Kawasaki Heavy Industries Ltd

TSE:7012

Earnings Call Transcript 2024-Q1

[山本 克也 (やまもと かつや), executive]

My name is Yamamoto. Thank you for your participation. Now I'd like to present financial highlights.

Page 1. As we disclosed at the Tokyo Stock Exchange and through our website at 11:30 today, the first quarter results for FY 2023. So record order received and record revenue for the first quarter, thanks to the weaker Japanese yen on top of positive effects from strong sales and increased market share in the U.S. market. In power sports and engine and cost reduction and others in the ship business.

Regarding the outlook for FY 2023, as we decided to review the full year outlook, driven mainly from changes of the first quarter actuals, we upwardly revised both the revenue and the profit of energy solution in the marine engineering, as well as the power sports and engine, while downwardly we revised precision machinery in the robot. We, however, kept the currency assumption at JPY 130 to the [ Dollar ] as per the previous announcement, because there are still many uncertainties such as business sentiment, mainly concerning the Chinese market and the semiconductor market, foreign exchange and so on. Overall, the initial forecast remains unchanged.

This is the summary of the financials. From Page 3, I will explain more details. Page 3. In the first quarter of FY 2023, we took orders worth JPY 457.3 billion, with revenue of JPY 405.3 billion. Business profit of JPY 10.2 billion, profit before tax of JPY 14.9 billion and profit attributable to owners of parent of JPY 9 billion.

As indicated, weighted average exchange rate of the Japanese yen for the first quarter was about JPY 7 weaker year-on-year. The value of U.S. dollar-based transaction was about $450 million.

Page 4. This page shows orders received revenue and business profit by segment. As indicated by number one, Aerospace Systems saw revenue and profit growth on the back of passenger demand recovery and the depreciation of the yen, and Energy Solutions in marine engineering saw profit growth, due to an improved equity method profit in Ship & Offshore Structure business.

As indicated by number two, Precision Machinery and Robot saw revenue and profit decline, mainly due to the sluggish semiconductor and the Chinese construction machinery markets. As a result, we ended the quarter with revenue of JPY 405.3 billion, up by JPY 54.9 billion year-on-year. The business profit stood at JPY 10.2 billion, up by JPY 5.6 billion.

Page 5, please look at the table for details. As indicated by number one, profitability has improved significantly due to cost reductions at the joint venture in China in ship and offshore structure, as well as lower steel prices and a weaker Chinese yuan.

Page 6. Next, let me explain items below business profit. As indicated by number two, we posted a JPY 7 billion foreign exchange gain in the quarter, due to year-end valuation of receivables reflecting the significantly depreciated Japanese yen at June end. As a result, profit attributable to owners of parent was JPY 9 billion, up by JPY 3.6 billion year-on-year.

Page 7, I will explain the factors contributing to a change in business profit. The year-on-year depreciation of the yen improved the profit by JPY 6.4 billion. The increase in power sports and engines off-road four-wheelers mainly contributed to change in revenue, and overall profit increased by JPY 4.2 billion, while profit declined by JPY 1.7 billion due to change in product mix and other factors, such as lower sales of profitable robots for semiconductor manufacturing equipment in precision machinery in the robot and increased the sales promotional expenses in power sports and engine.

Concerning certain bonus provisions that have been conventionally recorded in a lump-sum at the year-end, we decided to record them on a quarterly basis to deliver it out from this fiscal year. This change in accounting treatment resulted in reducing profits by approximately JPY 2 billion, compared to the same period last year.

And with the increase in profitable equity method investments, business profit for the first quarter stood at JPY 10.2 billion, up by JPY 5.6 billion year-on-year. Please refer to Page 8 for more details by segment.

Page 9. Changes in assets for the first quarter as marked by #1, while receivables of rolling stock increased receivables decreased in power sports and the engine from the end of the previous fiscal year due to payments collection as a result of the progress of sales to end users.

On the other hand, as marked by #2, inventories increased due to aerospace systems for which the production of 787 is now going into full swing, as well as the Precision Machinery and Robot for which the market recovery is slow.

Page 10. This slide shows changes in liabilities in the net assets. As indicated by #3, interest-bearing debt increased from the end of the previous fiscal year, but this is a normal business cycle and is lower than previous years. You can understand that it is in line with our plan.

This resulted net D/E ratio of 96.8%. We will continue to improve asset efficiency by the promoting the collection of our accounts receivables and by controlling inventories, so that we will bring net D/E ratio back to the benchmark level of 70% to 80% by the end of this fiscal year.

Page 11. Box #1 shows the cash flow from operating activities. While the previous first quarter FY 2022 saw cash outflow with increased advanced payment in Aerospace, the first quarter FY 2023 saw progress in receivables collection in Power Sports and Engine. And the cash flows from operating activities improved by JPY 39.5 billion year-on-year.

Cash flows from investing activities did not change materially. As a result, free cash flow improved by JPY 41.6 billion year-on-year.

Page 12 shows historical cash flows over the past 10 years for your reference.

