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

Hello, everyone. I'm Shimomura, President of Sumitomo Heavy Industries. Thank you very much for joining our financial results meeting today despite your busy schedule. At 3:00 p.m., on 29th October, we announced the results of the second quarter FY 2021 and the revision and the year-end dividend forecast at the Tokyo Stock Exchange. I'll explain them and the business forecast for FY 2021. Today's presentation starts with financial summary for the second quarter FY 2021, followed by the projection for FY 2021. Finally, I will explain the topics in the first half of this year, including initiatives on sustainability. At first, let me explain the financial summary for the second quarter FY 2021. Economic environment surrounding our company is generally on the recovery track, with lingering impacts of COVID-19. And the recoveries in capital investment and machinery demand have been stronger than expected. For the second quarter FY 2021, orders were JPY 489.5 billion. Net sales were JPY 446 billion, and operating profit was JPY 27.5 billion, marking increase both in sales and profit year-on-year. Let me explain by item. As for orders, except Energy & Lifelines, orders increased year-on-year, and orders in Industrial Machinery and Logistics & Construction increased substantially. In Industrial Machinery, orders in plastics machinery and semiconductor production equipment increased. And in Logistics & Construction, orders in hydraulic excavators increased due to demand recovery. As for sales, sales in all segments increased year-on-year. Sales in Logistics & Construction increased substantially due to rebound recovery. Operating profit increased in all segments year-on-year, except Industrial Machinery. Details will be provided on the next page. Net profit attributable to owners of parent was JPY 17.7 billion and dividend per share will be JPY 35, up JPY 26 per share year-on-year. Next, let me explain operating profit by segment. From this fiscal year, results are presented by the new segment. In Mechatronics, due to increased demand for the mainstay gear reducers, sales and profit increased. In Industrial Machinery, plastics machinery saw increased sales and profit due to increased demand in China and Europe. But semiconductor production equipment saw a decrease in sales and profit due to a decrease in order backlog compared to the previous year. As a result, the segment profit stayed almost unchanged from the previous year. In Logistics & Construction, hydraulic excavators were robust in Japan and China and demand increase with a market recovery in North America also contributed to the sales and profit increase. The material handling system business sales and profit decreased. In Energy & Lifelines, the profit increase mainly in energy plant business led to the segment profit increase. Year-on-year changes in operating profit. Operating profit year-on-year growth is mainly attributable to sales increase of hydraulic excavators and plastics machinery, among others. Balance sheet. Total assets were JPY 1.045 trillion. Current assets decreased by JPY 2.3 billion, but fixed assets increased due to asset capitalization. And the total assets increased JPY 14.3 billion from the end of the previous fiscal year. Liabilities decreased JPY 11.9 billion due to a decrease in long and short-term debt. Net assets increased JPY 26.2 billion from the end of the previous fiscal year due to the increase in net profit. As a result, shareholders' equity ratio increased 1.8 points to 49.5%. Net ratio of interest-bearing debt decreased 1.4 points to 1.0%. Sales by regional segment. Sales increased in North America, Europe and China. In North America, sales of hydraulic excavator and construction crane increased. In Europe, sales of hydraulic excavator and plastics machinery and Mechatronics increased. And in China, sales of Industrial Machinery, mainly plastics machinery, increased. Next, I will explain projections for FY 2021. At first, let me explain the assumption for the projection, our initiatives for the new coronavirus infections and the supply chain disruption. As for how we address the new coronavirus infection, we prevented the outbreak of cluster infections in the company despite the rapid increase in the number of infections in Japan and overseas. And we were able to minimize the impact on production. As for future actions, we review BCP constantly so that we will be able to maintain sales and production activities. As for how we address the supply chain disruption, problems occurred in the supply and logistics of materials and parts due to lockdowns in Asia caused by the coronavirus crisis; this issue of ships stalled from unloading in the U.S. and China; and the labor shortages in the U.S. However, we were able to minimize the impact on our business performance in terms of volume and price because many of the orders were received before these problems became apparent and because the BCP worked well. As for future actions, we will negotiate for sales price revision due to expected impact expansion, and we will strengthen and expand supply chains and review lead time in a timely manner. Bearing these issues and the initiatives in mind, we compiled the forecast for FY 2021. Orders and net sales will increase year-on-year, and orders are