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

Hello, everyone. I am Shinji Shimomura, President of the company. Thank you very much for participating in today's financial results briefing at 3:00 p.m. today on the Tokyo Stock Exchange. The company announced its FY 2023 financial results and Medium-Term Management Plan 2026. The following is a description of its contents. This is today's content. In the first half, I will give an overview of our FY '23 results, and in the second half, I will explain our Medium-Term Management Plan 2026. First, here is the overview of our FY '23 results. Our fiscal year-end was changed in FY '22. And in this document, figures for FY '22 have been adjusted to allow comparison with the current period. Market conditions, while firm in certain domestic fields showed an overall weakness. This was due to factors such as a lack of momentum in capital investment and a continuing phase of adjustment in semiconductor market conditions. Overseas, capital investment in North America was robust. In Europe, however, inflation triggered an economic slowdown, while in Southeast Asia investment sentiment declined. In China, the recovery of production and consumption was dull and demand continued to decline, while supply chain issues eased, rising prices continued and geopolitical risks remained. This resulted in a high degree of uncertainty. Under these circumstances, during FY '23, the company received orders totaling JPY 1,008.7 billion, achieved net sales of JPY 1,081.5 billion and generated operating profit of JPY 74.4 billion. When compared with the previous fiscal year orders decreased due to a drop in demand for semiconductor-related products and a reduction in energy-related projects. For Energy & Lifeline, sales decreased due to a timing difference in the progress of some construction projects. However, for the other segments, the order backlog led to sales increases. As a result, overall sales increased. Operating profit rose on higher sales in Mechatronics and Logistics & Construction and also due to currency exchange effects. Here is the financial summary. Compared with our most recent forecast, profit attributable to owners of parent was JPY 32.7 billion due to the recording of an extraordinary loss. The extraordinary loss was mainly due to a reevaluation of the asset value of software due to a change in the development plan for our main system and an impairment loss at Sumitomo Construction Machinery, Tangshan, a consolidated subsidiary in China. Due to changes in the business environment, we no longer expect this subsidiary to achieve the earnings originally forecast and have, therefore, recorded an impairment loss on fixed assets that it had held. Here are the results by segment. Details of each segment are provided in the reference section. This is a comparison of operating profit with the previous fiscal year. Positive factors are sales increases and foreign exchange effects resulting from the weaker yen. On the other hand, negative factors were an increase in selling and administrative expenses. Next is the balance sheet. Total assets are JPY 1,200.9 billion. Major factors for changes are as noted. Next is the cash flow statement. Free cash flow was positive JPY 22.1 billion due to an increase in net profit. Here is our forecast for FY '24 earnings. Market conditions in Japan and North America are expected to remain firm. In China and Europe, however, a sense of weakness is causing uncertainty. Supply chain disruptions are easing, although their effects on some models will linger. In addition, while prices of some procured goods are expected to continue rising, we expect that progress of price passing measures will improve profitability to a certain extent. Orders received in fiscal year 2024 will be JPY 1,120 billion. Net sales will be JPY 1,110 billion, and operating profit will be JPY 70 billion. When compared with the previous fiscal year, orders received will increase due to a higher number of energy-related projects, customer completion of inventory adjustments and a recovery in demand for semiconductor-related products. Sales will increase due to the completion of a substantial backlog of orders, mainly in Logistics & Construction. Operating profit will decrease due to investments in large-scale development projects and the impact of exchange rates despite the growth in sales. In FY '24, we plan to pay a dividend of JPY 125, aiming for ROIC of 6.2%. I will explain the details of our capital policy later. This is a comparison of operating profit with the previous fiscal year. Sales and general and administrative expenses will increase in FY '24 due to the effect of exchange rates and development investments in Energy & Lifeline. Next, our forecast for orders, net sales and operating profit by segment compared with FY '23. Mechatronics orders will rise as inventory adjustment in Europe is completed and recovery in China is expected from the second half of the year. Operating profit will decline as a result of lower sales. Industrial Machinery orders will rise as plastics machinery is expected to recover moderately mainly in China. In other areas, semiconductor-related orders are expected to bottom out before recovering from the second half of the fiscal year. Sales will increase due to an old backlog in other areas. Operating profit will remain at the same level as the previous year. In Logistics & Construction, orders for hydraulic excavators will increase as inventory adjustments mainly in North America are completed, although large orders for industrial cranes will decrease, overall orders for the segment will increase. Sales and operating profit will increase as a