Kawasaki Heavy Industries Ltd

TSE:7012

Earnings Call Transcript 2021-Q3

[山本 克也 (やまもと かつや), executive]

I am Yamamoto. Thank you for joining us today. I would like to present the financial results for the third quarter FY 2020.

Please turn to Page 3 of the presentation material. This slide shows a summary of the third quarter financial results. Orders received and net sales are as shown here.

As for orders, environments in Precision Machinery & Robot and Motorcycle & Engine steadily recovered, but the impact by COVID-19 in Aerospace Systems and impacting Energy System & Plant Engineering by prolonged negotiations and delayed investment decisions were observed. In Rolling Stock, reactive downturn from the large orders in previous year affected orders. Due to all of these, orders declined year-on-year.

Net sales declined sharply as a whole by JPY 102.9 billion year-on-year. Mainly, it was caused by the sales decline in Aerospace Systems. But the sales contraction's rate has been moderating compared to the second quarter.

Operating income will be elaborated in detail on Page 5 and onward by factor. Mainly due to the spread of COVID-19, operating income decreased by JPY 34.7 billion. But COVID-related loss has been shrinking except in Aerospace Systems. Recovery in Precision Machinery & Robot and Motorcycle & Engine was notable. And operating income in 3 months from October to December turned to plus JPY 18.1 billion, showing steady recovery.

Accordingly, recurring profit and loss improved to breakeven, but the net profit due to impairment loss of Sakaide Works in the second quarter and the partial withdrawal of deferred tax assets, loss of JPY 13.9 billion was posted.

At the bottom of the page, weighted average exchange rates and net sales in foreign currencies are shown. As shown here, yen appreciated against U.S. dollar by JPY 4 to $1 and depreciated against euro by JPY 1 to EUR 1 year-on-year.

Page 4. Orders received, net sales and operating income by segment are as shown here. I'll explain them on the page of each segment.

Page 5. Details of change in profit and loss. Operating income decreased from JPY 30.9 billion to minus JPY 3.7 billion, down JPY 34.7 billion year-on-year.

Let me go through variance analysis. COVID-19 impact was minus JPY 38.8 billion for the whole company. Breakdown is: Aerospace Systems account for 60%; Motorcycle & Engine and Rolling Stock were 10% plus, respectively, and 30% combined. And these 3 segments account for 90% of the total impact.

As for foreign exchange rates, as mentioned, yen appreciated against U.S. dollar in weighted average rate, and the impact was minus JPY 3.9 billion. Certainly, as for change in sales, despite profit increased due to sales growth in hydraulic equipment for excavator for China and semiconductor robot in Precision Machinery & Robot, impact by commercial aircraft-related sales decrease in Aerospace Systems was substantial, and minus JPY 7.6 billion impact was recorded.

Firstly, as for change in product mix and other factors, impact by worsened aftersales profit of engine as well as loss on shorter operation in Aerospace Systems were substantial. But profitability in Rolling Stock improved year-on-year, and the product mix improved with robust sales of off-road vehicle and motorcycle for North America in Motorcycle & Engine. And in total, positive impact of JPY 1.9 billion was recorded.

As for SG&A expenses, mainly hydrogen-related R&D cost was reduced, and promotion and advertisement cost in Motorcycle & Engine was reduced as well. And in total, JPY 13.7 billion of improvement was posted.

Factors for decreased operating income were explained before. But as for nonoperating income and expenses, it was JPY 3.6 billion, up JPY 19.2 billion year-on-year.

There are 2 major factors for change. Firstly, as for gain and loss on foreign exchange, yen appreciated against the U.S. dollar this year. But gain on payment side, yen's depreciation against euro and variation gain on other currencies' credit were posted. And the total gain and loss on foreign exchange was JPY 1.9 billion, up JPY 6.7 billion year-on-year.

Secondly, payments for the in-service issues of commercial aircraft jet engines. After reviewing the payment of engine manufacturers, including Kawasaki Heavy Industries, considering the progress of replacement work, reversal gain on the payment posted previous year and before was recorded. And with no new additional payment this year, in total, improvement of JPY 10.6 billion was posted.

