Sumitomo Heavy Industries, Ltd. (6302) Earnings Call Transcript & Summary

I am Shimomura, the President. I will now provide the financial summary for second quarter of fiscal year 2020 and projections for fiscal year 2020. With no prospect of an end to the spread of coronavirus infections, we'd like to express our deepest sympathies to all those have been afflicted by the disease and to those whose lives have been affected by the spread of infections. We sincerely hope that the spread of the virus will be brought to an end as soon as possible and that you all remain safe and healthy. Please turn to Page 2. This is the outline of today's presentation. At 3:00 p.m. October 30, we disclosed our financial results for the second quarter of fiscal year 2020 at the Tokyo Stock Exchange. Based on the results for the second quarter, we have revised our full year performance forecast. So we have also disclosed revisions to our performance and dividend forecasts. I will now explain the details of these revisions. Please turn to Page 3. This is our management policy for fiscal 2020. This is a policy announced in May 2020 when we announced our financial results for fiscal year 2019, last fiscal year, and there is no change in this policy. Please turn to Page 4. This is an overall review of the first half of the fiscal year. Overall, in the first half of the fiscal year, we took measures against COVID-19, including ensuring the safety of employees in the event of an outbreak and providing maximum cooperation to societal demands. We have been working to realize a short-term BCP to maintain production in case of occurrence of infection and to maintain business and plant operations during a decline in supply and demand. Although our business performance has been affected by the spread of COVID-19, from a long-term perspective, we are carefully and selectively conducting major investments and mergers and acquisitions. I will explain this in more detail during the topic section. The medium-term plan, which was postponed by 1 year, is currently being formulated, taking into account changes in the business environment, while qualifying our aim and the societal issues to solve from a long-term perspective. I will now report on the financial summary for the second quarter of fiscal 2020. Please turn to Page 6. This is a financial summary. Market conditions were affected by the spread of the novel coronavirus infections and demand for machinery, both in Japan and abroad was in a declining phase. In addition, uncertainty is increasing due to worsening trade friction between the U.S. and China, continued geopolitical risks and the volatility and slump in oil prices. Our overseas subsidiaries and their fiscal years in December and the impact of COVID-19 has been felt since the second quarter. This situation has had a large impact on orders and sales, particularly for mass-produced machinery. Concerning operating profit, as I will discuss in detail in the following pages, backlog of orders mainly for heavy machinery converting into sales and semiconductor production equipment showing strong performance, partly due to front-loading of demand from the second half offset the decline in mass-produced machinery. As a result, orders were JPY 370.8 billion. Net sales were JPY 391.7 billion, and operating profit was JPY 21.2 billion, down from the previous term, but net income for the second quarter was JPY 10.9 billion. We have decided to pay an interim dividend of JPY 9 per share as announced in August. Please refer to Page 7. This is operating profit by segment. In mass-produced machinery, the Precision Machinery segment saw an increase in profit, thanks to strong sales of semiconductor production equipment, while the Machinery Components and Construction Machinery segments saw large drops in operating profit due to the impact of COVID-19. In heavy machinery, excluding ships, industry machinery and environmental facilities and plants saw an increase in profits due to backlog of orders converting into sales. An analysis of changes in operating profit is shown on Page 8. Effect of profit decreases were especially pronounced in mass-produced machinery, excavators, plastic machinery and machinery components. Others were impacted negatively by a decline in capacity utilization of excavators. Next on Page 9, let's look at the balance sheet. Due to aggressive investment, tangible assets have increased. This has led to an increase in interest-bearing debts. There has been no change in the shareholders' equity ratio. Sales by regional segments are shown on Page 10. The decline in sales by region is largely attributable to the impact of excavators in North America, Europe and China. The reason for the increase in sales in Asia, excluding China, is due to an increase in sales of semiconductor manufacturing equipment in precision machinery. As for the overseas excavator business, the fiscal year ends in December, so the results included are from January to June. Next, I would like to explain the performance forecast for fiscal 2020. The performance forecast for fiscal 2020 is shown on Page 12. As I mentioned at the beginning of this presentation, we have revised our full year forecast announced in August in response to the results of the first half. Although COVID-19 has had a significant impact on our performance, particularly in the Machinery Component, Precision Machinery and Construction Machinery where the lead time after receiving an order is short. We have revised our forecast based on the assumption that they will start to gradually recover in the second half of the fiscal year. The main reasons for the upward revisions are that semiconductor-related demand was strong in the precision equipment and others and that market conditions in Japan and China for hydraulic excavators have improved more than initially expected. The forecast has been revised to orders of JPY 760 billion, sales of JPY 810 billion and operating profit of JPY 36 billion. As a result, net income is revised to JPY 16 billion. We have revised our full year dividend forecast to JPY 39. The full year payout ratio is 30%, 29.9% to be exact. In the following pages, I would like to explain each segment. Please look at Page 13. This is a Machinery Components segment. In the first half of the fiscal year, orders, sales and operating profit all declined due to the impact of the spread of the new coronavirus. As for the second half of fiscal 2020, we expect small-sized and precision gear reducers to recover, but other products will take time to recover. By region, we expect an early recovery in China. Based on the above assumptions, the second half performance forecast will be at the same level as the first half. Page 14 explains the Precision Machinery segment. In the Plastic Machinery business, the automobile-related business continues to face an extremely difficult situation, partly due to the spread of COVID-19. We expect these conditions to continue in the second half of the fiscal year. In the first half, we did receive large orders for industries that are still essential under COVID-19, such as food containers, medical applications and for electrical and electronics-related products. We may see sporadic orders in these areas. However, overall, the outlook is uncertain, and we expect things