The Strengths of MIYAJI ENGINEERING GROUP, INC.
Resources and experience that have helped us overcome crises that extend beyond management issues
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MEG has a history that extends over a century, beginning with its predecessor, MIYAJI IRON WORKS CO., LTD. These include major crises that go beyond simple management issues. Technically challenging work also carries a risk of major accidents that could have an impact on society. We've had to make some hard decisions to get through these trying circumstances, but we've been able to do so thanks to the solid support offered by our stakeholders, such as our business partners, and thanks to our own equity capital. MEG has many business partners and large plants and facilities. Through our past experience, we've learned that to protect our company and our stakeholders, it's important that we have equity capital that we can utilize in the event of an emergency.
1 Crises that go beyond simple management issues
The first crisis we faced was the indefinite delay of the Honshu-Shikoku Bridge project that resulted from the 1970s energy crisis. MEG was at the forefront of long-span bridge technology, which we had cultivated through our work on the Kanmon Bridge. We had acquired land in Hiroshima Prefecture's Fukuyama City to build a state-of-the-art plant in preparation for the Honshu-Shikoku Bridge project. We had just completed construction of the pier and were about to begin construction of the plant itself when it was announced that the project would be suspended. The indefinite delay turned all of the loans used in preparation for the project into non-performing loans, and we were forced to make the agonizing decision to cut our 1,500-strong workforce by 500 employees.
The second crisis we faced was the contraction in public sector project expenses in the 2000s due to a change in the government's policies. Led by slogans like "People, not concrete," the public sector project budget was slashed from almost 10 trillion yen to less than 5 trillion yen. Furthermore, measures aimed at ending collusion produced dramatic changes in the business order environment and there were frequent cases of orders involving dumping(*) in order to ensure that plants remain in operation. As a result, 45 of the 76 companies in the Japan Bridge Association withdrew from the association due to ceasing operations in the business sector or declaring bankruptcy The number of association members plummeted to just 31. MEG also faced difficulties during this time. In response to the drastic decline in order volume, we sold our head office building in 2007. In 2014, we made the difficult decision to completely shut down operations at our Matsumoto Works, whose history spanned six decades. When bridge construction project collusion emerged as a social problem in 2005, we sincerely reflected on our own actions, issued a declaration indicating our commitment to abandoning past practices, established a compliance management system, and rebuilt our business system with a focus on governance.
(*) Bidding systems were revised with guidance from the national government, and it is now impossible to take on orders that would constitute dumping. Instead, all bidding is performed using appropriate pricing.
2 What are accidents with a major impact on society?
MEG excels at special construction projects involving a high level of technical difficulty. We take the utmost care with respect to safety, but completely eliminating accidents is not possible. When accidents occur involving technically difficult construction projects, they can have a major impact on society. As a company that works with social infrastructure, a major accident that we take as a warning with respect to safety is the accident that occurred on the National Route 15 Rokugo Bridge, which crosses the Tamagawa River. On December 14, 1984, the arch bridge that was formerly used to cross the river was being dismantled and loaded onto a barge, when the bridge became imbalanced and collapsed. Five people lost their lives, and 13 were injured. This accident keenly impressed on us the importance of safety, and by thoroughly implemented safety measures, we have avoided any more major accidents.
Another accident in the bridge industry which had a major societal impact was the March 14, 1991 collapse of a bridge in Hiroshima's new transportation system. Despite the project being a difficult one, performed on a heavily trafficked prefectural road, sufficient safety measures were not implemented, and a bridge beam that had been tentatively installed the previous day fell 10 meters onto the road below. It struck 11 vehicles stopped at a red traffic light, killing 14. The company involved was a technically skilled company with a long history, but it neglected safety, and paid the price: following the accident its business steadily declined, and in 2012 it went out of business. This major incident truly brought home the importance of safety.
Although following the 1991 bridge beam collapse there have been no major accidents in the bridge industry that have involved members of the general public, on April 22, 2016, a bridge beam fell on a roadway due to improper construction planning. This major accident produced 10 casualties, and the fact that no members of the general public were involved was nothing short of miraculous. This accident made us acutely aware, again, that when it comes to safety, one cannot let one's guard down for even a moment.
MIYAJI ENGINEERING GROUP Safety Measures
3 Capital Requirements for Crisis Preparedness
MEG’s Capital Policy
The Group considers establishing highly sustainable corporate structure from a medium- to long-term perspective, enhancing corporate value, and returning profits to shareholders to be important management policies. At the same time, our basic approach is to implement a well-balanced capital policy, including investing for sustainable growth, which is a concept we share with our shareholders and stakeholders.
Characteristics of Our Cash Flows
In the bridge business, which is the Group’s core business, although the Group receives a portion of advance payments each fiscal year, it collects construction fees based on the amount of work completed each fiscal year. This is especially true of projects ordered by public agencies and expressway companies. The Group’s cash flows therefore tend to be dominated by cash inflows in the first half of the fiscal year and cash outflows in the second half of the fiscal year. Therefore, over the course of the fiscal year (from April to March), even if cash on hand can be used to make payments from the begining of the fiscal year to the end of the third quarter (from April to December), during the fourth quarter (from January to March), the Group tends to need to procure outside loans.
