WEBVTT 1 00:00:07.625 --> 00:00:10.255 Hello and welcome to this educational film which is 2 00:00:10.285 --> 00:00:11.615 devoted to a Cabernet, 3 00:00:12.175 --> 00:00:14.815 a Japanese KA involved in an industry which is 4 00:00:14.815 --> 00:00:16.055 electronic continent. 5 00:00:16.055 --> 00:00:19.455 The name of the company is Marta Manufacturing 6 00:00:20.475 --> 00:00:23.735 and the subtitle is Imper, which is going 7 00:00:23.735 --> 00:00:25.935 to be explained a little bit later on in the film. 8 00:00:26.385 --> 00:00:29.975 Marta is going to be created in 1944 at the end of the war, 9 00:00:29.995 --> 00:00:33.375 and it's going to develop in the post-war period in ja, 10 00:00:33.635 --> 00:00:35.575 the country is in ruins. 11 00:00:36.145 --> 00:00:40.695 About 2.7 million people died during the war. 12 00:00:41.185 --> 00:00:43.255 Maybe more. 25% 13 00:00:43.315 --> 00:00:46.935 of industrial infrastructure has been absolutely destroyed. 14 00:00:47.635 --> 00:00:50.255 Per capita income has been divided by two 15 00:00:50.595 --> 00:00:55.375 and the debt, the government debt represents 266% of GDP 16 00:00:56.615 --> 00:00:59.455 sanction sanctions too hyperinflation, it's going to drop 17 00:00:59.475 --> 00:01:02.735 to 26% by 1948, 18 00:01:04.115 --> 00:01:07.375 but it's a period of misery, of despair 19 00:01:07.475 --> 00:01:08.975 of under nourishment. 20 00:01:09.285 --> 00:01:10.575 Some statistics mentioned 21 00:01:10.575 --> 00:01:14.415 that a few hundred thousand people died of under nourishment 22 00:01:14.515 --> 00:01:16.455 as a consequence of agriculture, 23 00:01:16.455 --> 00:01:18.455 which had been completely ed. 24 00:01:19.515 --> 00:01:24.135 The American occupation is going to last up to 1952. 25 00:01:24.265 --> 00:01:25.855 There will be a Doge plan 26 00:01:26.035 --> 00:01:28.535 as there was a marshal plan in Europe 27 00:01:28.795 --> 00:01:30.415 and there will be quite a lot 28 00:01:30.415 --> 00:01:33.415 of financial support from the United States. 29 00:01:34.175 --> 00:01:36.495 The United States are a bit worried about the development 30 00:01:36.595 --> 00:01:40.375 of communist countries in USSR and in China. 31 00:01:41.385 --> 00:01:44.015 There will be also the Korean War, which is going 32 00:01:44.015 --> 00:01:47.655 to boost the Japanese economy as a consequence 33 00:01:47.655 --> 00:01:50.495 of providing plenty of supplies locally. 34 00:01:50.955 --> 00:01:52.095 Now during the occupation, 35 00:01:52.095 --> 00:01:55.375 there will be some very important structural reforms. 36 00:01:55.375 --> 00:01:57.975 The first one is the abolishing of Shinto 37 00:01:58.515 --> 00:01:59.935 as a state religion 38 00:02:00.365 --> 00:02:02.055 because it was suspected 39 00:02:02.075 --> 00:02:05.135 of supporting very much the authoritarian government 40 00:02:05.725 --> 00:02:08.375 pre-war, which led Japan to the war. 41 00:02:08.665 --> 00:02:10.095 There will be also an attempt 42 00:02:10.095 --> 00:02:13.655 to dismantle this big conglomerate that bad, 43 00:02:14.105 --> 00:02:18.375 which later on went back as K rat suits after 1950 44 00:02:18.915 --> 00:02:21.615 and today it still exists under the umbrella 45 00:02:21.755 --> 00:02:24.575 of some banks like dhi, Congo Bank. 46 00:02:25.035 --> 00:02:28.015 That's it. There will be an agrarian reform 47 00:02:28.195 --> 00:02:30.255 and with distribution of land 48 00:02:30.565 --> 00:02:33.455 because you have to boost agriculture so 49 00:02:33.455 --> 00:02:34.655 that people get food. 50 00:02:35.695 --> 00:02:37.775 Interestingly, general MacArthur is going 51 00:02:37.775 --> 00:02:41.815 to support the ment of workers union democratization 52 00:02:42.035 --> 00:02:44.735 of labor relations so that there is a kind of balance 53 00:02:44.735 --> 00:02:47.615 of power inside the cabinet between the owners, 54 00:02:48.075 --> 00:02:51.055 the managers, and the workers Last 55 00:02:51.155 --> 00:02:55.455 and definitely not least women get access to vote. 56 00:02:55.525 --> 00:02:57.615 They will have the right to vote 57 00:02:58.155 --> 00:03:00.845 at the same time in Japan and in France. 58 00:03:01.305 --> 00:03:05.085 By the way, now during this period, there will be the ment 59 00:03:05.105 --> 00:03:07.565 of a generation of fantastic entrepreneurs. 60 00:03:07.795 --> 00:03:10.525 They are going to create, so Acuta 61 00:03:10.915 --> 00:03:13.485 with his partner, MAA Buka. 62 00:03:13.485 --> 00:03:16.045 Of course, Morita is a little bit more well known. 63 00:03:16.225 --> 00:03:18.525 He was 21 years old at that time. 64 00:03:18.785 --> 00:03:20.685 His partner is 34 years old. 65 00:03:20.685 --> 00:03:22.445 They're going to create a fantastic company. 66 00:03:23.135 --> 00:03:28.045 Morta is created by Akira Morta, born in 1921. 67 00:03:28.065 --> 00:03:31.765 He passed away in 2006, so when he creates a company, 68 00:03:31.915 --> 00:03:33.605 he's 23 years old 69 00:03:33.785 --> 00:03:37.525 and he is going to produce ceramic capacitors for radio. 