Page 13. Regarding the outlook for FY 2023, as stated earlier, we have not changed the overall figures from the initial forecasts, although some segments have been devised in light of the current situation.

Given that, we have maintained our exchange rate assumption of JPY 130 to the dollar, we believe that if the current rate continues, net income may potentially increase year-on-year. However, we would like to assess the risk of economic downturn stemming from concerns over international affairs and the sluggish real estate market in China during the first half of FY 2023, as well as the impact of the PW1100G-JM engine repair.

Page 14, segment breakdown is shown in the table. I will go into more details on segment specific slides.

Page 15, the results the first quarter is shown in this slide. Orders received in revenue increased due to an increase in aircraft for the Ministry of Defense and Boeing and the Jet engines. And the business profit also improved year-on-year due to revenue increase, while the number of Boeing 787 shipped remained at two units in the first quarter.

The number of production is expected to recover to about four to five units per month in the second quarter ended thereafter, and the profitability is expected to improve sequentially. We increased the full year forecast by JPY 10 billion, only for orders received from the last announcement due to an increase in orders for the Ministry of Defense and the weaker yen.

Page 16. This slide is for your reference, showing orders received in revenue by aerospace and aero engine, number of component parts sold to Boeing and the Jet engine components part sold.

Page 17 shows the quarterly revenue and the profit.

Page 18. This page describes our view of the business environment and the order trend, as well as specific efforts and initiatives to achieve the earnings target.

Regarding the market overview, market is steadily improving as passenger demand from the commercial business has almost recovered to the prepandemic level, with the resumption of production and the delivery of Boeing 787, as well as demand growth and profitability improvement expected for the Ministry of Defense project and to the national policy to strengthen defense capabilities. There are no major changes from the previous announcement regarding specific efforts and initiatives.

Page 19. The first quarter results as shown this slide. Although revenue increased by JPY 17.1 billion year-on-year due to an increase in the delivery of rolling stock for the U.S. market. Profit was flat year-on-year due to the impact of lower domestic operations. The FY 2023 forecast remains unchanged from the previous announcement.

Page 20 shows orders received and revenue in domestic and Asia, and in North America. For your information, Appendix shows sales from high margin after sales to service and the progress of the M9 project for Long Island railroad in the U.S.

Page 21 shows the quarterly trend of revenue and profit for your information.

Page 22 shows the market overview and the specific efforts of the rolling stock business. As we reported the last session, Proto-trains for our R211 project for New York subway in North America have been delivered in the first quarter. We will focus our effort on production and delivery of mass production trains going forward. Other contents remain unchanged from the previous announcement.

Page 23. The first quarter results for FY 2023, as shown in this slide. Orders received decreased despite orders for naval equipment for the Ministry of Defense, due to the base effect in the same period last fiscal year when we had taken orders for domestic municipal waste incineration plants and the two LPG ammonia carriers.

Revenue is up, thanks to an increase in energy business and the construction work for LPG ammonia carriers. Business profit increased due to higher revenue and higher equity in earnings of affiliates. We kept the outlook for orders received unchanged since there were no significant changes, but raised the forecast for revenue by JPY 10 billion, due to an increase in sales to the Ministry of Defense in the Marine Machinery business and an increase in small project and repairs in the ship and offshore structure business.

The forecast for business has also been raised by JPY 2 billion due to revenue increase and an improvement in equity in earnings of affiliates.

Page 24 shows orders received revenue and profit and loss of investments accounted for using equity method of energy plant and the marine machinery business and the Shipment & Offshore structure business for your reference.

Page 25 shows quarterly trend of revenue and profit for your reference.

Page 26 shows the market overview of this segment. There are no major changes to business environment and the trend of orders received. As for specific efforts, we will continue this fiscal year to focus on offering products and services that contribute to the realization of the low carbon and decarbonized society. As part of this effort, we are designing and sequentially building LPG ammonia carriers.

Thanks to the high level of trust from our customers, the order backlog for these vessels reached to 12 vessels as of August. We have enough work to last us until the mid-2020s when we will begin building the liquified hydrogen carriers.

We will continue to establish a leading position as a leading company towards realizing the required hydrogen supply chains. In addition to hydrogen, this page also contains the latest information on our CO2 separation and recovery efforts to provide decarbonization solutions, as well as our ship operation management support system, SOpass, which we are working on at service-selling business rather than product selling business.

Page 27. The first quarter results for FY 2023, as shown in this slide. Orders received decreased due to a decrease in robots for semiconductors and the general purpose, and in hydraulic components for construction machinery market in China.

Revenue decreased due to a decrease in robots for semiconductors. Business profit also decreased due to revenue decrease. Regarding the outlook, we lowered our forecast of orders received revenue business profit from the last announcement in light of the sluggish Chinese construction machinery market and the slower-than-expected recovery of the semiconductor market.

Page 28 shows orders achieved revenue and the profit and loss of investments accounted for using equity method of Precision Machinery & Robot, as well as revenue of hydraulic components to China and the revenue of robots by segment for your reference.

Page 29 shows quarterly trend of revenue and profit for your inference.

