Kawasaki Heavy Industries, Ltd. (7012) Earnings Call Transcript & Summary

Thank you for joining our meeting today. I'm Kanehana. I'd like to present the financial results for FY 2019. Let me start with the overview of the financial results for FY 2019. In FY 2019, Aerospace Systems marked increase both in sales and profit year-on-year, but the sales declined in mass-produced products affected by the U.S.-China trade friction and the latest COVID-19. As a result, net sales increased JPY 46.5 billion to JPY 1,641.3 trillion, renewing the record high following the previous year, but operating income went down by JPY 1.9 billion to JPY 62 billion. In nonoperating expenses, additional loss related to commercial aircraft jet engine was incurred following the previous year and ROIC remained at 4.2%. Next, I'll explain our situation after the outbreak of COVID-19. At the request of the governments and municipalities, we have been suspending operations and asking people to work from home. Impacts were more notable in Europe. On the sales front, many motorcycle dealers closed their shops from the mid-March to the late April. With the ease of regulation, in some countries, they resumed operation. But still, in many countries, dealers continue to close shops. On the manufacturing front, the U.S. factories of motorcycles and rolling stocks in the state of Nebraska and the state of New York have suspended operation at the administrative guidance since late March as well as many motorcycles and hydraulics component factories in India and ASEAN countries. From late April, they started to resume operation gradually, but it will take some time to get back to the normal level. On the other hand, operation in China returned to normal mostly and on the sales front, hydraulics components for construction machinery were weak in January and February, but it turned to pick up in March. In Japan, every possible work was shifted to work from home both in head office and branches, and the flex work time was adopted by adjusting working hours and working style. Those who are essential to working office are ensured to take stringent sanitation and personal care to prevent infection. Business impact of COVID-19 as for FY 2020 ending March 2021 forecast will also be greatly affected by the slowdown of global economic activities impacted by COVID-19. In particular, Aerospace Systems, which is affected by the drastic decrease of passengers demand; and Motorcycle & Engine, which is terribly affected by restricted moves and sluggish personal consumption, will suffer material impacts, and the company as a whole may turn to red. However, at this moment, it is difficult to make the reasonable forecast in each business. We would postpone the announcement of the forecast for FY 2020. We will announce a forecast promptly when the reasonable forecast disclosure becomes possible after assessing the impacts on the business performance cautiously. Given such business condition, dividend forecast is undecided. On FY 2019 midterm business plan, we compiled the plan which extends to FY '21 last year. And we announced the basic policy of balancing the autonomous business management and company-wide corporate governance and the quantitative target of topping JPY 100 billion of operating income in the final year. As announced on 28th April, we are making steady progress in pursuing the basic policy in the midterm business plan by shifting to the company with Audit and the Supervisory Committee after AGM in June 2020 and we continue to work on them. However, as for the quantitative target for 2021, considering the business and market environments that I described, we think it's necessary to reassess it and decided to withdraw it this time. That concludes my remarks. Thank you.

Next, the Chief Financial Officer, Vice President, Mr. Yamamoto, please.

