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Edited Transcript of 7012.T earnings conference call or presentation 31-Oct-19 4:30am GMT

Q2 2020 Kawasaki Heavy Industries Ltd Earnings Presentation

Kobe Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Kawasaki Heavy Industries Ltd earnings conference call or presentation Thursday, October 31, 2019 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, ladies and gentlemen. I'm Tomida. Thank you for joining us today.

At the end of September, we revised our full year forecast, and this time, we hold results meeting on conference call. I would like to present according to the presentation material.

First, please turn to Page 3 for the summary of financial results. Orders received and net sales are as shown here. Decline in orders might look noteworthy, but this is mainly due to reactive downturn from a defense project in Aerospace Systems and a large order of overseas project in Rolling Stock in the first half of the previous year. And it does not indicate any major changes.

Operating income increased slightly year-on-year, and this is a result of offsets of many positive and negative factors. And I will elaborate on them on Page 5.

At the bottom of this page, weighted-average exchange rates and net sales in foreign currencies are shown. As shown here, yen appreciated against dollar and euro, respectively, by JPY 1.4 to $1 and JPY 6.1 to euro. Against other currencies besides dollar and euro, yen appreciated against most of currencies.

In the second quarter, the progress in the first half against the full year target was 15.5% and slightly improved from 13.2% of the corresponding period of the previous year. By sustaining the efforts for improvement, we would like to achieve the full year target, which was revised on September 30. In addition to the revision in sales and profit, which were announced in the previous months, orders forecast was revised down by JPY 50 billion based on the changes in foreign exchange rate and market conditions of Precision Machinery & Robot. I'll explain in detail by segment one by one on sales and profit, the forecast after revision and the reasons for revision.

Page 4 shows orders received, net sales and operating income by segment. They vary considerably by segment, so I will elaborate on them from the next page.

Page 5 shows details of year-on-year change in profit. Operating profit increased from JPY 8.4 billion in the corresponding period of the previous year to JPY 8.6 billion in this year, up JPY 0.2 billion year-on-year.

Let me go through variance analysis. First of all, plus JPY 8.5 billion is reversal and one-off loss in Rolling Stock segment recognized in the first half of the previous year. And minus JPY 1.4 billion is expenses spent with the review of the delivery timing of pilot Rolling Stock under M9 contract. However, majority was already recognized in the first quarter, as already announced. In the following pilot, Rolling Stock, delivery of mass-produced Rolling Stock has already started, and the additional loss is not expected here.

Thirdly, as for FX, foreign exchange rates, as mentioned, yen appreciated against the U.S. dollar and euro in weighted average exchange rate for sales year-on-year, and the impact was minus JPY 3.7 billion.

As for change in sales, despite profit decline due to a serious decline in Energy System & Plant Engineering, profit increased substantially by sales increase in Aerospace Systems, and the total impact was plus JPY 2.8 billion. As for change in product mix and other factors, it affects profitability in various manners. Sales in semiconductor robot decreased. And in Aerospace Systems, cost increased in line with the sales increase in new engines. And with some other factors, in total, impact was negative JPY 5.6 billion.

As for SG&A, we observed the reactive increase from the provision for doubtful account for overseas distributors in motorcycle business in the first quarter of the previous year. But R&D cost, which peaks out in this year for hydrogen, increased. And as a total, impact stayed almost flat year-on-year.

Let me explain mainly on nonoperating income and expenses on Page 6. It improved by JPY 0.3 billion year-on-year to minus JPY 7.8 billion.

Let me go through major factors for change. As for gain/loss on foreign exchange, in the previous year, we can -- generated FX gain. But in this fiscal year, from the end of the previous fiscal year to the end of the second quarter this year, yen appreciated by JPY 3 to $1. And in the previous year, JPY depreciated on the contrary. Euro also moved similarly. And as a result, profit decreased year-on-year by JPY 8.8 billion.

