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

Hello, everyone. This is Shimomura, the President of Sumitomo Heavy Industries. Thank you very much for joining financial summary meeting despite your busy schedule. Today, at 3:00 p.m., we announced the financial results of the second quarter FY 2022 and the revision of the forecast for FY 2022 at the Tokyo Stock Exchange. Let me explain the contents in this meeting. This is today's content. In the first half of presentation, I will explain the financial summary for the second quarter FY 2022 and the projections for FY 2022. And in the second part, I'll explain topics in the first half of this year and the initiatives to promote sustainability. Prior to the presentation on the financial results, let me explain the change in fiscal year-end. Starting from FY 2022, the fiscal year-end is changed. In this year of transition period, the results of 9 months are recorded for Sumitomo Heavy Industries and its domestic subsidiaries, but 12 months for overseas subsidiaries as before. Included period varies between domestic and overseas, and included period in the second quarter results are shown in the red box part. I will start with the financial summary for second quarter FY 2022. FY 2021 figures are adjusted for the like-for-like comparison. Orders in the first half were JPY 705.4 billion. Net sales was JPY 576.6 billion, and operating profit was JPY 26.7 billion. Orders and net sales increased and operating profit decreased year-on-year. Orders increased due to the solid growth in capital investment and machinery demand, along with the overall steady economic environment. Net sales increased due to the impact of yen's depreciation, but the increase was limited due to the production constraints resulting from procurement difficulty and the difference in progress of construction work in Energy & Lifelines segment, among others. Operating profit decreased due to price increase in raw materials and procured products, sales decline in Energy & Lifelines segment and the decreased project profitability despite the positive impact by depreciation of yen. Profit attributable to owners of parent remains almost same year-on-year at JPY 19 billion. And accordingly, interim dividend for the first half remains unchanged at JPY 45 per share. Performance by segment. Orders were robust in all segments due to the overall steady development of economic environment. Net sales increased, but increase was limited due to production constraints resulting from procurement difficulty in the Industrial Machinery and the Logistics & Construction segments and the difference in progress of construction work in the Energy & Lifelines segment, among others. Operating profit decreased due to price increases in raw materials and procured products, sales decline in energy plant and the decreased profitability in overseas projects despite positive impact by depreciation of yen. Let me explain the details of segment later. Year-on-year comparison of operating profit. Positive factors from the previous years are sales increases in Mechatronics and Industrial Machinery and the foreign exchange impact by depreciation of yen. Various negative factors are increasing SG&A expenses along with sales growth and the impact from price increase of raw materials and procured products. Consolidated balance sheet. Total assets were JPY 1,179.4 billion. Variance by item is as described. Liabilities and net assets. Due to increased retained earnings and foreign currency translation adjustment due to depreciation of yen, net assets increased and the shareholders' equity ratio went up to 51.2%. Consolidated cash flow statement. Operating cash flow stayed at JPY 24.2 billion due to an increase in working capital. Investing cash flow was negative due to continued investment and, as a result, free cash flow was JPY 2.7 billion. Next, I'll explain projections for FY 2022. We revised the full year 2022 full year forecast based on the first half results. As for the full year forecast for 9 months, orders are JPY 970 billion, net sales are JPY 870 billion and operating profit is JPY 43 billion. Compared to the previous forecast, orders increased due to the expected strong demand in capital investment and the machinery demand sustained for this fiscal year, and there is no major factor for change in sales from the previous forecast. Operating profit forecast is down due to the increase in raw materials, procured products and logistic costs beyond our initial expectation and worsened profitability in overseas project in energy plants despite the impact of depreciation of yen. Dividend remains unchanged from the initial forecast as JPY 90 for FY 2022, and the dividend payout ratio is 42.4%. Orders, net sales and operating profit by segment. Compared to the previous forecast, orders in Energy & Lifelines are down due to the shift of contract signing time of large projects. But in all other segments, orders were increased. Net sales in hydraulic excavators are down due to the production constraints caused by the procurement difficulty, but in all other businesses, sales were increased. Operating profit is down due to the increase in raw materials, procured products and logistic costs beyond our initial expectation and worsened profitability in overseas project in energy plants despite the impact of depreciation of yen. I will explain by segment. Starting with Mechatronics. In the first half FY 2022, orders and sales increased due to a rise in demand for small to medium-sized gear reduces, precision gears for robot and motors in Japan, Europe and the U.S. But operating profit improvement was limited due to an increase in cost for materials and logistics despite positive impact by increased sales and depreciation of yen. For the full year of FY 2022, we assume that the market condition will remain strong, and we have revised upward the previous forecast for orders and sales, but revised downward the operating profit forecast due to higher rise in cost for materials and logistics than our initial expectation despite the positive factor of depreciation of yen. On the second page of each segment, orders, net sales and operating profit for 6 years are shown as reference. In Mechatronics, sales mix by model of gear reducer business is shown. There is no major change in mix from the end of the previous fiscal year. Industrial Machinery. In plastics machinery, orders, sales and operating profit decreased in the first half FY 2022 due to the slowdown of demand in China and Europe, which had been strong in the recovery from pandemic in the previous year. FY '22, full year forecast remains almost unchanged from the previous forecast. Orders and sales increased slightly, but operating profit decreased slightly due to a rise in materials cost and the electricity costs, particularly in Europe. In Others business, in the first half FY '22, sustained strong demand for semiconductor-related products led to increases in orders, sales and operating profit. But in FY '22 full year, orders are revised upward from the initial forecast, with sustained strong demand in semiconductor-related products. Operating profit slightly decreased due to increased order backlog, whose labor time stretches longer into next year and beyond