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Edited Transcript of 1963.T earnings conference call or presentation 12-Nov-19 10:59am GMT

Q2 2020 JGC Holdings Corp Earnings Presentation

Yokohama Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of JGC Holdings Corp earnings conference call or presentation Tuesday, November 12, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Masayuki Sato

JGC Holdings Corporation - Chairman & CEO

* Shinichi Taguchi

JGC Holdings Corporation - General Manager of Finance & Accounting Department

* Tadashi Ishizuka

JGC Holdings Corporation - President, COO & Representative Director

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Presentation

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Shinichi Taguchi, JGC Holdings Corporation - General Manager of Finance & Accounting Department [1]

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This is Taguchi, General Manager, Group Finance and Accounting department. I am pleased to report to you the highlights of the second quarter fiscal year 2019. I will follow this agenda.

I have listed 3 points for the highlights for the second quarter. We made a smooth progress for the quarter at a fair pace overall to achieve the forecast for FY '19. Thanks to the good progress of debt collection, operating cash flow became positive in a big way. The progress of new contracts was on the track with our assumption that orders are to concentrate in the second half. In October, we were awarded for a large LNG plant in Mozambique. We are expecting FID or the final investment decision for this in the second half of the year.

Next, income statement. With the full year forecast year-on-year had to go down both in sales and profit. The second quarter and actuals are down both in net sales and profit year-on-year. Net sales was JPY 218.3 billion, down JPY 59.9 billion year-on-year. Gross profit was JPY 18 billion, down JPY 2.5 billion. Gross profit ratio improved 0.9 points, becoming 8.3%. Operating income was JPY 7.2 billion, down JPY 3.1 billion. With the FX impact, ordinary income was JPY 10.3 billion, down JPY 5.5 billion. Profit attributable to owners of the parent was JPY 4.4 billion.

As for the progress into the full year forecast, 44% for net sales and 38% for operating income at rather low level. But with the expectation that we will have large deals coming up in the second half, it is fair for me to say that we are making rather smooth progress as a whole.

Next, our segment information. With the completion of large LNG projects, Ichthys and Yamal, which we had until last year, total engineering was JPY 194.1 billion, down 23.3% year-on-year. Major revenue sources were LNG Canada, Mozambique, a floating LNG and a solar power plant in Japan. Segment profit was down 36.1%, becoming JPY 3.6 billion. Profit went down more than our net sales in percentage. This can be explained that the sales tends to concentrate in the second half and S&G, which was actually incurred, though it was in half of the full year forecast.

Functional Materials Manufacturing went down in sales, 3.1%, becoming JPY 21.8 billion. Segment profit was down 18.4%, becoming JPY 3.1 billion. Chemical and environmental catalyst had a rather good sales both at home and abroad. But all the refining catalyst materials and cost and fuel cost went up, exports to China in a slowdown due to the U.S.-China trade friction, and we had a tough time with the functional paints and other materials in fine chemicals with a high profit ratio, thus pushing down profit ratio to some extent.

Next, our consolidated balance sheets. Total assets was JPY 711.1 billion, up JPY 2.2 billion, flat from the previous year. On the current and asset side, cash and deposit increased, and uncollected amount from the completed projects went down. I will cover this in the next cash flow section.

Joint venture cash and deposit balance, which is not included in the balance sheet. We have JPY 142.8 billion, outside the balance sheet. They are mainly from the LNG Canada joint venture.

On the right, our total liabilities and net assets. Current liabilities increased by JPY 13.4 billion mainly due to a reduction in account payable for construction and an increase of advances received on uncompleted contracts. The decrease of JPY 10.8 billion in net assets is accounted for by JPY 7.1 billion for the dividend payment and JPY 6.6 billion in foreign currency translation adjustment. Shareholders' equity ratio is 66%.

Next shows consolidated cash flows. Balance of cash flows increased by JPY 100 billion in the past 6 months from the beginning of FY 2019 to the end of Q2. This is mainly due to an increase in cash flows from operating activities of JPY 113.2 billion resulted from the clearance of strict payment conditions of the Algerian project, which had been suppressing operating cash flows. Accordingly, the advances received on uncompleted construction increased sharply. Cash flows from investing activities remain on the same level with a slight decrease of JPY 3.7 billion from acquisition of property, plant and equipment. Cash flows from financing activities declined by JPY 7.7 billion due to the cash dividends paid.

About new contracts, the value of orders received was JPY 76 billion in this quarter, attributable mainly to the domestic pharmaceutical projects. The forecast for the full year remains JPY 800 billion on the view that the decisions of major large-scale projects are anticipated in the latter half of the fiscal year. The order of Mozambique LNG project we received in October is expected to be posted in the full year results. As for the outstanding contracts, total of orders received as of the end of September was JPY 1.0798 trillion. Because there were no major orders received in the first half, outstanding orders decreased by JPY 120 billion from the end of the previous fiscal year. No major change in breakdowns by business area, LNG-related orders accounted for 62%. By region, North America accounted for the largest, 55%. The principal contracts in terms of value were LNG Canada, Mozambique project, the Thai chemical plant and the Algeria project. The situation is unchanged from the end of the previous quarter.

