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Edited Transcript of 7012.T earnings conference call or presentation 6-Feb-20 4:30am GMT

Q3 2020 Kawasaki Heavy Industries Ltd Earnings Presentation

Kobe Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Kawasaki Heavy Industries Ltd earnings conference call or presentation Thursday, February 6, 2020 at 4:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kenji Tomida

Kawasaki Heavy Industries, Ltd. - VP, Assistant to the President, Senior Executive Officer & Representative Director

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Presentation

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Kenji Tomida, Kawasaki Heavy Industries, Ltd. - VP, Assistant to the President, Senior Executive Officer & Representative Director [1]

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Good afternoon. I am Tomida of Kawasaki Heavy Industries. Thank you for joining us today. Now I'd like to present on the financial results for the third quarter FY 2019. Please turn to Page 3 of the presentation material. This slide shows a summary of financial results. As for the overview, orders received and net sales are as shown here. And the decrease in orders might attract attention, but this is mainly due to the reactive downturn after the large defense project orders in Aerospace Systems and Ship & Offshore Structure segment, and there were no major changes.

Operating income was down year-on-year. But this is a result of the balance of many positive and negative factors. And recurring profit and net income attributable to owners of parent will be elaborated in the following pages. Full year forecast will be provided later. And the progress as of the end of the third quarter was close to 70%, both in orders and sales, and they were in line with our projection.

At the bottom of the page, weighted average exchange rate and net sales in foreign currencies are shown. Yen appreciated against dollar and euro by JPY 2.5 to a dollar and JPY 7.3 to euro respectively.

The table on Page 4 shows year-on-year change by segment. I'll explain this later more in detail by segment.

On Page 5, let me explain year-on-year variance analysis of operating profit. Operating profit decreased by JPY 5.8 billion from JPY 36.8 billion in the third quarter of the previous year to JPY 30.9 billion in the corresponding period of this year.

Let me walk you through the various factors. First, plus JPY 8.5 billion is reversal, a one-off loss in Rolling Stock business recognized in the same period of the previous year.

As for M9 contracting Long Island of the United States, the expense for the delay of delivery of pilot Rolling Stock, JPY 1.4 billion was marked in the first half. And the mass production process was reviewed, and we examined material costs among others again. And in the third quarter, expense of JPY 2.3 billion was added and the total cost was JPY 3.7 billion.

Regarding FX, as mentioned before, yen appreciated against the U.S. dollar and euro in weighted average exchange rates and profit decreased by JPY 7.6 billion. As for change in sales, profit decreased due to sales decline in Precision Machinery & Robot and Energy System & Plant Engineering. However, it was more than offset by profit increase by sales increase in Aerospace Systems and the total impact was plus JPY 5 billion.

Regarding change in product mix and other factors, GTG plant for Turkmenistan in Energy System & Plant Engineering segment was completed. And after that, we review the expense for further responses and the profitability improved substantially.

On the other hand, due to fixed cost increase for hydraulic components, sales declined in semiconductor robots, cost increased with sales growth of new engines in Aerospace Systems and amortization of development costs for new ships and reduced operations in ship and offshore structure. Profit decreased JPY 5.3 billion in total.

In SG&A, profit was down JPY 2.7 billion due to increased R&D costs mainly in hydrogen-related R&D cost, which peaks out this year.

On Page 6, let me explain changes in nonoperating income and expenses. Nonoperating income and expenses improved JPY 1.3 billion to minus JPY 15.6 billion. Major reason for variance is as shown here. Payment for in-service issues of Trent 1000. This is a recognized payment based on RRSP contract. And in addition to minus JPY 1.1 billion in the second quarter, JPY 6.5 billion was added after the scrutiny of loss recognition of Rolls-Royce, which was already reported on November 11. And the total sum was JPY 7.6 billion.

