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

Hello. I am Shimomura, serving as President. Thank you for taking time out of your busy schedule to participate in today's earnings results briefing. At 3 p.m. on the 10th of May at the Tokyo Stock Exchange, we announced our fiscal 2020 financial results, fiscal 2020 dividends, fiscal 2021 projections as well as our Medium-Term Management Plan 2023 and the change in our fiscal year-end. I will now explain their contents. Please turn to the next page. This is the content of today's presentation. In the first half of the presentation, I will provide an overview of the financial summary for the previous fiscal year, fiscal 2020 and the projections for fiscal 2021. And in the second half, I will explain the newly-formulated medium-term management plan. First, I will explain about financial summary for fiscal 2020. Fiscal year 2020 started with the impact of the COVID-19 beginning to grow. In the midst of the severe economic environment, we conducted our business activities through trial and error. We were forced to postpone the medium-term management plan that had originally been planned, and we started the fiscal year in a situation where we were unable to finalize our fiscal 2020 performance forecast at the time of announcing fiscal 2019 results. Our financial results for which there were concerns, we were able to announce the results with less negative impact than had initially been expected. I will now explain in concrete terms. We had orders of JPY 813.9 billion, net sales of JPY 849.1 billion, operating profit of JPY 51.3 billion, so a decrease in both sales and profit from the previous fiscal year. I will explain each item. First, orders decreased for all segments, excluding Environmental Facilities & Plants. And Precision Machinery, in particular, recorded a significant decrease. The overall reason for the decline was that the COVID-19 pandemic dampened economic activities, and there was a decrease in demand for machinery. In terms of net sales, sales declined in Machinery Components, Precision Machinery and Construction Machinery from the previous fiscal year. Construction Machinery, in particular, recorded a significant decrease. Demand decreased due to the COVID-19 pandemic, greatly affecting mass-produced machinery in particular, whose lead time is short. Operating profit declined in Machinery Components, Construction Machinery and Ships from the previous fiscal year. Details will be explained in the next page. For extraordinary profit or loss, we recorded an impairment loss in Ships and other segments. As a result, we recorded profit attributable to owners of parent of JPY 26.8 billion, and the dividend forecast of JPY 54 as of January 2021 was revised upward by JPY 11 to distribute a dividend of JPY 65 per share. Next page explains the operating profit by segment. As I will explain later in the section about our medium-term management plan, we have decided to change our business segments from fiscal year 2021. However, I will explain here based on the former segments. For Machinery Components, the COVID-19 pandemic dampened demand, leading to reduced sales and profit. In Precision Machinery, plastics machinery sales decreased, but profit increased due to a change in motor configuration. And for semiconductor-related products, profit increased due to the strong market. In Construction Machinery, profits decreased significantly, because hydraulic excavator sales decreased and quality products (sic) [ costs ] were incurred. For mobile cranes, decreased sales led to lower profits. In Industrial Machinery, profit increased due mainly to increased sales of material handling systems. Unfortunately, operating loss continued for the Ships business, because the market for ships was stagnant. For Environmental Facilities & Plants, profit increased due to increased sales of energy plants and water treatment plants. Please refer to the next page. This is an analysis of changes in operating profit. The main reason for the decrease in profit compared to the previous year was a decrease in sales. However, the decrease in profit was smaller than expected because of the positive impact of decrease in fixed cost, including the decrease in travel expenses as a result of the impact of COVID-19. Next page shows the consolidated balance sheet. Total assets exceeded JPY 1 trillion for the first time in our company's history. Profit attributable to owners of parent increased by JPY 20.8 billion due to an increase in cash and deposits, and notes and accounts receivable and fixed assets also increased. So total assets increased JPY 34.6 billion from the previous fiscal year to JPY 1,030.7 trillion. Liabilities increase was limited to JPY 7.3 billion, partly because interest-bearing debts remained almost the same. Net assets increased by JPY 27.3 billion from the previous fiscal year due to the increase in profit attributable to owners of parent. As a result, the shareholders' equity ratio increased by 1% from the previous fiscal year to 47.6%. Net ratio of interest-bearing debts decreased by 1.4% year-on-year to 2.4% due to the improvement in free cash flow as shown on the next page. We show the consolidated cash flow statement on the next page. Operating cash flows increased by JPY 27.9 billion from the previous fiscal year to JPY 64.1 billion. Despite a decrease in profit before income taxes, improvement in working capital and others helped improve operating cash flow. Although we continued investment activities, it was less than the previous year, so cash flow from investing activities improved year-on-year. As a result of all of this, free cash flow was JPY 20.4 billion. Please turn to the next page. This is the performance forecast for the next fiscal year. We expect orders and net sales to increase from the previous fiscal year. Operating profit is expected to decrease slightly year-on-year to JPY 50 billion. With the impact of COVID-19 being contained, fixed costs are expected to increase as we revitalize our sales activities. Therefore, we forecast a negative impact on profits. However, profit attributable to owners of parent is expected to remain almost unchanged due to an improvement in extraordinary income and loss, because there will not be the impairment losses recorded in the previous fiscal year. The annual dividend forecast is JPY 70, which is an increase over the previous year. Please refer to the next page. The company has decided to change its fiscal year-end in the next fiscal year 2022. As