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Edited Transcript of 6409.T earnings conference call or presentation 7-Nov-19 10:59am GMT

Q2 2020 Kito Corp Earnings Call

Tokyo Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Kito Corp earnings conference call or presentation Thursday, November 7, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Yoshio Kito

KITO Corporation - President, CEO & Director

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Presentation

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Yoshio Kito, KITO Corporation - President, CEO & Director [1]

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Thank you very much. My name is Kito. Thank you very much for coming in spite of your busy schedule. So allow me to go right into explaining our overview of our first half. In other words, the financial results for the quarter ended September 30, 2019, of KITO.

First of all, the outlook towards the market and the economy. There are some uncertainties. And I do believe people are feeling a little more anxiety. And compared to last year. I do have to admit that we're not exactly feeling the tailwind that we have been expecting since last year. And I think that very much expresses how we were spending this first 6 months.

But amidst this concern, I still do believe that we were able to take in the demand in a very steadfast manner. And so we have pretty much been able to accomplish the result that we have been expecting at the beginning of this fiscal year.

Our business, as you know, is very much diversed. In other words, we do have a diverse range of customers, and we do serve to diverse industries. If you look at our business structure, you can find that we're also very much diversed region wise.

In other words, we are able to very much diversify the risks. And I think that very much worked well in allowing us to have a very sound, a stable performance so far.

I would like to go into details. But first of all, for sales, that was JPY 27.5 billion. In other words, compared to last year, this is a decline by 2.3 percentage points.

Operating profit, that was JPY 2.180 billion, which is a decline by 15.1% versus last year. And when it comes to recurring profit, there's more decline.

In other words, that was 22.4% decline, achieving JPY 1.8 billion. And as for net profit, that was JPY 1.83 billion.

First of all, sales and operating profit. I do believe we have been able to and pretty much in line to what we had been disclosing as part of our guideline. In other words, we initially had been saying that we'd be achieving JPY 28 billion in sales and JPY 2.5 billion in operating profit. We have pretty much been able to end this first half in line. But then when you go down below, for example, we do have a little more impact coming from currencies or perhaps for tax, which is why you find a more decline when it comes to other profits. But then, if you again look at the performance and the profit that we've been able to generate from our main business line, you can find that we have been able to achieve pretty much in line to what we have been expecting.

So I'd like to also go into the trend of sales and operating profit margin for quarterly -- on a quarterly basis. We do find the first 2 quarters, we have been finding a bit of a decline compared to last year. But then when we try to analyze some of the positives -- positive and negative impacts, I think we conclude, it is very much result -- the result of currency.

For example, if you look at U.S. dollars, U.S. dollar versus yen, we expected it would be JPY 110 versus dollar, which is now JPY 108, which is not a large gap. But then when we look into other currencies, we do have a bit of a gap. In other words, euro or Canada dollars or RMB. We do find the trend is a bit stronger.

Yen -- in other words, yen is appreciating versus these currencies. And that is why we're finding a bit of a decline when it comes to sales and profit.

Let me now go per region. First of all, in Japan, compared to last year, we have been able to find a positive result, slight but yes, positive. When we look at the market, we do find the entire market looking at having a little more stricter attitude towards capital expenditures. And this is something that we'd find even amongst the peers, but still we have been able to end a bit positive versus last year.

For the Americas, that is just a 0.9 percentage points decline versus last year, which is a decline by JPY 111 million, which is very much about currencies. Where do we find more decline versus last year? That will be Asia and Australia. For Asia, we do find a larger impact coming from South Korea. This is something that I have already been reiterating many times.

Our business in South Korea, we do have a high exposure to this specific display industry. Unfortunately, ever since second half of last year, this is an industry where we have had a very slow move or actually no move in terms of capital expenditures.

Even for other industries, we do find that South Korea, over all in all, is finding a bit of a difficulty at this moment. If there is any area where there might be some action, that would be the ship building. Otherwise, South Korean economy is struggling at the moment. And that is why we are also finding a tough time at our -- at South Korea.

And so again, most of the decline we're finding in Asia comes from South Korea.

Other areas. Now there is one market, which is not belonging in any other segments thus far, which will be Australia, as this is in the others. At the beginning of the year, we were a bit more optimistic in Australia. However, the Australian market, especially natural resource market, it is -- it does have a relation or it does have dependencies to the Chinese economy.

