Kawasaki Heavy Industries Ltd

TSE:7012

Earnings Call Transcript 2019-Q1

[Kenji Tomida, executive]

This is Tomida of Kawasaki Heavy Industries. Thank you very much for joining us today out of your busy schedules. I will begin my presentation.

Please turn to Page 3 of the handout material. This is the summary of financial results. Orders received increased JPY 80 billion year-on-year due to the increase in domestic orders in the Energy System and the Plant Engineering segment and the acquisition of North American orders in the Rolling Stock segment. Net sales increased year-on-year due to an increase in the Precision Machinery and Robot and Motorcycle & Engine segments despite a decrease in the Rolling Stock segment.

Operating income increased JPY 2 billion year-on-year due to the improvement in the Ship & Offshore Structure segment despite the increase in depreciation of development cost of new commercial aircraft jet engine projects in the Aerospace Systems segment.

Recurring profit increased JPY 3 billion year-on-year due to the increase in gains of foreign exchange, which is a nonoperating item in addition to the higher operating income as the Japanese yen depreciated from JPY 106.27 to JPY 110.54 to the dollar.

Net income attributable to owners of parent decreased JPY 700 million year-on-year due to the increase in tax expenses, which is seasonally incurred during the first quarter of every year. Weighted average exchange rates and the net sales in foreign currencies are shown at the bottom of the page. The yen appreciated JPY 2.6 to JPY 108.13 to the dollar. Page 4 shows financial results by segment. I will come back to this point later when I discuss each segment.

Next, Page 5 shows details of change in operating income. Operating income increased JPY 2.1 billion year-on-year from JPY 4.9 billion to JPY 7.1 billion. Let me explain the factors behind the increase in operating income. First of all, the FX rates is responsible for a decrease by JPY 600 million on a net basis as the sales weighted yen rate appreciated JPY 2.6 to the dollar, while the yen depreciated against the euro and other currencies.

Second, there was an increase in sales by JPY 2 billion, mainly in the Precision Machinery and the Robot and the Motorcycle & Engine segments. Third, product mix and other factors pushed up the operating income by JPY 3 billion due to a reduced low profitability projects in the Ship & Offshore Structure segment and an improved profitability in the energy business despite a lower profitability in the Aerospace Systems segment due to the increase in depreciation of development costs of new commercial aircraft jet engines product.

So overall, there was a positive JPY 3 billion. Fourth, SG&A was down JPY 2.3 billion due to the bad debt provision booked for the overseas distributor in the motorcycle business and increased cost in the Precision Machinery and Robot segment and an increase cost for hydrogen-related R&D.

Next, I will explain non-operating income and expenses on Page 6. Equity in income of unconsolidated subsidiaries and affiliates is down JPY 1 billion due to a decline in profit at a Chinese joint venture company. On the other hand, gain and loss on foreign exchange is up JPY 1.4 billion due to the yen 's depreciation since the end of the previous fiscal year towards the end of this fiscal year. As a result, nonoperating income increased JPY 900 million year-on-year.

Let me take you through each segment one by one, starting with the Aerospace Systems segment. First of all, from this quarter, we classified aircraft and aircraft engines in the same business segment. We also changed the format of this page. We put together orders received and the net sales into a single chart instead of having a separate chart for orders, sales and profit, respectively. And we added a line chart for operating margin in addition to operating income in the second chart. I will mainly make comments on Q1 since full year forecast is unchanged from the announcement we have made in April for the company as well as for each segment.

I will start with the Aerospace Systems segment. For the first quarter fiscal year 2018, orders and sales versus last year are as shown here. Orders for component parts for commercial aircraft remained at a high level, while orders for commercial aircraft jet engines increased. Operating income decreased JPY 2.6 billion year-on-year due to the impact of the strong yen and increase in depreciation of development cost of new commercial aircraft engine projects and other factors despite improved profitability in component parts for commercial aircraft.

Please turn to the next page. Page 8 is Energy System and Plant Engineering. For the first quarter results, orders and sales are as shown on the page. Orders for LNG tanks and industrial gas turbines for the domestic market increased while sales declined due to a reduction in the construction work for an overseas chemical plant. The chemical plant mentioned here is a gas-to-gasoline plant in Turkmenistan. The amount of construction work hit the peak during the previous year. The progress of construction work, on the other hand, is in line with the plan. There are no issues with the progress. Operating income improved JPY 700 million due to profitability improvement of the energy business offsetting the profit decline at the chemical plant I just mentioned.

Next, let me discuss the status of the overseas LNG plant. As explained in April this year, the construction work showed a steady progress, and it has been already completed as of today. Costs associated with the subcontractor change, including the incremental portion, has been charged to the local contractor in breach of the contract. I will discuss the detailed amount of compensation later in my presentation.