Page 30 shows market overview of this segment. We have updated our market overview on the sluggish Chinese construction machinery market and the semiconductor manufacturing equipment market. Although the current situation in both of these markets is not as favorable as our assumption at the beginning of the fiscal year, we believe that the construction equipment market outside of China is solid, and that new demand related to AI and green investment will emerge in the semiconductor market going forward.

We believe that the situation will improve from the next fiscal year onward. There are no major changes from the previous announcement regarding specific efforts and initiatives.

Page 31 shows the first quarter FY 2023 results. Revenue increased year-on-year due to an increase in motorcycles for Europe, 4-wheelers for the U.S. and the general-purpose engines and the depreciation of the yen.

Business profit improved due to revenue increase despite an increased sales promotion cost and the fixed cost for advertising and promotional activities. Regarding the outlook, we revised up revenue by JPY 10 billion and the business profit by JPY 3 billion to JPY 50 billion based on better than initially expected North American market, which is our main market, where our sales have been strong, and we have been gaining market share.

Page 32 shows revenue by subsegment, namely motorcycles for developed countries, motorcycles for emerging markets, utility vehicles, ATVs and the PWCs and the general purpose gasoline engine. Wholesales of motorcycles by country is also shown for your reference.

Page 33 shows quarterly trend of revenue and the profit for your reference.

Page 34 describes market overview of Power Sports & Engine for your reference. We updated U.S. and European market overviews.

Page 35, regarding shareholder return, as we kept our outlook unchanged, we plan to maintain full year dividend of JPY 80 per share. The same as the last announcement. While we plan to pay an interim dividend of JPY 40 per share, we will take into account the results of the second quarter to determine the year-end dividend.

Page 36. Let me report four project topics today. The first three projects, are hydrogen project that we expect to be our core business in the future.

This page introduces the progress of the liquefied hydrogen supply chain project. We are targeting 2030 for its commercial-scale demonstration. We completed technical development of cargo tank for large liquefied hydrogen carriers in June this year.

As shown in the slide, we built a test liquified hydrogen tank on a scale close to the actual product, verified the integrity of assembly, welding and workability of installation and confirmed that gas displacement, heat insulation and other performance were obtained as planned.

Based on these results, we will begin construction of a large commercial scale liquefied hydrogen carriers in the mid-2020s. By accelerating these efforts to commercialize hydrogen in Japan, we will contribute to the early realization of a carbon-neutral society.

Page 37, continuing on with the hydrogen business, let us introduce our initiatives for building partnership for hydrogen society. As shown on the slide, we built the world's first and currently only liquefied hydrogen carrier, Suiso Frontier. We unveiled it at Otaru Port in April this year, in conjunction with the G7 Climate, Energy and Environment Ministers Meeting held in Sapporo Hokkaido.

The ship was visited by Mr. Nishimura of Economy Trade and Industry, EU ministers and the Secretary of the U.S. Department of Energy. The media from various countries covered their visit, generating interest in the liquefied hydrogen supply chain and highly crediting our technical capabilities and a progressive approach.

In July, Suiso Frontier was showcased in Saudi Arabia. In conjunction with Prime Minister Kishida visit to the Middle East and received a visit by the Minister of Energy and the Minister of Investment of Saudi Arabia. We will continue to contribute to the realization of the hydrogen society, not only in Japan, but also on a global scale.

Page 38 introduces our strategic cooperation and collaboration for building partnership for hydrogen society. From the left, we concluded a strategic collaboration agreement with ADNOC and UAE energy company in April this year to build international liquefied hydrogen supply chains.

Next, the middle slide shows an establishment of HySE, a hydrogen small mobility engine association in May this year. Members are Kawasaki Motors, Suzuki, Honda and the Yamaha Motor. And special members Toyota Motor and us Kawasaki Heavy Industries.

And on the right in May, we signed an MOU with DNV, the world leading third-party certification body to visualize CO2 emissions in international liquefied hydrogen supply chains. In order to realize a hydrogen society, it is important to deepen collaboration with various companies in Japan and abroad.

As introduced on the previous pages, we will strive to expand and develop our hydrogen business through partnership and collaboration with other companies, as well as increasing our presence across the globe.

Page 39. The last of our project topics is our collaboration with Microsoft to realize an industrial metaverse.

In April this year, we showcased a prototype of our industrial metaverse jointly with Microsoft at the Hanover Messe in 2023 in Germany. And we're able to demonstrate the future of smart factories by remotely-operating our robots installed in Japan from Germany.

Microsoft plans to open Microsoft AI Co-Innovation Lab in Kobe in the fall of this year. It will be its fifth such lab in the world. And with our main base also in Kobe, we will work with Microsoft as our partner to create solutions.

As we described, we will improve our business profit margin by leveraging our strength in technologies unique to an industrial robot manufacturer and by increasing the ratio of service selling business, such as soft services, in addition to our traditional equipment sales business.

Page 40, from this slide onward contain information regarding capital expenditure, depreciation and amortization, R&D expenses, the head count at the year-end and so forth.

This concludes my explanation.

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