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Edited Transcript of 6302.T earnings conference call or presentation 28-May-20 10:59am GMT

Full Year 2020 Sumitomo Heavy Industries Ltd Earnings Call

Tokyo Jun 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Sumitomo Heavy Industries Ltd earnings conference call or presentation Thursday, May 28, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Shinji Shimomura

Sumitomo Heavy Industries, Ltd. - President, CEO & Representative Director

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Presentation

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Shinji Shimomura, Sumitomo Heavy Industries, Ltd. - President, CEO & Representative Director [1]

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I'm Shimomura, the President of Sumitomo Heavy Industries. Thank you for your attendance. First, I'd like to extend my deepest sympathies to those that were infected by the new coronavirus and those whose lives and livelihoods were affected by the spread of the infection. The Sumitomo Heavy Industries Group complies with the government's basic policies on measures against COVID-19. And when going to work, we take fellow measures to prevent infections. We apologize for the inconvenience this may cause and ask for your understanding. I hope that the spread of the new coronavirus infection will end as soon as possible and pray for the safety and health of all of you.

Let me now start my presentation. At 3 p.m. today, we disclosed our financial results for fiscal year 2019 at the Tokyo Stock Exchange. I will present based on that material. As shown on Page 2 of this material, today's report consists of 3 items: financial summary for fiscal year 2019, future outlook and the medium-term management plan.

The first is the financial summary for fiscal year 2019. Please open to Page 4. Here, we show the financial summary for fiscal year 2019. The impact of the new coronavirus sharply slowed domestic and overseas economic activity from the fourth quarter of fiscal 2019, leading to a decline in demand. However, since our group's overseas subsidiaries financial year closed in December, the impact is still small, and the full impact on businesses results is expected to be in fiscal 2020.

In fiscal 2019, machinery demand entered an adjustment phase led by the automobile industry on a global basis, including Japan, Europe, North America, China and Southeast Asia, resulting in declines in orders, net sales and operating profit in all our segments. Furthermore, in the Construction Machinery and Ships segments, there was an impact on parts procurement from Typhoon #19, which hit last autumn, resulting in lower figures from those announced in October. As a result, orders totaled JPY 826.2 billion. Net sales totaled JPY 864.5 billion, and operating profit was JPY 56.8 billion. The operating profit ratio was 6.6%. Profit attributable to owners of parent decreased by 28% to JPY 32.8 billion.

As for dividends, JPY 112 was planned at the beginning of the year. That was changed to JPY 91 at the time of Q2 results announcements in line with earnings revisions. We will maintain that level. The dividend payout ratio will be 34%.

Operating profit by segment is shown on Page 5. Regrettably, operating profit declined in all segments. I will explain the details later in the section of the material, looking at each of the segments.

The analysis of changes in operating profit is shown on Page 6. As I mentioned at the beginning, there will be minimal impact from the coronavirus in fiscal '19. The effect of profit decreases of JPY 4.3 billion includes the impact of sales decline due to the typhoon. Of the JPY 10 million in others, approximately 60% was due to a shortage of production resulting from a decrease in the operation of mass-produced machinery. The remainder is a profit difference due to differences in the model composition.

Page 7 shows the balance sheet. We made aggressive investments during the medium-term management plan 2019 period. This term, we increased cash and deposits on hand and, as a result, interest-bearing debt increased by approximately JPY 50 billion to JPY 124.7 billion. Total assets increased by JPY 14.5 billion due to the consolidation of Invertek, which we acquired last November.

Cash flow statement is shown on Page 8. Free cash flow turned negative for the first time in 7 years.

Page 9 summarizes orders, net sales and operating profit for the 3 years of the medium-term management plan broken down by segment. This is for your reference. I will not go into the details here.

Next, I would like to explain the outlook for the future. Please turn to Page 11 of the document. The impact of the spread of COVID-19 is extremely large and widespread, and we expect it to be prolonged. The impact is expected to be particularly strong in mass-produced machineries. By region, the economies of China, Taiwan and South Korea are recovering relatively quickly, while the situation in other regions, including Europe and United States, is highly uncertain.

