Nabtesco Corp

TSE:6268

Earnings Call Analysis

Sales Decline Offset by Transport and Accessibility Growth

In the first half of fiscal 2024, sales dropped by 6.4% year-on-year to JPY 152.5 billion, driven by weak demand in Component Solutions, particularly precision reduction gears. Despite this, operating profit reached JPY 6.4 billion, down 26%, but beating the April forecast by JPY 1.4 billion. Growth in Transport and Accessibility Solutions helped offset declines. Full-year projections remain firm at JPY 323.7 billion in sales and JPY 13.5 billion in profits. Although Component Solutions are still struggling, cost-cutting measures should maintain profit stability. Aircraft and Marine segments show promising growth, particularly in the commercial and Ministry of Defense markets.

Navigating Through Challenges

In the first half of fiscal year 2024, the company reported sales of JPY 152.5 billion, a decrease of 6.4% from the same period last year. Yet, this was relatively encouraging as it surpassed the company’s own expectations from the previous plan by JPY 1 billion. The decline was largely attributed to the Component Solutions segment, particularly in precision reduction gears, which suffered from low demand in robotics. However, the Transport Solutions and Accessibility Solutions segments demonstrated steady performance, helping to offset some losses.

Profits in a Mixed Environment

The operating profit for the first half was JPY 6.4 billion, which marked a significant year-over-year decline of 26%. Nevertheless, this was an improvement of JPY 1.4 billion compared to earlier plans. The main factor for the profit decline was again the Component Solutions segment. Despite these challenges, both the Transport and Accessibility areas showed growth, although additional burdens came from an impairment loss related to European manufacturing equipment.

Steady Dividends Amidst Challenges

The interim net profit also recorded JPY 4.2 billion, and the company maintained an interim dividend of JPY 40 per share, reflecting a commitment to shareholder returns despite the current market challenges.

Future Projections and Segment Performances

Looking ahead, the company has kept its full-year revenue guidance unchanged at JPY 323.7 billion. Although overall sales expectations remain static, adjustments within segments were made; the forecast for Component Solutions was lowered while Transport and Accessibility Solutions forecasts were revised upward, signaling potential growth in these areas. Operating profit expectations also remained steady at JPY 13.5 billion, supported by strategic cost reduction initiatives projected to enhance profit margins.

Project 10: Aiming for Higher Margins

The company has initiated 'Project 10', aimed at enhancing the operating profit margin to 10% by fiscal year 2026. This necessitates an increase of 6 percentage points, which will occur through focused cost-cutting strategies, improved procurement processes, and operational efficiency enhancements. From these efforts, a 0.4 percentage point improvement in margins is anticipated for fiscal year 2024.

Segment Insights: Looking Beyond the Numbers

While the Component Solutions business is projected to continue facing a difficult market, positive growth is expected in the Transport Solutions area, including railroad and marine vessels, driven by several new projects. Meanwhile, the Accessibility segment is projected to exceed JPY 100 billion in sales for the first time, driven by robust demand in building door solutions.

Challenges Ahead: Market Dependencies

Despite generally favorable conditions in the commercial aircraft sector, particularly with the Ministry of Defense projects gaining traction, the company noted potential delays in large-scale projects that could impact the second half of fiscal year 2024. The continuing downturn in China’s market for precision reduction gears is also a significant concern, with recovery not anticipated until 2025. This broader context highlights the dual-edged nature of their current strategies.

Adaptibility and Strategic Focus

The management’s commentary emphasized adaptability in their approach, enhancing existing product lines for sectors like food packaging, and focusing on emerging opportunities within electrification and automation technologies. Such initiatives portray a commitment to innovation while preparing the company to capture growing business opportunities in a transitioning market landscape.

Earnings Call Transcript 2024-Q2

[Unknown Executive]

Now we will start the second quarter of fiscal year '24 results briefing. Again, please refrain from recording during the session. Presentation material is available on the top page of our website, www.nabtesco.com. Please note that today's conference is being recorded.

First, let me introduce today's speaker, Mr. Atsushi Alan Habe, Representative Director, Senior Managing Executive Officer, Corporate Planning, Accounting and Finance, Information Systems and Corporate Communications Department. Next, Mr. [ Kadushi Masukami ], General Manager of Accounting and Finance Department.