the sales ratio of our overseas subsidiaries has increased due to the progression of globalization, we have decided that we need to adjust our fiscal year-end to the global standard. In addition, we have decided to bring about this change in order to announce the financial results to our investors quickly. Please note that the final decision on this matter will be made at the next fiscal year's general shareholders meeting. The next page is a summary of the results by former segments. This material is for reference only. So I will not explain it, but I would briefly comment on the Ships segment. The Ships segment recorded operating loss in fiscal 2019 and 2020, but we expect it to recover in fiscal 2021, and we expect it to turn profitable. Next page shows overseas sales by regional segment. I will skip over this page. I will now explain the Medium-Term Management Plan 2023. In formulating the Medium-Term Management Plan 2023, we took an approach of striking a balance between sustainability and value enhancement. As you know, last year, we experienced the unprecedented pandemic of COVID-19, which is still having a major impact on our daily life, social activities and economic activities. This has further accelerated the trend of emphasizing the sustainability of society as seen in the target of realizing the decarbonized economy. In the previous medium-term management plan, the main focus was on increasing corporate value. However, in consideration of the changes in the external environment, we have formulated a Medium-Term Management Plan 2023 by balancing social sustainability and corporate value enhancement. In particular, we will focus on enhancing the sustainability of the company through solving social issues and determining our direction from a long-term perspective. Please refer to the next page. This is a basic policy for the Medium-Term Management Plan 2023. In order to strike a balance between corporate value and social value, we have set the following 3 points for the enhancement of corporate value: one, developing a robust entity; two, reformation for improving the corporate value; three, transforming into a company with a comfortable work environment; in addition, for enhancement of social value, we set forth: four, contributing to SDG's movement through products and services; five, reducing environmental burdens through business activities. These 5 items are our basic policies. Please refer to the next page. Since the basic idea of Medium-Term Management Plan 2023 is to enhance corporate value through solving social issues, long-term thinking is necessary. And we have decided to try to bring the ideal stage into existence in 2030, 10 years from now. This chart shows the positioning of Medium-Term Management Plan 2023. The plan is our start toward our long-term objective and lays the foundation for reform. A more clear picture will be presented in the next medium-term management plan and beyond and with the aim to realize it by 2030. On this page, we show our capital policy. We will continue the ROIC management, which has been our basic policy. We will go back to the basics once again and focus not only on increasing profits, but also on improving capital efficiency to ensure thorough ROIC management. We will also continue to make high-level growth investments. In terms of shareholder returns, our basic policy is dividend payout ratio of 30% or more, and we aim to improve the dividend payout ratio in a stepwise manner while improving revenues. The projected dividend payout ratio for fiscal 2021 set at JPY 70 or 31.8% is based on this policy. This slide shows financial targets and the investment plan. Forecast for FY 2021 was already covered in the first section about the projection. So here, let me explain the final year of the Medium-Term Management Plan FY 2023. With orders of JPY 1 trillion and net sales of JPY 970 billion, we will aim to achieve record highs for both. Operating profit is still in the process of recovery with JPY 70 billion, and ROIC is 7.5%. Capital investment will focus on informatization in addition to the continued investment into core businesses, and we will invest JPY 100 billion in 3 years. R&D expenses will expand to JPY 74 billion level through investment for growth. And for M&A and new business investment, JPY 40 billion is incorporated. Please turn to next page. I will explain more in detail the key points of mid-term management plan (sic) [Medium-Term Management Plan]. Firstly, we aim to strike a balance between corporate value and social value. Diagram shown below summarizes the idea. Based on the origin of SHI Group, Sumitomo's business philosophy and SHI's business principles and by pursuing sustainability as a company and solving social issues to enhance social sustainability, we enhanced both of corporate value and social value. Secondly, in order to solve social issues, long-term vision is required. And by backcasting from 2030, 10 years from now, we identified a long-term direction. Let me elaborate more in detail later. Thirdly, we review the business portfolio to realize these and maximize value. This will be also explained more in detail later. Please turn to next page. I will explain an example of the long-term direction shown before. In this slide, megatrends assumed for 2030 and social issues to be solved are identified. And combining them with our product lineup described in 3 categories of move, transport, change a shape and support the lives of people and necessary technologies targeted development areas at SHI Group are shown here. Some have already started and targeted development areas are environment and energy and automation and digitization. Please turn to next page. Targeted development areas are shown here. Due to time constraint, I will not explain detail. But in the field of environment, environmental conservation technologies necessary for sustainable industries are targeted in development. I would skip the following part. Please turn to next page. Efforts to promote sustainability is shown here. Conventionally, we identify the company-wide material issues in promoting CSR and enhanced activities. This time, our basic policy is to strike balance between corporate value and social value, and we promote the policy further. Our aims are to solve social issues through products and services, enhance capabilities to respond to environmental and climate change and apply the TCFD framework in the management of climate-related risks and opportunities and disclose information. And we will