and limited sales increase due to procurement difficulty in addition to the rise in material and logistic costs. In Industrial Machinery, sales mix plastic processing machinery business by segment, and orders and sales of ion implanters business. When we compare the sales mix of injection molding machines with that of the end of the previous fiscal year, sales in medical care, foods, containers and miscellaneous goods increased slightly. Logistics & Construction. In the first -- FY '22, in hydraulic excavators, orders increased despite the demand decrease in China, supported by strong demand in other regions. Net sales decreased due to production constraints and operating profit deteriorated with sales decrease and the material cost increase despite the impact by depreciation of yen. The full year order forecast for FY '22 is revised upward due to strong orders in Japan and North America, but sales are revised downward due to production constraints. And operating profit is revised downward due to sales decrease and the material cost increase beyond expectation. In Others business, order sales and operating profit increased in the first half FY '22. For the full year forecast for FY '22, all of orders, sales and operating profit are revised upward from the previous forecast. In Logistics & Construction, in addition to the demand of hydraulic excavators by region, in this forecast, information of industrial cranes and mobile cranes are shown. Demand of hydraulic excavators by region in FY '22 will be almost flat year-on-year, except China. Finally, Energy & Lifelines. Energy plant orders in the first half FY '22 increased due to orders received for large-scale project for biomass-fueled power generation plants in Japan. The sales decreased due to reduced order backlog in Japan. Operating profit decreased due to sales decrease and the declined profitability in large projects in Europe. In Others business, orders, sales and operating profit increased. For the full year forecast of FY '22, orders in energy plant business are revised downward from the previous forecast due to delay of large contract agreement compared to our forecast. Operating profit is revised downward due to a difference in construction work progress and worsened profitability of overseas project. In Energy & Lifelines, main order received projects are shown. In this year, we received our new order in Japan and Sweden, respectively. Following 4 pages are reference materials. This chart shows consolidated order, sales and operating profit. Orders and sales of sub-segments of plastics machinery and hydraulic excavators and sales from semiconductor-related businesses are shown here. Sales in semiconductor-related businesses of this year for 9 months will be equivalent to the previous year of 12 months. This slide shows capital investment, depreciation cost, research and development cost, personnel and foreign exchange sensitivity. Sales by region. Overseas sales increased year-on-year in all regions, except China. Now I'll explain topics in the first half FY 2022. First, development condition. This slide shows the development targets shown in the Medium-Term Management Plan 2023. In the Medium-Term Management Plan 2023, we are strongly promoting development in 4 areas of environment, energy, automation and digitalization. And today, let me present 2 initiatives in automation. Our Technology Research Center succeeded in developing a robot capable of traveling over curved steel structure, which had been conventionally difficult. It will reduce physical burden on workers on sites of manufacturing and maintenance of large steel structures, including ships and plant facilities, and we aim to create safer and smarter next-generation manufacturing sites. Second, newly developed product won the award. TUAKA an actuator for driving robots, won Hermes Award 2022 at HANNOVER MESSE held in Germany in May 2022. HANNOVER MESS described this award as an Oscar in the industrial world, and the products and solutions with prominently advanced technological innovation are subject to the award, and we are highly honored to win the award this time. I'll introduced 2 completions of new plants, starting with the new plant for gear reducer. Our new plant was completed in Mexico and launched the operation. It aims to expand gear reducer business in the North, Central and South America, through assembly parts machining and supply. Second, new plant completion of ion implanter. Sumitomo Heavy Industries Ion Technology, a wholly owned subsidiary of SHI manufacturers ion implanters used in the semiconductor manufacturing process in Saijo City, Ehima Prefecture. This plant was completed in October 2022, with further automation and labor savings in addition to the capacity expansion. With this, we expand the ion implanter business further, which is a core business in our group, semiconductor manufacturing related business. Final topic is the development of our next-generation heavy ion cancer therapy device. SHI and the National Institutes for Quantum Science and Technology successfully developed the world's first multi-ion source that enables more advanced heavy ion cancer therapy. This development enables treatment using multiple ions and can increase the damage inflicted in cancer cells while reducing damages to surrounding normal cells. We are accelerating development aiming the treatment launch in 2026. Finally, the progress in promoting sustainability. We started an honest discussion for CO2 reduction at the time of use of products as a basis for CSV. Our initiative to increase the disclosure of nonfinancial information and offering products and services for social issue solutions are highly appreciated, and SHI is selected as a component of ESG investment index and the positive impact financing contracts were concluded. Future issues are as shown here, and we promote our initiatives further, aiming to strike optimum balance between corporate value and social value. From next page, I will explain our initiatives in environment, social and governance. First, response to climate change risks. In line with the Paris agreement, we worked out a long-term plan and analyzed and evaluated the climate change impact on SHI in 2 scenarios of 1.5 and 4 degrees, and SHI is a machinery manufacturer that promises diverse product groups. This time, we focused on Energy & Lifelines and the Mechatronics segment with high level of CO2 emission at the time of product use and with relatively high impacts on business and evaluated risks and opportunities. Business and response to human rights. SHI as a company with global business development, recognizes that the human right consideration is important in the entire value chain. We set up the cross-sectional human rights project to identify the major human rights risks and to build management structure, and we plan to establish the human rights policy at the beginning of the next year. Governance. Based on the results of Board of Directors' effectiveness assessment, we review especially the composition of the Board of Directors, accelerate the discussion on business portfolio strategy and enhanced deliberations, with an awareness of cost of capital to improve governance further. With this, I conclude my presentation.