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Edited Transcript of 7012.T earnings conference call or presentation 27-Apr-17 5:00am GMT

Thomson Reuters StreetEvents

Full Year 2017 Kawasaki Heavy Industries Ltd Earnings Presentation

Kobe Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Kawasaki Heavy Industries Ltd earnings conference call or presentation Thursday, April 27, 2017 at 5:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Kenji Tomida

Kawasaki Heavy Industries Ltd - Senior Executive Vice President




Kenji Tomida, Kawasaki Heavy Industries Ltd - Senior Executive Vice President [1]


Good afternoon ladies and gentlemen. I am Kenji Tomida, Senior Executive Vice President. Let me go over the financial results for fiscal 2016. Please turn to page 3, the summary.

Year on year, orders received were down JPY344.9 billion. This was primarily because in the previous fiscal year we won a bulk order for 20 P-1 maritime patrol aircraft from the Ministry of Defense of Japan, resulting in a year on year decline of about JPY230 billion in the aerospace segment. We also recorded a decline in the ship and offshore structure segment which continues to suffer from the sluggish shipbuilding market and in the plant and infrastructure segment which enjoyed larger orders in the previous year. Net sales felt a strong adverse effect of the depreciation of the end and the assignment of the construction machinery business in the previous fiscal year. But this was offset by an increase in sales coming from strong hydraulic component for the construction machinery in the position machinery segment and a steady progress in the gas to gasoline plant in Turkmenistan. All in all, net sales fell only slightly year on year.

Operating income as he can see posted a large year on year decline of JPY50 billion. I will explain in more detail later using the waterfall chart.

Compared to the forecast announced in January, operating income was 5.9 billion in higher. This was partly thanks to the changes in the exchange rates as begin was slightly weaker than our assumption of JPY110 to the US dollar. In addition, the gas turbine and machinery segment achieved a larger cost reduction than the assumption and there also were some time lags in recording R&D expense depreciation resulting in an improvement of some JPY4.2 billion. These were the main reasons.

Recurring profit, similar situation as the operating profit. Decline in net income attributable to owners of the parent was smaller because the previous year we recognize the extraordinary losses on a joint shipping venture in Brazil. At the bottom you can see exchange rate information, weighted average exchange rates, and net sales in point currencies during the period.

Dollars, as you can see, appreciated by JPY10 over the previous year. And euros by about JPY12. Net sales in US dollars totaled $2.4 billion, so the impact roughly was about JPY25 billion, very simply put.

Next page, details of changes in profit by segment. I believe it's self-explanatory. Just one thing I'd like to comment. Others declined in both sales and orders received. Because until the first quarter of the last fiscal year we still had the construction machinery business and the assignment of this business had an impact.

Page 5, variance analysis. We adopted this style starting from this announcement to explain the changes in operating profit. JPY95.9 billion in the previous year and a year on year decline of about JPY50 billion. The biggest factor, as you can see, and as I mentioned briefly earlier was the exchange rates. The US dollar, euro, and other major currencies together had an impact of approximately JPY30 billion.

The second point. In fiscal 2016, as has already been disclosed, there were two major write-offs in the ship and offshore structures segment, namely allowance for doubtful accounts on trade receivables from the joint venture in Brazil, and provision for loss on construction contracts for the offshore service vessel for Norway. And, as we said in our third quarter conference call, in the plant and infrastructure segment, provision for loss on construction contracts for LNG tanks for overseas market was recorded. The impact totaled about JPY17.5 billion.

Exchange rates and losses related to particular projects, altogether, accounted for a majority of the JPY50 billion decline year on year.

Let me also touch upon other changes shown on the slide. In the aerospace segment, we felt an impact of Boeing 787 price revisions and the rolling stock segment felt the impact of changes in product mix. There were fewer highly profitable items and those changes in sales product mix and others had a negative impact of about JPY15.8 billion. On the other hand, changes in sales volume, particularly in the plant and infrastructure and precision machinery segments had an impact of pushing up profit by about JPY11.4 billion.

All in all, profit declined year-over-year by JPY50 billion.

Next page, summary of income statement. As for operating income, reasons for decline had already been explained. SG&A expenses increase year on year by JPY2.5 billion on the income statement. Earlier, in the variance analysis chart, the SG&A expenses were shown as having a positive impact of JPY2.1 billion. The difference comes from the fact that the allowance for doubtful receivables on trades in relation to the joint venture in Brazil which totaled about JPY4.6 billion was included not in the SG&A expenses but in losses and offshore service vessels business. Equity and income of unconsolidated subsidiaries and affiliates improved by JPY2.6 billion. This was because in the previous year losses in relation to the joint venture in Brazil was recognized in the equity and income of unconsolidated subsidiaries and affiliates which was absent this fiscal year. Gain and loss on foreign exchange worsened by JPY1.1 billion year on year. This was due to the appreciation of the yen at the middle of the year, resulting in a net loss.