70 00:03:37.825 --> 00:03:40.645 The radio is the only distraction for Japanese people. 71 00:03:40.645 --> 00:03:41.845 They're listening to the radio. 72 00:03:42.515 --> 00:03:44.045 They start in a small factory, 73 00:03:44.305 --> 00:03:47.725 150 square meter based in Kyoto 74 00:03:47.865 --> 00:03:52.805 and they start in 1944 as Marta Manufacturing. 75 00:03:53.795 --> 00:03:57.165 It's a manufacturing company whose story described in the 76 00:03:57.255 --> 00:03:59.565 manga, which was produced by the company. 77 00:04:00.145 --> 00:04:03.085 So you can see the younger Ratta starting his own company 78 00:04:03.425 --> 00:04:07.405 and fighting against his father saying the problem is not 79 00:04:07.405 --> 00:04:09.485 to steal the customers from other companies. 80 00:04:09.485 --> 00:04:12.245 The premise is to attract customers with innovation. 81 00:04:12.385 --> 00:04:14.205 That's the philosophy of the company. 82 00:04:14.705 --> 00:04:17.245 The manga also served as a support to film, 83 00:04:17.245 --> 00:04:18.725 which you can watch on YouTube 84 00:04:19.385 --> 00:04:21.205 and you have the introductions of product. 85 00:04:21.825 --> 00:04:24.965 At that time it was about ironic, it was about the radio 86 00:04:25.385 --> 00:04:26.885 and the TV or whatsoever, 87 00:04:27.145 --> 00:04:30.005 and today it's about computers, smart phones, 88 00:04:30.565 --> 00:04:32.005 communication, mobility. 89 00:04:32.905 --> 00:04:34.645 The company is producing capacitors 90 00:04:34.705 --> 00:04:37.285 and has a 40% global market share, 91 00:04:37.665 --> 00:04:41.845 but also resistances, sensors, badger, lithium, iron, 92 00:04:42.465 --> 00:04:44.805 and the company is going to move forward 93 00:04:45.065 --> 00:04:47.045 as a manufacturing company. 94 00:04:47.315 --> 00:04:48.525 This is its development. 95 00:04:48.825 --> 00:04:51.245 The company is listed in 1964 96 00:04:51.305 --> 00:04:53.645 and it's going to establish its first facility 97 00:04:53.745 --> 00:04:54.765 in the United States. 98 00:04:55.155 --> 00:04:57.445 It's going to be China in 73. 99 00:04:57.615 --> 00:04:59.685 We'll speak about China later on Europe 100 00:04:59.905 --> 00:05:04.125 and Taiwan, 78, Brazil 1990, so it's a global 101 00:05:04.885 --> 00:05:08.725 B two B company with very prestigious customers 102 00:05:09.025 --> 00:05:11.005 as Apple and Huawei. 103 00:05:11.305 --> 00:05:14.325 Of course, you don't know the burrata manufacturing brand 104 00:05:14.325 --> 00:05:17.525 name, but you are using their components when you are using 105 00:05:17.555 --> 00:05:19.965 your smartphone, wherever it comes from. 106 00:05:20.035 --> 00:05:23.525 Manufacturing means that growth is organic growth. 107 00:05:23.545 --> 00:05:27.045 Of course there will be some acquisitions in 2017, 108 00:05:27.345 --> 00:05:30.205 for example, the Suns battery business 109 00:05:30.385 --> 00:05:31.885 for almost 40 billion. 110 00:05:32.325 --> 00:05:35.725 Japanese, yes there medical for 11 billion. 111 00:05:35.865 --> 00:05:37.285 The Psalm is 50 billion. 112 00:05:37.765 --> 00:05:38.965 Remember this figure, it's important. 113 00:05:39.465 --> 00:05:42.765 2021, it's our et cetera. 114 00:05:42.765 --> 00:05:45.405 It's again about 50 something billion, 115 00:05:46.345 --> 00:05:49.405 but if you compare that with the industrial investments 116 00:05:49.405 --> 00:05:53.325 of the company, the CapEx each year it's from 150 117 00:05:53.425 --> 00:05:55.565 to 300 billion each 118 00:05:55.665 --> 00:05:58.325 and every year, not by accident one day or the other. 119 00:05:59.345 --> 00:06:02.885 And what is also very interesting if you accept Sonny's 120 00:06:02.885 --> 00:06:05.245 battery business is the fact 121 00:06:05.245 --> 00:06:07.605 that when Murata is selecting a company, 122 00:06:07.795 --> 00:06:09.045 it's for its technology. 123 00:06:09.905 --> 00:06:12.605 So these companies is showing the balance sheet in the line. 124 00:06:12.885 --> 00:06:16.605 Goodwill, intangible, r and d, capitalized RD expenses 125 00:06:16.985 --> 00:06:18.965 and not in property, plant and equipment. 126 00:06:19.465 --> 00:06:22.765 So the company is manufacturing by itself 127 00:06:23.585 --> 00:06:25.885 and the philosophy of the firm is you attract 128 00:06:26.205 --> 00:06:27.405 customers through innovation. 129 00:06:27.665 --> 00:06:30.525 You don't buy customers, you attract them, 130 00:06:30.755 --> 00:06:32.445 something which was developed in a few 131 00:06:32.445 --> 00:06:33.645 fields in the academy. 132 00:06:33.865 --> 00:06:36.165 Now if you look at the evolution of the revenues, 133 00:06:36.425 --> 00:06:38.085 you have a period of stabilization 134 00:06:38.265 --> 00:06:41.965 and then you have phases of growth, sometimes stabilization, 135 00:06:42.185 --> 00:06:43.245 and you start again. 136 00:06:44.145 --> 00:06:47.165 It started very much in the decade 2010. 