Kawasaki Heavy Industries Ltd

TSE:7012

Earnings Call Transcript 2023-Q3

[山本 克也 (やまもと かつや), executive]

My name is Yamamoto. Page 1. As we disclosed at the Tokyo Stock Exchange and through our website at 11:30 today, the revenue and profits grew significantly for the third consecutive quarter with a quarterly net profit hitting the record JPY 52.5 billion, and this quarter delivered JPY 80.8 billion in business profit.

A strong performance was driven by recovery of the passenger demand in Aerospace Systems, continued outdoor demand and successful price pass-through of rising cost, mainly in Power Sports & Engine, which is a new name for the former Motorcycle & Engine segment. The FX assumption of a U.S. dollar was changed from JPY 140 to JPY 130 in the new full year forecast. The new projection forecast, business profit will reach JPY 86 billion, up by JPY 10 billion from the November forecast and the net profit will be JPY 54 billion, up by JPY 9 billion thanks to robust Power Sports & Engine and better profitability in aero engine. Despite of a one-off dip in profit in Precision Machinery & Robot. This is the summary of the financials.

From Page 3, I will explain more details. Page 3. Consolidated results for the third quarter FY 2022. The third quarter of FY 2022 received orders of JPY 1,476.5 billion, earned JPY 1,196.3 billion in revenue. JPY 80.8 billion in business profit and JPY 72.1 billion in profit before tax. Profit attributable to owners of parent was JPY 52.5 billion. The years weighted average exchange rate of Japanese yen was about JPY 24 lower year-over-year. The value of U.S. dollar-based transactions was $1.4 billion. Page 4. Consolidated results by segment. This page shows orders received, revenue and business profit by segment. As you see in box #1, profits dramatically improved Y-o-Y in Aerospace Systems due to air passenger demand recovery and accelerated posting of our profits in the third quarter. As indicated by number 2, Energy Solution & Marine Engineering increased profit as a result of a reversal of loss provisions for Chinese shipbuilding or joint ventures, which have been posted in the third quarter of the last fiscal year. As marked by #3, Power Sports & Engine made gains in revenue and profit, driven by robust outdoor demand and weak Japanese yen while successfully passing the cost inflation to pricing. As a result, the quarter ended with revenue of JPY 1,196.3 billion, up by JPY 157.6 billion Y-o-Y.

The business profit increased to JPY 80.8 billion, up by JPY 52.1 billion. Page 5. Income statement. Please look at the table for details. As you see in the box 1, raw material costs rose, but the sales cost ratio improved as a result of a price pass-through in mass production products, growth in sales volume and the depreciation of the Japanese yen. As you see in box 2, selling, general and administrative expenses increased mainly in the headquarters departments, but this is in line with our starting plan, just like the second quarter. As box #3 shows a share of investments accounted for using equity method had posted a loss provisioning due to bad profitability, ship and offshore structure joint ventures in China in the same period last year and the steel price pressure. The situation is improving, and the depreciation of renminbi has been helpful, enabling a reversal of the provision. As a result, the share in equity method subsidiaries was JPY 3.9 billion in profit, improvement of JPY 19.1 billion. The business profit was JPY 80.8 billion, up by JPY 52.1 billion year-over-year. Page 6. Let's turn to profits and our business profit. This quarter saw rapid appreciation of Japanese yen, generating a valuation loss on assets denominated in foreign currencies.

The third quarter posted a JPY [ 4 ] billion in foreign exchange loss. Adding other finance costs profit before tax was smaller than business profit at JPY 72.1 billion. The profit attributable to owners of parent was JPY 52.5 billion, up by JPY 41.2 billion over a year. Page 7. Details of a change in the business profit. I will explain the factors contributing to a change in profit. The Japanese yen depreciation improved profit by JPY 42.1 billion. Higher raw material prices pushed up our cost, but that was successfully offset by price pass-through and cost reduction. Furthermore, Power Sports & Engine continued to enjoy strong sales, gaining JPY 7.6 billion more in revenue. As I said before, Power Sports & Engine was able to pass cost increase through new pricing and the product mix effect turned from negative to positive in this quarter. As a result, the business profit reached JPY 80.8 billion, up by JPY 52.1 billion Y-o-Y. Please refer to Page 8 for more details by segment. Page 9. Statement of the financial position and total assets. This slide shows the changes in assets as marked by #1, Power Sports & Engine and Aerospace Systems increased inventories. Box #2 shows Aerospace Systems increased advanced payments to suppliers from advanced money received at the last year-end. Aero Engine increased account receivables.

