Kawasaki Heavy Industries Ltd

TSE:7012

Earnings Call Transcript 2018-Q3

[Kenji Tomida, executive]

Good afternoon, ladies and gentlemen. I'm Kenji Tomida. Thank you very much for attending our financial result briefing today. Let me start my presentation on the financial results for the third quarter of fiscal year 2017, starting from Page 3, summary of financial results.

As for orders received, we had relatively strong orders received for the third quarter, going up around JPY 120 billion year-on-year, as you can see here. Next, net sales are also up from the previous year despite the decrease in Plant & Infrastructure, thanks to the increase in Precision Machinery, Gas Turbine & Machinery and other segments.

Operating income rose around JPY 22 billion year-on-year despite the decline in Aerospace, owing to the stronger sales in Precision Machinery and Gas Turbine & Machinery as well as the lower base set during the previous year by domestic losses incurred in Ship & Offshore Structure.

Recurring profit turned more positive as operating income grew. However, net income attributable to owners of parent declined by about JPY 3 billion due to the extraordinary losses recognized by Ship & Offshore Structure, as announced in December last year.

Just for your information, weighted average exchange rates and net sales in foreign currencies are shown at the bottom of the page. The yen weakened more than JPY 4 to JPY 111.31 to the dollar.

Page 4 shows segment by segment orders received, net sales and operating income. Detailed explanation will be given later when I come to the pages for each segment.

Please turn to Page 5 for various analyses. Operating profit grew JPY 21.7 billion year-on-year from JPY 22.8 billion for the third quarter 2016 to JPY 44.6 billion for the third quarter 2017.

Let me take you through factors behind it. Starting with the losses on offshore service vessels recorded for the third quarter 2016. The absence of which for this year is a positive JPY 9.3 billion. On the other hand, the decrease in profitability of commercial aircrafts was a negative JPY 6.1 billion. This, however, is a one-time factor due to the price revision for Boeing 787 anticipated since the beginning of the program and the absence of milestone revenue. Next, is the impact of foreign exchange. The yen weakened year-on-year. The impact is a positive JPY 10.9 billion. Next, change in sales is a positive JPY 8.9 billion. Sales increased in Precision Machinery, Gas Turbine & Machinery and others. Next, change in product mix was a positive JPY 4.8 billion, thanks to the fewer number of low profitability projects in Plant & Infrastructure and improved profitability of jet engines during the third quarter of this year, that makes JPY 4.8 billion. Lastly, change in SG&A was a negative JPY 6.1 billion due to the enhanced sales activities at overseas subsidiaries leading to higher selling expenses on local currency terms due to the yen's appreciation. That is a negative JPY 6.1 billion.

In summary, the improvement in Ship & Offshore Structure was canceled out by lower profitability in the Aerospace, yet year-on-year, operating profit growth was achieved due to the strong trend of Precision Machinery and Gas Turbine & Machinery as well as favorable foreign exchange rates.

Next, Page 6 shows the summary of income statement starting with operating income, which increased year-on-year for the reason I just explained. SG&A increased JPY 1 billion year-on-year. This increase would be JPY 6.1 billion if we include JPY 5.1 billion of the allowance for doubtful accounts on trade receivables in Brazil as we did on Page 5. So the net is JPY 1 billion. The JPY 1 billion increase is mainly from the enhanced sales activities.

Next, nonoperating income and expenses deteriorated by JPY 4.7 billion due to a decrease in individual -- in dividends from equity method companies and the recognition of JPY 2.5 billion as a payment for contract adjustment for commercial aircraft jet engines and the absence of proceeds from sale of fixed assets at an overseas subsidiary, which was recorded last year. So the total was a negative JPY 4.7 billion.

Next, extraordinary income and losses deteriorated by JPY 15 billion due to the absence of JPY 2.2 billion extraordinary gain last year from sale of domestic fixed assets as well as an extraordinary loss of JPY 12.8 billion recognized this year in relation to the offshore business of Ship & Offshore Structure. So the total is JPY 15 billion.

Let me now move on to the discussion on each segment. Please turn to Page 7. I'll start with Ship & Offshore Structure. The performance for the third quarter, orders received, net sales are shown on the slide. Orders received is in a negative territory because of the cancellation of an offshore service vessel worth JPY 30 billion.

Next, operating profit improved year-on-year, as I explained, with [ variance ] analysis, we had JPY 9.3 billion in losses incurred for our offshore vessel business last year. Full year forecast, next, was revised downward due to the termination of a contract for an offshore service vessel for Norway. Sales and profits are in line with our expectation, and therefore, forecast are kept unchanged from our announcement in October.

Next page, please. Page 8 is Rolling Stock. Orders received and net sales for the third quarter are as shown here. Operating profit is up JPY 700 million year-on-year, mainly due to strong sales in Japan. On a full year basis, the order forecast has been revised up substantially due to the orders received for New York subway cars, while sales forecast is revised down by JPY 5 billion due to a delayed booking of after-sale orders, causing the operating profit forecast to go down as well. So the decrease in the OP is also because of the same reason. So that's for the Rolling Stock.

