Kawasaki Heavy Industries Ltd

TSE:7012

Earnings Call Transcript 2021-Q2

[山本 克也 (やまもと かつや), executive]

Thank you very much for joining us today. I am Katsuya Yamamoto, CFO of Kawasaki Heavy Industries. Let me dive into the presentation on the financial results of the second quarter of fiscal 2020. Please turn to Page 3 where you see the summary of financial results of the second quarter.

Orders received and net sales are as shown on the slide. Although the spread of COVID-19 has affected the financial results, the impact was on the declining trend during the period between July and September. Regarding orders received, due to COVID-19, the demand decreased in Aerospace Systems, and Energy System & Plant Engineering segment was also affected by prolonged business negotiations and postponement of investment decision-making, so the trend has not changed significantly from this first quarter.

In terms of net sales, the cumulative total for the first half of the year saw a significant decrease of JPY 79.2 billion or 10.7% year-on-year, mainly due to the drop of JPY 82.3 billion in Aerospace Systems. Sales of the Motorcycle & Engine segment also decreased by JPY 7.4 billion, but the rate of decrease in July through September was smaller than in the first quarter.

Operating income will be explained in detail on Page 5 by factor. But in the first half, we saw a total decrease of JPY 30.5 billion, mainly due to the impact of the spread of COVID-19. Operating income for July to September was minus JPY 1.2 billion, a significant improvement in the amount of loss compared to the first quarter.

Net income attributable to owners of parent decreased more than recurring income due to impairment loss charged through Sakaide Works and the partial withdrawal of deferred tax assets. Thus, following the first quarter, both sales and income have fallen sharply year-on-year. But since we expect to see an improvement from the third quarter onward and we tend to have profit skewed in the second half despite the continued impact of COVID-19, we anticipate a slight surplus in the second half. We will continue to take various measures such as curving capital investment and R&D expenses, partial return of executive compensation, which has already been implemented, as well as cutting travel and other expenses.

The weighted average exchange rate and net sales in foreign currencies are shown at the bottom of the page. As stated, to the dollar and euro, the yen appreciated by about JPY 3 and JPY 1, respectively, year-on-year.

Page 4, please. The orders received, net sales and operating income by segment are shown on this page. Details will be explained on the page of each segment.

Page 5 shows details of year-on-year change in operating profit and loss. Operating profit decreased by JPY 30.5 billion year-on-year from JPY 8.6 billion in the previous year to minus JPY 21.8 billion. Here is the result of our analysis of the factors behind the change.

First, due to the impact of COVID-19, profit of the entire company decreased by JPY 35.1 billion, of which the Aerospace Systems account for 65%; and the Motorcycle & Engine, 15%. Other segments that had impacts are the Rolling Stock where we faced delivery interruptions and factory closures in New York area and Precision Machinery & Robots in the descending order of impact. The impacts of COVID-19 in July-September significantly shrunk in segments other than Aerospace Systems compared to the first quarter.

Second, regarding effects of foreign exchange rates, as mentioned earlier, yen appreciated in terms of the weighted average rate from the year before against both the dollar and euro, resulting in a JPY 3 billion decline in operating profit.

Third, in terms of change in sales, sales related to large aircraft for Japan Ministry of Defense, such as P-1 and C-2, in the Aerospace Systems segment saw a temporary decrease in the second quarter, leading to a JPY 4.7 billion drop in operating profit.

Fourth, as for changes in the product mix, there was a large impact on the Aerospace Systems due to deterioration of aftersales profit for engines and suspensions of factory operations, while profitability has improved in the Rolling Stock segment and product mix improved due to increased sales of semiconductor manufacturing equipment in Precision Machinery & Robots, hence, an overall improvement of JPY 4.4 billion.

SG&A expenses improved by JPY 7.9 billion in total due to a decrease in advertising expenses for motorcycles and engines and a decrease in R&D expenses mainly related to hydrogen.

Page 6, please. The factors behind the decrease in operating profit were as explained earlier. Nonoperating income improved by JPY 11.4 billion year-on-year to JPY 3.5 billion. Main factors for the difference are twofold. The first factor is gain and loss on foreign exchange. Although the yen maintained its strength against the dollar in the second quarter due to gain on the payment in dollars and valuation gain on accounts receivable in other currencies against which the yen depreciated, the total gain amounted to JPY 1.7 billion, representing an improvement of JPY 7.5 billion from a year before.

The second factor is payments for the in-service issues of commercial aircraft jet engines. As a result of reviewing the share of payments amongst aging manufacturers, including our company, based on the progress of replacement work, a gain on reversal of such payments posted in or prior to the previous fiscal year was recorded. And since there is no new such payment incurred in the first half of this fiscal year, we saw an overall improvement of JPY 4.1 billion.