As for extraordinary income and losses, as explained in the second quarter results meeting, gain on shares of corporate housings and sales of shares of subsidiaries in the periods were posted. While impairment loss on ship in Sakaide Works were also posted.

Against the loss on business withdrawal recognized in the previous year, there was a reactive uptick. And accordingly, extraordinary income was up JPY 1.9 billion year-on-year to plus JPY 0.8 billion.

Page 7, Aerospace Systems. FY 2020 third quarter orders, sales and profit year-on-year are as shown here. This segment was most affected by the COVID-19.

As for the aircraft, sales units of Boeing 787 and 777 decreased sharply due to shipment suspension caused by the plant operational suspension of Boeing and reduced production. And the Ministry of Defense sales will be more concentrated to the fourth quarter compared to the previous year. Consequently, both of sales and profit decreased substantially. As for engines, sales were down almost 50% year-on-year, and aftersales also decreased and the sales fell sharply.

However, in 3 months from October to December, flight hours recovered. And in the total of this segment, it turned to profit of plus JPY 4.6 billion. And 3 quarters cumulative operating income was minus JPY 19.2 billion.

Full year forecast for FY 2020. Due to the additional cutback of Boeing production, profit of aircraft will be lower than the previously announced forecast. But aftersales of engine has been improving and the full year focus remains unchanged from the previous one. In FY 2021, partly due to expected improvement of aftersales of engine, segment profit is expected to recover gradually.

Page 8, Energy System & Plant Engineering. FY 2020 three -- third quarter orders, sales and profit year-on-year are as shown here. Domestic sales increased, more than offset the impact of the COVID-19. But in the previous year, large sales with construction work completion at the chemical plant for Turkmenistan were posted. And due to the backlash, total sales went down slightly year-on-year. As for profit, due to sales decrease and operational loss by the impact of COVID-19, profit was down by JPY 4.6 billion from the previous year when we had profitable project.

Full year forecast for FY 2020. As for orders, due to expected delay of investment decision of clients and reduced project affected by COVID-19, following the second quarter, we revised down the forecast in this quarter. Sales will be flat year-on-year, but forecast of the profit was revised up this time due to improvement of profitability for some projects.

Precision Machinery & Robot. FY 2020 third quarter orders, sales and profit year-on-year are as shown here. FY 2020 forecast, in China market, sales of hydraulic components for construction machinery are stronger than expected, and sales were turning to recover from the third quarter in other markets. Therefore, we revised up the forecast of orders, sales and profit.

Page 10, Ship & Offshore structure. FY 2020 third quarter orders and sales year-on-year are as shown here.

FY 2020 forecast. Orders and sales forecast remain unchanged. But profit was revised down JPY 0.5 billion to minus JPY 3.5 billion, along with the change of foreign exchange assumption. For the management stability in the next year and onward, we will strive further to win orders of commercial ships, in particular LPG carriers.

Page 11, Rolling Stock. FY 2020 third quarter orders and sales year-on-year are as shown here. As for profit in the third quarter, we posted additional allowances for project, whose process was reviewed in North America due to COVID-19. But profit increased with sales increase in Rolling Stock in Japan, and profit rebounded after the loss-making project in North America in the previous year. And as a whole, profit improved by JPY 1.8 billion.

FY 2020 forecast. As mentioned, reviewing the process in North American project, we revised down the forecast of sales and profit this time. This time, we will examine the cost deterioration of the entire project in North America, including that of the next year, caused by the reduced operation due to COVID-19, and the result will be reflected in this fiscal year. And in FY 2021 and onward, business will be firm, including that of North America.

Page 12, Motorcycle & Engine. FY 2020 third quarter sales year-on-year are as shown here. Up to the first half, COVID-19 impact has been substantial. But for North America, sales are higher than the previous year, mainly in off-road model. And in Europe, sales are recovering to the previous year's level, and they more than offset the decline in emerging countries. As for profit, in 3 months from October to December, operating income was plus JPY 6.9 billion, and the COVID-19 negative impact is clearly over, except the emerging countries.

