15,000,000,000 although it is rather conservative focused. Of balance sheet summary. Of inventory increased a little bit in preparation for net sales growth in the remaining year, of the company, but we should be able to reduce the amount soon and I will explain how shortly. Stronger financial basis. Of. In addition to the convertible bonds, we will raise 30,000,000,000 yen at maximum through hybrid capital. Of we have issued 40,000,000,000 yen of convertible bonds on July 16, and we'll issue JPY 30,000,000,000 of perpetual subordinated bonds by September 2, which will be used for loan payment. Of of sharing we are now building product development center. It is located in front of JLR Nara Station option and is only 30 to 40 minutes away from Kyoto and Osaka. The exterior was designed by Mr. Kuma Kenko. Of the ground opening is planned in June 2022. We are also building a new factory for manufacturing green of casting in the beautiful historic city of Izumo Shivan Prefecture. The new facility will produce recyclable casting components with its cutting edge electric furnaces. It uses carbon free energy too. We are aiming for smaller carbon printed throughout the supply chain of our machine tools. As for the investment in growing markets, of we are building a new factory for fiber access machines in a city near Shanghai, China under the permission of Bafa. Of WAFA is an export control authority in Germany. We are also spending 4,000,000,000 yen to expand the Tianjin plant, of the company, which is operated under the approval of Japanese government. We implement 1.5 of shifts a day and produce 500 units per year, but we will raise the production capacity to 1,000 units. Of for the first time as DMG Mori and a machine toolmaker, we will build a factory in Africa. Of the new plant in Egypt will be mainly built on government funds and DMG Mori will share the know how. Of we plan to produce vertical machining centers and horizontal turning centers there. They will be simple, but precise and robust. Of it will hopefully contribute to the development of local operators and Africa's industrialization. Of the full year forecast. Given the favorable pace of orders, of the company's financial results. We should be able to achieve at least 4.20 1,000,000,000 yen in order intake. We are expecting 3.65 of JPY 5,000,000,000 in sales JPY 20,000,000,000 in operating profit, both of which are a little conservative. We strive to seek much higher figures. Of the midterm profit outlook. We lowered the breakeven point in 2020, and we intend to keep the cost structure to achieve of the record high operating profit in 2022. Of the company. However, it also depends on how fast we can turn the order intake into sales revenue in 2022. Of delivery of some components including semiconductors is often delayed lately. Marine traffic is busy of 2. The building construction around the world is also 2 to 3 months behind the schedule and sometimes our customers fail to accept our machines on time. But either way, our plan is to achieve yen420,000,000,000 to yen 430,000,000,000 yen in 20.22 and yen 450,000,000,000 to yen 500,000,000,000 yen in 2023. Of As a scenario tendency in the machine tool industry, the next economic adjustment phase may come in of 2024 or 2025, but we will survive the phase by lowering the breakeven point as in 2020. Of we will continuously strive to pay dividends to shareholders as well as to repay debts from profits. Of the company. We also work on increasing compensation for employees in proportion to profit. Financial targets. Of we aim for the shareholders' equity ratio of 52% by the end of 2023. Of the remaining question is how to deal with hybrid capital. Of I will continuously discuss with internal and external parties how much hybrid capital we should keep in the of future. In 2024 and 'twenty five and beyond, we will need to invest more in the future business growth and in Monday. Of therefore, we must achieve these goals and reinforce our financial structure by 2023. Of business environment. The red line shows the total order intake of JMTBA members. Of the year. The black line is the sum of 7 major machine tool builders excluding DMG Mori and the blue line is DMG Mori. Of looking back the past 13 years, the blue line has been gradually keeping larger distance to the red line. After reaching a record high, our order intake declined from 2018 to 2020. However, this time, we could limit the decline compared to the industry average and our peers. Of our business. Also, our order intake is recovering more quickly than average. I am convinced that our business strategy of Promod 5 Axis machines, process integration, automation and total solutions directly to the customers all over the world, not limited to major markets will certainly be approved in 20222023. Of order intake by region. Of our Q3 forecast is rather conservative, but we will be able to receive at least the same level of order intake as Q2. Of usually, our order intake in August remains low due to summer vacation. But this year, our focus for August looks quite are positive. This is because many companies are focused to adjust their investment planning as a result of worldwide spread of COVID-nineteen during the last year. We have a strong order intake in July. Of based on these facts, I am certain that our Q3 order intake will exceed the result of Q2. Next, transition of order intake by region. As you see, Germany and Europe are very important markets for us with a quick recovery. Of order intake from Americas remained very stable. Chinese market is growing. I expect our order intake from China in 2023 or of 2024 will be almost at the same level as Americas. Asia is recovering and growing steadily. Of our goal is to achieve 10,000,000,000 yen order intake by quarter and 40,000,000,000 yen per year. I assume the market volume in Japan will trace a historical trend. Order intake composition, 1st by industry. Of order intake from machinery, SMEs and semiconductor industries have been growing continuously. Order intake from automotive decreased from 30% in 2000 to 12%. Over 50% of of our investment for producing electric or hybrid cars. The demand from Dia mode