For these reasons, the company carries more current assets. Page 10. This slide shows change in the liabilities and net assets. As is indicated by number three, interest-bearing debt level is higher compared to the level at the year-end, but this is the normal business cycle and the debt level is lower than usual years. Please understand that it is in line with the plan. This quarter ended with a net D/E ratio of 112.1%. In order to return to the target range of 70% to 80% by the year-end, we will continue to accelerate collection of accounts receivable, control inventory assets and improve asset efficiency. Page 11. Box #1 shows the cash flow from operating activities. Cash outflow from operating activities was JPY 113.1 billion, improvement of JPY 22.5 billion Y-o-Y, driven by significant profit improvement in spite of increase in advanced payments to suppliers from the money received at the year-end. The cash outflow from investing activities increased by JPY [ 68 ] billion. This was mainly due to capital increase to our equity method affiliate, medical right. Other than this, there is no big change Y-o-Y. The total free cash flow was negative, JPY 166.3 billion, improvement of JPY 15.7 billion Y-o-Y. Page 12 shows historical cash flows over the past 10 years. Page 13, earnings forecast for FY 2022. Turning to earnings forecast for FY 2022.

Changing the FX assumption from JPY 140 to JPY 130 has a negative influence on profits. But the strong Power Sports & Engine is leading the revenue up to JPY 1,750 billion, JPY 30 billion than the November forecast. Likewise, business profit is projected to reach JPY 86 billion, up by JPY 10 billion. Profit before tax will be JPY 78 billion, up by JPY 10 billion and the profit attributable to owners of parent will be JPY 54 billion, up by JPY 9 billion. All financials were revised up. The fourth quarter will continue to grow in revenue. However, we will see a drop in profit temporarily, because the company is planning to pay more to employees under inflationary pressure. We also plan to put provision for performance-based bonuses and other expenses such as digital transformation. But please understand that a temporary drop is not due to deterioration of operation environments. Next, I will explain forecast by segment. Page 14. Forecast by segment is shown in the table. I will go into more details on segment-specific slides. Page 15. Aerospace Systems' financial results are shown on this slide. Orders received increased with Ministry of Defense and for commercial aircraft engines. Both revenue and business profit grew Y-o-Y, driven by big growth in commercial aircraft engine after sales revenue growth during this quarter.

The full year forecast of orders received and revenue remained the same as in November. But business profit was revised up by JPY 2 billion, thanks to better margin on some models as a result of longer flight hours of commercial aircraft engines. This is positive enough to cover the adverse impact of FX rate change on profit. Page 16. This slide shows orders received and the revenue of aerospace and aero engines as well as aircraft components sold to Boeing and jet engine components sold. Business profit of the fourth quarter is projected to turn negative with a loss of JPY 1.2 billion from the positive earnings of the third quarter. As I mentioned earlier, this is because the high-margin aftersales revenue concentrated in the third quarter, which boosted profitability. It is also because the scheduled payments to original equipment manufacturers are settled mainly in the fourth quarter. In addition, the fourth quarter will post a charge-off related to discontinuation of some engine development. All considered, the profitability of this segment is improving in line with the market recovery. Page 17. Aerospace assistance. This page shows the quarterly revenue and the business profit. Page 18. This page describes our view of a business environment and order trend as well as specific efforts and initiatives achieve the earnings targets.

Page 19. Rolling Stock. The orders received increased by JPY 252.1 billion, Y-o-Y due to major orders for new subway cars for New York City Transit.

