Kawasaki Heavy Industries Ltd

TSE:7012

Earnings Call Transcript 2022-Q3

[山本 克也 (やまもと かつや), executive]

My name is Yamamoto. Thank you very much for your participation. Now I would like to present the financial highlights.

As the company announced today at 11:30 at the Tokyo Stock Exchange and on the company website, the third quarter performance was significantly better than planned in both sales and operating profit driven by strong Motorcycle & Engine business.

The shipbuilding joint ventures incurred a recurring loss again as we did in the second quarter due to external factors such as steel price and foreign exchange rates. However, we believe the company is poised to revise the operating profit upward and maintain the recurring profit in line with the previous announcement. The entire group is determined to deliver the numbers even better than the ones we presented today in the upcoming fourth quarter. This is the overview.

Now I will explain more from Page 3. Page 3, please. Consolidated results for the third quarter. The third quarter's year-to-date net sales was JPY 1.0387 trillion. The operating profit was JPY 39 billion, the recurring profit was JPY 21.3 billion and the net income attributable to owners of parent was JPY 7.2 billion.

The 3-month operating profit grew by JPY 18.6 billion. The third quarter added JPY 10.2 billion to the recurring profit and JPY 2.7 billion to the net income because the shipbuilding joint venture business incurred losses.

The 9-month weighted average exchange rate of the Japanese yen from April through December was JPY 6 lower than last year. The value of U.S. dollar-based transactions was $1.1 billion.

Page 4. Consolidated results by segment. This page shows orders received, net sales and operating profit by segment. The Aerospace Systems is continuing performance improvement as passenger demand is coming back.

In the meantime, the Motorcycle & Engine, which started as Kawasaki Motors last October, dramatically grew in sales and profit, thanks to strong demand in the outdoor leisure market in the developed countries. Precision Machinery & Robot business also recorded higher sales and profit from wafer transfer robots for semiconductor manufacturing equipment.

The Rolling Stock business spinout, Kawasaki Railcar Manufacturing Co., is still improving its profit. As a result, the total net sales was JPY 1.0387 trillion, an increase of JPY 6.2 billion year-on-year. The OP was JPY 39 billion, an increase of JPY 42.7 billion.

Page 5, income statement. Please look at table for details. As the net sales grew considerably in Motorcycle & Engine business, the sales cost grew accordingly as you see in the box #1. The Japanese yen has been cheaper than the previous year, but the company had large exposure to U.S. dollar-denominated liabilities. This is the reason for exchange loss in the nonoperating expenses due to conversion of U.S. dollar-denominated liabilities.

I would like to comment on equity and loss of unconsolidated subsidiaries and affiliates. As I mentioned, the steel price continued to increase, while the renminbi appreciated against U.S. currency. The profitability of the ships weakened because the ships have been priced in the U.S. dollar contractually. The rising material costs meant higher production costs of marine equipment.

For these factors, the company put up a provision for 50% more ships than the second quarter. As a result, the equity and loss of unconsolidated subsidiaries and affiliates was JPY 15. 1 billion.

The steel price hike created a big loss this year, but the robust motorcycle business covered the loss. The recurring profit improved by JPY 21.3 billion. The steel price is already beginning to fall in the Chinese market in Q4. We will keep close watch on steel price movement.

Page 6. Next, I would like to explain the recurring profit and incomes below. As I said in the last slide, the equity in income of affiliates deteriorated. However, the equity and loss of affiliates does not contribute to reduction of tax burden. This is why the large tax expense is posted.

As a result, the net income grew by JPY 2.7 billion to JPY 7.2 billion from JPY 4.5 billion quarter-on-quarter. But the year-on-year change is a positive JPY 21.2 billion due to reversal of deferred tax assets.

Page 7. I will explain the factors contributing to the changes in profit. Mass production businesses, such as Motorcycle & Engine and Precision Machinery & Robot, made a big contribution to our sales. The Aerospace Systems business is beginning to show profitability improvement as the jet engine maintenance costs, which were a major burden last year, were decreased.

Please refer to Page 8 for more details by segment. I will skip Page 8.

Page 9, balance sheet. As indicated by notation 1, the cash and deposits decreased as a result of a repayment of interest-bearing debt. As you will find in notation #2 and #3, some adjustments were made across accounts because the company applied a new accounting standard for revenue recognition.

Page 10, liabilities and net assets in the balance sheet. Liabilities and net assets changed because the company reduced the trade payables in Aerospace and other segments, as you see in notation #1. This resulted in increase in interest-bearing debt, though this is a normal business cycle and the debt level is as usual as other third quarters before.

At the same time, the net D/E ratio went up 13% to 149% from the second quarter's 136%. We don't think this is a problem in particular, considering that it is in the fourth quarter that the company receives money from many of the customers. Still, we are aware that there is a gap from the company's reference D/E ratio, which is 70% to 80%. So we will continue to speed up the collection of trade receivables while controlling the inventory assets so that we can improve asset efficiency.