With regard to in-service issues of Trent 1,000 engine, based on RRSP contract and accounting period of Rolls-Royce, payment was recognized as JPY 1.1 billion. But compared with the first half of the previous year, it improved by JPY 8.5 billion. In extraordinary income and losses, there was JPY 1.2 billion gain on sales of corporate housing sites.

Please turn to Page 7. From this page, let me explain business results by segment. As for the results in the second quarter FY 2019, orders, net sales and operating income vis-à-vis the previous year are as shown here. Regarding the progress in the second quarter, sales increased and flat profit were expected from the beginning due to R&D cost increase under the new program, and mix change in component parts for commercial aircraft and the first half results were in line with our projection.

And as for the forecast for the full year, operating income was revised down by JPY 4 billion through foreign exchange rate revision against the announced rate in July. But except FX, any major changes that might affect the result in this fiscal year are not expected.

Page 8 for Energy System & Plant Engineering. As for the results in the second quarter, orders, net sales and operating income vis-à-vis the previous year are as shown here. Despite sales decrease, profitability improved in some businesses compared with the initial projection, and profit increased. As for the forecast for the full year, due to time lag in signing agreement and a revision in sales recognition timing, orders and sales decreased by JPY 5 billion, respectively. But profit improved by JPY 1.5 billion as profitability improved in large project reflected in the first half of financial results.

Page 9 is for Precision Machinery & Robot. As for the results in the second quarter, orders fell sharply year-on-year due to sluggish semiconductor market in robot and the U.S.-China trade friction. Hydraulic equipment orders went down slightly year-on-year, partly affected by inventory adjustment of Chinese makers. Sales in hydraulic equipment stayed flat year-on-year. But sales in robot decreased due to slow semiconductor market recovery, and the total segment sales decreased.

Operating income went down JPY 6.4 billion year-on-year to JPY 3.2 billion due to sales drop in robot. Sales mix change with reduced semiconductor sales and cost increased to prepare for production expansion in hydraulic business.

As for the full year forecast, operating income forecast was revised down by JPY 10 billion, as mentioned on September 30. Majority of JPY 10 billion lies in hydraulic business. New robot business, foreign exchange impact and a negative product mix impact caused by semiconductor robot decline are factored in.

In Precision Machinery, hydraulic sales were revised down by JPY 25 billion, both in sales and profit. The first half progress vis-à-vis the full year forecast was close to the previous year's progress. In robot, sales forecast remains unchanged. Despite Chinese market deterioration due to U.S.-China trade friction, we assume that the semiconductor market bottomed out with resumption of investment by Taiwanese makers and information on projection by U.S. major equipment manufacturers.

Every year, both of sales and profit tend to concentrate in the fourth quarter. And with firm demand for automotive, profit steadily grow in the second half. And as a total segment, we will achieve operating income of JPY 16 billion.

Page 10 is for Ship & Offshore Structure. As for the results in the second quarter, orders and net sales vis-à-vis the previous year are as shown here. In the previous year, sales on profitable LNG carrier and LPG carriers were booked, whereas this year, short operation and the lump sum recognition of development cost for newly designed LPG carrier, which was all new order, reduced operating income by JPY 2.6 billion. But these factors were discounted initially, and they are in line with our projection.

As for the full year forecast, reflecting the yen's appreciation impact with our revision of foreign exchange rate, operating income was revised down by JPY 0.5 billion to minus JPY 2.5 billion. In this segment, we'll continue to focus on winning orders of LNG carriers for some more time. And by promoting technological transfer to Chinese shipyards, we accelerate the shipbuilding shift to China further so that integrated management will be promoted and deepened. Furthermore, we will promote structural reform further, including the more diverse use of Sakaide work.

Page 11 is for Rolling Stock. As for the results in the second quarter, orders and sales vis-à-vis the previous year are as shown here. On profit front, reversal is booked from one-off loss of JPY 8.5 billion, which was recognized in the first half of the previous year. But additional cost, which has been booked from the first quarter due to delivery time revision of M9 pilot Rolling Stock in North America as well as FX impact, time lag of overseas parts and increasing provision rate to sales in the first half impacted profit. And all of them combined improved profit by JPY 4.5 billion.