Regarding the situation in our group, production plants in China have returned to normal levels. In Indonesia, Malaysia, Vietnam and the Philippines, production and shipments have been suspended due to the impact of lockdown, but now they are gradually resuming operations and are heading toward recovery. The supply chains in these regions were impacted to different degrees. And in some cases, we experienced distribution difficulties. But currently, there remain no major impact. They may, however, be impacted going forward depending on this infection situation, so we feel the need to pay close attention.

Based on these circumstances, we have decided that it is difficult to conduct a reasonable calculation of our consolidated financial forecast for fiscal year 2020 and so will not be announcing such a forecast. We will continue to carefully assess the impact of coronavirus and make an announcement when it becomes possible to make a reasonable forecast. Since we will not be publishing the earnings forecast, we will also forego announcing the dividend outlook. We will also not publish the next medium-term management plan at this time.

And during fiscal 2020, we will focus on steering our business operations in the presence of COVID-19. We will continue to monitor the impact of COVID-19 and also make studies about the post-corona world and reexamine the plan and would like to announce the next medium-term management plan around May 2021.

The management policy for fiscal 2020 is shown on Page 12, aiming for coexistence with COVID-19. Here are some of the things we intend to pursue. First, in every situation, we will place priority on the safety of our employees and the maintenance of our operating basis. Although the emergency declaration has been lifted and economic activities are gradually resuming, we will establish a business continuity structure, assuming the existence of COVID-19, and continue to operate our businesses. We will take appropriate measures in areas that are expected to recover soon. We will thoroughly implement bottom line management and maintain financial discipline. In addition, with the aim of achieving continuous business growth, we plan to make research and development investments that will lead to the next medium-term management plan and also make strategic capital investments.

Furthermore, we will assess the future direction post corona and continue to reexamine the next medium-term plan. We will maintain our human capital and strengthen our continuous efforts toward achieving growth. From the following page, I describe each segment. The effect of COVID-19 in fiscal 2020 will also be explained in each section.

Please turn to Page 13, the Machinery Components segment. In fiscal 2019, due to an adjustment phase in demand for machinery, particularly in the automobile industry and the delay in the recovery for robots and other automation equipment, both orders and sales declined. And due to increase in expenses and the change in model configurations, operating profit also declined.

As for our outlook for fiscal year 2020, we expect that small-sized and precision models will see early recovery due to demand for consumer staples and investments in automation and material handling in China. However, for the mainstay medium-sized models, which have a broad base of users and large-sized models used for mining and large industrial machinery, we expect it will take time to recover. By region, we expect an early recovery in China. But at this point in time, we recognize that other regions are in very difficult situations.

Next is the Precision Machinery segment. Please turn to Page 14. In fiscal 2019, overall orders, sales and operating profit declined year-on-year due to sluggish demand for electrical and electronic equipment in China and lower demand in Japan and Europe leading to lower numbers for Plastic Machinery. Precision and other equipment saw an increase in orders, sales and operating profits, supported by strong demand for semiconductor-related products.

In fiscal 2020, we expect that the situation for the automobile industry and the electrical and electronics industry in Europe will remain particularly severe. Regarding the precision and other equipment, we expect that the models for semiconductor manufacturing equipment will be relatively strong, while we expect to see impact for cryocoolers for MRI and other physical chemical equipment in the future. Although there have been no major changes in the semiconductor industry to which we supply our semiconductor-related models, we see investments tending to be delayed, and the momentum is not as strong as last year.

Page 15 talks about the Construction Machinery segment. In 2019, orders, net sales and operating profit of hydraulic excavators declined due to reduced demand in the ASEAN region, sluggish growth in the Chinese market and typhoon damage causing a problem with our part suppliers. Mobile cranes also declined due to lower demand in Japan and North America. In fiscal 2020, excavator demand in China is expected to recover rapidly, while other regions are expected to see declines. We expect our shipments to also decline, particularly to Europe and United States.

As for mobile cranes, there is a risk of cancellations due to the stoppage of business negotiations in Japan at present, but we think it will become a little more stable going forward. There is still uncertainty in North America, and it is difficult to project at this moment.

Next is the Industrial Machinery segment. Please turn to Page 16. In fiscal 2019, orders for industrial cranes remained unchanged from the previous year due to strong demand for products related to electricity and ports. In fiscal 2020, we believe that the steel industry will have a particularly difficult time with regard to industrial cranes. However, this should not have a significant impact on our earnings for this fiscal year because of the relatively long lead time.