is increasing. Of the market needs new types of diammoor to produce home appliances and Automobits. Of medical has been growing continuously. Looking at the machine model, over 70% of the demand comes from the machines suitable for automation, 5 axis, mill turn and horizontal machining centers. Of we will maintain our leadership in these segments, promote automation and differentiate ourselves from peers. Looking at our customers by company of the company's size. Most of our customers have less than 500 employees. Last year, we produced only about 5,000 machines. Of this year, we will produce 8,000 machines and next year, 10,000. Of we deliver our machines to high end users and our machines' average price is high. This means we do business with customers who deal with advanced cutting edge machining solutions. Of even the world's largest manufacturers do not buy 5,000 units of machine tools per year. Of, but thanks to our customers, we are accumulating rich know how in machining technology, installation and operators training. Of we will deliver this accumulated know how and experience back to our customers together with machines, of the company, and we will grow together as reliable technology partners. This is our strategy. Of average price of order intake. Due to the impact from worldwide spread of COVID-nineteen, of our order average price dropped in Q4 of 2020. But since then, we have been recovering steadily in both Japanese yen and euro basis. The latest average price is coming back close to record high. Of transition of order intake and backlog. Our order backlog is increasing again. Of Ideally, our order backlog should be maintained between JPY 150,000,000,000 to JPY 200,000,000,000 in order to keep the delivery time at about 10 months. Of the delivery time should not exceed 12 months. Of we will produce efficiently and keep our stroke machines at minimum. We will shorten the Final Four Machines production, but invest more time for adjustment of automation and peripheral equipment. Of the company. We will fully utilize our system solution plant and facilitates to capture a growing demand for trucking projects. Of focus topics. 1st, process integration. It is a single machine, Nx1000. Of combined with IMTR, a machine traveling robot, it can replace 3 units: of 2 turning machines and 1 vertical machining center and automatized machining process. Of we needed 3 operators for 3 units and parts in progress, fixtures, charts were waiting to be set up between the 3 machines. Of such production line is expensive too. Of approximately $17,000,000 in total. NTX1000 and IMTR are not of cheap either, but they can reduce the footprint and finish order process in one machine. Of previously, we tried to improve dimensional accuracy of each process. But by completing all of 15/21. We can minimize the barometric distortion and eventually improve the barometric accuracy. Of of IMTR can be customized. Of FANUC and Nachifujikoshi are standard, but we can offer Yasukawa, Kuka and ABB if requested. Of As shown in the video, of Itchen Machine and Gear shaped part. Of this system can eliminate the parts in progress stuck between machines. Of. We learned one thing during the 15 months of COVID-nineteen pandemic. Of the company's financial results. We used to participate in major trade shows in Tokyo, Chicago, Hanover and Milan. Of In such events, of the company. We exhibited dozens of machines, each of which costed several 1000000 yen. Of including the exhibit fee in machine transportation and setup cost, we spent around 10,000,000,000 yen annually. Of of it shows. We used the machines in each showroom, so the cost was minimal. Of the company's financial results. We invite several customers at a time, 20 to 30 customers at maximum, to the weekly shows. We of such events in IGA and Tokyo in Japan, Davis in the U. S, Tianjin in China, Front of It has been very effective from the customers' viewpoint and also motivated our sales and factory staff and encouraged discussion between different parties. Of this experience once again made us realize the importance of having a direct close communication with each customer. Of we don't have to invest too much on major shows. Of instead, we can share our products' basic information on Digital Twin showroom and hundreds of our YouTube clips. Of basic technical trends and machining conditions can be checked through these digital contents. Of If customers are willing to see test cuts or demonstrations, they can come to our showrooms. Of the company's financial results. We will continue to combine these two approaches in the future. With our factories around the world, we are confident that we can meet each customer's of IRONMANCE. Of Next, digital contents. Of together with Mr. Saito from Iyusho Seiimitsu, a leading company in ultra precision 5 axis machining, we created this digital text of the company's report, 100 Examples of 5 Axis Indexed Machining. It gives a sense of how the 5 Axis of index and simultaneous machining work and help the beginners introduce 5 axis machining without hesitation. Of myDM Shimuri, our portal website with 40,000 members started to give online courses to of digital twin test cut is one of our new innovations. Of taking the dynamic and static characteristics of machines and workpieces into account, it can almost perfectly simulate a real life machine. Of Of course, the final acceptance should be done with actual machines. Of the of 1 week or sometimes even 1 month before inviting the customers to showrooms for final acceptance. Of Next, of recent trend of EV Markets. Please see this video. Of EVs require less parts, but their manufacturing methods are totally different from conventional parts. Of EVs need a very robust battery case combined with a hole. Of the company's of press and plastic dies are often used too. Of large sized fiber access machines are suitable for such applications and are becoming popular among e wavemakers. Of we have mostly completed a renovation of IGA campus and now we are moving standalone machines of assembly area from Nara Campus to IGA. We will start such a location this of Oden. This will make IGA campus the biggest machine to