Thank you for joining us today. As of the 1st of April, I was appointed as the Vice President. I'm Yamamoto. I have been in charge of finance, IR and corporate communication, among others. I'd like to have your support and cooperation. Now let me present the financial results for fiscal year 2019. Please turn to Page 3. This is a summary of FY 2019 financial results. Orders received and necessaries are as shown here. As for orders, in the previous year, large orders were received due to defense projects in Aerospace Systems and the Ship & Offshore Structure and overseas project in Energy System and the Rolling Stock segment. Their backlash and declined sales of motorcycle resulted to orders decline of JPY 75 billion. Operating income decreased slightly year-on-year, but there are offsets of many factors, and I'll elaborate on them on Page 5. Compared to the forecast in February, profit on mass-produced products such as motorcycle declined due to COVID-19. But due to the company-wide efforts, including cost cut, the result was mostly in line with our forecast. At the bottom, weighted average exchange rates and net sales in foreign currencies are listed. Yen appreciated against U.S. dollar and euro year-on-year by JPY 1.8 and JPY 6.6, respectively, as shown here. Please turn to Page 4. Orders received, net sales and operating income by segment are as shown here. Please turn to Page 5. For details of changing profit, operating profit declined from JPY 64 billion to JPY 62 billion, down JPY 1.9 billion year-on-year. Let me go through the variance analysis. Reversal of onetime loss posted in the previous year in Rolling Stock business was JPY 16.5 billion. Delay of the private car delivery in M9 Rolling Stock contract and the review of the mass production schedule costed the additional loss of JPY 4.2 billion in this year. As for the FX, as mentioned, yen appreciated against dollar and euro year-on-year on weighted average rate, and it pushed down the profit by JPY 10.5 billion. On changing sales, Aerospace Systems sales boosted profit and in total, profit went up by JPY 4.3 billion. On change in product mix and other factors, in Energy System & Plant Engineering, upon completion of large overseas project, reversal gain was posted from contingency costs, but worsened product mix in robot and motorcycle pushed down the profit by JPY 3.6 billion. On SG&A, as R&D cost for hydrogen business, which peaked out in this year, increased and profit went down by JPY 4.4 billion. Next page, please. Change in operating profit was described before, but nonoperating income and expenses improved by JPY 4.5 billion year-on-year to minus JPY 21.6 billion. Let me go through major factors. Gain and loss on FX was down JPY 3.7 billion year-on-year as yen appreciated against dollar by JPY 2 from the end of the previous year to this year-end. On payments for the in-service issues of commercial aircraft jet engines in the fourth quarter, JPY 3.9 billion was additionally posted for Trent 1000 engine at the time of Rolls-Royce financial closing. But for the full year, payment improved by JPY 3.3 billion year-on-year. For extraordinary income and losses, there is no change from the third quarter. And in this year, we posted a gain on the sales of former corporate housing lot and loss on withdrawal of energy plant business. Now I will explain the business results by segment and the impact of COVID-19 on FY 2020 performance. Page 7 for Aerospace Systems. As for the result of FY 2019, year-on-year comparison of orders, sales and profit are as shown here. Compared to the forecast in February, profit was higher by JPY 6 billion, by 16%, and this is due to the better-than-expected cost reduction and the lower sales volume of new engines. Impact of COVID-19. As shown here, declining demand for commercial aircraft and aftersales market will lead to drastic decline in sales and profit. Energy System & Plant Engineering. As for the results of FY 2019, year-on-year comparisons of orders, sales and profit are as shown here. Compared to the forecast in February, sales were down. But due to the improved profitability in some projects vis-à-vis the initial forecast and cost reduction of R&D and others improved the profit. Impact of COVID-19. Since February due to travel restrictions and lockdown in Japan and abroad, the progress of business talk has been partially stalled and the conclusion of project contract might be delayed, and this impact on orders are being concerned. Additionally, weakened demand for aftersales market due to the suspension of plant is also concerned and the profit will go down. Please turn to Page 9. For Precision Machinery & Robot, as for the results of FY 2019, year-on-year comparison of orders, sales and profit are as shown here. Compared to the forecast in February mainly due to the impact of COVID-19 in China, order, sales and profit in hydraulic components and robot were weaker and the results were lower sales and profit compared to the forecast. Impact of COVID-19. In January and February, sales in hydraulic component and robot fared substantially in China and that affected FY '19 performance. But in March, it turned to the notable positive growth year-on-year. However, for the full year, the impact of drop in January and February will be more likely to linger on. In hydraulic components business, other than China market, especially the drop in Europe and America is