Regarding the full year forecast, there is no change from the previous announcement. For Total Engineering segment, income from the LNG Canada project is estimated to be posted from the second half of the year. Potential risks concerned in the second half are political unrest in Algeria that could affect our undergoing project in the country and the progress of a project in the Middle East, which is close to completion. But there are other projects progressing favorably so that we can expect better results. Other than these risks, every possible change in profits are taken into consideration for our full year outlook, and we expect to achieve the predicted results. But we will keep a close watch on the risk factors.

As for the Functional Material Manufacturing segment, there is a concern about the slow exports to China affected by U.S.-China trade friction. However, we assume this could be covered by the steady sales growth of chemical catalysts and environmental protection catalysts. The exchange rate used for this forecast was JPY 110 to the dollar. For the reference only, we assess a change of JPY 1 in the exchange rate affects sales figures by JPY 2 billion, gross profit by JPY 100 million and ordinary profit by JPY 400 million.

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Masayuki Sato, JGC Holdings Corporation - Chairman & CEO [2]

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Hello, everybody. This is Sato. As has been announced, JGC Group has adopted a new group management structure. We became a holding company as of October 1. Today, I would like to explain our goals and basic business strategy with this presentation entitled New Group Management Unit Under a Holding Company Structure.

It goes without saying that for the group companies to grow and increase value sustainably, we need to transform ourselves by responding to macro changes in the environment. In our case for example, those macro changes facing us could be found in energy and environment. As you know this already, I am talking about the change, less carbon, more energy. In other words, going forward, while energy consumption is expected to grow, fossil fuel will decline, while renewable energy will grow in the energy mix.

On top of that, including further efforts to reducing carbon dioxide emission and plastic waste, trends like low-carbon societies and environmentally recycling society will gain more momentum, and this will further accelerate. That said, though, just looking at the year of 2040, according to the forecast made by IEA, in the primary energy, fossil energy such as oil, gas and coal will come down from the current 80%, but it still accounts for 60%, backed up by the demand coming from emerging countries. Whereas renewable energy, though it will have a high-growth, but it is still staying at 40% even in 2040.

Our transformation and moving into the holding company structure is the result of those macro changes in our environment we are fully aware of. Our goals here: We believe in our main business is fossil energy-related overseas oil and gas operations, which account for a large portion for some time to come. So we intend to further advance and polish our technologies and the cost competitiveness. At the same time, we should not to be too much dependent on overseas oil and gas. We would like to grow our profit in multiple operations such as overseas infrastructure, domestic EPCs and functional materials manufacturing.

Another aim is to focus on an expanding environmental-related business as we see the global trend toward low-carbon recycling-oriented society is getting stronger and irreversible. This means we should carry out a two-pronged strategy. Based on these aims, we came up with core business strategy shown here. As overseas oil and gas projects remain as our main business, total engineering sector continues to focus on oil, LNG and petrochemical industries while also focusing on the natural gas and LNG with less environmental impact.

The overseas infrastructure segment is expected to become the next pillar of our group business. We are trying to expand orders of infrastructure facilities such as power plant using renewable energy in Asia, where we are researching environmental and local needs.

Domestic EPC segment is positioned as a stable revenue generator for JGC Group. With the infrastructure projects in energy and chemical, life science, power generation and health care industries, we are trying to contribute to Japan in addressing issues that advanced economies are facing. At the same time, we incubate new business here and bring them to overseas.

Functional Material Manufacturing segment is expanding its business by developing new products, which respond to market changes and needs such as diffusion of 5G, electric vehicles and hybrid cars and the shift to microplastic alternatives. Each segment of JGC is focusing on the environmental business, but it is also a significant issue for JGC Group as a whole. As of October 1, JGC Holdings established the Sustainability Co-Creation Department to utilize environmental-related technologies for creating new value chain and businesses.

Having shifted to the holding company organization, JGC now has the system to respond promptly to the future environmental changes, but this is not our goal. Our goal is to always pursue the optimal business portfolio matching the changes in macro trends and achieve continuous growth of the group.

This concludes my presentation. Thank you.

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Tadashi Ishizuka, JGC Holdings Corporation - President, COO & Representative Director [3]

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Hello, everybody. This is Ishizuka, President and COO. I will cover the business overview. I will explain those 7 items on this slide.

First orders. Mr. Taguchi already explained the outline. I stated in the IR in the beginning of the fiscal year that our order target is JPY 800 billion, JPY 600 billion from overseas oil and gas, JPY 150 billion from domestic business and the remaining JPY 50 billion from overseas infrastructure. As of now, JPY 76 billion in the first half, we are still far away from the target of JPY 800 billion. As Taguchi mentioned on the weekend, now expect to get orders from Mozambique LNG and LNG receiving terminals in the Philippines for as much as JPY 480 billion, giving us an opportunity to reach JPY 556 billion within the current fiscal year. So we still have JPY 244 billion to go as shown in the bottom. I will expand on this later, but we are having a good prospect for several projects. So we believe we can reach our target of JPY 800 billion by the end of the current fiscal year.

