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

My name is Yamamoto. Thank you for your participation. Allow me to present the financial highlights. In our financial results for the third quarter of fiscal year 2025, our company achieved revenue of JPY 1.5614 trillion, a year-on-year increase of JPY 154 billion. Turning to profits. Improved profitability in the Aerospace Systems and the Energy Solutions and Marine Engineering segments covered the Powersports and Engine business, which was greatly impacted by increased tariff costs. Accordingly, business profit increased year-on-year to JPY 82.4 billion, and pretax income and profit were both up. Record third quarter-to-date figures were recorded for orders received, revenue and profit. Turning to the full year forecast for fiscal year 2025. The figures for business profit were unchanged. However, pretax income and profit were revised upwards from the previously announced figures by JPY 7 billion and JPY 8 billion, respectively, as a result of realizing foreign exchange gains in the third quarter. Today, our company announced changes to our shareholder return policy and the stock split, and I will explain this on a later slide. This concludes the summary. I will provide more details beginning on Page 5. As this slide shows, overall, the results for the third quarter of fiscal year 2025 are tracking generally in line with the guidance given when the second quarter financial results were explained in the previous announcement in November. As you can see, the weighted average exchange rate was approximately JPY 2.7 stronger than in the previous year and U.S. dollar-based transactions amounted to $1.72 billion. Please see Page 6. This chart provides a breakdown of orders received, revenue and business profit for each segment. As point 1 shows, in the Energy Solutions & Marine Engineering segment, there was a strong performance from the Energy business and the Ship & Offshore Structure business. In contrast, as point 2 shows, profit decreased in the Powersports & Engine business due to factors such as increased tariff costs and decreased profitability against the backdrop of intensifying competition in the U.S. powersports market. Overall, profit increased JPY 3.3 billion to JPY 82.4 billion. Page 7 shows the statement of profit or loss. Please see the chart for details. Please see Page 8. As point 2 shows, foreign exchange gains increased significantly due to depreciation in the value of the yen through the end of the third quarter. As a result, quarterly profit before tax increased JPY 24.4 billion to JPY 88.8 billion and quarterly profit attributable to owners of parent increased JPY 21.6 billion to JPY 65.8 billion. This is Page 9. I will now explain the factors behind changes in business profit. The appreciation of the yen against the U.S. dollar compared to last year's exchange rate was a factor contributing to a decrease of JPY 6.5 billion in effects of FX rates. Regarding change in revenue, there was an increase in revenue in all segments. In particular, the Powersports & Engine business made a noticeable contribution. Consequently, business profit increased by JPY 32 billion, offsetting the negative impact of exchange rate fluctuations. Despite improvements in the Energy Solution & Marine Engineering segment and the Precision Machinery & Robot segment, there was a deterioration of JPY 16.9 billion in change in product mix and other factors due to a sharp decline in the Powersports & Engine segment. Please refer to Page 10 for a detailed breakdown by segment. Page 11 shows the statement of financial position. Concerning the factors contributing to changes in assets in the third quarter, as point 1 shows, inventories followed upward trends in the Powersports & Engine segment and the Aerospace Systems segment as a result of increasing revenue. Please see Page 12. This shows factors contributing to changes in liabilities and equity for your reference. The net debt-to-equity ratio was 90.5%, which was a significant improvement from the same period last year. Page 13 shows the cash flow statement. Details are shown in the materials. Please see Page 14. For reference, we have provided a chart showing the cash flow trends over the past 10 years. This is Page 16. This shows the full year forecasts for fiscal year 2025. The forecasts for revenue and business profit remain unchanged. However, the forecast for orders received has been revised upward by JPY 90 billion from the previous announcement to JPY 2.62 trillion, reflecting an increase in orders for domestic waste incineration plants and other factors. I will provide more details on the next page. This is Page 17. Concerning the full year forecast for business profit, please refer to the changes in the forecast since the beginning of year announcement. Please see Page 18. This chart shows a breakdown of performance forecast by segment. Detailed explanations will be provided on the individual segment pages. Page 21 is about Aerospace Systems. This slide shows the results for the third quarter of fiscal year 2025. Despite an increase in Boeing business, orders received decreased as a reaction to the large bulk order for CH-47 helicopters received in Ministry of Defense business in the third quarter of the previous fiscal year. Revenue increased year-on-year due to increases in Ministry of Defense business and Boeing business. Business profit increased due to increased profit resulting from higher revenue. Looking at the forecast for fiscal year 2025, the forecast for orders received from the Ministry of Defense was revised upward by JPY 20 billion compared with the previous announcement. The