Mr. Habe will give a presentation followed by a Q&A session.

[波部 敦, executive]

Good afternoon, everybody. My name is Atsushi Habe. I'm very pleased to give you the presentation. And from here, can I ask the interpretation?

[Unknown Executive]

Yes.

[波部 敦, executive]

I hope so.

[Interpreted] So I'd like to deliver the first half of fiscal 2024 results from here on. Thank you. So first of all, about the summary of agenda. So this is going to be the flow today. So first, I'd like to explain the first half results. And then I'll talk about the full year forecast. And then I'd also like to talk about these 3 things in the actions for profitable growth.

So here is the result of the first half. The upper part of this slide shows the sales and the lower part shows the operating profit. And as for the gray bar at the very left, this is showing the first half results of FY 2023, and the very right dark blue bar shows the FY '24 first half results. And in between, there are bar charts indicating the results or the contributions of each segment.

So the first half sales were JPY 152.5 billion, which was lower by 6.4% from the previous year's first half. However, compared against the plan that we announced on April 30, it was higher by JPY 1 billion. And to give you more details here, the biggest drag was coming from the Component Solutions business, especially precision reduction gears, which saw a big decline year-on-year. And that is because continually the robotic demand has been low and sluggish.

However, the Transport Solutions and Accessibility Solutions were doing steadily well. And therefore, the drop in the Component Solutions, CMP, was offset by the Transport, TRS, and Accessibility, ACB.

Now as for the bottom part here, operating profit. In the first half of this year, the operating profit was JPY 6.4 billion, which was minus 26% year-on-year. And compared to just the plan that we announced in April, it was actually increased by -- which was higher by JPY 1.4 billion. And the reason for the lower -- year-on-year lowered operating profit is mainly because of the Component Solutions, which saw the drop in the sales that led to the drop in the profit as well.

But as for the Transport and Accessibility, they were achieving good growth in the profit. But one more factor that was dragging down the profit was the impairment loss that was coming from our manufacturing equipment subsidiary in Europe. And therefore, all-in-all that profit turned out to be JPY 6.4 billion.

And this slide shows the first half results, the P&L. And as for the sales and operating profit, they have already been explained earlier. And as for the OP margin, it was 4.2%. And the net profit was JPY 4.2 billion. And as for the interim dividend, dividend per share, it's JPY 40, as we had announced.

Now this slide shows the balance sheet. And the column on the left shows the balance sheet as of the end of December 2023, and the blue bar right next to it shows that balance as of the end of June this year. And the assets increased mainly due to the inventories that was higher. And also because we started to operate the Hamamatsu plant, there was this increase in the non-current assets. Therefore, there was this increase in assets by JPY 11.3 billion.

And also the liabilities, there was increase in the borrowings of JPY 10.2 billion. And the total equities also increased. And as shown at the very bottom, the ratio of the equity attributable to owners of parent was 61.9%.

And this -- and this slide shows the full year outlook. And in fact, this is showing the market trend outlook as well as our forecast for the second half of the year. And on the very right column, we're showing the trend of the general market environment. And as you can see, obviously, the CMP, Component Solutions, would be continually very bad. But other segments, aside from some little cloudiness in some of the businesses, we are going to expect generally good demand -- a good market environment.

As for each segment, the Component Solutions, CMP's precision reduction gears are seeing sluggishness. And in fact, at the beginning of the year, we were estimating that therefore the recovery would start from the second half of this year. But actually, the situation is still tough. The economic conditions in China is bad and also the EVs, the automotive production is not really recovering much yet.

Therefore, we are now foreseeing the market recovery to take place only after 2025. And therefore, we are showing this umbrella to show the situation is going to be really rainy. And that's similar for the hydraulic equipment as well. Even though we are seeing some recovery in some of the areas, overall the demand in China is not coming back. Therefore, we are continually foreseeing sluggish conditions.

Now as for the Transport Solutions, TRS, overall the business is expected to be good here. And first, regarding the railroad vehicle equipment. In Japan, we are winning many new projects and the MRO has been good. So -- and we are continue expecting the good business conditions here to stay.