Regarding extraordinary income and losses, a gain of JPY 4.8 billion was recorded on the sale of company-owned dormitories and houses as well as shares of affiliated companies in the first quarter, while the future profitability of the Ship & Offshore Structure of Sakaide Works was reviewed in the second quarter, which led to recognition of an impairment loss of JPY 3.9 billion. As a result, extraordinary income/losses in the first half was almost unchanged year-on-year.

Now Page 7, the results by segment. Page 7 shows the results of the Aerospace Systems segment for the second quarter of fiscal 2020. Year-on-year results of orders received, net sales and profits are as shown on the page. The effects of COVID-19 were felt most in this segment. Regarding aircraft, sales units of component parts for commercial aircrafts in the first half decreased significantly, especially for Boeing 787, 777 and 777x, due to the impact of the suspension of shipments resulting from the suspension of factory operations at Boeing and cut in our production.

Business with Ministry of Defense also fell significantly as more of them were postponed to the second half than in the previous year, hence, a significant decline in sales and profit. Sales of engines decreased by more than 50% year-on-year, and sales for aftersales services also shrunk, resulting in a large decrease in total sales for engines.

On the other hand, in terms of profits, billing for replacement costs for spare parts that recorded sales in the fourth quarter of the previous fiscal year and progress in replacement of defective engines paid for by engine manufacturers were concentrated in the first quarter when we posted a significant amount of losses. But in the 3 terms months of second quarter, the monthly loss was less than half of the previous quarter partly due to the reduced impact.

As for fiscal 2020 full year forecast, in the aircraft business, sales of the businesses for Ministry of Defense will recover from the second half, but the timing of pitching down to the monthly production of 6 aircrafts at Boeing has been moved up from what was announced last time. Therefore, we expect to see a slight drop in sales and profit from the announcement made last time.

In the engine business, sales in the second half are expected to increase by about 30% from the first half due to the recovery of passenger demand, leading to an improved profitability in the second half. However, the recovery of demand, including that for aftersales service, is expected to be slightly delayed from the time of the previous announcement. And therefore, the forecast has been revised downward from them.

Page 8 shows Energy System & Plant Engineering segment. As for the results for the second quarter of fiscal 2020, year-on-year results of orders received, net sales and profits are as described here. The increase in sales of domestic projects offset the impact of COVID-19 and pushed up the total sales, while profit decreased slightly year-on-year due to operation losses caused by the pandemic.

For fiscal 2020 forecast, regarding orders, because it is expected that customers' investment decisions will be delayed and the number of projects will decrease due to the spread of COVID-19, we have lowered our guidance. Sales are expected to be about the same as the previous fiscal year. Forecast for profit has been raised from the previous announcement due to the improvement in profitability of hydrogen-related projects and the increased effects of cut in the periodic costs.

Page 9 shows Precision Machinery & Robot segment. In terms of results for the second quarter of 2020, orders received, net sales and profits are as described. The recovery in the demand in the Chinese construction machinery market was strong, making up for the weakness in the European and emerging markets. On the other hand, in the robot business, despite the strong sales for semiconductor manufacturing equipment, sales of aftersales parts were sluggish due to the COVID-19. Therefore, profit was at the same level as the previous year.

As for fiscal 2020 forecast, sales of hydraulic components for the construction machinery in China are continuing to perform better than we expected. Moreover, the impact of COVID-19 has been revisited mainly for auto views, resulting in the upward revision of our guidance for orders received, sales and profits this time.

Page 10 shows Ship & Offshore Structure segment. As for the results of the second quarter of fiscal 2020, orders received and sales as compared to the previous fiscal year are as shown on the slide. Now although the forecast for orders received for fiscal 2020 has been revised down this time in light of the market environment, the previously announced forecast for sales will remain unchanged as we steadily engage in the construction of LPG carriers and submarines. In terms of profits, although there will be an impact from the decrease in construction work this fiscal year, the cost reduction of newly built ships has progressed, so our guidance has been raised this time.

Page 11 shows the Rolling Stock segment. And regarding the results for the second quarter of fiscal 2020, orders received and sales compared to the year before are as shown here. In terms of profits, an overall improvement of JPY 4.2 billion was achieved due to an increase in profits based on increased sales in passenger cars for the domestic market and the improvement of the cost of North American projects, which recorded a loss in the previous fiscal year. Although there was a slight impact of COVID-19 in July-September quarter, mainly in North America, our forecast for fiscal 2020 remains unchanged as the amount of impact was factored in at the time of the previous announcement.