There were some notable changes in nonoperating income and expenses. In total, deterioration of JPY8.7 billion year on year. In fiscal 2015, in relation to the move of an office of an overseas affiliate, we recorded a gain on sale of property as well as a receipt of subsidies in relation to capital investment. Whereas in fiscal 2016, with large losses on the sale of fixed assets we recorded significant here on your change. An extraordinary income and losses we recorded a gain on sale of fixed assets in Japan totaling JPY2.2 billion. And, in fiscal 2015 we recorded extraordinary loss in relation to the joint venture in Brazil. Thus, a major year on year improvement in extraordinary income and expenses. Starting from next page, details by company. For your information, exchange rate assumptions for forecast for fiscal 2017 are JPY108 to the US dollar and JPY114 to the euro which means slightly stronger yen than the current level.

In the ship and offshore structure segment, shipbuilding market as you know was sluggish during fiscal 2016. In terms of orders received, the only order for newly built ships was for one submarine. None for merchant vessels. But currently, operation is study with existing orders. Net sales increased you on year with an increase in building and repair work of submarines and a deep sea rescue vehicle.

Operating income deteriorated due to the recognition in the third quarter of losses in relation to the construction contracts of the offshore service vessel from Norway and the construction of hull parts of a drilling ship in Brazil. In the fourth quarter, we recognized additional provision for losses in the offshore service vessel for Norway. All in all, operating income declined to significantly year on year.

As for fiscal 2017 forecast, in terms of orders received, we expect new orders for LNG and LPG carriers. In terms of sales, we expect the level in fiscal 2016 to be maintained with stable operation coming from existing orders, particularly shipbuilding work of gas carriers.

As for operating income, given that most of losses in fiscal 2016 were due to write-offs, we expect to breakeven in fiscal 2017 in the absence of such factors.

In the rolling stock segment, in fiscal 2016, orders received increased year on year despite a decline in the overseas market next to strong business in Japan, including orders for Oedo subway line in Tokyo.

Net sales decreased due to declining proportion of sales to Asia including Singapore and Taiwan. Operating income decreased due to lower sales, decrease in profitable projects, in other words changes in product mix, as well as increasing cost in some projects and the impact of exchange rates.

As for fiscal 2017 forecast, we expect high levels of orders received, given strong demand in North America and Asia, with quite a number of promising deals. We expect sales to increase, both in Japan and overseas markets. And with that, we expect higher operating income but, given that there still aren't enough profitable products, we do not expect growth to be as high as in fiscal 2015.

In the aerospace segment, orders received in fiscal 2016 decreased significantly year on year because as was mentioned earlier, in fiscal 2015, we won able quarter for 20 P1 maritime patrol aircraft which totaled about JPY200 billion.

Sales, on the other side increased for the Ministry of Defense. However, due to the effect of the stronger yen, we saw a decrease in net sales. Operating income was affected not only by the higher yen but also price revisions for the Boeing 787 and production costs for the 777 and as a result we saw a large decrease.

Next, forecast for the fiscal year 2017. We expect a large increase in orders, mainly from growth in orders from the Ministry of Defense. Sales will increase for the MOD but component parts for the Boeing 777 will decline. So all in all, sales should be the same as the previous year. Operating profit will decline further due primarily to the decline for the Boeing 777. Furthermore, price revisions for the 787 is continuing in that impact is going to have a full-year impact. That is another factor for the lower operating profit. Next, I explained about gas turbine and machinery. Results for fiscal 2016. Orders received dropped from the previous year when we had a sizable order for participating in the development of a new aircraft engine. Also the low oil prices impacted orders for resource development equipment such as propulsion systems and compressors.

As for sales, component parts for the Trent XWB and other component parts for aircraft engines as well as construction of gas engine power generation systems mainly in the domestic market increased. So, sales were up.

Operating income. Certainly there was an impact from the stronger yen. Also, sales increase for component parts of newly developed aircraft engine was accompanied by an increase in depreciation of development costs. For new development, depreciation cost is frontloaded and that negatively impacted profits. So operating income declined.

As for the fiscal 2017 forecast, orders received is expected to increase due to an increase in industrial gas turbine for domestic and overseas customers. As for sales, component parts for Rolls-Royce and Pratt & Whitney aircraft engines are expected to increase leading to higher net sales. As for operating income, increase in component parts for aircraft engines will result in higher depreciation for development costs and to so we expect an overall decline in operating income.

Next, plant and infrastructure. In fiscal year 2016, orders received declined due to a decrease in refuse incineration plants for which there were large sized orders in the previous year. As for net sales, construction of gas to gasoline or JT G plants in Turkmenistan reached its peak and is progressing very well, leading to increase in sales.

As for operating income, provisions for losses on construction contract and LNG tanks for overseas markets were booked so the total declined from the previous year. As for forecast for fiscal 2017, orders received is expected to increase for plants in overseas markets. As for sales, the Turkmenistan business will pick out so overall we expect lower sales.