Now aircraft equipment, this is super good actually for both the commercial aircraft as well as the Ministry of Defense business. And they are both achieving the greatest ever growth.

Now commercial vehicle equipment, this is the only one exception within this Transport, which is not going to be growing much. In fact, in the logistics side, logistics industry, there is shortage of truck drivers and manpower. Therefore, we cannot expect much growth in Japan. And in the overseas market, especially in Thailand in Southeast Asia, the demand is sluggish. So this -- therefore, we are foreseeing some cloudiness or sluggishness in the commercial vehicle equipment.

Now as for marine vessel equipment, they are doing well in both the new vessels and MRO. So we are expecting good growth in both of those areas. And we are also winning new projects. So we can expect good performance this year.

Now Accessibility, which is the automatic doors business. First, in the building doors business, we are expecting good growth in both Japan and overseas. And the platform doors are also doing well, and it's likely to be continuing well. So for the first time for this Accessibility Solutions segment, we're expecting the full year sales to exceed JPY 100 billion.

Now Manufacturing, which is mostly packaging machines for the food industry. The demand is solid. However, there were some postponement of some large-sized projects. Therefore, in the second half of this fiscal year, we may see some stalled movement. However, we know that the underlying demand is continually strong. We can expect good growth in the next fiscal year.

So here is the full year forecast for both the sales and operating profit. And the very left gray bar shows the plan as of April 30 after the first quarter. And the one on the very right shows the current plan as of July 31. So the overall number, the plan that we are having, is going to be the same. The sales would stay at JPY 323.7 billion. However, the -- each segment expectations are now changed a bit. So basically, for the Component Solutions business, we decided to revise down the forecast, whereas Transport and Accessibility is expected to be higher. So we revised it up. So all-in-all, it stays the same.

And as for the operating profit, once again the total amount is not going to be changed. We're continually planning the profit -- full year profit to be JPY 13.5 billion. But there were some changes in the -- among the segments. And first, regarding the Component Solutions, even though we are anticipating the drop in the sales, we have -- we are going to work on further cost reductions and some other efforts. So even though the sales is lower, we are going to keep the same expected level of profit. So therefore, this is not going to be too different from what we had planned.

And as for Accessibility Solutions, in fact, we have -- this is really contributing to our profit overall with various different factors. But because of the impairment loss that we are going to foresee -- I mean because of the impairment loss that we had to book, overall the total profit is going to stay at JPY 13.5 billion.

Now this slide shows the operating profit analysis from a different angle. And here, you can see the reason why we could -- we are keeping the full year profit forecast of JPY 13.5 billion. And once again, as for Component Solutions, because the sales is going to drop, we are going to see some negative impact on the profit from that part of the sales reduction.

However, as highlighted in this blue box, we are going to work on this cost cutback efforts, including the optimization of human resources and the review of procurement and cost structure and so forth. Therefore, this is going to be improvement push up factor by JPY 1.6 billion.

At the same time, we're going to work on the further price pass-through efforts. So all-in-all, we can expect to keep the JPY 13.5 billion full year profit. And in fact, that part that's highlighted in this blue here is relevant to the Project 10 activities that we are working on in order to recover and achieve the further growth.

Now I would like to talk about the actions for the profitable growth, and this slide is showing the progress of that Project 10 that I just mentioned. This is the project to improve our profitability, which we started from this spring. And the idea is to achieve the -- to retrieve the OP margin of 10% by FY 2026, and we're very much determined to do so. And that means that we have to improve the operating profit margin by 6 points. And in order to do that, we have 3 main actions as shown in those 1, 2 and 3 here. And we are making sure that they're going to be carried out steadily.

And in the middle part of this slide, we're showing the actions in 2024 and these are the specific actions for each. And from these actions throughout this FY '24, now we're expecting 0.3-point improvement from the activity action number one and 0.1-point improvement from actions number two and three. Therefore, overall, we're expecting now the improvement of 0.4 points. And we're very much determined and confident about achieving this improvement.