The revenue grew due to increase in Asia. The business profit shrank by JPY 2.1 billion due to loss provisioning for delayed Long Island Rail project in U.S. at the end of the last quarter. The full year forecast for FY 2022 hasn't changed as we don't anticipate big changes to orders received revenue or business profit. Page 20. This page shows orders received and revenue in domestic in Asia and in North America. For your information, the appendix shows sales from high-margin aftersales service with the progress of [indiscernible] projects for a Long Island railroad in the United States. Page 21. This page shows the quarterly trend of revenue and business profit for your information. Page 22. The market overview of the Rolling Stock segment has not really changed since last time. Regarding major project milestone, the [ R2 11 ] [indiscernible] trains for the New York City transit or delivery schedule was moved down from the third quarter to the fourth quarter. There has been a delay because the COVID pandemic created disruption to engineer dispatch plans from a European supplier to the United States.

As a result, software modification to the purchased equipment took longer than scheduled. But please be assured that there is no other major disruption to affect the overall schedule. Page 23. Energy Solution & Marine Engineering. This slide shows the results of the third quarter FY 2022. Orders received made a big jump Y-o-Y propelled by orders for power generation facilities and domestic municipal waste incineration plants. The revenue is up, thanks to increase in energy business and construction work for submarines despite a decrease in construction work for domestic municipal waste incineration plants. The business profit improved dramatically as a result of a profit improvement at Chinese shipbuilding and joint ventures. The full year order forecast was revised upward for the third consecutive quarters, thanks to increase in LPG ammonia carriers. Revenue and business profit remained the same. Page 24. This page shows orders received and revenue of energy plants and marine machinery shipping offshore structure as well as share of profit were also investments accounted for using equity method. Page 25. This page shows quarterly trend of revenue and business profit. Page 26. This page shows the market overview and order trend in this segment. The top priority is to provide products and services to achieve a low-carbon and decarbonized society.

This slide highlights Kawasaki projects with waste incineration plans. We are developing products for a transition to decarbonized energy. Kawasaki received order to modify gas turbines for a petrochemical company in Belgium, so that they can mix 30% hydrogen in co-firing. Another topic is that Kawasaki was awarded the world's first [indiscernible] by ClassNK for dual fuel generator engine, which uses hydrogen as a fuel. We are leading this area with even more achievements. Page 27. Precision Machinery & Robot. The slide shows the results of the third quarter FY 2022. The orders received and revenue stayed at the same level last year due to increase in robots in spite of a decrease in hydraulic components for Chinese construction machinery market. On the other hand, business profit declined considerably by JPY 4.3 billion Y-o-Y due to rising costs of electrical components and raw materials, Chinese lockdown, and decrease in hydraulic components for China. The forecast of orders received and revenue were revised down by JPY 10 billion, respectively due to probable decrease in hydraulic components and semiconductor robots for China given the trade restriction against China. The business profit was revised down by JPY 6 billion again, considering decreased revenue, rising raw material prices and reduced operation.

Page 28. This page shows orders received and the revenue of Precision Machinery & Robot as well as the share of profit of investments accounted for using equity method. Appendix shows revenue from hydraulic components to China and the revenue of a robot by segment. Page 29. This page shows the quarterly trend of revenue and business profit. Page 30. This page shows market overview and specific efforts in this segment. Demand was depressed for hydraulics in China's construction machinery, mainly due to lockdown. As to business environment around robots for semiconductors, we are paying a close attention to subdued demand for some products such as semiconductors for smartphones and the impact of a U.S.-China economic friction. Page 31. This slide shows the results of the third quarter FY 2022. Revenue grew strongly Y-o-Y due to an increase in motorcycles for North America and Southeast Asia. 4-wheelers for North America and general-purpose gasoline engines in addition to depreciation of Japanese yen and price pass-through. Business profit improved due to increase in revenue and price pass-through in spite of higher raw material prices, logistics and fixed costs. We revised up a business profit to JPY 68 billion, up by JPY 12 billion from the November forecast, another record number in a row after the previous year, supported by revenue growth from motorcycles sold in developed countries and reduced supply chain risk, although the exchange rate assumption of Japanese yen was revised upward.