Notation 3 indicates decrease in shareholders' equity. As explained at the second quarter earnings report, this does not affect cash flow. I would appreciate your understanding.

Page 11 shows cash flows. The cash flow from the operating activities increased by JPY 700 million year-on-year. The cash flow from investing activities deteriorated year-on-year because last year had proceeds from the sale of fixed assets. Excluding these special factors, this year is not very different year-on-year.

The total free cash flow was negative JPY 182.5 billion, down by JPY 20.3 billion. However, the company expects collection of considerable trade receivables from operating activities in the fourth quarter and plans to turn free cash flow positive this fiscal year.

Page 12. For your information, this page shows cash flows over the last 10 years.

Page 13, earnings forecast for FY 2021. Motorcycle & Engine business has made JPY 29.6 billion in the operating profit in Q3 earnings. This segment is expected to make a big full year profit improvement. Considering a loss from shipbuilding joint ventures and equity loss in affiliates as well as expected additional defense orders in the Aerospace Systems business on the other hand, now I would like to announce new forecast.

The forecast of orders received is JPY 1.530 trillion, up JPY 70 billion from the last forecast. The net sales forecast is unchanged at JPY 1.550 trillion. The new OP forecast is JPY 46 billion, up JPY 6 billion. The recurring profit and net income are unchanged at JPY 22 billion and JPY 15 billion each. The revised foreign exchange assumption is $1 is JPY 114, meaning Japanese yen will be JPY 2 cheaper against the dollar.

Next, I will explain segment by segment. Page 14, forecast for FY 2021 by segment is shown in the table. The dip in the operating profit in Energy Solution & Marine Engineering is offset by the OP growth in Motorcycle & Engine, which enjoys robust business in motorcycles and utility vehicles for off-road activities. I will explain more details in the segment-specific slides.

Page 15, Aerospace Systems. This slide shows performance of the third quarter of FY 2021. There are more orders received from Boeing, but the total orders received decreased due to a decrease in component parts for commercial aircraft engines caused by the application of a new accounting standard for revenue recognition.

The net sales were down due to slow business with Boeing and the Defense Ministry, Furthermore, the application of the revenue recognition accounting standard had an effect.

The operating profit grew significantly due to improvement in the profitability of the commercial aircraft jet engines for Boeing. The full year forecast was revised upward, anticipating order growth with the Defense Ministry.

Sales and operating profit are unchanged even in light of uncertainty due to new Omicron variant and Boeing's production cut because of a change to a Japanese yen's exchange rate assumption and other factors.

Page 16. This slide shows orders received and net sales by aerospace and Aero Engine separately. You will also find the number of aircraft component parts sold to Boeing and the number of jet engine component parts sold.

Page 17. Aerospace Systems. This page shows the quarterly trend of net sales and operating income.

Page 18. This page describes market overview in the company's focus areas to achieve the financial targets. There is no substantive change since the last announcement. The company continues to position aircraft engine business as the core area to generate profit by reducing production costs. The company reviews the fixed cost structure theory to meet the changes in business environment.

Page 19, the Rolling Stock segment. This slide shows the performance of the third quarter of FY 2021. Compared to the same period last year, when the company enjoyed big orders for Shinkansen, this year saw fall in orders received. The sales is a little down. But the OP improved, thanks to better profitability of overseas project as the COVID-19 impact subsided. The full year forecast remains at the same level as the last time.

Page 20. This page shows orders received and the net sales in Domestic and Asia vis-à-vis North America. For your information, we included sales from high-margin aftersales service and an update on M9 project for Long Island Rail Road in the United States.

Page 21. This page shows the quarterly trend of net sales and operating income for your information.

Page 22. Like the Aerospace Systems, the market overview of the Rolling Stock has not changed since last time. M9 project in the North America incurred a loss in the recent year. 92 cars under the base contract have been delivered. Optional trends are now under production and will be delivered in the second quarter of the next fiscal year.

Page 23. Energy Solution & Marine Engineering. You will find the performance of the third quarter of FY 2021. Orders received went up due to orders for domestic municipal waste incineration plants, LPG/ammonia carriers and other projects. But sales and profit were both down due to a decrease in power plants and raw material cost hike.

The full year OP forecast was revised downward by JPY 3.5 billion as the net sales are likely to go down due to the timing shift of a project in energy system, and the steel material cost will create loss in domestic ship and offshore structure business in the fourth quarter.

Page 24. This page shows orders received and net sales by subsegment of Energy System & Plant Engineering and shipment offshore structure.

Page 25, this page shows quarterly trend of net sales and operating income.

Page 26, the market overview and order trend of this segment. The top priority is to secure more orders. As you see in this slide, the company won 2 successive orders for waste incineration plants in the third quarter. There is a strong renewal demand. We will aggressively approach these customers to win even more orders.

Also, the companies are trying to establish a leading position in the decarbonization field in the mid- to long term. I reported in the Group Vision progress presentation last December that we started a discussion with RWE, a German power company, regarding the world's first demonstration of 100% hydrogen power generation by a 30-megawatt class gas turbine.