So this slide is showing some of the growth areas of existing businesses and how we'd like to work on it. And the first is for the aircraft equipment. And in fact, like I said, the market conditions are very good for both the Ministry of Defense business as well as the commercial aircraft business. And the MRO business is also good for us. So while we are enjoying this good market environment, how can we achieve further growth? And then the ideas and actions are mentioned at the bottom part of this slide.

So first of all, as shown in the first bullet point, we'd like to maximize growth opportunities by increasing applied models and supply items. So this means that through the new projects, we would like to make sure to win those good new projects. And that would be for both the commercial aircraft as well as the Ministry of Defense business like the fighters and missiles and so forth included. And not just those new businesses, we are also getting queries from the existing customers too. So we'd like to make sure to win those new businesses and new projects, and increase the overall business volume further.

The second thing is establishment of a highly efficient production system to meet demand increase. Now while there is increasing volume of jobs and works, we need to build up the capacity to cope with such increased volume. And we have to improve the efficiency of the production too. But we are not planning to just -- we're not planning to add on headcount here. We're planning to improve the efficiency of the production system. So that's what this is.

And the third point, the flight control actuation systems. It's -- this is our core product in this aircraft equipment. But now it just -- not just in the aircraft, we'd also like to apply this new -- this technology, core technology that we're having for the new generation mobility such as drones. And by trying those things, we'd like to win new businesses as well. And this may not be just limited to the selling of the flight control actuation systems itself, but to control of our total mobility as a whole as a system.

Now here's another example of growing our existing business, and this is about the marine vessels equipment. So I'm not going to go into the details. But then again, as shown on the left, there is the general needs to cut down the CO2 emission in the marine world as well. So we would like to cope with such needs. And as shown on the right, there is good market growth expectation for the automated operational systems as well. So we'd like to make sure to capture such needs too.

Now some of the actions to take, we're going to cope with the new fuel requirement through those products shown here, such as electronically-controlled hydraulic valves and also the gas valve for main engine adopted to hydrogen. And this hydrogen product is developed together with the company in the Greater Osaka area.

Now the other one on the right is about the automatic operational navigation system. In fact, we acquired this one company in Greece. And together with this company, we'd like to provide this kind of system, not just for the new build ships -- newly built ships, but also for the replacement ships, or even as an add-on to the existing ships as well. And if we could really capture this market for the add-on, that means the total approachable market size could be thousands of ships out there. So there is a great big business opportunity for us.

Now this slide shows the new development of some of the new products. And as shown here on the left, in this diagram, we have been mainly dealing with the mechanical components so far. But now we'd like to add more electrification and also automation and autonomy technologies on top of it, and realize the smart motion control. That's the kind of evolution we're working on. And one of the examples we're working on is something that we believe would be unique for us because we can use the competitive edge of our precision reduction gears. And that is to add some electrification factors to this precision reduction gears to approach the new market.

And we are showing 2 examples of this kind of smart motion control application and one is for hydraulic equipment for electrification of the excavators. And since our precision reduction gears are very compact and flat, and have high rigidity and long life, it really fits with the needs of the excavators. Therefore, we are working on this new product that is going to be electrified. And once it's going to be developed, it's going to be capturing a lot of market needs, and we think it's going to be very competitive. In fact, we're going to exhibit this product at the trade show to be happening in this September at Tokyo Big Sight. So from there on, together with the new customers, we hope to commercialize this product.

And one another example is this packaging machines. And this is mainly for the factory automation solutions in the food industry. So we're applying the AGV with mecanum wheels in this automated factory. And we think this is going to be very much fitting to their needs because it's going to automate the whole system and improve the efficiency of the whole production factory. So we can contribute to become the solution.

So that is all for my presentation. Thank you very much.

[Unknown Executive]

Now let's move on to the Q&A session.

[Unknown Executive]

[Operator Instructions] Okay. Mr. William Nestuk.

[William Nestuk, analyst]

Okay. I just have 2 short questions. I may have missed the beginning portion of today's presentation. But my first question would be, when do you expect robot gear demand to recover? That's my first question.

And then my second question will be Indonesia train, railway car, equipment sales, do you expect that in this year, in the third or fourth quarter? Or is that a story for next year 2025, Indonesia-related transportation demand, yes? Those 2 questions.