forecast for revenue was revised downward by JPY 10 billion due to declining revenue in Boeing and Ministry of Defense business. In terms of business profit, however, the forecast was revised upward by JPY 4 billion to JPY 60 billion due to improved profitability. This is Page 22. For your reference, Page 22 provides the results of orders received in revenue in the Aerospace and Aero Engine businesses, including the number of aircraft component parts sold to Boeing and the number of aircraft engine component parts sold. This is Page 23. This page shows the quarterly trends in revenue and business profit. Also provided for your reference, it gives an overview of past trends. This is Page 24. We have updated the information on the business environment, mainly regarding the business for the Ministry of Defense for your reference. Page 25 is about Rolling Stock. This slide shows the results for the third quarter of fiscal year 2025. Orders received increased sharply year-on-year due to an order of 378 railcars in the R268 project for New York City Transit, MTA in the United States. Revenue increased from business for the Japan and North American markets and business profit increased due to an increase in revenue. The accounting treatment related to the settlement with the Washington Metropolitan Area Transit Authority, WMATA, concerning a 7000 series railcar announced on February 6 was recorded in the third quarter. As this matter had already been incorporated into the initial plan at the beginning of the fiscal year, it has no impact on the financial forecast announced this time. Accordingly, business profit remains unchanged from the previous forecast. This is Page 26. This page shows orders received and revenue in Japan, Asia and North America. For your reference, it also shows revenue in aftersales service, which we have focused on as a profitable business undertaking and the progress of the R211 project for New York City Transit, MTA. For your reference, Page 27 shows quarterly trends in revenue and business profit. This is Page 28. It provides details of specific efforts for your reference. Page 29 is about Energy Solutions & Marine Engineering. This slide shows the results for the third quarter of fiscal year 2025. While orders received decreased as a reaction to the orders received for submarines in multiple ships in the third quarter of the previous fiscal year, there were sharp year-on-year increases in both revenue and business profit due to strong performance in domains such as the energy business and the ship and offshore structure business. Concerning the full year forecast for fiscal year 2025, an upward revision was made to orders received due to increased orders for domestic waste incineration plants. The forecast for revenue was unchanged, but business profit was revised upward by JPY 3.5 billion due to improved profitability in the energy business and the marine machinery businesses. This is Page 30. This page provides a breakdown of orders received in revenue for the Energy System and Plant Engineering business and the Ship & Offshore Structure business. This is Page 31. This page shows quarterly trends in revenue and business profit for your reference. This is Page 32. One example of specific efforts contributing to sustainable social infrastructure was an order received for a jet oil, the first such order received in 8 years. For your reference, we have included an example of a solution for a decarbonized society, the completion at our company's Kobe Works of the installation of a demonstration facility for carbon dioxide separation and capture technology. Page 33 is about the Precision Machinery & Robot segment. This slide shows the results for the third quarter of fiscal year 2025. Year-on-year increases were recorded for orders received, revenue and business profit. There is no change to the full year forecasts for fiscal year 2025 from the previous announcement. This is Page 34. This page shows orders received and revenue for both the Precision Machinery business and the Robot business. Revenue from hydraulic machinery to the Chinese market and the breakdown of robot-related revenue by field are also provided for your reference. This is Page 35. This page shows quarterly trends in revenue and business profit for your reference. This is Page 36. It provides details of the business environment and trends in orders received for your reference. Page 37 is about Powersports & Engine. This slide shows the results for the third quarter of fiscal year 2025. Looking at revenue, despite exchange rate impacts due to the yen's appreciation, increased revenue was achieved as a result of increases in revenue from 4-wheelers for North America and motorcycles for developed countries. Business profit decreased sharply for reasons such as increased tariff costs as well as decreased profitability against the backdrop of intensifying competition in the U.S. powersports market. Looking at the full year forecast for fiscal year 2025, the forecast for revenue is unchanged, but the forecast for business profit has been reduced because of the decreased profitability resulting from intensifying competition in the U.S. powersports market. This is Page 38. Page 38 shows revenue from motorcycles for developed countries, motorcycles for emerging markets, 4-wheelers and PWC and general-purpose engines. We have also included regional wholesale volumes for motorcycles, 4-wheelers and PWC for your reference. This is Page 39. This page shows quarterly trends in revenue and business profit for your reference. This is Page 40. This slide provides details of the business environment and trends in the