137 00:06:48.065 --> 00:06:50.605 Now the growth rates are not that predictable 138 00:06:50.605 --> 00:06:53.645 because sometimes growing, sometimes it's not 139 00:06:53.755 --> 00:06:56.045 because it's a cyclical business, 140 00:06:56.305 --> 00:06:57.605 but all in all, you have a kind 141 00:06:57.605 --> 00:07:01.845 of smooth growth in a revenue, sometimes stabilized 142 00:07:02.025 --> 00:07:04.445 or interrupted in the short term. 143 00:07:04.695 --> 00:07:07.685 There are three business segments at Mira Manufacturing, 144 00:07:07.745 --> 00:07:09.965 but the dominant one is competence. 145 00:07:10.425 --> 00:07:11.925 The second one is modules, 146 00:07:12.225 --> 00:07:15.405 and the third one is name others, which is by the way kind 147 00:07:15.405 --> 00:07:18.725 of subcontractor to modules and components. 148 00:07:19.155 --> 00:07:21.725 It's intra-company business. 149 00:07:22.425 --> 00:07:24.085 The dominant one is competence 150 00:07:24.385 --> 00:07:27.685 and you understand that it's very big and it's fast growing. 151 00:07:28.315 --> 00:07:31.725 It's definitely the sort of power and growth in the company. 152 00:07:31.985 --> 00:07:35.005 If you look at the respective contribution of this segments 153 00:07:35.065 --> 00:07:37.525 to the total revenues of the company, you understand 154 00:07:37.525 --> 00:07:39.965 that competence about 70, 80%. 155 00:07:40.305 --> 00:07:43.125 The figures which you can see on the graph are interrupted 156 00:07:43.185 --> 00:07:47.005 in 2021 for a very simple reason that the company decided 157 00:07:47.065 --> 00:07:51.045 to completely change the parameter of the segments in 2022. 158 00:07:51.065 --> 00:07:54.605 So the figures in 2022 are absolutely useless. 159 00:07:55.075 --> 00:07:58.285 Same story for the contribution per segment in percentage 160 00:07:58.285 --> 00:08:02.085 to revenues, what you observe is up to 2021, 161 00:08:02.465 --> 00:08:05.005 the percentage is 70 to 80%. 162 00:08:05.065 --> 00:08:08.605 For components, it's 80% In 2021, as far 163 00:08:08.605 --> 00:08:11.325 as modules are concerned, it was up to 30%. 164 00:08:11.415 --> 00:08:14.325 Today it's about a little bit less than 20%, 165 00:08:14.345 --> 00:08:16.565 and others, again is a subcontractor. 166 00:08:16.905 --> 00:08:20.165 Now you understand that competence is a dominant business in 167 00:08:20.165 --> 00:08:23.125 terms of volume, but also in terms of profitability. 168 00:08:23.985 --> 00:08:26.005 The segment result, which is a kind of uh, 169 00:08:26.075 --> 00:08:29.205 operating income divided by sales as it's calculated 170 00:08:29.265 --> 00:08:32.725 by the company, shows that it's about 10% return on sales 171 00:08:32.825 --> 00:08:37.365 for modules and others, which iss about 30% for components. 172 00:08:37.465 --> 00:08:39.685 So you understand that competence is growing, 173 00:08:39.855 --> 00:08:41.125 competence is big, 174 00:08:41.225 --> 00:08:43.445 and conce is very profitable in terms 175 00:08:43.725 --> 00:08:45.125 of commercial profitability. 176 00:08:45.725 --> 00:08:48.005 A profit is revenues divided by cost. 177 00:08:48.075 --> 00:08:49.645 What about the operating expenses 178 00:08:49.945 --> 00:08:51.285 as a percentage to revenue? 179 00:08:51.675 --> 00:08:54.325 This is a manufacturing company, so as a consequence, 180 00:08:54.405 --> 00:08:55.845 a dominant cost in the p 181 00:08:55.845 --> 00:08:59.365 and l is the cost of goods sold, the manufacturing cost 182 00:08:59.505 --> 00:09:01.965 of these goods which you ship to your customers. 183 00:09:02.465 --> 00:09:04.965 If you look at indirect cost such as sg 184 00:09:04.965 --> 00:09:06.965 and a, it's quite stable and constant. 185 00:09:07.185 --> 00:09:09.445 If you look at the effort of the company each 186 00:09:09.445 --> 00:09:11.965 and every year in research and development in innovation. 187 00:09:12.345 --> 00:09:16.565 So it's a company which is moving in a very stable process. 188 00:09:17.185 --> 00:09:19.085 Now, if you correlate revenues 189 00:09:19.185 --> 00:09:22.725 and ebitda, you remember that revenues are stable 190 00:09:22.985 --> 00:09:24.045 and then up 191 00:09:24.465 --> 00:09:28.005 and if you look at EBITDAs, it is up for first period 192 00:09:28.105 --> 00:09:29.885 and if you look at the last 10 years 193 00:09:30.105 --> 00:09:32.965 or so, it's a little bit volatile, 194 00:09:33.345 --> 00:09:36.925 but it's kind of stable throughout the operating cycles, 195 00:09:37.745 --> 00:09:41.285 and this is true for EBIT D, this is true for EBIT as well. 196 00:09:42.035 --> 00:09:45.245 It's up and then fluctuations and stabilization. 197 00:09:45.345 --> 00:09:48.045 If you look at the last 10 years on the average, 198 00:09:49.205 --> 00:09:52.165 EBD represents 27% of revenues 199 00:09:52.385 --> 00:09:55.245 and even it's about 18% of revenues. 200 00:09:55.585 --> 00:09:58.725 Of course there are cycles, but there is a trend 201 00:09:58.865 --> 00:10:00.485 and there is a stability. 