Operating income. The impact of overseas LNG tanks will be gone. However, due to lower sales, we expect only a slight increase over the previous year.

Next, motorcycle and engine. Fiscal 2016 results -- net sales was impacted greatly by the stronger yen. Motorcycles for emerging markets and general-purpose engines decreased. This was partly offset by strong sales in motorcycles in Europe and utility vehicles for the US but overall sales was down over the same period of the previous year. Operating income followed suit and fell.

As the fiscal 2017 forecast, sales should continue to be strong for motorcycles and utility vehicles in developed countries. And motorcycles for emerging markets which have been in a slump is expected to recover. So, that should lead to increased sales which in turn should lead to an increase in operating income. At the bottom of the page, we used to show the geographical breakdown of consumer products. Starting from this time, we changed it to the new format showing the breakdown by product. You can see the trend of four fiscal years 2014, 2015 and 2016. Motorcycles for both countries, utility vehicles, and PWCs or jet skis are growing. On the other hand, motorcycles for emerging markets are declining. The decline for motorcycles for emerging markets from 2015 to 2016 is slight and in 2017 we expect a recovery as I previously mentioned. Here, we are not showing the forecast for fiscal 2017 so, let me roughly explain that to you. Please take notes if necessary. So, to give you the numbers come in fiscal 2017, motorcycles for developed countries shall be 157,000 units. Motorcycles for emerging markets shall be 340,000. Utility vehicles and PWC's or jet skis shall be 68,000 units. That is our plan. And that concludes my explanation for motorcycles.

Precision machinery. Fiscal 2016 results for hydraulic components -- since the latter half of 2016 we are seeing the recovery of sales of hydraulic shovels in China. This has led to a surge in orders for our hydraulic components and currently we are having difficulty producing enough to meet customer demand.

Robots have also increased substantially for automotive and semiconductor applications. And so, overall we are seeing an increase in sales. Since these are mass-produced products, an increase in sales leads directly to operating income growth so we saw a substantial growth in operating income.

As for fiscal 2017 forecast, we expect the strong trend to continue, both for hydraulic components and robots. So, orders, sales, and operating income are all expected to increase over the previous year. So, up to here, I have explained the business results of various companies. Let me now briefly touch upon the balance sheet. Total assets increased due to increases in trade receivables and fixed assets but working capital did not go up due to increases in trade payables and advances from customers. Shareholders equity ratio declined a little which can be explained by the increase of a balance of total assets. Interest-bearing debt remained almost flat. Cash and cash equivalent increased. Therefore, the net interest-bearing debt and net debt equity ratio went down.

Moving on to the cash flow. With suppression of working capital increase and reduction in capital expenditures, cash flows from both operating activities and investment activities improved. Free cash flow also improved by JPY16.7 billion to reach JPY28.6 billion.

From now, I'd like to speak about our business result forecast for fiscal year 2017. Orders received are expected to grow due to increases in orders for domestic and overseas markets in rolling stock segment and in orders received for MOD in aerospace. We project increases in orders and almost all the segments which makes our projection to be JPY1.56 trillion, up about JPY210 billion from the previous year. Sales in plan and infrastructure is expected to go down due to the business with Turkmenistan peeking out. On the other hand, gas turbine and machinery is expected to grow with favorable sales of newly developed jet engines. Steady growth is also expected in precision machinery and motorcycle and engine segment, driven by motorcycles to the developed countries. All in all we expect net sales to go up from the previous year. Next is operating income. Ship and offshore structures segment is expected to reach breakeven, recovering from a deficit of JPY21.4 billion recorded in the previous term trade aerospace segment on the other hand is projected to go down due to the decline in sales of component parts for Boeing 777 which would not be compensated by the growth in other segments. And our forecast for the operating income of 2017 is set at JPY58 billion, an increase of JPY12.1 billion over the previous year. As a result, as has been already mentioned, before tax ROIC for 2017 will be 6%. As for the dividend payment come our mid-to long-term goal for dividend payout ratio is 30%. In fiscal year 2016, with one off loss, the payout ratio rose to over 38%, a very high level. Furthermore, we are continuously making high level of investment to secure midterm growth of the company. Accordingly, we need large amount of capital for the future. So, at this moment we plan to set the dividend payout ratio to be about 30% which would mean six yen of dividend payment per share.

Needless to say, this figure reflects the projected income level that I explained earlier. The following pages, 17 and 18 are the familiar tables. I hope you will read them later. Finally, I'd like to draw your attention to a couple of points on page 19.

R&D expenses will grow, especially focusing on new product development in robots and motorcycles. CapEx also will remain high in such areas as aerospace, jet engines and robots. To prepare new models and products, CapEx will also be needed for rationalization and upgrading of aging facilities since a large amount of investments have been made for quite some time. Depreciation and amortization will also be higher.

That concludes my presentation. Thank you for your attention.


Editor [2]


Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.