Taisei : Summary of President’s Speech and Main Questions and Answers at Financial Results Briefing for Medium Term Business Plan (2024 2026) and FY2023 PDF （164KB） PDF （164KB）

May 2024

Taisei Corporation

Summary of President's Speech and Main Questions and Answers at Financial Results Briefing for Medium-Term Business Plan (2024- 2026) and FY2023

1. Summary of President's SpeechIntroduction

• In 2021, we, Taisei Group, formulated [TAISEI VISION 2030] as our vision for the next 10 years. Today, I would like to brief you on the new Medium-Term Business Plan, which is the second phase toward the year 2030.
• [TAISEI VISION 2030] is a medium- to long-term vision with the goal of making us a "pioneering corporate group contributing to the development of a resilient society where people can live affluent and cultural lives." While basics of the vision remain unchanged, a profit-oriented approach has been reinforced in light of our recent performance.

Assumptions of [TAISEI VISION 2030] Achievement Plan

• (1) Summary of the previous Medium-Term Business Plan: We were unable to achieve any of our profit targets. This is because of decline in the contract price due to fiercely competitive environment and the abnormal soaring construction costs. Meanwhile, positive results were seen in energy and environment business, safety, technology development, and M&A.
• (2) Medium- to long-term external environment and structural changes: While there has been a strong appetite for investment regarding construction demand, conditions on the supply side remain challenging, and we expect the gap between supply and demand will widen, increasing upward pressure on construction costs.
• Of the three Xs identified as structural changes, two M&As have been concluded in the Group, especially regarding "IX: Industry Transformation." There is a need for the overall industry to keep enhancing productivity and supply capacities to address the growing shortage of engineers and workers.
• (3) Corporate culture reform: We launched our corporate culture reform project

last summer against the background of failures and troubles we have caused in the most recent years. This encourages "change to proactive behavior" through transforming the thinking and behavioral patterns of executives and employees, and enabling them to fully demonstrate their individual abilities, as a management commitment to create new value for customers and society.

Overview of [TAISEI VISION 2030] Achievement Plan

• In the lead-up to FY2030, we have formulated a seven-year plan to achieve the [TAISEI VISION 2030], with priority issues and measures to address. In detail, the plan comprises the "Fundamental Management Policy," the "Policy on Business Foundation Development," the "Medium- to Long-Term Business Strategy" for each business segment, the "New Business Model," which creates related services with construction as the starting point, and the "Methodologies for Business Transformation," which cross boundaries between medium- to long-term business strategies.
• The image of the achievement of the targets in [TAISEI VISION 2030] is to ensure improvement in profit level by steadily implementing medium- to long-term business strategies for each segment, as well as by creating new business model and transforming businesses.

(Fundamental Management Policy)

• The Fundamental Management Policy has been organized as "Financial Policy, Human Capital, and Technology Development," and indicates how the company's management resources (so-called "people," "goods," and "money") are to be allocated toward FY2030.
• The Financial Policy is for formulating rules on how cash generated from business activities and asset sales should be prioritized for allocation between growth investments, shareholder returns such as dividends, and internal reserves, with the continued assurance of ROE of approx. 10% and growth investments as a source of returns to be implemented based on investment criteria and fund allocation policies.
• Note that despite the goal up to this point being practically debt-free business operations, we have decided to increase interest-bearing debt to the extent that financial discipline can be maintained, and to allocate this toward growth investments to obtain returns.
• Regarding shareholder returns, with long-term and stable dividends as a premise, we are committed to the strategic acquiring treasury share. (* Details can be found in "Action to Implement Management that is Conscious of Cost of Capital and Stock Price" disclosed on the same day of May 13)

(Policy on Business Foundation Development)

• The Policy on Business Foundation Development specifies how themes that transcend inter-business boundaries are addressed. It is a sustainability strategy that consists of environment, energy and human rights fields, and is also acts as a safety and quality policy.