202 00:10:02.085 --> 00:10:04.845 Interestingly, if you look at the cash conversion cycle, 203 00:10:04.995 --> 00:10:06.685 it's inventory risk 'cause receivables, 204 00:10:06.685 --> 00:10:08.845 minus pay receivables. 205 00:10:08.845 --> 00:10:11.685 It's quite constant payables. It's quite constant. 206 00:10:12.025 --> 00:10:15.925 It represents 20 dayss of revenues, which means 207 00:10:15.925 --> 00:10:19.725 that the company is paying its suppliers reasonably quickly 208 00:10:19.905 --> 00:10:22.965 and not in 90 days and of the next months. 209 00:10:23.705 --> 00:10:25.605 Now, what is interesting to observe is the 210 00:10:25.605 --> 00:10:26.845 evolution of inventories. 211 00:10:27.345 --> 00:10:28.725 At the very beginning of the period, 212 00:10:28.995 --> 00:10:31.685 inventories were quite stable and reasonably low, 213 00:10:31.985 --> 00:10:35.245 and then there is an increase in 20 11, 20 and 12. 214 00:10:35.955 --> 00:10:39.685 It's a consequence of the dramatic event of Fukushima. 215 00:10:40.115 --> 00:10:42.645 Then it goes down and if you observe the last two years, 216 00:10:42.875 --> 00:10:44.845 inventories are skyrocketing. 217 00:10:45.225 --> 00:10:49.805 Why supply chain operating difficulties, shortages 218 00:10:49.905 --> 00:10:52.205 of any kind of component you can imagine. 219 00:10:52.435 --> 00:10:55.405 This is why if you want to serve your customer, you have 220 00:10:55.405 --> 00:10:58.845 to keep inventories in a warehouse closer to manufacturing 221 00:10:59.365 --> 00:11:01.805 facility just because customers are so important. 222 00:11:02.545 --> 00:11:03.605 Now, as a consequence, 223 00:11:03.885 --> 00:11:07.085 a massive effort in capital expenditures, property, plant 224 00:11:07.085 --> 00:11:09.005 and equipment capacity on the one hand 225 00:11:09.585 --> 00:11:11.765 and the increase in the inventories, on the other hand, 226 00:11:11.945 --> 00:11:13.405 the assets turnover went down. 227 00:11:13.865 --> 00:11:16.525 You remember over the last 10 years return sales was quite 228 00:11:16.845 --> 00:11:20.325 constant assets activities down from about 1.5 229 00:11:20.385 --> 00:11:22.285 to about 0.8. 230 00:11:22.985 --> 00:11:25.925 Now the return on capital employed is the consequence 231 00:11:25.925 --> 00:11:28.125 of return on sales fluctuating 232 00:11:28.125 --> 00:11:30.405 and stable assets turnover declining. 233 00:11:30.665 --> 00:11:32.725 The return capital employed is down 234 00:11:33.105 --> 00:11:35.165 and today it's about 15%. 235 00:11:35.225 --> 00:11:39.445 The company is announcing that it should be minimum 20% 236 00:11:40.065 --> 00:11:42.765 at least on the average in the long term, they have 237 00:11:42.765 --> 00:11:45.405 to announce a kind of recovery bouncing back 238 00:11:45.405 --> 00:11:46.685 to a higher rose. 239 00:11:46.995 --> 00:11:49.005 When you calculate the return capital employee, 240 00:11:49.005 --> 00:11:50.845 you can also compare with the return investment. 241 00:11:51.145 --> 00:11:53.245 The return investment is the same calculation 242 00:11:53.325 --> 00:11:54.725 as a return capital employed, 243 00:11:55.145 --> 00:11:58.045 but at the denominators level you get rid of goodwill 244 00:11:58.065 --> 00:12:01.205 and intangibles, which are the consequence of acquisitions. 245 00:12:01.745 --> 00:12:03.005 Of course, return capital 246 00:12:03.465 --> 00:12:05.405 and return investment are quite the same 247 00:12:05.405 --> 00:12:08.085 because acquisitions are definitely not 248 00:12:08.145 --> 00:12:10.285 so important in the balancing. 249 00:12:10.585 --> 00:12:12.445 Now, in the corporate finance point of view, 250 00:12:12.455 --> 00:12:14.645 there are two questions I would like to discuss with you. 251 00:12:14.705 --> 00:12:18.325 The one is gross and value gross performance 252 00:12:18.325 --> 00:12:20.485 and value performance is there, what is the relationship 253 00:12:20.485 --> 00:12:21.565 between growth and value? 254 00:12:21.865 --> 00:12:24.125 And you remember that gross is consuming financial 255 00:12:24.365 --> 00:12:27.245 resources, working capital requirement, cash conversion, 256 00:12:27.245 --> 00:12:30.205 cycle capacity, property plan and equipment. 257 00:12:30.705 --> 00:12:32.925 How did the company finance its growth? 258 00:12:33.395 --> 00:12:34.725 This is an interesting question. 259 00:12:34.725 --> 00:12:36.645 Let's go first with gross and value. 260 00:12:37.225 --> 00:12:40.125 If you look at the stock price of the company, you observed 261 00:12:40.125 --> 00:12:42.845 that it was a little bit low and then it went up, 262 00:12:43.465 --> 00:12:46.685 but basically it is following the stock market. 263 00:12:47.035 --> 00:12:49.765 Indexed no more, no less accept. 264 00:12:49.825 --> 00:12:51.205 If you look at the last month, 265 00:12:51.745 --> 00:12:54.485 now once you know the stock price, you know the market value 266 00:12:54.485 --> 00:12:56.565 of equity, you add net financial debt 267 00:12:56.585 --> 00:12:58.285 and you have the enterprise value. 