result of clearing a huge backlog of orders for hydraulic excavators. Energy & Lifeline orders will increase due to a rise in the number of biomass power generation facilities. Sales will be on par with the previous year, but operating profit will decrease due to large-scale development investments. Here, we will discuss Medium-Term Management Plan 2026. First, here is a summary of the previous medium-term management plan. In 2023, the final year of the previous medium-term management plan, the economic environment recovered gradually and although some capital investments softened, the volume of orders received in sales each exceeded JPY 1 trillion. Operating profit ratio was 6.9%, almost in line with our target, while ROIC was 7%. Next is a summary of the previous Medium-Term Management Plan and future issues. We achieved our sales targets. This was due to strong capital investment demand, a buildup of old backlog and a gradual easing of constraints on production, all of which enabled us to move ahead with shipments. Operating profit was almost in line with the plan. While rises in material costs and procured product prices continue to exert an impact, we have made progress and improvements in price passing. However, ROIC was below the target as fixed assets increased due to inventory assets and capital investment. In Medium-Term Management Plan 2026, we will strive to grow highly profitable businesses and reform our business portfolio to enhance earning power. We will also pursue management that is conscious of capital costs as we work to contribute to further increase corporate value and social value. In January of this year, we defined our purpose as the unchanging principle of enhanced society and those within it with compassion through our ownership and vision. In Medium-Term Management Plan 2026, we set targets by backcasting from our ideal state by 2030, along with strengthening the revenue base of existing businesses, we have established 4 key investment areas based on core technologies. We will focus our investments on the fields of robotics and automation, semiconductors, advanced medical devices and environment and energy fields. Next is the basic policy of Medium-Term Management Plan 2026, aiming to achieve our ideal state by 2030. Our basic policy is to develop a robust entity based on the 4 segments that we formed in the previous Medium-Term Management Plan to achieve the 3 key issues. We will carry out strategies from both corporate and segment perspectives. Amid an uncertain global economy, an erratic business environment and changing social styles, our external environment is increasingly defined by a lack of visibility. In this business environment, we will work to strengthen our management base, continue our business portfolio reforms and enhance our earning power with an awareness of cost of capital and return on capital, aiming to sustainably increase our corporate value. These are our plans for earnings results and investments during Medium-Term Management Plan 2026. We aim for operating profit of JPY 100 billion, 8% -- and ROIC of 8%. We are also targeting orders received of JPY 1.28 trillion in sales of JPY 1.25 trillion. We planned capital investment of JPY 190 billion over 3 years, mainly in the key investment areas of robotics and automation, semiconductors, advanced medical devices and environment and energy. We will expand R&D investment to the JPY 90 billion level with investments geared toward growth. Here are the target values for each segment. With the goal to ensure that by FY '30, the company-wide ROIC surpasses the WACC level desired by the market with a sufficient spread being secured and ROIC surpasses WACC in every segment. We aim for the company-wide ROIC of 8% during Medium-Term Management Plan 2026. Now I will explain our corporate strategy. First, our business portfolio reformation. With a focus on capital efficiency and market growth potential, we have clarified the positioning of our businesses. We divided them into businesses that drive growth, businesses to be developed that may play a central role in the next generation, businesses that serve as a stable revenue base and businesses whose strategies are to be rebuilt. We will actively invest in the above 2 quadrants, concentrating our management resources to drive company-wide growth. We will restructure our strategies for low growth and low profit businesses. Here, we will introduce strategies for the semiconductor field, a business that is driving growth. Our products include ion implanters, laser-annealing equipment and cryopumps. We will work to expand the market for power semiconductors, et cetera, promote next-generation model development in response to market changes and strengthen our global expansion with the aim of expanding market share. Next, I will explain shipbuilding, one of our businesses whose strategies need to be rebuilt. Beginning in FY '24, we will no longer accept new orders for the construction of general commercial vessels. The business will be concluded by delivering the vessels currently in the backlog of orders. We will promote business reforms in the areas of decarbonized energy, resource recycling and services, which are part of our Energy & Lifeline segment strategy. Next is an ROIC tree showing an evaluation of our current situation and improvement measures aimed at enhancing capital efficiency due to delays in earnings contributions from new businesses and growth businesses. Strengthening our earning power is the biggest issue. We will make significant investments in 4 key areas and rebuild a strategy for low ROIC businesses as we work to improve capital efficiency. I would now like to