[波部 敦, executive]

[Interpreted] So to answer to your first question, the precision reduction gear is expected to be recovering. I mean, relating to robot gear, is expected to recover from the first half of 2025 now. And in fact, originally, we were thinking that it's going to recover from the second half of this year, but it's not likely to happen just yet. The market is not improving and also the customers are still having a lot of inventory. So now we think it's going to be the first half of 2025. And by the way, we are continually keeping the good market share, and we are confident that the automotive demand would surely come back. Therefore, once it comes back, we can once again achieve good growth.

And as for a second question regarding the railroad equipment business in Indonesia, I think you're talking to about the PT INKA. And we think the sales recovery would take place from the second half of this year.

[William Nestuk, analyst]

Do you have any scale or any image of what the sales volume might be? And how will it develop for next year 2025? Just some kind of image if you have some figure.

[波部 敦, executive]

[Interpreted] So you're still asking about the Indonesian railroad vehicle equipment?

[William Nestuk, analyst]

Yes, just about Indonesia, only that. Yes.

[波部 敦, executive]

[Interpreted] So as a back order, we have about 192 rolling stocks to work on. And the sales would be emerging from -- sales will be booked from throughout this year into next year. But I'm sorry, I do not have a number of the amount of the sales at the top of my head, sorry.

[William Nestuk, analyst]

Okay. So when is the peak? Is the peak next year or is it 2026 for Indonesia railcar sales?

[波部 敦, executive]

[Interpreted] We think it's going to be 2025.

[Unknown Executive]

Are there any other questions? [Operator Instructions] Nestuk-san, please go ahead.

[William Nestuk, analyst]

Okay. So just a short update on the 737 MAX business because of the problems with safety, the blowout of the door, and they're limiting the amount of production by Boeing of this model. Is this affecting you? How do you think this will develop? Will next year be better for this model?

[波部 敦, executive]

[Interpreted] So thank you for the question. In fact, the answer is, yes, we were affected by Boeing's limitation of the production of 737 MAX, as you know. But then again, more recently, there has been now the turn in -- change in the Boeing policy, and they're going to increase the production volume hereon. So we're expecting that positive impact to be upon us for this year as well as the next fiscal year for 737 MAX.

[William Nestuk, analyst]

Okay. And just one question about currency. Is there a currency benefit from the weak yen? And if so, what is the approximate benefit for the aircraft business to Boeing from the weak yen if you have a figure?

[波部 敦, executive]

[Interpreted] So this is one of the slides that's included in the presentation material. And you can see the overall foreign exchange impact and the sensitivity in our business. And throughout the first half of the year, we had JPY 1.4 billion benefit on our operating profit for the total company, not just for the aircraft but for the total company.

And the business with Boeing is, of course, denominated in U.S. dollars. Therefore, according to the foreign exchange rate at the time of the transaction, we would get that for a transaction -- foreign exchange gain from the transaction or translation. But for the further sensitivity foreign exchange, please refer to Page 24 of our presentation.

[William Nestuk, analyst]

Okay. And just one short question, further question, sorry. On the food packaging business, your product is high end. And so, some customers don't want to buy the high end. Do you plan to offer a more economical or cheaper models in the future for food packaging? Or is it mainly you're going into more automation is -- so are you moving -- do you have any plan to move further down in price for the food packaging business?

[波部 敦, executive]

[Interpreted] So our food packaging machines are mainly targeting the high-end customers because our products are high end, premium products, mainly like for pouching machines and so forth. And we believe our products does not really fit into those customers or the markets that are seeking cheaper products. And we do not think our -- and we have no plans to launch such cheaper version of our products either.

[Unknown Executive]

Are there any other questions? We have still time. Final call, are there any questions?

So I don't see any other questionnaire. So we will close this meeting. Okay? So we will close this meeting. Thank you for joining us today.

[波部 敦, executive]

So, thank you very much.

[Unknown Executive]

Yes, thank you.

[波部 敦, executive]

Have a nice day.

[Unknown Executive]

Thank you. Have a nice day, bye.

[波部 敦, executive]

Bye.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]