268 00:12:58.585 --> 00:13:01.005 The enterprise value is the value of business operations, 269 00:13:01.005 --> 00:13:03.565 which you divide by what you invested in business 270 00:13:03.565 --> 00:13:05.765 operations, book capital employed, 271 00:13:06.145 --> 00:13:09.805 and the market to book is a relative value creation, 272 00:13:09.805 --> 00:13:11.125 which you can observe for the company. 273 00:13:11.625 --> 00:13:13.125 You can of course correlate the market 274 00:13:13.145 --> 00:13:15.085 to book on the return on capital employee 275 00:13:15.225 --> 00:13:16.365 and what do you observe? 276 00:13:16.675 --> 00:13:18.565 They move in the same directions. 277 00:13:18.565 --> 00:13:20.045 They are quite correlated, 278 00:13:20.865 --> 00:13:23.765 but even more interesting is to compare the market to book, 279 00:13:23.765 --> 00:13:26.445 which you observe with a market to book, 280 00:13:26.445 --> 00:13:29.165 which should be the case, assuming that there is no road, 281 00:13:29.665 --> 00:13:33.005 you have a perfect correlation, which basically 282 00:13:33.005 --> 00:13:37.245 that says not 1% of growth in the free cash flow, 283 00:13:37.245 --> 00:13:38.765 in the earnings per share in the revenues, 284 00:13:38.765 --> 00:13:41.245 in whatever metrics you want in the stock price 285 00:13:41.265 --> 00:13:43.965 of the company, which is quite surprising 286 00:13:43.965 --> 00:13:45.485 because the company is growing. 287 00:13:45.755 --> 00:13:48.765 Earlier in the film I showed you the annual growth rate, 288 00:13:48.765 --> 00:13:50.085 which is a little bit chaotic, 289 00:13:50.545 --> 00:13:51.885 but if you take a category, 290 00:13:52.005 --> 00:13:54.605 a five year compounded average growth rate, 291 00:13:54.985 --> 00:13:57.765 it was more than 10% during the decay. 292 00:13:57.765 --> 00:13:59.885 2010 it went down, 293 00:14:00.385 --> 00:14:04.725 but even though there is a decline in the sales in 2022, 294 00:14:05.275 --> 00:14:06.445 it's still 4%, 295 00:14:06.555 --> 00:14:09.885 four 5% over the last five years as an average. 296 00:14:10.475 --> 00:14:12.965 There's no such growth in the stock price. 297 00:14:13.505 --> 00:14:16.485 In order to try to understand the potential influence 298 00:14:16.485 --> 00:14:20.045 of growth in the valuation, I use the DCS, 299 00:14:20.045 --> 00:14:21.765 the discounted free cashflow method 300 00:14:21.825 --> 00:14:25.605 to evaluate the fundamental value of one share of moreira. 301 00:14:25.985 --> 00:14:29.405 So you take the one about 6%, you take the EBIT D 302 00:14:29.405 --> 00:14:32.285 and CapEx metrics and the cash conversion cycle. 303 00:14:32.715 --> 00:14:34.965 Then you calculate your free cash flows, you discount 304 00:14:34.965 --> 00:14:37.805 and you put the gross rate is a gross rate is zero. 305 00:14:38.225 --> 00:14:40.325 The fundamental value is a stock price, 306 00:14:40.695 --> 00:14:43.325 which is absolutely consistent, which what I said earlier, 307 00:14:43.705 --> 00:14:47.725 but what is interesting is if you take a growth rate of 4%, 308 00:14:47.735 --> 00:14:51.965 which is a five year cagr, you can value phenomenal value, 309 00:14:52.135 --> 00:14:54.885 which is a current stock price plus 45%. 310 00:14:55.585 --> 00:14:59.285 So there's an upside potential about 50% of the stock price, 311 00:14:59.625 --> 00:15:02.205 and if you take a gross rate, which is 10%, 312 00:15:02.345 --> 00:15:04.885 you remember it was more than 10 today, less than 10, 313 00:15:04.895 --> 00:15:07.005 let's imagine that it goes back to 10%. 314 00:15:07.225 --> 00:15:11.405 The stock price should be multiplied by two an this is 315 00:15:11.425 --> 00:15:12.725 by the way what 80% 316 00:15:12.725 --> 00:15:16.165 of financial analysts say just the price should be higher, 317 00:15:16.505 --> 00:15:20.085 but the market pays for the ING and does not pay for growth. 318 00:15:20.585 --> 00:15:21.725 You remember that the value 319 00:15:21.725 --> 00:15:24.045 of a company is not on its financial metrics. 320 00:15:24.395 --> 00:15:29.165 It's also about ESG is the business of Murata, 321 00:15:29.405 --> 00:15:33.245 a kind of ESG friendly ESG compatible business. 322 00:15:33.745 --> 00:15:36.765 In the Rio Tin to film, I was describing the example 323 00:15:36.765 --> 00:15:39.565 of a company which was absolutely terrible in terms 324 00:15:39.565 --> 00:15:41.005 of ESG practices. 325 00:15:41.145 --> 00:15:44.845 As a consequence, the investors were extremely worried about 326 00:15:44.905 --> 00:15:46.085 the future of the company 327 00:15:46.925 --> 00:15:49.285 and it was generating value destruction. 328 00:15:50.395 --> 00:15:53.285 Very often when I teach to executives 329 00:15:53.425 --> 00:15:55.285 or students, I'm asked the question, 330 00:15:55.515 --> 00:16:00.325 when you are ESG friendly, does it create value or not? 331 00:16:00.665 --> 00:16:03.005 Now, if you look at ESG at Burrata, 332 00:16:03.025 --> 00:16:06.165 the company says We are creating economic value, 333 00:16:06.225 --> 00:16:10.725 but we are also creating social value with ESG initiatives 334 00:16:10.785 --> 00:16:12.325 and we are co-creating value 335 00:16:12.395 --> 00:16:15.445 with our stakeholders on sharing the 336 00:16:15.445 --> 00:16:16.565 value with the stakeholders. 