Earnings Call: Q1 2021

May 12, 2021

Today, I'd like to report on the financial results of the Q1 of fiscal year 2021. Here's today's content. Consolidated order intake currently recovers to over 100,000,000,000 yen It was higher than the original plan of 85,000,000,000 yen We have around 1,000 sales representatives across the world and they submitted monthly order intake forecast 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 124,000,000,000 yen from 96,000,000,000 yen at the end of December 2020. It is time to start thinking about delivery schedule of next year. We intend to Tata increased order backlog and prepared for 2022. Operating income increased from the same period of last year, too. Thanks to the speedy vaccination in China, we had a big thrill exhibition in Beijing exclusively for Chinese customers. Looking at 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 Pinggu 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 2,030. We also revised full year business focus upward. Here's income statement summary. Consolidated order intake, JPY 101,400,000,000 Sales revenue, JPY 81,100,000,000 operating income, JPY 4,000,000,000 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, yen 3,100,000,000 Net income, JPY 1,800,000,000. The effective tax rate will be almost normalized this year after reorganization of subsidiaries. Concerning FX rate, the weaker yen against Europe 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 1,700,000,000 yen JPY1.3 billion gain of FX due to rika yen JPY900,000,000 due to SGA cost reduction through digitalization. For example, we switched from physical to digital exhibitions. We also reviewed less profitable projects and strictly managed cost of each machine and turnkey solution was measures and gained 500,000,000. However, lower sales compared to the same period last year has led to a negative effect of 3,700,000,000 yen in operating income. In total, the operating income was 4,000,000,000 yen 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 80,000,000,000 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 surfaced 100,000,000,000 yen we would be able to achieve an operating income margin of 10%. Next, cash flows. The down payment has improved in proportion to an increase of orders. Unfortunately, the free cash in Q1 was minus 1,800,000,000 yen 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 10,000,000,000 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 focused. I am certain we can achieve more than 400,000,000,000 yen in order intake. As for sales revenue, yen 345,000,000,000 is a minimum target. Operating income will be yen 14,000,000,000. The operating income margin is currently expected to be lower than that of Q1, 4.9 percent, 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 pan from around 8,000,000 yen to 6,430,000 yen last year. This year, it will be improved to 7,100,000 yen 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 dry productivity oriented culture in Europe and other countries. It eventually broke roots, 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 GM TBA 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 recovery in demand in Europe. It was only realized with direct sales and service network and the growing membership of our portal site, Maidi and Jimori. 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 fiber optic 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 robust 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 10,000,000,000 yen 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 and 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 Q1, 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 carbon molds and die castor, 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 Q4 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 a 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 Frontend 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 it to less than 200,000,000,000 yen in order to shorten the delivery time. JPY 140,000,000,000 to JPY 150,000,000,000 will be ideal. Next, China. Here, I want to show you the video of SYMDS 2021. This time, our Chinese employees handled this exhibition by themselves. Doctor. Biemun was also involved in our top manager station in China. The rest was up to Chinese. You can also see Mr. Pifer on the screen, our general manager in charge of China. Digitalization is advancing fast in China. We can exchange information with visitors and collect visitor's 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 axis instead of simultaneous buy box 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 Q1. Value wise, order intake in China was on a record high, €85,000,000 or more than €10,000,000,000 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 service by more than 330 employees. At Tianjin, we have around 140 employees. And we don't pay them loss salaries. Instead, just like foreign affiliated companies in past Japan, we are an attractive employer in China. We attract 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 common food in the whole supply chain. Here, you can see a factory to be built in Pinggu at the outskirts of Shanghai. The area covers 70,000 square meters. Here, we will produce DMU 5070, 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 6,300,000,000. Negotiations with local government about incentives are ongoing. But regardless of the amount, we will invest JPY 6,300,000,000 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 diameters of off floor space. Its production will focus on horizontal machine centers and the investment will be JPY 3,000,000,000. 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 2 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 We want to see these tasks done inside a machine. Given that Machines are depreciated over 7 to 10 years. Depreciation cost for machines and tooling cost is almost the same. A machine worth 100,000,000 yen consumes cutting tools worth 10,000,000 yen each year. You see efficient tool management directly affects customers' profit. That is why we want to offer qualified support in dispute 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 Box Machining Association in Japan. We consign fiber optic 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 fairly long time effort with weekly operating training. These core final products then graduate to become true fiberx machinists. And this is not about selling a machine. It's about educating operators and building new schemes. We do so together with the partners of this situation. Machines and automation are getting increasingly complex, but these skills are not sufficiently taught at universities and oncology is in Japan. So we want to fill this gap, that is, educate machinists to acquire the skills that will be monitored. This is about mydmjmori, a portal site for direct communication with customers. Now service requests can also be made online. And 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 certified by a third party. This is our action plan for the future. In 2019, we emitted 78 tons CO2 per machine. By 2,030, we will reduce the amount by 30% 55 tonnes. 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 2025, the introduction of electric furnaces at Watanabe Sei Kosho, adjusting 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 Shimazu Corporation is also planned at all allocations. Furthermore, we are partnering with Sakanoto Chu, a venture company for low pesticide vegetables. This makes for healthier launch at Continues. As for paid holidays, we are encouraging our employees to take them during were previous like last year. Only the Japanese have tendency of accumulating paid holidays. But for us, Antaiguo hoyes are recognized as lion bridges in PIFRS. So we urge 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 Ken Bokuma. It is located close to JR Station, JRunara Station. It will be the same size as Tokyo Global Headquarters. The 1st and second floor are designed as test centers for new machines. The 3rd floor will be our R and D headquarter. The 4th and 5th Roar will be our 2nd headquarter to complement Tokyo GHQ from Nara, where our company was founded. The 6th group will offer social space for our employees. After COVID-nineteen vaccination, we will plan some events so they will have a chance to fiscal immediately. 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.