JGC Holdings Corporation

My name is Taguchi, General Manager of the Group Finance and Accounting Department. I'm going to give you an outline of the financial results for fiscal year 2019, which ends in March 2020. I will begin with a review of the highlights for the fiscal year 2019. Profitability was improved in conjunction with the steady progress of construction work in several projects both domestic and overseas. Gross profit ratio increased by 1.7 points from the previous fiscal year. As for the spread of the new coronavirus, potential impacts have been reflected in the assessment of the project profitability. As a result, the gross profit for the year was affected by around 8 billion yen. In terms of financial stability, we have maintained a robust financial base. In fiscal year 2019, cash and cash equivalents increased by approximately 100 billion yen, mainly due to the large amount of positive operating cash flow, which has brought an improvement to our liquidity. Based on the above, the dividend per share has been maintained as announced at the beginning of the fiscal year. We move to the statement of income and the statement of comprehensive income. The results turned out to be almost in accordance with the revised forecast announced on May 12. Net sales have been affected by the reduction of the order backlog and are 480.8 billion yen, a fall of 138.4 billion yen compared to the previous fiscal year. Gross profit is 43.3 billion yen, which represents 1.6 billion yen decrease. The gross profit margin has improved by 1.7 points to 9%. Operating income is 20.2 billion yen, which represents a fall of approximately 3 billion yen compared to the previous fiscal year. SG&A expenses increased by 1.4 billion yen due to reasons including the change of the classification of direct department and indirect department following the transition to a hoarding company structure. Ordinary income is 22.3 billion yen, which represents 9.9 billion yen decrease compared to the previous fiscal year. Non-operating expenses have increased by 7.6 billion yen due to foreign exchange losses caused by depreciation of yen and allowance for doubtful debt. Profit attributable to owners of the parent is 4.1 billion yen, which represents a decrease of 19.8 billion yen compared to the previous fiscal year. Extraordinary income was recorded in the fourth quarter due to the sales of cross-shareholding and business investment assets, resulting in pre-tax income almost as forecasted at the beginning of this fiscal year. On the other hand, corporate income taxes increased by 13.4 billion yen from the previous fiscal year due to an increase in foreign income taxes. Comprehensive income was lost of 14.2 billion yen due to negative effect of currency translation adjustment accounts caused by depreciation of yen. Next is the segment information. In the total engineering segment, net sales decreased by 24.3% compared to the previous fiscal year to 426.7 billion yen with the completion of large LNG projects such as Yamal and XS LNG. Segment profit decreased by 12.4% to 12 billion yen. Gross profit increased significantly in the fourth quarter due to factors such as conclusion of change orders in overseas projects, drawdown of contingencies in completed projects, and other profit improvement in domestic and overseas projects. On the other hand, in conjunction with the widespread of novel coronavirus, we have carefully examined the impact on the projects that are underway, have estimated the additional costs that may arise due to the extension of the delivery date and the decrease in productivity, etc., and such risks have been factored into the project profitability in some projects. The profit margin slightly increased. In regard to the functional material manufacturing segment, although we were able to secure roughly flat sales compared to the previous fiscal year of 46.6 billion yen, segment profit decreased by 8.9% to 6.7 billion yen. Although oil chemical catalyst and environmental production catalyst showed good results, profitability declined due to a decrease in the fine chemicals field caused by the impact of the United States-China trade frictions. Next are the consolidated balance sheet. Total assets decreased by 37.5 billion yen to 671.2 billion yen. Non-current assets decreased by 33.7 billion yen, mainly on decrease in investment securities from the sales of cross-share holdings and business investment assets. In liabilities, non-current liabilities decreased by 23 billion yen. The main reason for the decrease is that the transfer of 20 billion yen corporate bonds to be redeemed this year to current liabilities. Net assets decreased by 19.3 billion yen due to the payment of dividends and the negative currency translation adjustment accounts. The shareholders' equity ratio was 58%. The company's portion of JV Cash was 141.9 billion yen, and the funds have been managed well. Next are the consolidated statements of cash flows. Cash and cash equivalents increased by approximately 100 billion yen this fiscal year, and the end-of-period balance was 261.8 billion yen. Cash flows through operating activities became positive, 92.4 billion yen, due to the end of payments of the reimbursement cost in ICSIS LNG project, as well as a collection of receivables in Algerian project. Cash flows through the investment activities became positive, 19.3 billion yen. This was resulted from the sales of cross-share holdings and business investment assets in conjunction with a review of the significance of their holding assets. The negative cash flow of 7.6 billion yen from financing activities was mainly due to the payment of dividends. In addition to the cash balance, we have 30 billion yen borrowing facility and a commitment line agreement with financial institutions. And at the current time, we maintain strong liquidity. The next topic deals with new contracts. Orders received remained at 189.6 billion yen. The main project for new orders were domestic power generation and pharmaceutical-related projects and others. In regard to LNG project in Mozambique, for which we expected to be awarded