to remain weak overall. In Precision Equipment and others, demand for semiconductor production equipment was strong, but sales of MRI and other physical chemical equipment were sluggish. In orders for semiconductor production equipment were lower than last year due to the impact of trade frictions between the U.S. and China, with some customers tending to take a wait-and-see attitude toward investment. Having said that, in the first half of the fiscal year, sales and profits for semiconductor production equipment increased partly due to front-loading of investment. For the second half of the fiscal year, we expect semiconductor-related products to be strong. However, sales and profits will likely decline substantially from the first half, partly due to the front-loading. Depending on the situation, there is a possibility of a rapid recovery in the market. So we will continue to monitor customer trends closely. Page 15 explains the Construction Machinery segment. The first half of the year was very strongly impacted by the spread of COVID-19, leading to declines in overseas demand with the exception of China, which recovered early. In the second half of the year, we expect domestic and Chinese demand to remain strong from the first half, but the situation in Europe and the United States will continue to be difficult. In the first half of the fiscal year, profits were boosted by reduced expenses, partly due to restrictions on activities. In the second half, we expect profits to decline compared to the first half because activities will return to normal levels. For mobile cranes, we expect domestic sales to be as weak as in the first half of the year, and we also expect North America affected by the slump in crude oil prices to remain weak. The Industrial Machinery segment is shown on Page 16. Concerning material handling systems in the first half of the fiscal year, orders for logistics and parking systems were lower than expected due to postponement of orders. Sales of other industrial machinery such as medical, presses and industrial turbines were also sluggish. Sales were maintained at a certain level due to the backlog of orders and the profitability improved due to individual projects with good profitability and cost control. In the second half, within Material Handling machinery, we expect industrial cranes for power and port applications to remain strong. For the steel business, however, although we expect a recovery in the future, we assume this will remain weak. We expect a recovery in the second half for logistics and parking systems, which were weak in the first half. As for other industrial machinery, market conditions are expected to remain difficult for both the press and medical markets. But we think we can secure a certain level of sales due to the backlog of orders. We expect profits to decline somewhat. The Ships segment is shown on Page 17. The ships market continues to be difficult. In the second half, despite the continued difficult market conditions, we aim to secure an order for 1 vessel. Also, in the second half, the ratio of vessel repairs to total sales is expected to increase and both sales and profits are expected to increase compared to the first half. but profits are expected to remain at the 0 level. Environmental Facilities & Plants segment is shown on Page 18. For the Environmental Facilities segment, orders increased in the first half due to orders for large-scale biomass power generation and other projects and sales increased from the backlog of orders. Profits were also higher. In the second half, market conditions are strong for both biomass power generations and water treatment plants in Japan, and we will aim to secure such orders. In addition, we expect to be able to secure sales and profits due to order backlog. As in previous years, our budget is second half heavy. Page 19 is a summary of the performance forecast for the segments that I have explained up to this point, which I hope you will find useful. From Page 20 onward, I will explain selected topics. As I mentioned at the beginning, we are continuing to make investments that are necessary from a long-term perspective. In addition, we are actively pursuing CSR activities. I would like to introduce these and other topics for the first half. Please turn to Page 21. As we announced in a press release on October [ 27 ], we decided to construct a new plant for our Semiconductor Production Equipment business. The semiconductor market is a market that is expected to continue growing in the future, and we expect the image sensor market, which is our main market, we will maintain a high growth rate. The new building is expected to double the current production capacity of the standard size products and also greatly increase the production capacity of the larger, more sophisticated products. The total investment is approximately JPY 11 billion. The second topic on Page 22, a is that the BNCT system is now covered by insurance. For the first time in the world, the BNCT, Boron Neutron Capture Therapy can be used for medical treatment under insurance coverage. The treatment targets unresectable, locally advanced or locally recurrent head and neck cancer. Currently, our BNCT systems are installed at 2 hospitals in Japan, in [ Tohoku ] Hospital in Fukushima Prefecture and Osaka Medical College Hospital. We have high expectations for the future. Page 23 explains the acquisition of shares of Leifeld. This was announced in a press release on May 29. The company has been consolidated from the end of Q1 on the balance sheet. And since the second quarter on the P&L. Leifeld is a German-based pioneer in flow forming machines, a global top-tier company with a dominant brand. The company has delivered high-powered machines such as forged aluminum wheels and pet wheels to Europe and other countries around the world. They also supply to cutting-edge fields, such as the aerospace industry. Nihon Spindle is primarily focused on the Asian market. So although the 2 companies are in the same industry, there is little overlap in terms of products and sales territories. So that is why we decided to acquire their shares. Going forward, we intend to maintain the brands and products of both companies, while leveraging synergies in terms of technology, service and sales to expand our business. Page 24, is the announcement of collaborative work in recycling used paper diapers. We have started collaboration with Total Care System company in Fukuoka and Toppan Printing company to recycle used paper diapers, which have recently become a social problem. Currently, the 3 companies are conducting hearings with local governments. In addition, plans for a model plant are being developed. On Page 25, we explain our CSR efforts. Our policy of aggressively promoting CSR remains unchanged even under COVID-19. Included in the table are facts that Nihon Spindle Manufacturing, a wholly owned subsidiary obtained a silver medal from Eco Vadis, a CSR assessment organization at the request of our customers and that our 6th environmental medium-term plan calls for a reduction in total CO2 emissions as a response to climate change issues. We will continue to actively pursue CSR in the future. This is the end of my presentation. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]