Kawasaki Heavy Industries Ltd
TSE:7012

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Kawasaki Heavy Industries Ltd
TSE:7012
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Earnings Call Transcript

Earnings Call Transcript
2020-Q1

from 0
K
Kenji Tomida
executive

Good afternoon. I'm Tomida of Kawasaki Heavy Industries. Thank you very much for joining our results meeting. Without further ado, I'd like to explain the first quarter financial results.

Let me start with Page 3 for the summary of financial results of the first quarter. Orders received increased in Ship & Offshore Structure, but they decreased in Energy System & Plant Engineering, Rolling Stock and Aerospace Systems segment, where large orders were booked in the previous year. And as a whole, orders received decreased by JPY 31.7 billion. Net sales decreased in Energy System & Plant Engineering and Motorcycle & Engine segment but increased in Aerospace systems. And as a whole, net sales increased by JPY 6.9 billion. Operating income increased in Energy System & Plant Engineering and improved in Motorcycle & Engine segment. But due to the weakening market in Precision Machinery & Robot and the expense fluctuation in Rolling Stock and Ship & Offshore Structure segment, operating income as a whole decreased by JPY 6 billion.

Recurring profit worsened by JPY 12.9 billion due to FX losses caused by depreciation of yen from the end of March to the end of June and decreased operating income. At the bottom of the page, weighted average exchange rate and net sales in foreign currencies are shown. Exchange rate was JPY 110.32 to $1 with JPY 2 depreciation year-on-year and JPY 124.35 to euro with JPY 5 appreciation year-on-year. As you see here, we started off the year with low profit compared to the previous year. Sales mix changes considerably in this quarter year-on-year, and that makes the upper-to-upper comparison difficult. Market prospect is uncertain, partly because of the impact of U.S.-China trade friction, and we cannot be optimistic. But we will keep close watch on the market changes with ongoing effort for improvement, and we have kept the initial forecast for the full year unchanged.

Now I will explain more in detail from this page. Results by segment are shown on Page 4. I will elaborate on each segment page.

On Page 5, details of year-on-year change in operating profit are shown. Operating profit decreased from JPY 7.1 billion in the first quarter of the previous year to JPY 1 billion this year, down by JPY 6 billion. Let me share with you the results of the analysis of factors for variance. As for effects of foreign exchange rates, weak yen's impact against dollars and the strong yen's impact against euro offset each other, and as a result, this impact was neutral. As for change in sales, impact of decreased sales in Energy System & Plant Engineering and Motorcycle & Engine more than offset those of increased sales in Aerospace Systems. And as a whole, this impact was minus JPY 0.6 billion. Change in product mix and other factors account for the most of the profit drop.

In Energy System & Plant Engineering, profitability improved, especially in Energy business, but profitability declined in Aerospace Systems, Precision Machinery & Robot, Ship & Offshore Structure and Rolling Stock segment. And as a whole, this impact was minus JPY 5.7 billion. Details will be provided later by segment. SG&A expenses had both positive and negative factors. Despite the increasing R&D costs, especially in hydrogen business, due to the absence of the allowance for the doubtful related to the overseas dealers in Motorcycle business, as a whole, this impact was plus JPY 0.3 billion.

Page 6 shows the overview of P&L. Let me comment on nonoperating income and expenses. It worsened by JPY 6.9 billion year-on-year to minus JPY 5.4 billion. Major factor for change is gaining a loss on foreign exchange. In the previous year, we have benefited by FX gain due to the weak yen. But from the end of the previous fiscal year to the end of this first quarter, yen appreciated by JPY 3.26 to $1. In other words, yen was weaker by almost JPY 4 to $1 in the previous year. Mainly, we suffered a translation-based FX loss at the end of the fiscal year, and that led to the loss of FX in this quarter. There was no extraordinary income and loss in this quarter.

Now I'd like to provide information by segment. Page 7 for Aerospace Systems. Quarter results with year-on-year comparison are shown here. Orders received went down due to the decrease in component parts for commercial aircraft and components part for the commercial aircraft jet engines. Net sales increased due to an increase in aircraft for Ministry of Defense and component parts for commercial aircraft. Operating income decreased JPY 0.5 billion year-on-year to JPY 4.8 billion despite increasing sales of aircraft. Due to an increase in new program-related R&D expenses amortization for commercial aircraft engine, profit decreased.

And as for the progress in the first quarter, as we informed to you in April, we anticipated the increase in R&D amortization for a new program and product mix change in component parts of commercial aircraft throughout the year, and sales increase and a flat profit were projected initially for the full year. And the results in the 3 months from April to June were in line with our projection, and the full year forecast for FY 2019 remains unchanged from the announcement in April as mentioned before.