assembly and core components planned in the world. Of the company's most crude magnet scale products will be continuously produced in Yiga. On the other hand, Nara will be fully renovated to system solution plant. We will expand the current system solution plant, and it will be 4 times bigger than the current floor space by the end of 2023. Of the current facility sales system solutions worth 10,000,000,000 yen per year, of the company's operating expenses. Excluding the machines machine body sales, by the end of 2023, the sales value will rise to JPY 40,000,000,000. Of we will invite potential turnkey customers from all over the world, give them factory tour during the weekdays of Nara and Kyoto Tour over the weekend in their mother language and offer operating operator training in this facility. Of less complicated standardized automation system can be manufactured in Davis or Tianjin 2. Of we have another high end system solution factory for German made machines in frontend. Of and other neighboring plants can also offer simple automation systems of several million yen. Of our German factories will share of technical know how with new factory in Cairo, Egypt, which will be built by the autumn of 2023, mostly on of NER, AOI's fund. This plant will produce relatively simple vertical machining center and turning centers. It will be our gateway to Africa. Of Africa. By developing operators and producing basic machines there, we would like to contribute to the industrialization of Africa in the mid- to long term. Now let's talk about our new innovation, Large Capacity Tool Magazine. Of such product is very popular in Americas and Northern Europe, where the productivity is higher than other regions. Of our tool management and scheduling software can handle up to 4,000 tools. Of this product is already up and running in Germany, Sweden and some other countries. Of the list price is around 1,000,000,000 yen and we deliver around 2 to 3 sets every month. Of this slide shows the hardware only, but the software has of great features too. It can be connected to the customer's ERP system, for example. It is a highly sophisticated of KEM that enables both hardware and software alignment with the existing production system. Of more and more customers proceed with automation. Of we developed a new product built in mist collector cell fog to eliminate fog or mist during the automated machining process. Of customers no longer have to purchase separate mist collector. Of the compact devices integrated in the machine, saves energy and creates a of safe and comfortable working environment. I wondered why it took me so long to identify the need for this solution. Of this solution is very effective and supports customers to reach their goals for sustainable development and CO2 free production. Of. We will deliver this solution as standard to our machines. Of the company. We are ready to deliver this even to users of other manufacturers' machines. Of DED stands for Direct Energy Deposition. Of. DM Shimori offers 2 types of item manufacturing machines, SLM or powder bed of Tag Machine and DED. We developed them in both Japan of the company in Germany. Our Japanese engineers are specialized in DED machines based on military machines. Of all the emerging companies in space travel industry, our customers. Our of motor and nozzle. This is Ms. Hirono. She's in charge of the development of this machine and gives you a brief introduction. Of of the company. We just finished our assembly, and I believe this would be the world's standard sound and of the year. We will have a live Q and A session, so don't hesitate to ask anything about the active manufacturing. Of We showed this video at an academic convention. Of U. S. Customers use this machine for production of rocket parts. Of. Currently, many Japanese customers use the DED technology for repairing existing parts. However, We see a growing demand for applying DED for die roller production. Of electric vehicle and battery production or semiconductor industry require theme parts sliced by die rollers. Of and here Japanese companies with accumulated know how in dealing with films and textiles have an advantage. Of With the DED machine, you can build solid and durable knives on a dial roller by combining additive and decision cutting technologies. This is a very promising market. Next topic, sustainability. Of the company. First, we support the TCFD recommendations. We have already been doing our efforts before, of the company's financial results, but now we declare our joint commitment as CEO and AG. We will further enhance the disclosure of information on of climate change in accordance with TCFD recommendations. Carbon neutrality is another major topic. Of the company. The idea is that 50% of our currently consumed power will be provided by solar energy. And this does not mean purchasing such energy. Of IGA and Nara campus are relatively vast so that we can cover 70% to 80% of our roofs with solar panels. Of. Of course, the amount of power generated differs according to the weather condition, but the target is that we provide 50% of our used of Power's Solar Energy. Also, we will reduce our power consumption by 25% over the next 5 years. We will do so of the company's financial results. The remaining 25% are reduced by purchasing carbon free energy such as solar, of wind or hydroelectric power. This will make us 100% carbon neutral. Of finally, Health Management. Of we pioneered in carrying out workplace vaccinations. In Nara, we also offer public officials of the local of the company's chance to receive their shot at our facility. We are moving at a very good pace. On August 20, 95% of all employees in Japan have received their shot. Of We have learned a lot from the vaccinations. We foster very good relationships with private universities in West and East Japan, that is in Nara and Nagoya as well. Therefore, we prepared sufficient medical staff to give vaccinations, of the U. S. Government shutdown, but some tasks will remain. For example, the side effects for especially young people after the second vaccination. We want to continue to provide special leave to ensure that no one has to worry.