337 00:16:16.835 --> 00:16:18.485 This is the philosophy of the company. 338 00:16:18.595 --> 00:16:19.885 It's a continuous cycle. 339 00:16:20.385 --> 00:16:24.525 The company's communicating on its management targets 340 00:16:24.735 --> 00:16:27.725 objectives, economic objectives, revenues, 341 00:16:28.445 --> 00:16:30.325 customer value creation, operating income, 342 00:16:30.825 --> 00:16:33.605 return invested capital, which is quite the same as Rose, 343 00:16:34.385 --> 00:16:37.005 and by the way, it's 20% for one, 20% for the other. 344 00:16:37.065 --> 00:16:39.125 So assets to the should be about one, 345 00:16:40.265 --> 00:16:42.125 but also social value. 346 00:16:42.305 --> 00:16:44.205 Social value is about environment. 347 00:16:44.635 --> 00:16:47.725 It's about reducing greenhouse gas emissions. 348 00:16:48.035 --> 00:16:50.885 It's about recycling, it's about clean energy and so on 349 00:16:50.885 --> 00:16:53.005 and so forth, and also social value. 350 00:16:53.075 --> 00:16:54.325 It's about diversity 351 00:16:55.385 --> 00:16:57.525 and the company says we have to increase the number 352 00:16:57.585 --> 00:17:00.285 of overseas employees working in the company. 353 00:17:01.195 --> 00:17:03.845 Diversity is absolutely great as an objective, 354 00:17:04.305 --> 00:17:07.285 but the company also mentioned somewhere in the annual 355 00:17:07.285 --> 00:17:09.085 annual report, it's a small line somewhere 356 00:17:09.115 --> 00:17:12.525 that the percentage of female employees in 357 00:17:13.095 --> 00:17:18.085 managerial positions is just 3.5%, so it means 358 00:17:18.085 --> 00:17:20.245 that the manager's population is 359 00:17:20.385 --> 00:17:23.085 96.5% men. 360 00:17:23.415 --> 00:17:26.165 There might be some potential improvements in this 361 00:17:26.165 --> 00:17:27.285 process now. 362 00:17:27.285 --> 00:17:28.805 It was about growth and value, 363 00:17:29.745 --> 00:17:32.445 no growth in the value ESG neutral. 364 00:17:33.065 --> 00:17:35.445 Now, what about growth and financing? 365 00:17:36.225 --> 00:17:37.885 On a financing point of view, 366 00:17:37.955 --> 00:17:39.805 there's an interesting concept which is named 367 00:17:40.105 --> 00:17:41.645 self-sustainable growth. 368 00:17:42.195 --> 00:17:44.165 What is the ability of the company to 369 00:17:44.675 --> 00:17:48.125 grow its capital employed, keeping the financial structure 370 00:17:48.265 --> 00:17:50.805 as easy, stable, they divided by equity 371 00:17:51.585 --> 00:17:55.125 and not diluting the shareholders, not issuing any share, 372 00:17:55.125 --> 00:17:58.125 which is exactly the policy of the company. 373 00:17:58.865 --> 00:18:01.405 No rights, no shares issue at all. 374 00:18:01.985 --> 00:18:03.845 Now to get a stable financial structure, 375 00:18:03.935 --> 00:18:06.645 gross in capital employed should be the same as gross in 376 00:18:07.645 --> 00:18:10.845 equity, but gross inequity is retained earnings, 377 00:18:11.025 --> 00:18:13.165 so earnings minus dividend. 378 00:18:13.715 --> 00:18:15.605 This is why the natural gross rate 379 00:18:15.665 --> 00:18:20.085 of the equity is a return equity net earnings divided 380 00:18:20.225 --> 00:18:22.925 by equity minus the dividend power ratio, 381 00:18:23.175 --> 00:18:25.085 which is about 30%. 382 00:18:25.715 --> 00:18:27.525 It's observed as 30% 383 00:18:27.905 --> 00:18:31.325 and it's announced by the company as 30% as a target. 384 00:18:31.905 --> 00:18:34.565 At the end of the day, the company can self sustain 385 00:18:34.565 --> 00:18:38.605 and self finance its growth at the rate of five to 10%. 386 00:18:39.065 --> 00:18:41.165 But what is very interesting is 387 00:18:41.165 --> 00:18:45.045 to compare the actual growth rate in the capital employed 388 00:18:45.635 --> 00:18:46.925 with a gross rate, 389 00:18:46.925 --> 00:18:49.525 which the company can self-finance without 390 00:18:49.895 --> 00:18:51.525 destroying its balance sheet. 391 00:18:51.755 --> 00:18:54.405 What you observe is that on the average gross in capital 392 00:18:54.765 --> 00:18:57.885 employed and sustainable growth are quite the same except 393 00:18:58.065 --> 00:18:59.165 two superiors. 394 00:18:59.375 --> 00:19:02.205 There is one superior at the beginning of the decade. 395 00:19:02.785 --> 00:19:07.565 2010 is about acquisitions and some investment, 396 00:19:07.865 --> 00:19:09.925 but you remember that during the second half 397 00:19:09.945 --> 00:19:12.525 of the decade there is a period of intense 398 00:19:13.085 --> 00:19:14.445 capacity increase. 399 00:19:14.715 --> 00:19:16.725 This is about property, plant and equipment. 