in the fourth quarter, the client has delayed their final decision on the investment, and the order has not been recorded. Next, we refer to our outstanding contracts. The order backlog as of the end of March 2020 was ¥941.6 billion, which represents a decrease of approximately ¥260 billion compared to the end of the previous fiscal year. The main projects were LNG in Canada, FLNG in Mozambique, chemicals in Thailand, and the domestic biomass power generation. Lastly, the forecast for fiscal year 2020. This forecast has been prepared under the assumption that the impact of the spread of novel coronavirus will not significantly worsen and that our business environment will return to normal by the end of the fiscal year. New orders are forecasted to be 670 billion yen with a focus on projects that are anticipated to be feasible at this point. Assuming that sales from new orders will be limited, the net sales and the other items below have been forecasted mainly on the progress of projects in the order backlog. Net sales are 480 billion yen. Gross profit is 43 billion yen. Operating income is 20 billion yen. Ordinary income is 23 billion yen. For the above items, the performance is the same as the previous year. Income attributable to owners of the parent is 8 billion yen. In regard to the tax expenses, considering the situation that foreign tax credit may not be available, the forecast is based on the assumption to bear double taxation of foreign and Japanese income taxes. Extraordinary items such as asset sales and impairment are not included in this forecast. The dividend per share is 12 yen. The dividend payout ratio is forecasted to be 37.5%. Our forecasts are based on the exchange rate of 107 yen to U.S. dollar. The effect caused by the exchange rate fluctuation per 1 yen basis is 3 billion yen for shares, 100 million yen for gross profit, and 300 million yen for ordinary income. This concludes our explanation of the outline of the financial results for fiscal year 2019. Hello everyone, I'm Seto, Chairman and CEO. I will speak on the current business environment of the group and the future management policy. I will not use slides this time. As for the market environment of the core oil and gas business in total engineering segment, as you know, the crude oil price began to fall at the beginning of 2020, and due to the reduced demand for crude oil triggered by the COVID-19 global pandemic, the decline in crude oil price accelerated. Due to global economic slowdown and the sluggish crude oil price caused by the spread of COVID-19, in oil and gas business in particular, the final investment decisions of clients have been delayed. Therefore, as President Ishizuka will explain shortly, the target project in overseas oil and gas business in FY 2020 will be rather limited. In functional materials manufacturing segment, investment for semiconductors and 5G are being resumed. But we need to cautiously monitor the market impacts by global economic slowdown and sluggish crude oil price. Currently, market environment is highly uncertain. But COVID-19 pandemic will be over in the course of time. And when the global economy turns to the recovery track with the end of COVID-19, the current extreme level of crude oil price will be adjusted gradually. Bearing those in mind, I think overseas oil and gas business, which is at the bottom now, will turn to pick up in FY 2021 or in the second half of FY 2020 in our scenario. Overseas oil and gas business is a main business of JGC Group. and as fossil fuel continues to be indispensable for human lives and economic activities now and in the medium and long term, it will continue to serve as the onyx pillar of the group for the time being. Having said that, global trend for low-carbon and decarbonization is now irreversible. Furthermore, the trend of new normal, which indicates new lifestyle and values in post-COVID-19, and the sluggish crude oil price this time, will accelerate the move for low-carbon and decarbonization. And that will lead to the negative mindset for fossil fuel in the society as the expected global trend. Given these, we assume that our current main business of overseas oil and gas business model may peak out earlier than our projection. And we need to take actions proactively with agility, with forward-looking perspectives, rather than simply waiting for the market recovery. In other words, in overseas orient gas business, we need to accelerate the business deepening to build up the winning strategy by adopting the innovative EPC execution technologies, among others. At the same time, we will need to speed up in building the second, third, or even fourth and fifth business pillar. As for the future direction, currently we have been discussing to work out the long-term vision which will be the basis for the next mid-term business plan. We are in the process of discussion, but President Ichizuka will share with you that direction later. In FY 2020, we'll be in the uncertain market environment, but we'll make utmost effort to secure the orders and achieve the business target. At the same time, we'd regard this crisis as an opportunity to move forward for the mid- to long-term growth. We take advantage of ample cash flows and take actions in solid and proactive manner. We like to meet expectation of shareholders and investors with such two-pronged approach. That concludes my presentation. Thank you for your attention. Hello, everyone. I'm Ishizuka, President and COO. I will explain the business overview. Please turn to page 2. Today, I will talk about these seven topics. Please turn to page 3. As explained before, consolidated orders received in FY 2019 were 190 billion yen, which fell in short against a target of 800 billion yen. As Chairman mentioned, originally skewed orders in the second half was anticipated in FY 2019, but from the beginning of 2020, Due to the overlap of the spread of COVID-19, global economic slowdown and the drop of crude oil price, clients' FID and CapEx plans were delayed, and the target was not achieved due to the time lag. We concluded EPC contract for Mozambique LNG in