Going to the next page, Aerospace on Page 9. Starting with Q3 results, orders received and net sales are as shown here. Operating profit is down JPY 5.3 billion due to the price revision of Boeing 787, lower sales volume for 777 and the absence of milestone revenue. So operating profit is down JPY 5.3 billion year-on-year. Full year forecasts for both sales and profits are unchanged from the October announcement. We kept the numbers the same.

Next, on Page 10, Gas Turbine & Machinery. For Q3, orders received decreased due to the decline in large-sized gas engine deals year-on-year. The sales are as shown here. Operating profit increased year-on-year due to an increase in sales and an improvement in jet engine profitability. Full year forecasts are revised up by JPY 10 billion for sales and JPY 2 billion for operating profit, mainly due to an expected increase in new engine sales.

Next, Page 11, Plant & Infrastructure. First, Q3 numbers. Orders and sales are as shown here. The chemical plant driving down sales refers to the gas -- to gasoline plant for Turkmenistan. The impact of reduced construction work was incurred because we had a peak year in the previous fiscal year and with the steady progress in construction this year, no more trouble is experienced. For Q3, operating income is shown as 0. However, this is actually slightly negative due to the reduced sales.

For full year forecast. First, orders. Orders are in line with our expectation, in general. Net sales, however, are revised down due to reduced construction work at an overseas chemical plant, while operating profit is revised down as well by JPY 500 million due to lower sales.

Let me make a comment on the status of overseas LNG plant. As I reported to you last November, construction is showing steady progress. Cost associated with the change in local contractor was higher. However, including that, we plan to claim damage compensation from the original contractor who are in violation with the contract.

Next, Page 12, Motorcycle & Engine. Starting with Q3, year-on-year comparison for orders received and net sales is as shown here. While operating profit is up JPY 5.2 billion to a positive JPY 3.2 billion due to sales growth and the yen's appreciation.

For full year forecast, both sales and profits are in line with our expectation in general. So forecasts are unchanged. This business has a peak seasonality during the fourth quarter, as you may be aware. Therefore, we believe that the full year target of JPY 14 billion is sufficiently achievable.

Page 13 is Precision Machinery which includes hydraulic equipment and robots. In total, for the third quarter, orders, sales and operating profit year-on-year comparison is as shown on the slide. There was a significant year-on-year growth in each of these items. Full year forecast for both sales and profits are kept unchanged because they are generally on track. So we have not changed the forecast.

Page 14 shows the summary of balance sheet. Compared with the end of March 2017, there was an increase in trade receivables and inventories, as well as a decrease in advances from customers, resulting in an increase in interest-bearing debt by JPY 280 billion to JPY 678.2 billion. The increase from Q1 to Q3, however, is usual trend. And for example, interest-bearing debt as of the end of Q3 last year was JPY 623.4 billion. Given the ongoing strong trend in orders, there is not a significant difference. Furthermore, net D/E ratio is almost unchanged from 138% of the previous year. So it shouldn't be a problem.

Next, Page 15 is a summary of cash flow. First, cash flows from operating activities deteriorated JPY 59.4 billion year-on-year due to an increase in working capital. Cash flow from investing activities also deteriorated by JPY 19.6 billion due to an increase in payments for fixed asset purchases and the absence of proceeds from the sale of fixed assets, which we had last year. As a result, free cash flow is down JPY 79.1 billion year-on-year.

Let me give you some of the major factors behind the year-on-year cash flow deterioration. The plant business saw a deterioration in overseas business. There was a company-wide increase in sales, which caused an increase in trade receivables. These are factors behind the lower operational cash flow.

With regards to the investing cash flow compared with the same period of the previous year, more payments for large Aerospace capital investments and the absence of proceeds from the sale of Tokyo office are the major factors.

The fiscal year 2017 cash flow is continuously challenging for us due to the increased production of new aircraft engines pushing up the working capital and the payments for Aerospace capital investments. So we will make the best effort to improve the situation.

On Page 16, let me take you through the full year forecast orders, sales and operating profit. I have already explained it for each segment but Rolling Stock and the Plant & Infrastructure revised down their forecast, while Gas Turbine & Machinery revised up the forecast to reflect higher sales and the profit expectations.

So overall, there is no major change. Operating profit and recurring profit targets are kept unchanged at JPY 62 billion and JPY 55.5 billion, respectively. On the other hand, the forecast for net income attributable to owners of parent, before-tax ROIC, or ROIC and ROE, have been revised down due to the impact of U.S. tax reform pushing up tax expenses because of the reduced deferred tax assets. Dividends are kept unchanged. However, due to the stock consolidation as of October 1, the full year dividend is now JPY 60 per share.

The rest of the materials are for your reference. Please refer to them later. Page 17 shows the results for fiscal year 2016, forecast for fiscal year 2017 by each segment. Page 18 shows before-tax ROIC by segment.

Page 19 shows R&D, CapEx and the number of employees as of the end of fiscal year. Forecasts are unchanged.

With this, I would like to conclude my remarks. Thank you very much for your kind attention.