Powersports & Engine business for your reference. This is Page 42. Regarding shareholder returns, as announced today, starting with the year-end dividend for the fiscal year ending March 31, 2026, our company has decided to switch our shareholder return policy from the dividend payout ratio standard to the so-called DOE standard, whereby we aim to achieve a dividend on equity ratio of 4%. The objectives of this switch are to enhance long-term shareholder value and ensure more stable and sustainable shareholder returns. As a result of this change, the forecast annual dividends for this fiscal year are JPY 166 per share, and the forecast year-end dividend is JPY 91 per share, an upward revision of JPY 16 per share from the previous announcement. This is Page 43. Also, as announced today, our company will split our ordinary shares at a ratio of 5:1 using March 31 as the record date. We plan for the stock split to become effective on April 1. Through the stock split, we aim to develop an environment that will make it easier for investors to invest and to expand our investor base. This is Page 44. Here, I would like to report on 3 project topics. Firstly, please allow me to explain the liquefied hydrogen supply chain business, which our company is tackling as a core next-generation business. In January 2026, our company signed a shipbuilding contract with our affiliated company, Japan Suiso Energy, to build the world's largest liquefied hydrogen carrier with a capacity of 40,000 cubic meters. Japan Suiso Energy plans to use this vessel to demonstrate the marine transportation and cargo handling of hydrogen as part of a liquefied hydrogen supply chain commercialization demonstration project led by NEDO. As part of a technological demonstration project that preceded the commercialization demonstration, our company built the world's first liquefied hydrogen carrier, Suiso Frontier. In the spring of 2022, the Suiso Frontier successfully completed the marine transportation and cargo handling of liquefied hydrogen between Australia and Japan. So far, it has successfully navigated journeys of more than 100,000 kilometers to 5 countries. In the latest commercialization demonstration project, we will be increasing the size of the liquefied hydrogen tank by 32x, which is enough to transport energy equivalent to the annual consumption of 80,000 ordinary homes in a single journey. The cooling tank technology needed to realize this high-volume transportation was newly developed based on the track record of Suiso Frontier. In this way, our company is making steady progress toward realization of a hydrogen society. This is Page 45. It explains the approach to improving business stability for the rolling stock business in North America and capturing new business opportunities in Japan. As explained on an earlier slide, in the current third quarter, our company received an order of 378 railcars in the R268 project for New York City Transit Authority in the United States worth approximately JPY 225 billion. The order was received, thanks to our company's record of delivering 2,900 railcars to the New York City Transit Authority since 1982 and our excellent reputation for reliability. When the railcars have been fully delivered for the R268 project, our company's share of the authority subway fleet is expected to reach 56%. The next project concerns the development of a new type of diesel electric railcar for the Japanese market, GreenDEC. This page explains that 5 companies have already decided to introduce GreenDEC. GreenDEC aims to help overcome the challenges facing regional railways who are struggling with aging diesel cars on nonelectrified lines and the need to reduce their environmental impact. GreenDEC is a hydrogen-ready product in the railways domain that has been designed in anticipation of using hydrogen in the future. In addition to manufacturing and delivering GreenDEC railcars, our company will expand after sales services by offering integrated support from status monitoring through to operational support and component sales, thereby further improving business profitability. This is Page 46. Lastly, looking to the future changes to robots that will be brought by AI. This page explains the development of a robot powered by physical AI that has been built by our company. The left side of the slide shows a nursing collaborative robot, Nurabot, for which demonstration testing is currently underway at Taiwanese hospitals in partnership with Taiwan's Foxconn Group. Next, at the center of the slide is the 4-legged robot, CORLEO. This is a new type of futuristic off-road mobility vehicle that had a major impact at the Osaka Expo. Development is accelerating toward the target of using CORLEO as an on-site mobility vehicle at Expo 2030 Riyadh in Saudi Arabia. On the far right of the page is a humanoid robot, Kaleido. The 9th generation model of Kaleido was announced at the International Robot Exhibition held in December 2025. The latest model was developed for use in disaster zones and similar situations in order to utilize its robustness. In addition to these projects, our company has been receiving requests for joint developments from numerous companies. As a comprehensive robot manufacturer covering everything from industrial robots to next-generation robots aiming to coexist alongside people, the expectations for our company continue to grow. Our company will continue to actively invest resources in the robot business as a growth domain and accelerate business growth. Please refer to the supplementary information provided from Page 47 onwards. This concludes the presentation. Thank you for your attention.