• In addition to environment and energy fields, new initiatives for respecting human rights have been outlined for the sustainability strategy.
• To enhance the content of disclosure, especially in the environment and energy fields, Group initiatives toward achieving three goals for society of a "Decarbonized society," a "Recycling-oriented society," and a "Nature co-existing society," as defined in the Group's long-term environmental targets, have been summarized in accordance with TCFD and TNFD framework recommendations. (* Details can be found in "Information Disclosure of Integrated Environmental Management" disclosed on the same day of May 13)
• Regarding quality, new additions have been made in light of recent scandals. The Quality Control Division, which was established last year, and its dedicated quality control personnel have been functioning well. We will continue to work closely with the field while eliminating deviations from quality control processes, establish a monitoring system, and use customer evaluation results effectively.

(Medium- to Long-Term Business Strategy, New Business Model, and Methodologies for Business Transformation)

• Regarding the formulation of the Medium- to Long-Term Business Strategy, the five segments of the Group domestic building construction business, Group domestic civil engineering business, Group domestic real estate development business, Group overseas business, and Group engineering business, have defined what we should aim for in FY2030 and organized scenarios to realize. Business activities will progress in line with these scenarios to realize.
• Our New Business Model aims to stabilize the profit base by diversifying our business through investing resources onto business related to building construction business and providing the various construction-related services. This iteration of the plan addresses "Regional Collaboration Strategy" and "O&M Businesses," both of which have already started activities.
• Regarding Methodologies for Business Transformation, this initiative crosses boundaries between medium- to long-term business strategies and is compiled with DX, M&A, and new business generation supporting program.
• For M&A in particular, P.S. Mitsubishi Construction and Satohide Corporation joined our company last year. This is positioned as a horizontal integration aimed at industry restructuring. However, in the future, we will consider M&A and business partnerships such as vertical integration targeting to secure appropriate workforce and labor-saving, along with integration of value chains aimed at new value creation to transform business structures.

[Medium-Term Business Plan (2024-2026)]

• Our targets are a group operating income of 120 billion yen, a group net income of 80 billion yen, and an ROE of approx. 8.5%. Note that if the reduction in the number of cross-shareholdings goes smoothly, we may be able to achieve ROE of 10%.
• The investment plan is at 350 billion yen, up from 250 billion yen indicated within the previous Medium-Term Business Plan. In addition to continuous investments in DX, development projects, and renewable energy, we will also accelerate investments in technology development related to decarbonization such as offshore wind power, along with investments in people.
• Within the seven-year [TAISEI VISION 2030] Achievement Plan, there are three themes to be achieved in the upcoming three years. The first is to restructure the profit structure of the Group domestic building construction business and the second is to establish integrated construction and development business structure for the Group overseas business. The third is to expand human capital and implement human resource system reform.
• Regarding [TAISEI VISION 2030] Achievement Plan and the new Medium-Term Business Plan, each division in charge will formulate a more specific action plan and incorporate it down to a level that enables each employee to make it a personal agenda before the company makes efforts as one.

2. Main Questions and Answers

1. What is the assumed gross profit ratio for the consolidated operating income of 120 billion yen in the Medium-Term Business Plan?

1. Regarding achievement of the consolidated operating income of 120 billion yen, improving the building construction profit ratio becomes important because the profit level for civil engineering and development is stable. We can expect a gross profit ratio slightly lower than 9% for building construction in the final year of the Medium-Term Business Plan. However, we also believe that there is a need to exceed 10% in the medium to long term.

1. Is there a risk of not attaining targets regarding the 5.8% non-consolidated building construction gross margin for FY2024?

1. Basically, we have not assumed any downward risks at this point in time. Although there are risk factors within projects currently under construction and projects planned to order in the future, a certain number of risks have been incorporated into the plan. Please note that the building construction performance for FY2024 is seen as still in its recovery process.

1. Regarding the reduction of cross-shareholdings, how are sales negotiations going and what is the certainty of achieving targets?

1. For the reduction target of 200 billion yen as of the end of March 2023, 80% of those based on the number of brands and 75% based on sales value have received approval for sale by their holders. In reality, the actual reduction may exceed 200 billion yen due to market price fluctuations. However, the target of it being less than 20% of consolidated net assets by the end of FY2026 will continue on.

1. Are profits from the sale of cross-shareholdings included in the consolidated net profit target of 80 billion yen in the financial forecast for FY2024 and the Medium-Term Business Plan? If not, is there room for an upward boost in profits?