October 2019, and we won the first negotiation right in Philippines LNG terminals. But unfortunately, we experienced delays in those projects. Please turn to page 4. Target orders for FY 2020 were set as 617 billion yen, as Mr. Taguchi explained. Breakdown is 400 billion yen for overseas oil and gas, 140 billion yen for overseas infrastructure, and 130 billion yen for domestic EPC. Please turn to page 5. Overseas oil and gas order target is 400 billion yen. As you see here, oil refinery modernization, LNG in Mozambique, which presented time lag, and LNG expansion in Qatar are listed among others. In particular, we have high expectations for oil refinery modernization project in Iraq, where we are in the final negotiation process. Please turn to page 6. This slide shows all the targets in FY 2020 for overseas infrastructure and the domestic EPC. In overseas infrastructure, we adapt the account-focused strategy to be involved from the concept stage of client's investment plan, and that began to materialize gradually. As shown here, target projects include non-ferrous projects in Indonesia, energy receiving terminals in the Philippines, solar power in Taiwan, and airports in Asia. Especially, we'd like to focus on receiving orders for non-ferrous smelting projects in Indonesia. As for domestic EPC, we'd like to increase orders in projects so that we'll be independent from the hydrocarbon dynamics and COVID-19 and crude oil price fluctuation. By targeting biomass power, pharmaceuticals, hospitals, nuclear power decommissioning, we'd like to achieve the target order of 130 billion yen. Please turn to page 7. This slide shows present status of ongoing project, but rather than the progress of project, I would like to comment on the impact of COVID-19. Mr. Taguchi partially explained the COVID-19 impact before, but let me add some comments. Currently, we are executing about 25 projects in Japan and about 15 projects abroad of various sizes. In Japan, we were affected by COVID-19. There was a case of infection in a pharmaceutical project site with an employee of a partner company infected. However, the contract action was taken and the work resumed. In other projects, we have been taking appropriate measures and we judge the current condition is mostly under control. Next, as for the large project of LNG Canada, which may be your concern, as of today, engineering works are in Japan, Canada, and the Philippines, and the modules are constructed in China. Engineering work was affected to some extent, but we managed to work from home. On site, we are working in accordance with the British Columbia Provincial Guidelines to control infection with no suspension of operation. Today also close to 1,000 workers are working. Every morning, which is every evening there, I talk with the local head of the client's company to confirm the status quo and discuss a control action to take. We have set up the task force team for the COVID-19 impact assessment in accordance with the agreement in constructive manner. In other overseas projects besides LNG Canada, works continue with control measures that fit national and regional conditions. Negotiation on COVID-19 impact is ongoing based on the contract agreement, and it will continue. Please turn to page 8. As for functional materials manufacturing business, in catalyst conditions are favorable, mainly in fine chemicals and environmental catalyst. But due to the COVID-19 and oil price, demand of oil-related catalysts must be monitored closely. In fine chemicals and fine ceramics, demand for SPE key components shows sign of recovery, supported by the demand growth for semiconductors and 5G. But we need to monitor the demand dynamics closely due to the impact by COVID-19 and U.S.-China trade friction. Please turn to page 9. As Mr. Sato mentioned before, let me speak on exploring business and deepening existing business in the long-term vision. We recognize that it is imperative to accelerate the speed in building the second, third, or even fourth and fifth pillar of business as well as deepening the overseas oil and gas business. Since our shift to the group structure in the previous year, we have been discussing the long-term vision. Though we are still in the process of discussion, I would like to share with you the overview of the direction today. As a basis of our discussion, our cause is to help to solve social challenges through our business based on SDGs. First, in low-carbon and decarbonized engineering, we aim to create opportunities that combine oil and gas fossil energy with low-carbon technologies including CCUS, carbon capture, utilization, and storage. Second one is new energy. We have so far built the solar biomass facility of 970,000 kilowatt, almost 1 million kilowatt. In addition to that, by focusing on hydrogen and ammonia as a hydrogen carrier, we'd like to create opportunities in new energy. Third one is resource recycling. Our initiative for waste plastic chemical recycling to combat marine plastic waste is a new one, joining hands with Showa Denko, Ube Industries, and Ebala Corporations. We have been additionally founded for the waste tires and waste textiles recycling. We'd like to contribute to the resource recycling and the circular economy through these initiatives. Please turn to page 10. As for health care and life sciences, already pharmaceuticals and medicals have become our major business pillar, and we'd like to evolve them further through biopharmaceutical manufacturing facilities. Fifth one is infrastructure, industrial innovation through water and transportation. In particular, we received inquiries on the airport project, where we can take advantage of our project management capability of managing huge and complicated projects. We like to make it as one of the business pillars. Finally, the sixth one is related to our manufacturing business of catalysts, fine chemicals, and fine ceramics. Needs for functional materials are increasing for carbon reduction and environmental needs. We would like to explore and deepen these businesses. That concludes my presentation. Thank you for your attention.