Here in Japan, we delivered Seibu Oil, a cogeneration system, which is operation now and burns byproduct hydrogen. We will continue to contribute to the carbon neutral goal of the world as we're leading the company in the hydrogen supply chain.

Page 27. Precision Machinery & Robot segment. The slide shows the performance of the third quarter of FY 2021. Hydraulic components for construction machinery and various robots for semiconductor manufacturing equipment are strong and are driving a net sales and operating profit year-on-year.

Hydraulic components for China are likely to soften in the fourth quarter as the Chinese property building boom slows down, dragging the construction machinery market.

The robot business will grow net sales, thanks to the striving semiconductor market. But the rising of parts procurement cost and supply chain disruption may create a risk pressure on the cost structure. Therefore, the full year net sales of this segment were revised down by JPY 5 billion, and operating profit was revised by JPY 3 billion.

Page 28. This page shows orders received and net sales of hydraulic components in the system and robotics. We added a sales data of hydraulic components to China and sales of robots by segment for your information.

Page 29. This page shows the quarterly trend of net sales and the operating income.

Page 30. Here is market overview and specific efforts of this segment.

Page 31, Motorcycle & Engine. This slide shows the performance of the third quarter FY 2021. Sales grew in motorcycles and general-purpose engines not only for North America but also for Europe and Southeast Asia. The profit was also boosted by depreciation of Japanese yen.

Regarding the full year forecast, the operating profit was revised to JPY 40 billion, up by JPY 9 billion from the last announcement, in light of lower parts procurement risk, price increases, less sales permission cost and foreign exchange assumption change.

Page 32. This page shows net sales and operating profit by subsegment, namely motorcycles for developed countries, motorcycles for emerging markets, utility vehicles, ATVs and the PWC and general-purpose gasoline engines. There is information regarding wholesale of motorcycles by country.

Page 33. This page shows the quarterly trend of net sales and the operating income.

Page 34. Here is market overview for Motorcycle & Engine segment.

Page 35, shareholder return. The full year dividend remains JPY 30 for a full year. No change since last announcement. There is lingering uncertainty in business environment, but the company is determined to do everything to improve its profit.

Page 36. I would like to share 4 project topics today. The first topic is about motorcycle segment, a segment that is driving the earnings of the company. We have Japan's top market share in 21cc-and-over class in terms of the cumulative unit numbers for 4 years.

This fiscal year, Ninja ZX-250R (sic) [ Ninja ZX-25R ] received Japan Motorcycle of the Year Award. Bimota, an Italian luxury handmade motorcycle company, launched KB4 with the Kawasaki engine in its latest model.

These examples demonstrate our brand and product power are getting stronger. And we will actively seek more opportunities for collaboration and alliance. We will continue to capture the growth potential of motorcycles in the world market to acquire more market shares while making active investment in new 4-wheel vehicles models for the future growth.

Page 37. This page is an introduction to wafer transfer robotics. Semiconductor shortage is disrupting production and supply of cars and other products, causing a serious problem to the people's living and corporate performance.

Our company has the world's top share in the wafer transfer robotics market. Increased production of robots is essential to production of more semiconductors.

To alleviate the semiconductor shortage problem, the company is now operating at full capacity. We want to meet the market needs by offering a wide selection of semiconductor robotics.

Page 38. The next topic I would like to introduce is hydrogen. Hydrogen is expected to become the growth pillar in the mid- to long term. At the end of last year, the world's first liquefied hydrogen carrier, SUISO FRONTIER, sailed from Kobe Port to Australia. Liquified hydrogen had been uploaded before the departure.

The objective was to demonstrate viability of loading and maritime transport of liquified hydrogen, structural integrity of tanks and piping. The carrier arrived at Adelaide Port on January 20 after 3 weeks of voyage. The pilot project successfully verified performance.

The company will continue to build the hydrogen supply chain from production, storage, transport to usage as hydrogen energy in order to contribute to the carbon-neutral society of the world.

Page 39. This is the last project topic. It is PCR viral testing service, municipalities who are operating free PCR test centers to cope with the spread of Omicron variant. The test demand is growing rapidly. Our company started free PCR test service in Setagaya and Suginami wards in Tokyo.

Just yesterday, the same service started in Kobe City in Hyogo prefecture. We are planning to roll out the test service to other prefectures. Just for your information, you can book a PCR test by visiting our company's website. Click the corporate banner at the bottom for quick booking.

We are also focusing on test services for travelers at airports to help reopening of international traffic. The company is already operating 2 test sites for outbound travelers at Kansai International Airport. We are now able to issue COVID negative certificates in 3 hours at the shortest.

We are planning to roll out the service to more international airports to facilitate reopening of international travel. Inbound travelers are now required to isolate themselves for a certain period of time on arrival in Japan. We want to offer PCR test service to inbound travelers so that their isolation requirement will be lifted and more people will travel internationally.

From Page 40 and onward, I attached reference information. In the appendix, you will find CapEx, depreciation and amortization, R&D expenses and the number of employees.

This is the end of my presentation. Thank you for listening.

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