shown as JPY 990 billion, and net sales are JPY 950 billion. Profit environment will continue to be tough with materials and procurement cost increase and tight supply, but with steady progress in productivity improvement and supply chain reforms, sales increase is expected. Operating profit will be JPY 60 billion, up JPY 10 billion from the initial forecast of JPY 50 billion. As for net profit, with a reduction of impairment loss, which was posted in the previous year, extraordinary income will improve and profit attributable to owners of the parent will be JPY 34 billion. Dividend per share is revised to JPY 90, up JPY 25 from the previous year's dividend of JPY 65. From here, I will explain the forecast for FY 2021 by segment. Let me start with Mechatronics. Major businesses in this segment belong to the former Machinery Components segment. Demand recovered mainly in Japan, Europe, the U.S. and China, and orders and sales increased year-on-year in large and small and the medium-sized gear reducers and precision gear reducers. Operating profit is also expected to increase but only to a limited extent due to soaring material costs. Next slide shows Industrial Machinery. This segment consists of a variety of products. And as before, orders and sales of plastics machinery are shown independently. As for plastics machinery, demand for electrical and electronics-related products in China has been robust. And in Europe and the U.S., demand for automotive and food containers has been growing, and orders and sales will increase year-on-year. Operating profit will be affected by soaring material costs. As for semiconductor production equipment, investment in Japan, Taiwan and China has been robust, and orders will increase year-on-year, but sales will decrease year-on-year. Next slide shows Logistics & Construction. Orders and sales of hydraulic excavator will increase year-on-year due to strong markets in Japan and North America, but partly due to soaring material costs, operating profit increase will be limited. Market recovery in construction crane is moderate, but orders and sales will increase year-on-year. Sales in material handling system centering on industrial crane will decrease year-on-year. Finally, let me explain Energy & Lifelines segment. Orders will increase year-on-year due to an increase in orders in energy plant business in Japan for biomass power generation equipment. Sales and operating profit are expected to be at the same level as the previous year as businesses in this segment will remain steady. Earnings forecast by segment. I will skip the comments in detail. But Industrial Machinery will serve as a key driver for the revision of the forecast for the entire company. Now I will explain the topics in the first half of this fiscal year. First topic is development. This table shows the targeted development areas in the midterm management plan 2023. We will promote development in 4 targeted areas of environment, energy, automation and digitalization. Today, let me explain our initiatives in environment and energy areas. I'll explain the energy recovery from wastewater after biodegradation. Our technology research center has succeeded, for the first time in the world, in recovering energy from unused dissolved components contained in anaerobically treated wastewater that was disposed of in the past, by generating electricity without microbial reactions. We will continue to study and develop for the commercialization in future. Second topic is the completion of the new plant for injection molding machines. For injection molding machines, we have production bases in Chiba and Germany, with Chiba supplying products globally and serving as the mother plant for our plastics machinery business. To increase production capacity as well as improving labor efficiency and automation, our new plant was completed in July 2021. The third topic is the increased locations of ion irradiation business. SHI ATEX, one of our wholly owned subsidiaries, is the only company in Japan that provides ion irradiation service. For ion irradiation, we use our own accelerators and ATEX already owns 4 units in Saijo City, Ehime Prefecture. With the recent expansion of the power semiconductor market, including for automotive and consumer applications, requests for ion irradiation have been rapidly increasing. The new Unit #5 has been installed in Kurashiki City, Okayama Prefecture this time. The fourth topic is the promotion of sustainability. In April, we strengthened the promoting organization. And in September, we established a basic sustainability policy. In environment of ESG, we endorsed TCFD in October. In governance, we are enhancing the function of Board of Directors by increasing the ratio of outside directors and appointing female outside auditors. Future issues are as shown here, and we will accelerate the promotion of sustainability to strike the optimum balance between enterprise value and social value. The final topic is governance. As mentioned in the previous topic at the promotion of sustainability, toward further improved governance, we review the composition of the Board of Directors, enhance deliberations with an awareness of capital costs and deepen the discussion on strategic direction. With this, I conclude my presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]