400 00:19:16.725 --> 00:19:18.165 This is about capital expenditures 401 00:19:18.385 --> 00:19:22.245 and then the actual CE growth is much more than 402 00:19:22.245 --> 00:19:23.645 what the company can afford. 403 00:19:25.005 --> 00:19:28.445 Interestingly, what happens in the balance sheet when you 404 00:19:28.445 --> 00:19:29.525 don't issue shares 405 00:19:29.525 --> 00:19:31.605 and you're growing at the rate, which is more than 406 00:19:31.605 --> 00:19:32.725 what is accepted 407 00:19:33.065 --> 00:19:36.245 and supported by the shareholders', equity grows. 408 00:19:36.715 --> 00:19:38.845 Then you have to finance your growth with debt, 409 00:19:39.905 --> 00:19:42.285 and then when you observe the gearing of the company, 410 00:19:42.915 --> 00:19:45.285 when the company is growing at a higher at a rate, 411 00:19:45.285 --> 00:19:48.525 which is much more than what it can sustain, what happens? 412 00:19:48.875 --> 00:19:51.445 That is up, but that is negative. 413 00:19:51.745 --> 00:19:53.685 The company has more cash than debt 414 00:19:53.705 --> 00:19:55.765 and significantly more cash than that. 415 00:19:55.765 --> 00:19:58.285 It's balance sheet. It's a very conservative 416 00:19:58.285 --> 00:20:00.765 and cautious company in terms of financial strategy. 417 00:20:01.105 --> 00:20:04.245 At the very beginning of the period, the debt is negative 418 00:20:04.245 --> 00:20:06.925 and represents minus 40% of equity. 419 00:20:07.355 --> 00:20:10.005 Then there is a period where capital employees growing at a 420 00:20:10.005 --> 00:20:12.405 higher rate than the system will grows 421 00:20:12.405 --> 00:20:16.005 and then debt is up still negative, stabilize. 422 00:20:16.315 --> 00:20:18.045 Then it's up still negative, 423 00:20:18.385 --> 00:20:22.365 but today debt over equity is minus 10%. 424 00:20:22.915 --> 00:20:27.205 It's still very cautious, but we are getting closer to zero. 425 00:20:27.825 --> 00:20:30.365 To characterize the financial strategy of a company, 426 00:20:30.545 --> 00:20:32.685 you can use a gearing debt divided by equity. 427 00:20:32.945 --> 00:20:36.445 You can also use a leverage then divided by ebitda. 428 00:20:36.865 --> 00:20:40.645 Of course it's negative because EBITDA is positive today. 429 00:20:40.865 --> 00:20:43.405 Net debt divided by EBITDA is minus one, 430 00:20:44.025 --> 00:20:45.925 so cash represents one year 431 00:20:46.065 --> 00:20:48.885 of cash operating profit of ebitda. 432 00:20:49.225 --> 00:20:51.925 The capital is very prudent. The capital is very ous. 433 00:20:52.275 --> 00:20:56.565 It's flexibility, it's maximal 100%. It's vulnerability. 434 00:20:56.755 --> 00:20:58.245 What does it mean? Vulnerability? 435 00:20:58.385 --> 00:20:59.445 It means your ability 436 00:20:59.545 --> 00:21:03.605 to be resilient if something terrible happens around you. 437 00:21:04.075 --> 00:21:07.125 Vulnerability is new, flexibility is maximum, 438 00:21:07.945 --> 00:21:10.925 but net cash is moving towards zero, 439 00:21:11.175 --> 00:21:13.325 which might be a concern one the or the other. 440 00:21:14.345 --> 00:21:17.005 I'd like to conclude this film with two questions. 441 00:21:17.875 --> 00:21:21.725 What do you do in 2022 when you observe some difficulties in 442 00:21:21.725 --> 00:21:24.925 the revenues and seven wise a bit more strategy, 443 00:21:25.235 --> 00:21:26.805 it's about manufacturing footprint. 444 00:21:26.935 --> 00:21:29.125 Where should you locate tomorrow? 445 00:21:29.455 --> 00:21:33.805 Production facility in 2022, revenues are down by 7%. 446 00:21:33.825 --> 00:21:36.885 In the meantime, earnings are done by 19% 447 00:21:36.885 --> 00:21:38.765 because it's a bit of fixed cost is net. 448 00:21:39.595 --> 00:21:42.845 When revenues are down, when profits are done, 449 00:21:42.845 --> 00:21:45.325 whether you you reduce costs, hmm, 450 00:21:45.785 --> 00:21:47.445 not when costs are investment. 451 00:21:48.195 --> 00:21:49.245 What about r and d? 452 00:21:49.485 --> 00:21:53.445 R and D is up by 12% in absolute terms, 453 00:21:54.225 --> 00:21:57.485 not stable as a percentage to revenue, they increase the r 454 00:21:57.485 --> 00:22:01.165 and d, even though the revenues are down another investment, 455 00:22:01.325 --> 00:22:05.565 capital expenditures, capital expenditures are up by 26%. 456 00:22:05.745 --> 00:22:08.685 You don't cut CapEx because your earnings are down. 457 00:22:09.025 --> 00:22:11.085 If you want to demonstrate your optimism 458 00:22:11.105 --> 00:22:13.205 to your shareholders, we're going to bounce back. 459 00:22:13.275 --> 00:22:14.325 It's just an accident. 460 00:22:14.945 --> 00:22:17.005 You stabilize or you increase the dividend. 461 00:22:17.225 --> 00:22:20.365 The dividend is increased by 25%. 462 00:22:20.825 --> 00:22:23.285 The last question is of course about head count. 463 00:22:23.955 --> 00:22:26.045 Head count is down by 6%, 464 00:22:26.585 --> 00:22:31.325 but the average annual turnover is about 7%. 