As for the full year forecast, the first half progress is not impressive, but in the initial plan, decrease in overseas parts and mixed deterioration in the first half were incorporated. And with regard to the North America Rolling Stock M9, cause for delivery delay, a pilot Rolling Stock was recognized. But all pilot trains were already delivered, and the delivery of mass-produce Rolling Stock have started. And we think we have already passed a critical point.

Japan and Asia business have been mostly in line with the plan. And in terms of profit, we continue to cut costs, and we will take every possible opportunity to improve profit, including saving periodical expenses so that we achieve the initial target.

Page 12 is for Motorcycle & Engine. As for the second quarter results, sales versus the previous year, are as shown here. In market, there were no major changes. As for operating income, despite the yen's appreciation impact, partly benefited by the absence of provision in doubtful account for overseas distributors, which was booked in the previous year, profit increased JPY 1.3 billion.

I will explain full year forecast. Due to the revision of foreign exchange rate, profit forecast was revised down JPY 3 billion to JPY 9 billion. In this segment, we will continue to promote premium brand strategy to expand, especially share in developed countries. And also by steadily expanding sales of sports recreation vehicle, KRX 1000, which is launched in this year, we secured JPY 9 billion operating income as a whole segment. KRX 1000 was launched on October 7. It has been enjoying the strong orders from dealers and have made a very good start.

Page 13 is for the summary of balance sheet. Balance sheet has been expanding since the end of the previous year in March. This is a seasonality with higher payment made at the end of the fiscal year, as usual. It is shown by a chart on the right bottom. But the interest-bearing debt increased year-on-year. And I will explain the situation in the following page of cash flow.

Page 14 shows cash flow. Free cash flow is down JPY 121.5 billion year-on-year to minus JPY 282.5 billion. There are 3 major reasons as follows. Firstly, in Aerospace Systems and others, along with sales increase, working capital increased. It is related to the progress of construction works and concentrated payment received. Secondly, this is rather a special factor, but payment terms for subcontractors were shortened, and that affected cash flow as one-off factor. Thirdly, as mentioned in the previous meeting, project -- provisions in the previous year led to cash outflow in this fiscal year. That includes Rolling Stock business and payment on Trent 1000 aircraft engine business in Aerospace segment. And the aggregate worsened cash flow compared to the previous year.

For the full year of FY 2019, due to aforementioned factors, cash flow is tight. However, through initiatives for improved capital efficiency and the promotion of payment received, we will make maximum effort to secure cash flow. To be more specific, we are working on to reduce strategic shareholdings, sales of known business asset and needless to say, strive to receive advanced payment and to improve cash conversion cycle by optimizing payment terms as well as review of CapEx plan.

Having said that, aforementioned 3 factors were recognized from the beginning of this year, and the severity for FY 2019 was well anticipated. And we'll work hard for the improvement.

Page 15 shows a summary of full year forecast. As for the full year forecast of FY 2019, exchange rates were revised, as announced in the previous month. They are JPY 107 to $1 and JPY 118 to euro revised from the previous rate of JPY 110 and JPY 125, respectively.

As for the full year forecast, as mentioned at the beginning, sales are JPY 1.660 trillion, and operating income is JPY 56 billion, which remain unchanged from the announcement in the previous months. And orders were revised this time, down by JPY 50 billion, mainly in Precision Machinery & Robot. After the revision, yen has been slightly depreciating compared to our assumed foreign exchange rate. But we have things to monitor closely, including the profitability improvement of Rolling Stock segment. Keeping close watch on individual trends, we will take necessary actions in timely manner to achieve target.

Remaining parts include the reference materials. Page 16 shows actual and forecast by segment. Page 18 shows R&D, CapEx and number of employees. Considering business environment, R&D, CapEx and the number of employees are revised this time as shown here. Page 20 shows market overview of each segment for your reference.

That concludes my presentation. Thank you.

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