Page 8 for Energy System & Plant Engineering. On the first quarter results, orders received decreased due to fewer large projects compared with the previous year when we received orders for domestic CCPP project and the domestic LNG tank. Net sales decreased due to decreased works on major domestic incineration plants and energy businesses. On profit side, due to the improved profitability, mainly in Energy segment, which more than offset the profit decline by the decline to sales, operating income improved by JPY 0.6 billion. As usual, this segment has seasonality of higher profit in the third and fourth quarter, and the first quarter results are in line with our projection. Therefore, our forecast for the full year remains unchanged from the initial plan.

Page 9 for Precision Machinery & Robot. On the first quarter results, orders slightly grew year-on-year in the hydraulic components for construction machinery. However, in Robots business, semiconductor market continues to be sluggish and partly affected by U.S.-China trade friction, orders went down. Servicing the hydraulic components business increased, but they went down in Robot business due to slow market recovery. And as a whole, segment sales were flat year-on-year. On operating income, due to weaker sales in Robot business as mentioned, product mix changes, particularly in semiconductor, which has been lackluster and production expansion cost, which continued for some time in hydraulic component business, operating income decreased by JPY 2.8 billion to JPY 1.7 billion.

As for 2019 forecast, on Precision Machinery for hydraulics, as the production was expanded in the previous fiscal year and the growth in Chinese market begin to settle down, supply shortage is almost over. Chinese market continues to be robust, but some construction machinery makers seem to be considering inventory adjustment, and future prospect is uncertain. And we'll continue to monitor market trend closely. We'd like to comment further in Q&A session, but sales will be up year-on-year. And with the improvement of supply/demand balance, we would see the considerable drop in production expansion cost, and that would improve profitability. But we need to examine further how close we can be to the initial target.

In Robot business, we expect the bottoming out of semiconductor market would come in the second half of the year. But exact timing is still fluid. If market condition deterioration is observed due to the delayed investment in Chinese market caused by U.S.-China trade friction, though the proportion of China is not so sizable except in semiconductor, bearing in mind the semiconductor market condition as well, we'd strive to improve the likelihood to achieve the full year target. In Robot business as a whole. Visibility in semiconductor is not good. But in other applications, such as auto and the general industrial machinery, they are mostly in line. We need to be focused on the future market condition of semiconductors.

Page 10 for Ship & Offshore Structure. On the first quarter results. Orders received increased JPY 14.6 billion year-on-year to JPY 21.5 billion due to orders received for 2 LPG carriers. On sales front, despite the absence of construction works of LNG and LPG carriers that we had in the previous year pushed up by the increase in sales of ship repairs, sales increased slightly year-on-year. As for operating income. In the previous year, sales of high-margin LNG and LPG carriers were booked. But in this year, we have less newbuilding ships, and utilization is dipping year-on-year. And we are developing new LPG carriers for new order received with an eye for the future continuous shipbuilding so that we can make it our standard to cut cost further. And the relevant development, customers booked lump sum at the time of the order received for the first vessel. And because of this, operating income deteriorated JPY 1.6 billion year-on-year to minus JPY 0.3 billion. All factors that I mentioned here were already incorporated in the initial plan.

As for FY 2019 forecast. Losses and the decline in utilization related to new orders in first quarter are within our expectation. In the previous year, construction works for LNG and LPG carriers were peaking and that there were no special factors that affected profitability and profit concentrated in the first quarter. Operating income in the first quarter was JPY 1.3 billion, and the full year operating income was JPY 1 billion. But in this year, it will be more evenly distributed, and the full year operating income would be in line with our initial projection. For the time being, we strive to receive orders for LNG carriers. We are beginning to materialize the projects. And also, we will promote a shift to Chinese shipyard so that integrated operation would be promoted, and that would lead to the further structure reform.

Page 11 for Rolling Stock. On the first quarter results, orders received and net sales year-on-year comparison are as shown here. We received orders for passenger cars and the refurbishment for North America market. But due to the absence of the equivalent orders this year, orders dropped. Sales were down due to decrease in domestic cars and the components of overseas market. On profit, decreased sales in components for overseas market, additional costs for Rolling Stock businesses North America and some other factors led to the decline of JPY 2.6 billion year-on-year.