Page 32. This page shows revenue by subsegment, namely motorcycles for developed countries, motorcycles for emerging markets, utility vehicles, ADVs and [indiscernible] and general-purpose gasoline engines. In addition to wholesales of motorcycles by country, we included a wholesale plan for FY 2022 in terms of unit number of motorcycles in developed and emerging countries and the number of units of 4-wheelers and [indiscernible]. Page 33. This page shows quarterly trend of revenue and business profit. Page 34. Here is market overview of Power Sports & Engine. U.S. and Europe are slightly slowing down in retail, but the market in general remains strong. In case the economic recession becomes real, the motorcycle market in North America will be affected, but we believe that a 4-wheeler market will continue to grow, and Kawasaki continues to launch attractive models going forward. Also, demand in emerging Asian countries is recovering. We will continue to work hard to keep this segment as a revenue driver by adapting to changes in business environment. There is no big change other than this. Page 35. Shareholder return.

As I explained earlier, the projected profit attributable to owners revised up to JPY 54 billion, up by JPY 9 billion from the previous forecast. In the meantime, we would like to keep the dividend forecast unchanged at this moment, considering that a company is planning wage raises to respond to inflation and external risks such as sharp appreciation of the Japanese yen. Please understand that our company would like to determine and announce the dividend later based on full year earnings results. Page 36. I would like to report 4 precious topics today. The first topic is Henatari, surgical robot system, which is drawing a huge expectation from the society. In October last year, Henatari was approved by National Health Insurance for gastroenterology and gynecology. Insurance coverage will qualify Henatari to perform 90% of robotic-assisted surgeries in Japan. The cumulative number of facilities introduced in Henatari was 31 as of December, as you see in the slide, but the number has reached 33 as of January end. More than 1,000 surgeries have been performed with Henatari as of January end. A single year market share in Japan is already above 20%. Last month, Henatari won Prime Minister's Award in the ninth Monozukuri Nippon brand competition. Henatari is highly recognized by medical doctors at home and abroad.

We plan to launch Henatari in Asia next fiscal year, starting in Singapore first. Page 37. The next project is applied directly under the President's command with market launch inside. It is a delivery service robot. Kawasaki and Fujita Health University conducted joint demonstration with the Kawasaki service robot [indiscernible] to reduce workload of health care workers and streamline in-hospital operation. During the demo, the service robot, [indiscernible] delivers business and medication instead of health care workers. The demo identified issues related to around-the-clock operation of robots, such as connectivity with infrastructure like elevators and security doors. We are planning to build a system to enable nonstop operation of our products for full-scale launch of the service in FY 2023. Page 38. This slide introduces our carbonate reality conscious motorcycles. Kawasaki motorcycles are very popular and both a top market share in Japan's 401 [indiscernible] market for 5 consecutive years. We will launch Japan's first motorcycle style battery EV this year, and we launched the industry's first strong hybrid motor cycle HEV in 2024. In early 2030s, we will develop a model cycles, powered by hydrogen fueled engines. Kawasaki will provide a wide range of our choices to all needs of people, who want to enjoy their leader in the carbon-neutral society.

Page 39. The last project topic I want to share today is hydrogen, which is a promising project as a core of our business portfolio. Since last year's formulation of a repower EU in Europe, there is a renewed momentum of a transition from fossil fuels. Renewable energy is expected to become the main power source in Europe, but the challenge is its testability to weather conditions. Stable supply requires good and highly adjustable backup power sources. We are confident that Kawasaki's prouder technology of a small- and medium-sized hydrogen gas turbine will deliver a solution to this problem. Kawasaki has a proven track record of 100% hydrogen power generation, which has been in operation urban areas, and small- to medium-sized gas turbines in Europe as well. We are receiving a flood of inquiries from all over the world, including RWE of Germany. Our technology is recognized as the world's front runner both in name and in reality. We are ready to accelerate our growth on a global scale as a significant hardware supplier in hydrogen power generation. Page 40. From this slide onwards, contain information regarding capital expenditure, depreciation, R&D expenses, the headcount at the year-end and so forth. Thank you.

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