deep, and that would lead to the lower sales. In robot, market recovery is expected for semiconductors due to demand for 5G. But for auto and other industrial sector due to review of CapEx plan, sales will go down. Ship & Offshore structure. As for the results of FY 2019, year-on-year comparison orders and sales are as shown here. Operating income is up by JPY 1.3 billion over the forecast in February. This is due to the shipbuilding cost reduction. Orders are down due to the time lag of the LPG carrier contract closing, which was expected at the year-end but pushed back to 2020. Impact of COVID-19. Projects and negotiations are ongoing, but due to travel ban imposed by COVID-19 and oil and gas price decline, some customers are taking wait-and-see stance and that may delay the deal closings and that might affect operation to some extent. But the business impact in this year will be rather limited. For the time being, we continue to focus to win orders of LNG carriers and promote the shift to shipyard to China through the further technological transfer to Chinese shipyard. We continue to deepen the integrated management, and including the company-wide utilization of Sakaide factory, our policy to promote structure reform remains unchanged. Rolling Stock. Year-on-year comparisons of order, sales and profit are shown here. Compared to the forecast in February, sales and operating income are slightly down, and this is mainly due to the COVID-19 in New York area that suspended the production in the U.S. And with the closure of train depot of customers, acceptance and inspection, ample reception were suspended. Impact of COVID-19. Following FY '19, in North America, which suffered greatest impact of COVID-19, suspension or limited operation continues and sales decline is -- the delay in process are expected. In Japan and Asia, due to less service, demand for maintenance and parts replacement will be down. However, many projects in North America have already put aside provisions, so impacts on profit and loss will be limited. Except the COVID-19 impact, projects in Japan and Asia are progressing almost in line. So stabilize the North America business will enable us to complete the structure reform. Finally, Motorcycle & Engine. For FY 2019 results, year-on-year sales comparison is as shown here. Compared to the forecast in February, both sales and profit were weaker. This is due to sales decline caused by the suspension of dealers' operation as lockdown was imposed in Europe and America in February and March triggered by the spread of COVID-19. Impact of COVID-19. As mentioned before, in this year also, dealers' operational suspension and global demand slowdown affected by COVID-19 are expected. Especially as in sales peak time from April to June in Europe and U.S., we will suffer sales decline, and this segment sales and profit will fall drastically year-on-year. With the resolution of COVID-19 situation, demand will recover gradually, but we cannot forecast the timing as of today. Page 13 shows the balance sheet summary. Following FY '18, in FY '19, we renewed the record-high sales. And with the production expansion, inventory increased JPY 38.8 billion year-on-year. Due to COVID-19 related credit decline, for some customers, we couldn't liquidate credit and that led to the increase of trade receivables by JPY 45.5 billion. Cash on hand increased by JPY 31.7 billion for the buffer for liquidity. Because of these major factors, total assets increased by JPY 118.9 billion. Total liabilities increased by JPY 139.6 billion as advances from customers decreased and working capital increased with the production expansion. Interest-bearing debt increased by JPY 128 billion to JPY 567.4 billion due to the impact described before. As a result, net D/E ratio moved to 101.2%, which is far above the guidance level of 70% to 80% shown in FY 2019 midterm business plan. In FY '20, as shown in the midterm business plan, we will sell down the cross shareholdings and nonbusiness assets, including corporate housings, use the external capital proactively and upgrade the cash management system of overseas subsidiaries. On the structure front, we will steadily implement that program to improve working capital through improving the payment terms and that will lead to the improved balance sheet. Summary of cash flow. Operating cash flow was down by JPY 125.2 billion to minus JPY 15.4 billion due to working capital increase, including the increase in trade receivables in Aerospace System and inventories increase in Energy & Plant Engineering. Investing cash flow improved by JPY 15.9 billion to minus JPY 69.4 billion due to decrease in CapEx in Aerospace Systems. As a result, free cash flow worsened by JPY 109.2 billion to minus JPY 84.8 billion. As mentioned before, by improving the operating cash flow and investing cash flow, firstly, we aim to achieve a free cash flow positive quickly. R&D, CapEx, number of employees are shown here on Page 15. R&D and CapEx in February were shown as JPY 56 billion and JPY 77 billion, respectively, in February. But due to the cost saving and the time lag, actuals were below those numbers. Others were almost in line with the forecast. Finally, market overview of each segment and forecast that we described before are included at the end of the material as referenced. Please refer to them later. That concludes my presentation. Thank you for your attention.