But compared with the corresponding period of the previous year, it went down by JPY 2.1 billion. As for extraordinary income and losses in the second quarter, JPY 1.2 billion of gain was marked on the sales of corporate housing premises. But due to the withdrawal from the parts of business in Energy System & Plant Engineering, extraordinary loss of JPY 2.3 billion was posted.

Let me explain business conditions by segment. Page 7 shows Aerospace Systems. Results of the third quarter 2019 orders, net sales and profit and their year-on-year comparisons, as shown here.

As for the forecast for the full year, regarding orders received, considering reduced production of Boeing 787 from 14 to 12 aircraft, we revised down orders by JPY 5 billion. In addition to the progress of cost reduction in Aerospace Systems, partly due to swift sales, information collection of some programs in commercial aircraft engine sector, both sales and profit were revised upward from the announced figures in October.

Page 8 shows Energy System & Plant Engineering. As for the results of the third quarter, orders, sales and profit, as shown here. Despite sales decline, especially due to profitability improvement of GTG plant for Turkmenistan and improvement in energy-related business, profit increased drastically. As for the forecast for the full year, orders were revised down by JPY 50 billion, considering time lag of large projects.

Forecasted profit was revised up by JPY 4.5 billion due to confirmed profitability improvement of large project in this year.

On Page 9, the Precision Machinery & Robot. As for the results of the third quarter, as explained in the second quarter meeting as well, impacted by inventory adjustment by Chinese construction machinery makers mainly in hydraulic equipment, semiconductor market sluggishness in robot business and the U.S.-China trade friction, orders and sales decreased year-on-year.

Operating income decreased to JPY 5.2 billion, down by JPY 9.7 billion year-on-year due to robots sales decline, sales mix change mainly in semiconductor business and cost increasing hydraulic business.

As for FY 2019 forecast, market deterioration impact was already reflected in the forecast in October. But in the following period, in Japanese construction machinery market, supply from construction machinery part makers delayed due to typhoon Hagibis and construction machinery makers production plan had to be revised.

In robot business, despite the recovery for semiconductor due to slow market recovery mainly in China, operating income of the whole segment will be short of the forecast in October by JPY 1.5 billion.

Now let me add some more comments on semiconductor robot. Monthly production volume of semiconductor robot in the second half is double the volume of the first half, and the production has been stable. Along with the firm demand for automotive in the fourth quarter, profit will be steadily growing. In the whole segment, we achieved the operating income of JPY 14.5 billion.

Page 10 is for Ship & Offshore Structure. As for the third quarter results, year-on-year comparison of orders and sales are as shown here. Regarding operating income, in the previous year, sales of profitable LNG and LPG carrier were booked. But in this year, operating income was down by JPY 3.5 billion year-on-year, mainly due to lower operation and lump sum recognition of development cost of a new LPG carrier that we obtained its order.

But they are already included in our forecast at the beginning of this fiscal year, and they are in line with our projection.

Full year forecast. Orders of 2 LNG carriers were included in the plan, but time lag is expected, and orders will be placed in the following year.

So orders were revised downward to JPY 60 billion, down by JPY 40 billion. Sales forecast will remain unchanged, without any major changes. And operating income already improved by the periodic expense reduction, including R&D costs.

As a result, EBIT, which includes a Chinese equity method affiliates profit will be breakeven. In Ship & Offshore Structure, we will continue to focus on the environmental regulation through LNG, LPG carriers and gas-fueled vessels.

And we will promote business shifting to China through technological transfer to Chinese shipyard. In addition to the consolidated business management including the more diverse use of Sakaide Works and the development of new businesses, we continue to promote structural reform.

Page 11 is for Rolling Stock. As for the third quarter results, orders and sales were as listed here. But orders with the improved profitability have been built up mainly in Japan. On profit front, as mentioned before, in addition to M9 project-related costs, fluctuation for the U.S., overseas parts have been declining. And as a whole, the growth over the previous year was just JPY 3.3 billion.

As for the full year forecast, we have examined the sales forecast closely, especially of M9 and assumed sales will be down JPY 10 billion.