In other words, when China economy decelerates, this does impact this Australia natural resource market, and that is why we're having some slowdown in Australia as well.

Let me go into a little more detail per region now. First, Japan. Again, the entire industrial machinery market has experienced a tough first half. Machine tools, as you know, have been growing a very slow move in July and August. And with that, for example, any cutting equipments or assembling areas. To be more specific, some electrification equipment industry, including bearing, these people are experiencing tough time. Compared to that, the area, the industry that is having a little more favorable turn would be the logistics. Even amongst this industrial machine industry, it seems like logistics are able to maintain some certain amount of demand. Now what about us? Where do we belong in this industrial machinery? So we are often acquainted as someone who would fit in the logistics or material handling, but then it is quite difficult to find a specific benchmark that exactly fits to what we do. But then again, we do have a diverse range of customers. And so even when the entire market is not exactly facing a robust situation, we still were able to find some stable amount of demand.

We -- as a matter of fact, we're being a little more conservative. We had been expecting a little more downside for the first half, but it seems like we do not have to see as much decline. So compared to what we had been expecting at the beginning of the year, I think we still can say that we are making a fair turn.

Now when we look at areas where we cater to, that would be equipments that would have to do with some factories, but then -- for production, but then we also do cater to any infrastructure-related areas, in other words, civil engineering or construction.

We were able to find more activity for the infrastructure building. And that is still something that we find. In other words, reinforcement of the existing infrastructures or developing new infrastructures. This is something that we still do find at the moment. But then this is an area where we serve via our rental companies. In other words, it doesn't mean civil engineering and construction would have a direct impact immediately to our shipment. When it comes to our shipment, we already have been -- we already had seen a peak last year. And so therefore, we thought that people would not purchase as much this year. In other words, we have been expecting a little more slowdown for this year. But then when it comes to how much rental companies are lending. It seems like these companies are having a very good time at the moment. It is in a very peak time. And of course, each rental companies, they would have their own timings when they would close their financial figures. There are some companies that is going to be closing their financial figures now. There are some companies that is entering a new year. But then, these companies are starting to place orders to us as we try to turn into the second half and onwards. And so first half, we have been seeing a decline vis-à-vis last year, but we do expect the figures should turn favorable recovery when we go -- when we look at our second half. And also, another thing, which might be just a tentative move, we are expecting Tokyo Olympic Games next year. And so we do believe there will be some demand coming in. And of course, I do have to admit that we yet do not see much visibility or a specific way to define what is directly going to fit the demand for the Olympic games. But then to give you an example, there are already stadiums, there are already buildings and some of the equipment is to be installed there. That is exactly where we're finding more orders or inquiries. To give you a little more specific example.

For example, electric bulletin boards or lightning pictures for these venues or stadiums, these are the areas where we are finding more demand and order, which is something that we did find, especially in the first half.

So again, companies that still has large exposure to Chinese market is still finding a slow growth even in Japan, but still, it seems like people in the semiconductors are finally starting to find some recovery.

And so all in all, I do believe the Japanese economy, the market, people in this sphere is going to find a little bit of a recovery as we go down the road.

Now next into the Americas, as you can see here, on a local currency basis, both quarters, first and second or to be more specific, year-to-date, all the way to the second quarters, we've been able to find a positive turn to some extent. But then at the same time, we think it is a very much flattish growth at the moment. Again, our Americas business is very diverse. We do have a diverse area of customers. So it is quite hard for us to really define which industry is triggering, boosting our growth or which industry is actually supporting our growth, but still, all in all, I do believe there is this certain amount of demand, even for the Americas market.

But then at the same time, I have to admit, the overall market is in a decelerating trend. Last year, 2018, it was the large growth time. But then, in 2019, the industry outlook is already saying that we're going to find some slowdown. Usually, the market that we focus in the U.S. would have a cycle of 4 to 5 year span. And within this span, there will be acceleration and then a deceleration. And at the moment, we are in a deceleration phase. There's still other concerns. For example, the trade war between China and also what is going to happen to the presidential election to -- that is to happen in 2020. These are some of the events that we will have to keep an eye on as we look down the road.

But amidst this situation, we have -- we are going to make sure that we still would be able to see some positive figures. We want to make sure we will be able to maintain the level of our business performance, the size of the business as we try to expand our market share. Some of you may remember that within our U.S. business. There was an event that we initiated. In other words, 3 years ago, we decided to replace our IT system in the U.S.