Next page, please. Page 9 is Precision Machinery & Robot. I will discuss the first quarter results. Orders and sales are as shown here. Hydraulic components for construction machinery and various robots are performing well. Operating income remained flat year-on-year because the increase in sales were canceled out by the increase in expenses incurred in preparation for the expanded production as well as the increase in fixed costs associated with business expansion.

Please turn to Page 10, Ship & Offshore Structure. Orders and sales are as shown here. They are down because last year, we had orders for an LPG carrier and a Kawasaki JETFOIL. Operating income improved JPY 4 billion year-on-year, as was shown with the waterfall chart, we do not have the loss disposal for an LNG carrier this year like we did last year. We have a higher profitability this year compared with the last year, thanks to cost reduction efforts.

Next page, please. Page 11, Rolling Stock. First quarter results orders and sales are as shown here. Orders increased due to the increase in North America while sales decreased mainly for overseas markets. On the other hand, operating income remained flat due to an increased profit in spare parts, refurbishments and other factors despite the decline in sales.

Last segment is Motorcycle & Engine on Page 12. The first quarter sales are as shown on this page. Sales are up JPY 6 billion despite the decline in motorcycle sales to emerging countries due to the strong sales of motorcycles and utility vehicles in developed countries. There was an increase of JPY 6 billion. Operating income remained flat year-on-year due to the booking of bad debt provision for the overseas distributor, which offset the increase in profit due to higher sales. That's all explanation I have for business segments.

Next, I'd like to give supplementary explanation on the balance sheet on Page 13. This year, we are planning to generate the highest net sales in our history. Therefore, the production output has been expanding. Compared to the end of the previous fiscal year, inventories have increased. As a result, total assets increased by JPY 62.8 billion from the end of the previous fiscal year. On the other hand, interest-bearing debt increased by JPY 94.5 billion from the end of the previous fiscal year due to a decrease in trade payables pushing up working capital and a net D/E ratio to 104.4%. But it is seasonally normal for net bearing debt to go up during the first quarter to the third quarter. In fact, net D/E ratio was almost at the same level at 105.7% for the same period in the previous fiscal year.

Let me now explain the claim associated with the overseas LNG tank construction mentioned earlier in the Energy System & Plant Engineering segment. The total costs exceeded the initial projection due to the breach of contract by an overseas subcontractor. Upon the completion of the construction work, we claimed compensation for the part of damages totaling approximately JPY 40 billion caused by the breach of contract. Part of the claimed amount is recorded as other current assets on the balance sheet.

Let me move on to cash flows on Page 14. First of all, cash flows from operating activities improved JPY 12.4 billion due to an increased payment received for an overseas plant project and reduced expenditures for materials and others caused by the reduced amount of construction work despite an increase in working capital, in line with business expansion. Cash flows from investing activities remained flat year-on-year due to the continually high level of capital investment maintained mainly for the Aerospace Systems segment this year. As a result, free cash flow improved JPY 13.4 billion to a net cash outflow of JPY 100.8 billion. Although a tough situation is likely to continue through fiscal year 2018 with an increase in working capital in line with higher sales and a high level of capital investment mainly for the Aerospace Systems segment. We will make further efforts to improve our financial structure and achieve a positive free cash flow for the year.

Next, let me discuss the full year forecast on Page 15 onwards. The forecast for fiscal year 2018 remains unchanged from the April announcement as explained earlier. Just for your information, the FX assumption is unchanged from JPY 107 to the dollar and JPY 130 to the euro.

Operating income for the first quarter was up JPY 2.1 billion year-on-year, in line with the guidance with the one-time factor of a bad debt provision for overseas distributor more than offset by the improved profitability of the Ship & Offshore Structure segment, in line with the plan and increased sales in the Precision Machinery & Robot and the Motorcycle & Engine segments.

Now outlook on the market environment is mostly unchanged from the original plan. We are likely to record historical high net sales again for the second straight year for fiscal year 2018. We believe that operating income guidance of JPY 75 billion is sufficiently achievable. We will continue to make efforts to realize further upside potential.

Dividend forecast of JPY 70 per share is unchanged from the previous announcement. Next, Page 16, forecast by segment has been already covered In my presentation. So please refer to it later.

Page 17 shows before tax ROIC by segment. And Page 18, R&D, CapEx and the number of employees. These are unchanged from the plan at the beginning of the year. Page 20 and 21 shows the market overview for each business. Just for your information.

With this, I will conclude my presentation. Thank you for your kind attention.