465 00:22:31.345 --> 00:22:32.365 So what does it mean? 466 00:22:32.785 --> 00:22:34.285 It means that you don't lay off anybody, 467 00:22:34.865 --> 00:22:38.085 but when seven people are out, you just hire 468 00:22:38.745 --> 00:22:40.525 one and that's it. 469 00:22:40.525 --> 00:22:42.765 So you try to stabilize your headcount 470 00:22:43.065 --> 00:22:45.405 and of course there is a kind of natural adjustment 471 00:22:45.425 --> 00:22:46.605 to revenues. 472 00:22:46.865 --> 00:22:48.485 But there is also an interesting point. 473 00:22:48.485 --> 00:22:49.925 When your stock price is down 474 00:22:50.105 --> 00:22:52.165 and you are absolutely convinced that you're going 475 00:22:52.165 --> 00:22:55.685 to bounce back, your stock price is under evaluated. 476 00:22:56.235 --> 00:22:57.405 When you are cash rich 477 00:22:57.505 --> 00:23:00.525 and your stock price is under evaluated, what can you do? 478 00:23:00.795 --> 00:23:01.965 Back back your shares? 479 00:23:02.825 --> 00:23:06.845 The company in the past three times bought back its shares 480 00:23:06.865 --> 00:23:09.605 for 15 billion Japanese yen. 481 00:23:10.065 --> 00:23:11.765 It was in 2007, 482 00:23:12.155 --> 00:23:15.525 nine 11 when the stock price was a bit gloomy. 483 00:23:15.795 --> 00:23:17.885 Then it went up, no problem, 484 00:23:18.065 --> 00:23:21.365 and then it goes down when the capital show is reasonably 485 00:23:21.365 --> 00:23:25.565 stable and then the company used 80 billion yen 486 00:23:25.625 --> 00:23:27.005 to buy back his share. 487 00:23:27.425 --> 00:23:30.005 It represents a little bit more than $500 million. 488 00:23:30.105 --> 00:23:33.565 For a company, it was revenues are $11 billion. 489 00:23:34.485 --> 00:23:36.765 You understand that it's quite significant buyback 490 00:23:36.825 --> 00:23:38.845 and then you show your confidence in the future, 491 00:23:39.145 --> 00:23:40.245 you increase the dividend, 492 00:23:40.385 --> 00:23:42.925 you keep on increasing your research and development 493 00:23:43.305 --> 00:23:45.405 and you buy back your shares just to say, 494 00:23:45.785 --> 00:23:47.885 my stock price is under a valid. 495 00:23:48.905 --> 00:23:51.685 Now changing the stock market to conclude this film, 496 00:23:51.955 --> 00:23:55.165 there's a very big question in all these manufacturing 497 00:23:55.645 --> 00:23:57.445 companies in the region, which is 498 00:23:57.495 --> 00:23:59.725 where do you locate the factories? 499 00:24:00.575 --> 00:24:03.685 There are plenty of Muira manufacturing facilities. 500 00:24:03.765 --> 00:24:08.285 In Woo, 13,700 people were there. 501 00:24:08.435 --> 00:24:11.885 It's almost one fifth of the total headcount of the company, 502 00:24:12.055 --> 00:24:14.805 which is absolutely huge invested capital 503 00:24:15.345 --> 00:24:17.925 160 billion Japanese yen. 504 00:24:18.145 --> 00:24:20.765 It is 17.5% of total 505 00:24:21.285 --> 00:24:25.085 property equipment manufacturing facilities of the company. 506 00:24:25.185 --> 00:24:28.245 So you understand that there's an extremely big side there. 507 00:24:28.595 --> 00:24:30.605 It's the largest by far, 508 00:24:31.785 --> 00:24:34.245 but as you know, the relationship between China 509 00:24:34.465 --> 00:24:37.645 and Japan are not always extremely friendly, 510 00:24:38.015 --> 00:24:41.885 especially in the past and the relationship between China 511 00:24:42.145 --> 00:24:43.565 and the rest of the region 512 00:24:43.625 --> 00:24:45.565 and the rest of the world are a very 513 00:24:45.565 --> 00:24:46.845 big question mark today. 514 00:24:47.385 --> 00:24:49.125 So if you want to mitigate 515 00:24:49.225 --> 00:24:50.765 and diversify your risk, 516 00:24:51.145 --> 00:24:54.045 you locate factories a little bit everywhere 517 00:24:54.105 --> 00:24:55.325 and it was in Thailand. 518 00:24:56.105 --> 00:24:59.365 The factory was integrated a few weeks ago. 519 00:24:59.505 --> 00:25:02.045 By the way, it's a new manufacturing facility 520 00:25:02.065 --> 00:25:03.285 for Muira time manufacturing 521 00:25:04.225 --> 00:25:05.285 and you know that a number 522 00:25:05.285 --> 00:25:09.485 of companies are located in Vietnam, in Philippines, 523 00:25:09.585 --> 00:25:12.605 in Indonesia, in Thailand wide. 524 00:25:12.875 --> 00:25:16.405 Because about the future you have to be quite conservative 525 00:25:16.585 --> 00:25:20.445 and cautious, which is a muira ways of working. 526 00:25:20.905 --> 00:25:23.685 The company keeps on going its own way. 527 00:25:24.025 --> 00:25:27.165 Imp importable keep on investing in the future, 528 00:25:27.435 --> 00:25:30.325 even in the short run is a little bit negative 529 00:25:30.705 --> 00:25:32.805 and the company is also keeping its very 530 00:25:33.785 --> 00:25:36.685 ous conservative way of doing things, 531 00:25:36.685 --> 00:25:38.485 including in the financial strategy, 532 00:25:39.455 --> 00:25:42.525 which is absolutely necessary if you want to survive 533 00:25:42.705 --> 00:25:45.045 and sometimes unfortunately it's not enough. 534 00:25:46.545 --> 00:25:47.255 Thank you very much.