The following year, in other words, 2 years ago, that is when we did some IT system replacement in Japan. And because of that, for 2 years in a row, we have to very much shrink, downsize the amount of shipments that we'll be able to offer to U.S. customers. And I do believe that 2 years were the time when we had to lose some market share versus our peers.

But finally, we're now able to normalize the amount of shipment we'd be able to offer to our U.S. customers, and that is why we are seeing an expansion to our market share.

So again, the overall market is in a decelerating trend, but still, we have been able to capture certain amount of performance.

Turning to China. Many, I understand, have been able to look at our Chinese performance with a good surprise. The Chinese economy is set to be on a decline. But luckily, we still are able to enjoy growth. So again, it is not that the entire market is growing, being invigorated. As a matter of fact, the entire market is on a decline. For example, the amount of investment in the auto industry is being downsized. But then there are, for example, infrastructure investment that is still going on, increasing. Even in the autos areas. Commercial vehicles, for example, trucks and bus. This part of the industry is still able to find a certain level of investment, whereas the usual passenger car area may not be. But then all in all, the overall market is still finding a decline. Fortunately, we still have been able to expand our business through increasing our market share. What's behind this? And I do believe I have had a chance to tell you about this in a separate occasion. But it has to do with the IP infringement eradication campaign that is being initiated by the Chinese government. And it seems like we are able to enjoy some advantage through this.

In the past, we had a great concern with a lot of -- out of our counterfeit products in the -- in China. There were some Chinese players who were offering our counterfeit products. And there was a TV program that focused on some crackdowns to counterfeit product manufacturers, probably to demonstrate what they're doing to the U.S. market. But what happened, what was introduced in this TV program was a crack down to a certain company, which had been offering our counterfeit products. And so because of that, there was this time, where we have been able to take back some market share that we have been losing. In other words, there are some events that is proving favorable for us. So those events will be part of the reason why we have been able to increase our sales in China. And at the same time, more people in China are becoming more keen in offering safety to their workers. People's interest towards safety and quality, again, is working as a tailwind for us. So again, the overall market may be shrinking, but fortunately, we still have been able to increase our sales in the China market. Asia. This is something I've already explained to you. In other words, most part of this decline comes from South Korea. It's a market that we, at the moment, do not find much visibility for recovery. And it is quite difficult to say when this market may recover. Some impacts that we have to take concern, maybe the row we're finding between Japan and South Korea. But then it is not that we are seeing any direct impact from this anti-Japanese product campaign that is happening at the moment in South Korea. Even when I ask my people in South Korea. They are telling me that now they almost don't feel any impact at all in our daily life. So that is fortunate, but still, again, we have large exposure to display market in South Korea, which, again, is an area where we don't have any bright outlook. We are now hearing there might be some recovery. There may be some expectation for a recovery in the semiconductor market. And all in all, I do expect the overall South Korea market would gradually recover, but it seems like we still will have to struggle a little more.

On the other hand, what about Southeast Asia. In Thailand, there is an increase in auto investment. And so therefore, we do believe we should be able to keep on finding a very sound, stable performance.

So with all that in mind, we are expecting JPY 2.2 billion of operating profit. Compared to last year, again, there is going to be some currency ForEx impact. But then the largest impact that we can point out to here is the increase in SG&A. This cost increase is what is directly impacting this decline in operating profit. But then, if we look at some of the positive and negative factors, I can just say that there were some events that just happened to increase our SG&A this time. For example, depreciation cost increased, which is about hundreds of million yen, and there was also a company that we decided to include in the consolidation at the end of last fiscal year, which is KITO Chain Italy.

The expense, the cost for KITO Chain Italy will be fully booked this year. This is not something that happened until last year, which is impacting the numbers by JPY 150 million or so. And so half of this increase in the JPY 625 million can -- I think, I can say it comes from this increase in depreciation as well as the cost for Italy chain -- KITO Chain Italy.

We've also decided to review how we book our standard cost. For example, some of the COGS element is now being booked in -- as part of the SG&A. So that is a bit of a change in the accounting. But then, in total, we are, again, finding JPY 600 million amount of negative impact to the operating profit.