penetrate material issues within the group to communicate the value creation stories. Please turn to next page for reviewing the business portfolio. Conventionally, under the business department system, we have made a certain achievement by clarifying earnings responsibility and focusing on the quality of business through the ensuring ROIC. On the other hand, we faced emerging issues including fragmented management resources, in particular, human resources and delayed responses to major complicated environmental changes. In order to take on challenges for sustainability and solution for social issues, which are listed in our midterm management plan (sic) [Medium-Term Management Plan], we deemed it necessary to enhance exploration capabilities and achieve new cultivation capabilities through certain scale and integration, and we review the business portfolio. As a first step, we reorganized the business, focusing on the common business direction and homogeneity and expecting to grow the [ batch ] for net growth through synergy, we review the published segment. Please turn to next page. New 4 segments are Mechatronics, Industrial Machinery, Logistics & Construction and Energy & Lifelines. This slide shows the direction of the 4 business segments. Each direction is configured with the social issues to be solved from the long-term perspectives with the enhanced social value in the center. For example, in Energy & Lifelines, we will head for and build the renewable energy system and resource regeneration and new material solutions. This slide shows product portfolio in the new business segment. Mechatronics includes power transmission and control equipment, motors, inverters and precision positioning equipment. Industrial Machinery includes conventional precision machinery, such as plastics machinery and cryogenic equipment and also quantum equipment and accelerators as well as shown here. Logistics & Construction includes material handling systems in addition to hydraulic excavators, rolled machinery and mobile cranes. Energy & Lifelines includes turbine and pump and ships, in addition to energy environmental equipment, water treatment system, pressure vessels and chemicals instruments. Please turn to the next page. This slide shows orders, sales and operating profit by new segment. The bar chart indicates from the top Mechatronics, Industrial Machinery, Logistics & Construction and Energy & Lifelines and others. Horizontally from the left, FY 2020 results, FY 2021 forecast and FY 2023 targets are shown. Results are shown in deep colors, and you can see the business scale as well. Please turn to next page. From here, let me explain the circumstances in 2021 and direction until 2023 and business results and focus by new segment. First one is about Mechatronics segment. The main business in this segment is Machinery Components in the former segment. As for the circumstances in FY 2021, notable recovery from the COVID-19 pandemic has prompted a global economic upturn. As a result, both orders and sales are expected to increase year-on-year. Targets for FY 2023 are JPY 183 billion of orders, JPY 176 billion of sales and JPY 10 billion of operating profit. As for the direction for FY 2023, we will drive growth at the motion control device business, launch a drive solution business that incorporates robotics elements and the service reform through a condition monitoring system. This slide shows the Industrial Machinery segment. This segment consists of many products. Orders and sales of plastic machinery are shown separately as before. As for market circumstances, in the case of plastic machinery, both orders and sales are expected to increase year-on-year, because demand from electric and electronic sector in China and demand from the U.S. and Europe are expected to stay strong as well as recovery in Japan. As for others, overall, markets are on the recovery trend and orders will increase year-on-year, but semiconductor-related sales will be sluggish due to weak orders in the previous year, and overall sales will be almost flat year-on-year. For FY 2023, we will head for JPY 250 billion, both for orders and sales. As for direction to pursue environmentally friendly technologies will be promoted in the period of plastics machinery. And in others, we'll secure a competitive advantage in the specific field and enhance the business domain that will contribute to improve usability by application of advanced technology. This slide shows Logistics & Construction segment. As for hydraulic excavators, both orders and sales are expected to increase year-on-year, because Japanese and the Chinese markets will stay strong and the recovery of demand in North America is also expected. As for mobile cranes, the market is on a moderate recovery trend and orders and sales will increase slightly year-on-year. In the material handling business, sales are expected to decrease due to reduced orders in the current and the previous fiscal year. For FY 2023, market is on the recovery trend. But without expecting substantial growth, orders will grow to JPY 340 billion, and sales will be JPY 330 billion. As for direction until FY 2023, electrification, automation and autonomous driving are the keywords, and we will head for those directions. Please turn to next page for Energy & Lifelines segment. As for energy plant business, orders are expected to decrease mainly due to declined orders for large scale project for biomass fuel and power generation plants in Japan, but sales will increase because of backlogs. In other business, orders will increase, but sales will decrease due partly to transfer of the domestic waste incineration business. As a result, for the whole segment, sales will be almost flat year-on-year. As for FY 2023, we incorporate the contribution by commercialization of energy plant business in the renewable energy market in orders, but orders will be almost flat year-on-year. As for the direction until FY 2023, toward the renewable energy, recycling of wastewater and new materials solution, we will promote commercialization. And we will also promote labor saving in operation management and strengthen service business globally. Next slide shows the diagram of segment reconfiguration for reference, indicating the change in business scale and movement. From next page and onwards, orders, net sales and operating profit by former segment are shown for the conventional comparison for reference. With this, I conclude my presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]