1. Although I cannot give you the amount, of those currently under negotiation, only those that have received approval from holders, and have a decided timing of sale have been incorporated. For this reason, we can say that there may be an upward boost if negotiations continue in the future.

1. Could you explain in detail the Medium-Term Business Plan policy of "a dividend payout ratio of 30% and total return ratio of 100% (maximum)" and your thoughts on implementing share repurchases?

1. We will continue to acquire treasury share, as we have conventionally been doing, with the aim of implementing shareholder return measures based on strategic objectives. The policy is to acquire treasury share up to a total return ratio of 100% in the event that surplus funds are generated after implementing growth investments and dividends. The total return ratio was 84% for the FY2023 results ,and we have already announced share repurchases for FY2024. This will continue in FY2025 and thereafter in a flexible way.

1. Am I correct in understanding that, under the indicated return policy, if the net income for FY2024 is better than expected, you will take this into account for returns in the next fiscal year? Furthermore, as you said that growth investments and dividends are to be excluded, what level of growth investment should we expect?

1. There will be more room for shareholder returns if profits increase. We plan to invest 170 billion yen for growth in the three years of the Medium-Term Business Plan. However, these investments are to be allocated from both current profits and surplus funds.

1. What is the level of surplus funds being considered in the Medium-Term Business Plan's fund allocation policy?

1. We consider the minimum necessary cash and deposits to be approx. 130 billion yen on a consolidated basis, and anything above this as surplus funds.

1. What is the outlook for both civil engineering and building construction project orders up to 2030?

1. For civil engineering, we expect a stable flow of orders due to the demand for infrastructure redevelopment and renewal for the government's national resilience plans, along with measures to mitigate frequent natural disasters. For building construction, steady investments are being made for projects including electronic production facilities, data centers, and logistics facilities. Regarding redevelopment projects focused on offices in urban areas, there is some concern about the future as initial costs rise with the ongoing soaring construction costs. Despite this, overall, we expect demand to continue.

1. Orders for civil engineering are at record levels, but can this current high profit level be maintained into the future? Or are there any concerns about risks?

1. The shield tunnel construction in Nihonbashi contributed to an increase in orders for the previous term. We expect civil engineering profits to remain stable into the future.

1. How is the progress of recent initiatives to strictly enforce profitability at the time of accepting an order?

1. Given that deflation is now a thing of the past, and the environment has switched to one of inflation, we have established rules to ensure profitability at the time of accepting an order by conducting thorough estimates at the stage of order acceptance. This is to ensure necessary profits when final financial results are calculated.

1. Regarding contracts, has there been any progress in having clients understand that labor cost increases and regulations on the upper limit on overtime hours have been reflected in estimates of construction periods?

1. Clients are understanding of labor costs because a continued increase is evident. In our efforts during contract negotiations on construction periods, we request appropriate timelines that take the upper limit on overtime hours and labor shortages into account, and we feel that clients are more understanding than before.

1. The assumed profit amount for renewal construction within the Medium-Term Business Plan remains unchanged. I expected an upward trend in this field-what is its future direction?

1. The demand for stock renewal is stable, and we are in an important position as being a business that can easily generate stable profits. Although the ideal is to increase sales, the profit target remains unchanged due to the limited number of staff. However, as we would like to boost sales in the future, we have been focusing efforts on environmental renewal work, which we call "Green Renewal ZEB (zero-emission buildings)."

1. What type of assets do you plan to focus on for the 105 billion yen investment related to the development business?

1. We intend to focus on projects that can be expected to add value that reflects the technology and expertise of general contractors, and not only from the perspective of yield. We will also consider dispersion of areas and assets. We will also aim for urban redevelopment projects, which have traditionally been our field of expertise.

1. Listed subsidiaries have been consolidated, but how do you regard this from a perspective of governance?

1. Although we are aware of general issues in listed parent/subsidiary pairs, we believe that human capital comes first in the construction industry, and maintaining a public listing helps to increase corporate value when employee motivation and other factors are taken into account.

1. Could you tell us about future M&A opportunities?

1. We have conducted two M&As in FY2023 with industry restructuring, and this has resulted in more information on projects. M&As are also a way to address our Group's personnel shortages and supplement Group functions where there are deficiencies, and we will continue to strive proactively to overcome these challenges.