In addition, especially in the case of large-scale expressway renewal projects, the process involves plant fabrication and on-site erection after design work for the ordered project is completed. This makes it difficult to recover fixed costs until the design work is completed. We expect this trend to expand further if large-scale renovation works increase and the business expands.
In addition, considering the risk of a temporary halt of cash inflows described below, the Group needs to cover subcontractor payments at plants and construction sites, as well as fixed costs incurred by the administrative department, including plant maintenance costs. Therefore, although the Group has secured a certain amount of debt to hedge risk, it is necessary to maintain cash reserves of around two to four months (¥10.0 to 20.0 billion) of monthly sales at all times.
Measures against Risks of Damage to Capital Adequacy
①Preparing for accident risks
The Group’s construction projects include road bridges, railroad bridges, and special steel structures, many of which involve large-scale, highly difficult construction work. Although the Group takes various measures to ensure safe construction, there remains a risk of accidents during construction, such as falling girders. If an accident should occur, the Group would be obliged to compensate not only the cost of remanufacture and reconstruction, but also to compensate any victims to whom it has directly caused damage or any third parties to whom it has indirectly caused damage. In particular, in the event of damage to main roads or railroads, the Group’s losses could be immeasurable. In addition, a suspended nomination following an accident could have a major impact on future work volumes. Although the Group prepares for such situations through the use of third-party liability insurance, etc., there are limits to the amount of loss compensation that is possible. In light of past accident experiences and the highly difficult construction projects for which we aim to receive orders in the future, we must maintain a certain level of equity capital (internal reserves) to ensure that we can continue our business even in the event of an accident.
②Preparing for natural disaster risks
Typhoon Faxai and Typhoon Hagibis, which hit Chiba Prefecture in 2019, damaged plant buildings and other facilities in Ichihara-shi, Chiba. It took eight months to repair the buildings and other facilities while adjusting production. In addition, since this plant is located in the Tokyo Bay waterfront area, in the event of an inland earthquake directly under the northwestern part of Chiba or a Tokyo Inland Earthquake, there is a risk of tsunami damage in addition to earthquake damage, which could have a severe impact on plant production. In addition, our construction sites cover a wide area of the country, and there is a risk that the anticipated Nankai Trough Earthquake or other earthquakes could stall production activities due to long stoppages at construction sites, or that we could incur significant costs for on-site restoration work. The new office building construction that is currently being planned will provide a new location to which our current manufacturing office will be relocated. This provides a business continuity plan (BCP) in the event of the Head Office in Chuo-ku, Tokyo being destroyed, ensuring the safety and security of employees of the Company and its subcontractors. While maintaining plant operations at the former manufacturing site, we will introduce state-of-the-art production lines there that will differentiate the Company from its competitors. The Group must maintain sufficient equity capital (internal reserves) to be able to continue its business even in the event of a major disaster that causes production activities to be halted, while covering fixed and temporary costs incurred until business activities can resume.
Capital Requirements for the Group
To ensure that the Group continues to grow sustainably toward achieving the final year targets of our Medium-Term Business Plan (FY2022 to FY2026) of ¥75.0 billion in net sales, ¥7.5 billion in operating profit, and ¥4.0 billion in profit attributable to owners of parent, we must, as described above, closely monitor our cash flow situation and the risk of damaging our equity capital. At the same time, while ensuring returns to shareholders, we must also actively allocate funds to investments for growth.
Equity capital after deducting non-controlling interests from total net assets is expected to be the equivalent of seven months of monthly sales (60% of annual net sales). This includes working capital of ¥10.0 to 20.0 billion (equivalent to two to four months of monthly sales) to meet construction progress, costs for coping with construction-related accidents or large-scale natural disasters, and costs of four months of monthly sales as management resources that can be invested in production recovery even if income is interrupted for a while. Based on our current business with its annual net sales of ¥65.0 billion, this amounts about ¥40.0 billion. Based on the ¥75.0 billion annual net sales target of the final year of the Medium-Term Business Plan, it is about ¥45.0 billion. We consider these to be the equity capital necessary to ensure the sustainable growth in the Group. In the Medium-Term Business Plan, we set the equity ratio at 55% or more.
In the Medium-Term Business Plan, we plan to invest ¥18.0 to 20.0 billion over the course of five years, and we aim to achieve an operating profit margin of 10%. We forecast a five-year EBITDA of approximately ¥40.0 billion. We will maintain a good balance of growth-oriented investment and internal reserves in preparation for the future. Furthermore, we will aim for a total return ratio of 30%, provide flexible returns to shareholders when business is performing strongly, and pay due care with respect to capital efficiency, thereby appropriately controlling equity capital levels.