Page 12 shows Motorcycle & Engine segment. As for results of the second quarter of fiscal 2020, sales as compared to the previous fiscal year are as shown on the slide. Although this is the segment that has been greatly affected by COVID-19, sales to North America, mainly off-road motorcycles and vehicles, have exceeded the previous year's level and so hub sales in Europe since June, thus making up for the downturn in emerging countries. Operating income turned into a surplus of JPY 800 million in the 3 months from July to September, and the amount of year-on-year decline in profit shrunk by JPY 1.3 billion from the previous quarter to JPY 1.8 billion.

The 2020 forecast for both sales and profits has been raised significantly this time, in line with the increase in retail sales of motorcycles and vehicles that exceeded expectations in North America and the recovery in sales for Europe. On the other hand, capital investment, R&D expenses and indirect costs, et cetera, will continue to be thoroughly reviewed to improve profitability so we can record surplus in the next fiscal year.

Please turn to Page 13 where you can see the summary of the balance sheet. Compared to the end of the previous fiscal year, total assets increased by JPY 21 billion. The main factors were an increase in cash on hand and in banks as we worked to secure cash on hand. And inventories increased because of a temporary suspension of production in the Aerospace Systems business, while progress was made in collecting accounts receivable amid the strong sales in motorcycles.

Total liabilities increased by JPY 51.3 billion driven by an increase in borrowings associated with increased total assets. As a result, the net D/E ratio was 135.4%, slightly worse than in the first quarter. We will continue to focus on improving this to achieve the level of 70% to 80%, which has been our target for some time.

Page 14 shows the summary of cash flows. Cash flows from operating activities improved by JPY 148.7 billion year-on-year as the previous fiscal year saw deterioration due to the absence of liquidation of receivables, which was implemented at the end of fiscal 2018 in the Aerospace Systems segment. Other reasons include the brisk retail sales in Motorcycle & Engine segment, which facilitated the collection of accounts receivables in the second quarter this year and the decline in inventories.

Cash flows from investment activities also improved by JPY 19.3 billion year-on-year due to gain on sale of company-owned dormitories and houses and of shares of affiliated companies. Consequently, free cash flow improved by JPY 168 billion from a year before. From the second half of the year onward, we will focus on improving our financial position by enhancing profitability and funding efficiency and promoting cash received for sales in order to achieve a positive free cash flow at the earliest stage possible.

Now let me discuss our forecast for fiscal 2020 consolidated operating performance on Page 15. In terms of orders received, although the recovery from the effects of COVID-19 is expected to be fast, especially for Motorcycles and Precision Machinery & robots, as a result of factoring in further reduction in the production by Boeing, delay in recovery of aftersales service profits in component parts for commercial aircraft jet engines and the decrease in orders for ships, the forecast has been revised down from the time of the previous announcement.

In terms of sales and profits, although we factor in a decrease in Aerospace Systems with an anticipation for an increase in Motorcycle & Engines and Precision Machinery & Robots, we have made upward revision to the forecast, and total net sales are now expected to be JPY 1.5 trillion, up JPY 40 billion, and operating income to be minus JPY 20 billion, an improvement of JPY 10 billion as compared to the previously announced figures.

In the second half, while incorporating the risk of COVID-19, we expect the operating income to turn positive for the 6 months of October through March. We will continue to focus on reducing fixed costs in order to minimize the full year operating loss. In addition, in the second quarter of this fiscal year, at Sakaide Works, which is the base for the construction of commercial ships in the Ship & Offshore Structure segment, we posted impairment loss and partially withdrew deferred tax assets. Based on these, we expect net income attributable to owners of the parent to be a loss of JPY 27 billion. And unfortunately, we have no choice but to pay no dividends this fiscal year. In the next fiscal year, we will work to steadily turn into profitability and start paying dividend again as soon as possible by proactively working on new businesses such as aircraft PCR test services and medical robots.

Page 16 shows a table for results of fiscal 2019 and forecast for fiscal 2020 by segment for your reference. Page 17 shows the results of fiscal 2019 and forecast for fiscal 2020 in terms of before-tax ROIC by segment, again, for your information. On Page 18 and 19, you can find historical data for R&D expenses, CapEx and number of employees as of the end of different fiscal years. On Page 20 and 21, you can find market overviews as reference materials.

That is all from me. Now on Monday, November 2, we are holding a briefing on our future business policies, including those for Ship & Offshore Structure segment where we posted an impairment loss in the second quarter. You're welcome to attend the meeting, either in person or remotely via the web. So I would urge you to join us using whichever means works for you. Thank you for your attention.