explain our capital policy. In Medium-Term Management Plan 2026, we will strengthen our cash flow generation capacity by carrying out measures to improve ROIC. We will also utilize interest-bearing debt to the extent that it does not impair our financial health, using it for investment and shareholder returns. We will pay dividends in a stable manner commensurate with shareholders' equity. Our indicator for this will be dividend on equity, DOE. Our basic policy is to attain a DOE of 3.5% or higher, maintain a minimum dividend of JPY 125 and ensure a total return ratio of 40% or more. During the Medium-Term Management Plan 2026 period, assuming financial targets are met, we aim to deliver JPY 80 billion in shareholder returns through consistent dividend distributions and flexible treasury stock repurchases. For FY '24, we have decided to increase the per share dividend forecast by JPY 5 to JPY 125 and repurchase JPY 10 billion worth of treasury shares. During Medium-Term Management Plan 2026, we expect the total return ratio to exceed 50% with improvements in DOE and continued share buybacks. Next is our corporate strategy of strengthening the business base. Our sustainability material issues and goals in Medium-Term Management Plan 2026 are outlined below. We have set 7 material issues and goals in our ESG aiming to turn the risks that arise from changes in the social environment into opportunities to increase corporate value. In terms of human capital for strengthening the business base, we believe that the growth and development of people and organizations is the source of sustainable business growth, and we will set 5 material issues, implementing specific measures aligned to each of these issues. Now I will explain our segment strategy. First, I will explain the role and direction of each segment. Mechatronics and Industrial Machinery are positioned as growth drivers. Logistics & Construction is positioned as a foundation segment. Energy & Lifeline is positioned as a development segment. In each segment, we aim to expand the key investment areas shown on the right side of the table with the aim of creating new value. Details of each segment will be explained on the following pages. First, in Mechatronics, we will focus management resources on the robotics and automation field, and semiconductor field. In the robotics and automation field, we focus on developing electrically driven modules for AGV versus an AMRs. In the semiconductor field, we will accelerate overseas expansion and advance the development of new models to expand our global business with a focus on power semiconductors. To expand in the field of robotics and automation, we will expand our investment in Invertek to develop electrically driven modules that combine gears, motors and inverters. We will meet electrification and automation needs related to energy conservation, environmental regulations and future robotics application technologies. Now let's turn to Industrial Machinery. In key investment areas, we will drive growth in semiconductors and advanced medical devices, while in foundational business areas, we will strengthen our revenue base with a focus on injection molding machines and other products, aiming to become a highly profitable business entity. In the advanced medical devices field, we anticipate medium- to long-term expansion, fueled by development of medical infrastructures in emerging countries and the increasing sophistication of medical care in developed countries. Through timely investments, we will respond to market needs by further refining technology for BNCT treatment devices, nuclear medicine models and cryocoolers for MRI. In Logistics & Construction, we will focus on developing next-generation products for areas such as automation and electrification by bundling compatible businesses into segments, we are enabling the development of common elemental technologies. We will utilize our 7 production bases in Japan and overseas, primarily targeting developed markets such as Japan and the United States as we work to secure stable profits. The key investment area is electrification and automation. Demand related to carbon neutrality is also increasing in construction machinery. We are advancing development with the aim of achieving early commercialization of electrified construction equipment. Even with electrification, we will refine our well-established hydraulic excavators by improving the operability and increasing production efficiency. We are already commercializing remotely controlled and automated systems and logistics machinery, and we are also applying our knowledge and experience to construction machinery. In Energy & Lifeline, we will target long-term growth by investing in carbon neutral and renewable energy promotion businesses to foster next-generation core businesses. At the same time, we will focus on enhancing after-sales service as we reinforce the earning power of existing businesses, which are the foundation of our profits. In the environment and energy field, we will promote commercialization while combining and developing the competencies of each business within the segment. We will invest in new growth business areas such as CCUs, gasification, LAES and offshore wind power generation facilities and will establish a development and demonstration system. By expanding our business in the area of decarbonized energy and resource recycling, we will pursue an increase in corporate value, along with an improvement in the group's social value. The following pages are for reference only and will not be explained. This concludes my explanation. Thank you for your attention and dedication and loyalty to our company.