Next page, please. First, overseas oil and gas, which is JPY 600 billion out of JPY 800 billion. As of now, we have only JPY 15 billion. Here and I am repeating again that we will get JPY 410 billion from Mozambique LNG. This being a joint venture, so now it is going to be 1/3. Besides this, as you'll see in the right-hand side, we have those target projects in the second half. As you see, there are many opportunities. We have already submitted our proposal for this gas processing for Saudi Arabia. We are still waiting for its result, and we are having a big expectation. Another one is a refinery project from Iraq, and we are preparing for a bid. We are hoping to get this by the end of the current fiscal year.

The bottom shows an outlook for FY 2020. There are big project opportunities coming up in FY '20 such as an LNG, EPC for Papua New Guinea, and we are also waiting for the LNG project in Jordan Cove in the state of Oregon in the United States. Another opportunity is LNG Canada toward the end of this year, moving into Phase 2, consisting of Train 3 and Train 4. This in the phase are to start. If it goes well, we should be hearing about the possible EPC in the next year. We also have opportunities in chemicals. So all in all, we have so many possible opportunities.

Next page, please. On the side of overseas infrastructure, target here is JPY 50 billion out of JPY 800 billion. Earlier, I talked about the LNG receiving terminal in the Philippines. This is treated as an overseas deal, and a provisional order has been decided for JPY 70 billion here. This is LNG receiving terminal a part of a power plant. This power plant covers 25% of the electricity demand in Manila. The fuel for this plant come from Malampaya offshore gas field. However, this gas field is going to be depleted. So they have to move into LNG, and this has become a kind of national project for the Philippines. We hope that a final investment decision will be made by the end of FY '19, and we hope that we can receive an order for this.

In the second half, there are opportunities in the Philippines and Vietnam for solar power receiving terminals. The site is going to be somewhat limited, but we are hoping that we can get many projects.

Talking about the next fiscal year. There is another big category of nonferrous in this infrastructure. We are hoping that we can get an EPC next year. Renewable energy and airport, we are still waiting for a good news.

Next page on domestic EPC. This accounts for JPY 150 billion out of JPY 800 billion. As of now, we just received only JPY 55 billion, mainly coming from active pharmaceutical ingredients and R&D facilities. In the second half, 2 biomass power plants. Another is maintenance service. There is going to be a rather major maintenance in plan in the next fiscal year, and so we are hoping to get the order by the end of this year. So putting them together, we've seen about JPY 100 billion was less. Is this a possibility? We are now hoping to reach our target of JPY 150 billion.

Moving into the next fiscal year. We are planning to get orders from wind power and the reactor decommissioning at Tokaimura. We are hoping to get more orders in this area.

Next page, please. Next, let me explain the situation of large-scale LNG projects. We often receive questions about LNG projects. LNG Canada project is progressing smoothly, and a launching ceremony will be held in the week after next week at the module site in China. For Mozambique project, JGC plays a role of leader in joint venture, and our partners are Fluor of U.S.A. and Technip of France. We haven't made an official final investment decision yet but made a certain contract and started initial engineering and preparations.

Next slide is about Functional Materials Manufacturing. As Mr. Taguchi explained earlier, business performance is a little lower than that of the previous year, but sales of FCC catalysts and environmental protection catalysts grow favorably, though the trade friction between the U.S. and China is affecting negatively on the sales of materials related to electronic industry. However, the sales of cosmetic ingredients used for [emulgen] increased and orders of the base components for 5G picked up.

In the fine ceramics business, we are manufacturing high-quality silicon nitride material for radiator panel of electric vehicles power unit. As the sales of these components went up favorably, we built a new factory last year. Now its production capacity is still not enough to catch up the orders, and we decided to build the second factory. Its ceremony for launching construction will be held next week. And in this way, we're entering into the new business areas.

Let's move on to the last slide. As Mr. Sato mentioned in his presentation, we assume tackling the environmental issues will become more important in our whole society and JGC Group consider it as not only the necessity of social contributions but also the potential business opportunities. As a part of the effort in this field, JGC built a pilot plant for underground storage of CO2 in Tomakomai, Hokkaido as well as in Algeria. Also, we are conducting various projects such as the development of CO2 separation membrane and ammonia catalysts. However, even though we have such high technologies, we cannot make a new business unless create value chains. And to this challenge, JGC established new department called Sustainability Co-Creation Department, assigning the managing director in sales division as head.

Our first initiative is to coordinate the value chains among JGC trading companies, suppliers and our clients. We are now working on plastic waste recycling. As JGC has a high gasification technology for processing natural gas, oil and coals, we are now trying to gassify plastic waste and produce chemical products such as ammonia and olefin from the synthetic gas. And with the plastic waste technology, I think we will be able to carry out global EPC projects of plastic waste recycling in the near future. Thank you very much.