FY 2020 forecast. Especially due to the strong retail sales in North America, this time we revised up the forecast of both of sales and profit. Strong retail sales in North America are expected to continue. But in the fourth quarter, sales promotion costs will increase with the expansion of sales promotional activities. And fixed costs, including R&D expenses, will be concentrated in the fourth quarter. Therefore, even with the quarter-on-quarter sales growth, profit will be down.

Page 13, summary of balance sheet. Compared to the end of the previous fiscal year, total assets are up by JPY 83.8 billion because of robust sales in motorcycle business, collection of account receivable progress. But on the other hand, by securing cash on hand, cash and deposit increased and the inventories increased in Aerospace Systems, and they resulted in asset growth.

On liabilities, along with the total asset growth, interest-bearing debt increased, and total liabilities increased by JPY 98.7 billion. As a result, net D/E ratio slightly worsened to 141.6% quarter-on-quarter. We continue to work hard to improve to achieve the level, which has been shown as a guideline.

Page 14, summary of cash flow. Operating cash flow improved JPY 148.6 billion year-on-year due to backlash in the previous year from the credit securitization in -- 2 years ago in Aerospace Systems segment, progress in account receivable collection backed by the strong retail sales in Motorcycle & Engine segment in this year and decreased inventories.

Investing cash flow improved JPY 23.8 billion due to gain on sales of corporate housings and sales of shares of subsidiaries. As a result, free cash flow improved by JPY 172.4 billion year-on-year.

In the fourth quarter and onward, we'll continue to improve financial position through initiatives to improve profitability, capital efficiency and cash flow so that free cash flow positive will be achieved quickly.

Page 15, consolidated forecast for this year. As for orders, orders in Energy System & Plant Engineering were revised down, affected by COVID-19. But recovery in Motorcycle & Engine and Precision Machinery & Robot are stronger than expected. And growth in defense demand and aftersales of engine in Aerospace Systems are expected. Therefore, total orders forecast was revised up JPY 20 billion from the previously announced one.

As for sales and profit, loss in overseas project in Rolling Stock is reflected. But as increased sales and profit in Motorcycle & Engine and the Precision Machinery & Robot are expected as well as profitability improvement in Energy System & Plant Engineering, operating income is revised up by JPY 10 billion from the previous forecast to minus JPY 10 billion. And recurring profit is also revised up by JPY 10 billion to minus JPY 15 billion.

As for net income attributable to owners of parent, considering the possible additional expenses, as of today, it was revised up JPY 2 billion from the previous forecast to minus JPY 25 billion.

As presented in the Group Vision 2030 shown on November 2, we continue to make active investment in new businesses, including airport PCR testing services, medical robot and near-future mobility, which are expected as new growth domains and aim to achieve profitability steadily in the next fiscal year.

Page 16 shows actual results in FY 2019 and the forecast for FY 2020 by segment in a table for reference.

Page 17 shows before-tax ROIC by segment in a table for reference.

Page 18 and 19, R&D, CapEx, number of employees and historical data are shown.

Page 20 and onward shows market overview of each segment for reference.

Page 22. The final page shows, as explained in the November 2 about the Group Vision 2030, the progress of the growth areas that we focus on today. Mainly, there are 3 points.

First one is the current status of the robot-based PCR testing services. We have received many inquiries, and it was officially decided that the first test will be conducted in Fujita Health University in Aichi. Today from 13:00, media presentation was organized. For details, please refer to the press release on our website. Testing systems are already installed in Fujita Health University. And from mid-February, collaborating with the university testing service will be launched.

Another project is in preparation for Nippon Foundation. For the project, it was announced that targeting nursing care facility staff in Tokyo, 14,000 PCR tests a day will be launched from April.

Second one is about robotic-assisted surgery system, hinotori. Product presentation was on November 18, and the product rollout was from December. Clinical use already started in Kobe University. In December, first clinical surgical operation was successfully carried out. By the end of January, the fifth clinical surgery was operated. And the progress has been solid.

Third one is hydrogen-related project. A verification test of liquefied hydrogen carrier is ongoing, and the liquefied hydrogen receiving terminal completed. Both are the first ones in the world. And the basic design for the world's largest liquefied hydrogen storage tank is completed.

This concludes the presentation on the financial results for the third quarter FY 2020. Thank you for your attention.

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