Here is our balance sheet. No major impact, but then, I will still highlight the inventory increased by JPY 1.8 billion. This, again, comes from KITO Chain Italy. Inventory of KITO Chain Italy is being booked from this fiscal year. So most part of this JPY 1.8 billion comes from that inventory part. Actually, more -- about half of this JPY 1.8 billion comes from KITO Chain Italy now being consolidated.

We still have approximately 5 months till the full year end.

Now this arrow you find here does not indicate how we look at the industry or the market, the arrows indicate how we view our own performance. Japan, we expect it is going to be a pretty flat performance vis-à-vis last year.

Our business, especially as we look at our track record, I think we can say there is always a time lag to what you find in our performance versus what happens in the market. And so that is probably why many people would now ask us that the orders of machine tools is now going to impact KITO's figures. Will there be a slowdown coming from the machine tools area. But then, at the moment, we do not believe that is going to happen. We don't see signs of that. We do not expect that will happen in the future as well, and we can say that because of the inquiries and some of the order backlogs that we have.

We rather do believe that we should see some increase for the performance we can make in Japan. But at the moment, we're just going to keep it a flattish expectation.

The type of business we do, it's not that we have such a long order backlog that enables us to see such a long-term outlook, the visibility that we would have from the order backlog is approximately 2 or 2.5 months worth. And looking at this 2 to 2.5 months of order backlog, we don't find any reason to feel worried.

As some of the inquiries that we are finding at the moment is of the same scale that we found 12 months ago. And there are some good news. For example, last year, at this moment, we did not really find new orders for the next fiscal year. This is something that we are already seeing now. Usually, orders, inquiries for the next fiscal year starts to become prevalent from December. But still, we're not in December yet, but we still are already finding new orders for next fiscal year. And so that is what gives us comfort in saying that we should not find a large decline compared to previous year as we look down the road. For Americas, yes, I will have to say there are some anxieties as we look down the road in the market. I already did mention earlier that the entire market is now on a declining trend or pace. But still, we do believe we should be able to maintain a flattish performance again. The overall industry has already given out -- given the first outlook for next fiscal year. And here, in this outlook, it says that there might be another expansion increase in the demand from second half of next calendar year 2020. I think it's fair to say that we're now seeing this fog to clear up. In other words, it is a dawn of the next growth phase. And so again, by increasing our market share, we do believe we will be able to maintain this performance -- the same amount of performance vis-à-vis last year as we end this 2020 March period or perhaps see some slight increase.

Turning to China. Again, the entire market is decelerating, but then we only have -- we don't even have 2 months left for this year. And we are pretty confident in saying that we should be able to see some positive turns compared to last year.

Asia and Europe. First of all, Asia, again, we'll just see a direct impact of the decline we are seeing in South Korea. What about Europe? Compared to U.S. or Japan, we are seeing more impacts from the decelerating market. For example, in Germany compared to 2018. It seems like the pace of orders has become slower. But still, we are now able to have new entities in our consolidation. Every year, we're seeing another new consolidated subsidiary. So again, our company in Italy is now fully in our consolidation, but the end of this fiscal year, we are also going to add in another consolidated subsidiary in Finland. And so that is how we should be able to keep on expanding our performance. With that said, on the other hand, I will also have to admit that we did make some slight downward revision for this fiscal year. We do have reasons of the downward revision per region. But again, one reason would be currency. Currency, Asia and Australia. These are the 3 elements that we are finding difficulty compared to what we have been expecting at the beginning of the year. And so that is why we have to make some adjustments to our forecast.

Currency, for example, versus U.S. dollars at the moment, we are JPY 109 versus dollar. So we don't believe we will have major impacts coming from U.S. dollars, but then Canadian dollars or euro or RMB. These are the currencies that is impacting our figures bit by bit. And so that is why, all in all, it is going to be JPY 60 billion of sales.

Proportion wise, Japan is still increasing its part. And so that is why sales contribution from Japan is 27%; Americas, 47.5%; China is increasing its proportion to 11.3%.

Profit. Again, there are some slight adjustments coming from currencies. But then as we look at our second half, we do believe we will be able to surpass the sales and operating profit that we marked last year amidst this environment.

The final part is about dividend. So yes, we are -- we did announce some downward revision. However, the dividend payout for the first half JPY 24 per share and then second half at the end of the year, JPY 24 per share, total will be JPY 48. And that is something that we still mean to keep. That concludes my presentation. Thank you very much.