Quarterly profit is on the recovery track. But the planned earnings improvement will not be achieved. And we revised down the profit forecast by JPY 3 billion to minus JPY 2 billion.

We have already shipped 48 trains of M9. Manufacturing process was realigned by the review of delivery schedule this time, and we assume that there will be no major loss risk. As for other projects in Japan and Asia, in general, they are proceeding in line.

Page 12 is for Motorcycle & Engine. As for the third quarter results, year-on-year comparison of sales, as shown here. As for operating income, in addition to appreciation of yen, the downsizing trend of motorcycle in developed countries affected profit. And operating income was down JPY 4.5 billion. For the full year forecast, mainly for the utility vehicles in the U.S., we made the notification of recall to the U.S. authority.

Relevant costs, including repair costs and the impact of sales suspension will be about JPY 4 billion. General purpose engine has been increasing sales steadily, but the growth is lower than our initial forecast. And as a result, fixed cost spent for the production structure expansion will not be fully covered.

Bearing those in mind, we revised down sales by JPY 5 billion to JPY 345 billion and operating income was revised down by JPY 6 billion to JPY 3 billion.

Page 13 is for the balance sheet. Since the end of the previous fiscal year, balance sheet has been expanding, but this is a usual seasonality with more payment at the end of the fiscal year, as shown in the chart of right bottom. That said, interest-bearing debt increase is larger than usual. So I'll explain this on the following page of cash flows.

Due to increase of interest-bearing debt, net D/E ratio is high at 155.3%. But for the full year, we would like to strive to approach to the level shown in the current midterm plan 2019 through consistent improvement.

Page 14 shows cash flows. Free cash flow worsened by JPY 59.7 billion year-on-year to minus JPY 334.6 billion. And there are mainly 3 reasons for this. In Aerospace Systems segment, working capital increased with a sales increase, and it includes the increase in working process. What is unique in this fiscal year is a payment site. Site for some contractors was shortened by 30 days. And there were cash outflow for the project where allowance was recognized in the previous years.

For example, Trent 1000 and Rolling Stock are the cases. And because of the overlap of these 3 factors, cash flows deteriorated.

For the full year of FY 2019 due to aforementioned reasons, cash position will be tight. But we will make maximum effort to improve the cash flows through capital efficiency improvement and push for further payment. To be specific, we have already started to work on sales of strategic shareholdings, use of external capital for nonbusiness assets, request for advanced payment, optimization of payment site for the improvement of cash conversion cycle and the review of CapEx plan. Financial burden will be peaking out this year.

Page 15 shows full year forecast for FY 2019. FX assumption remains unchanged at JPY 107 to a dollar and JPY 118 to euro. As for the full year forecast, as explained in each segment, orders received were revised down JPY 100 billion from the previous announcement to JPY 1.550 trillion due to contraction in Energy System & Plant Engineering and in Ship & Offshore Structure.

Net sales remain unchanged at JPY 1.660 trillion but operating income was revised up to JPY 60 billion due to improvement in Energy System & Plant Engineering and Aerospace Systems.

Recurring profit and items below, remain unchanged from the announcement in the previous month, as expense for Trent 1000 is included in nonoperating income and expenses. Dividend will be JPY 70 per share as announced before.

Finally, in order to achieve the goal, as for FX, now yen has been depreciating and weaker than our assumption. And in each segment, earning improvement initiatives are planned. So we will monitor trend closely and try to achieve the goal.

As for coronavirus implication, as of today, future prospect is uncertain. And we'll keep close eye on that.

And the following pages are mainly for the reference materials. Page 16 shows full year forecast and the results in the previous year by segment. Page 17 shows ROIC.

On Page 18, there was a slight change in R&D because of cost decrease and the time lag in hydrogen project and expected across-the-board cost savings. There are no changes in other items, as you see. And historical data and other reference materials are also included. So please refer to them later. This concludes my presentation. Thank you for your attention.

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