Let me comment on the relevance between the first quarter results and the forecast for the FY 2019. In the initial plan, overseas component sales decline was incorporated. On the other hand, as for M9 Rolling Stock business in North America, due to the additional requirement from customers and modification in the final test run, this process was extended by 3 months. As a result, delivery of the first 14 cars was delayed from the initially scheduled May to August. This time, we set aside the additional cost to respond to this, mainly for extending the process with a limited application, and it is not the significant cost. First, we will prioritize the delivery of 14 cars, which will be followed by the deliveries of other mass-produced cars. In the process, we will be catching up with the schedule. Projects in Japan and Asia have been progressing as planned. On profit front, we will aggressively continue to reduce cost further, and we expect the effect will be materialized in the second half. We explore every opportunity to improve profit, including the cutback of indirect costs, including SG&A and ultimately aim to achieve the initial target.

Page 12 for Motorcycle & Engine. On the first quarter results, sales year-on-year comparison are as shown here. Yen appreciated against many currencies, including European currencies. And also, due to the time lag of wholesale, sales decreased JPY 5.4 billion to JPY 68.3 billion. For one thing, by the end of the previous fiscal year, dealers were aggressive in selling new motorcycles. And this year, it seems that the start in sales was rather slow, but it is also in line. Market view remains almost unchanged from the initial forecast. On the operating income. Despite sales decrease due to the absence of allowance for the doubtful accounts related to overseas dealers, which was booked in the previous year, operating income increased by JPY 0.5 billion.

As for the full year forecast, it remains almost unchanged from the initial forecast. Not only in the first quarter but for the full year also, sales will be slightly down year-on-year due to yen's appreciation against euro. On profit, despite the expected weakening of euro and other emerging countries' currencies, we continue to promote premium brand strategy to gain share, especially in advanced countries. Now we will secure operating income of JPY 12 billion as a whole segment. That policy remains unchanged.

So far, I have covered the segment information, next, Page 13 for a summary of balance sheet. Following FY 2018 and FY 2019, we will renew record high series again. And due to the expanding production, inventories are up by JPY 38.9 billion over the end of the previous year. And due to the trend of receiving more cash at the end of the fiscal year, in the first quarter, we tend to increase a trade receivable in the backlash. Especially, we observed the backlash of the strong cash received at the end of the previous fiscal year based on the promotion. As a result, total assets were up by JPY 72.6 billion. Total liabilities increased by JPY 90.2 billion due to increase in working capital with the production expansion despite decrease in trade payable. Interest-bearing debt increased by JPY 155.9 billion, affected by aforementioned factors, to JPY 595.4 billion. As a result, net D/E ratio was 119.9% temporarily. But for the full year, we'd like to obtain the target range of 70% to 80%, which was shown as a guideline in this midterm business plan 2019.

Page 14 for cash flow. Operating cash flow is heavily affected by the profit decline, and it is also hit by the inventories of Energy System & Plant Engineering and increase in trade receivables, which is a backlash of the cash received at the end of the previous fiscal year. Those increases in working capital squeezed operating cash flow by JPY 89.5 billion year-on-year to minus JPY 163.7 billion. Investing cash flow showed improvement of JPY 9.5 billion to minus JPY 17.1 billion due to the decrease in CapEx in Aerospace Systems segment. As a result, free cash flow deteriorated JPY 79.9 billion year-on-year to minus JPY 180.8 billion. In the second quarter and onward, we will improve profitability, capital efficiency and the promotion of operating cash received. And also, nonbusiness assets will be sold as a short-term measure, and we will endeavor to accomplish free cash flow positive following the previous year. But due to some special factors, hurdle seems to be tougher than usual. With regard to cash flow, due to the overlap of some factors, including cash-out of the previous allowance provision for loss, increased working capital for the future production expansion and higher level of CapEx, 2019 seems to face the peak of those loads. And from FY 2020, the next year, we will see this change over to the better.

Page 15 for the consolidated orders received, net sales and profit forecast. Exchange rates assumption are kept intact from those reported in April, JPY 110 to $1 and JPY 125 to euro. As I said at the beginning, we had a slow start in the first quarter, but we sustained the full year forecast of net sales JPY 1.7 trillion, operating income JPY 72 billion, unchanged from the guidance shown in April, to achieve the target. Currently, yen has been appreciating compared to our assumption, and we have some factors for concern as mentioned, including market trend of Precision Machinery & Robot and profitability recovery of Rolling Stock. We will keep close watch on those unknown factors and take actions in timely manner so that we would achieve target.

Following pages show forecast by segment and others as usual.

Page 18. R&D CapEx and the number of employees remain unchanged from the announcement in April.

Remaining pages describe market overview, so please refer to them later.

That concludes my presentation. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]