With regard to presses and medical equipments, in addition to the presses for automobiles, in the medical field as well, measures against corona infections are currently prioritized. And we believe that the projects in which our medical equipment excels tend to be delayed.

Page 17 explains the Ships segment. In fiscal 2019, we recorded an operating loss due to a decline in sales and the impact of typhoon. In fiscal 2020, we expect market recovery to be delayed and the difficult environment to continue. We intend to minimize losses by accumulating repair projects.

Finally, Environmental Facilities & Plants segment. Please turn to Page 18. In the energy plant business, in fiscal 2019, there was a year-on-year decrease in large-scale projects in Japan, and projects in the wastewater treatment plant business also decreased. As a result, orders decreased significantly. Sales and operating profit remained unchanged due to backlog of orders.

As for fiscal 2020, there has been little impact for boilers in the domestic market, both in terms of the market involvement and the progress status of projects. However, SFW projects have been delayed due to lockdown and other regions. The wastewater treatment plant business is expected to be strong due to backlog of orders.

Finally, I will explain the medium-term management plan. As I mentioned earlier, we have decided to reexamine the next medium-term management plan. Here, I would like to explain the results of the medium-term management plan 2019, which ends in fiscal year 2019.

Please turn to Page 20. First, the overall review of the medium-term management plan 2019. We made aggressive M&A overseas, and we were able to conduct growth investments. And we believe we have achieved good results. In fiscal 2018, in particular, thanks in part in the favorable market conditions, we were able to exceed all numerical targets. However, in fiscal 2019, as I explained earlier, we still have not reached the goal of becoming a highly profitable company, although we were hampered by the effects of recession in Europe and the U.S.-China trade war.

On Page 21, we outline the 5 basic concepts in specific developments to be implemented in the medium-term management plan 2019. We have implemented the plan under these basic policies. The details of these efforts will be explained on the following pages.

Page 22 summarizes the results of the 3-year medium-term management plan 2019. Again, in fiscal 2018, we achieved all of our numerical targets. We made aggressive capital and R&D investments to achieve steady growth and transform ourselves into a highly profitable company. Capital investment, in particular, exceeded our initial expectations.

Starting on Page 23, I explain the specific measures under the 5 basic concepts. Please look at Page 23. First, this graph shows the growth of the overseas business, which we have promoted to ensure stable growth of the company. Overseas sales increased steadily due to M&A. Sales increased particularly in North America and Asia, including China and Europe.

Next, we have made investments in accordance with the roles of the businesses to transform the company into a highly profitable business entity. That is shown on Page 24. We made aggressive capital investment and R&D investment.

On Page 25, we show the sales of the service business, which we were focusing on as part of our initiative to create excellent products and services. We have achieved steady growth. And in the future, we intend to further strengthen our business by focusing on top-quality products and customer pool.

The status of new consolidated companies is shown on Page 26 for your reference. I will not go into the details of this now.

Page 27 describes our CSR activities. We have actively promoted CSR as a basic concept in the current medium-term management plan. As a result, we have come to defining the materiality of our group. We actively engaged in dialogues with 20 key divisions to lay the foundation for value-creating CSR, and we are able to share the ways in which each business contributes to society. In order to increase the environmental value of our products, we are evaluating environmentally friendly products and reflecting that into our product development.

In the environmental field, we have disclosed the amount of CO2 emissions from the use of our products and the amount of contribution to CO2 reduction by our customers through the use of our products. As a result of these activities, we have been included in the S&P JPX Carbon Efficient Index. We have also acquired third-party certification for CO2 emissions from our own manufacturing operations in order to improve the reliability of our data.

From fiscal year 2016, we have been working to promote diversity and opportunities for women. Although the overall number of female employees is small, the number of female managers has increased 1.3x over the past 3 years to 16.

In fiscal 2018, we disclosed inappropriate inspections. And since then, we have conducted company-wide quality audits and compliance surveys to strengthen preventive measures. We will continue to strengthen our corporate governance.

Page 28 is sales breakdown by region attached as reference.

That's all for today. Thank you very much.

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