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

[Interpreted] Hello, everyone. I am Shinji Shimomura, President of the company. Thank you very much for participating in today's financial results briefing. The company announced its financial results for fiscal year 2024 today on the Tokyo Stock Exchange. The following is a description of its contents. Here is an outline of today's explanation. I'll explain the financial summary for fiscal year 2024 and our forecast for fiscal year 2025. Then I'll discuss the review of the Midterm Management Plan 2026. First, here is the overview of our fiscal year 2024 results. Looking at the market environment, in Japan, capital investment shifted toward a gradual recovery, mainly in the manufacturing industry, but there were some areas of weakness with the semiconductor market showing signs of stagnation. Overseas, in the U.S., while capital investment remained firm, demand declined in the hydraulic excavator market. In Europe, the economy remained weak due to monetary tightening. In China, the worsening real estate market continued to hamper demand. Under these circumstances, during fiscal year 2024, the company received orders totaling JPY 936.1 billion. Sales were JPY 1,071.1 billion, and operating profit was JPY 55.1 billion. Here is an outline of our results. Operating profit decreased year-on-year due to lower sales from weak orders and increased development costs. We recorded an extraordinary loss of JPY 27.5 billion, resulting in current profit of JPY 7.7 billion. Here is a breakdown of the extraordinary losses. We recorded an impairment of JPY 24.9 billion for Lafert's fixed assets, including goodwill and other business assets as well as JPY 2.6 billion for restructuring costs related to our European operations. Lafert is a core business in the robotics/automation field, which is a key investment area. We will improve capital profitability by carrying out structural reorganization through the consolidation of production facilities and by expanding business with a focus on high-profit models. We aim to enhance the added value of our business through cross-selling with Invertek in the U.K. and seek further steady growth by expanding in the U.S. market, which has potential for growth. Next, we have a comparison of operating profit with the previous fiscal year. While foreign exchange differences and other factors were positive, the decrease in sales and an increase in selling, general and administrative expenses were negative factors, resulting in a profit decline of JPY 19.3 billion. Here are the results by segment. Details of each segment will be explained later. Next is the balance sheet. Total assets are JPY 1,260.2 billion. Next is the cash flow statement. Compared to the previous fiscal year, the decrease in net profit, increase in working capital and continued investment resulted in a negative free cash flow of JPY 36.7 billion. Next, I will explain the earnings forecast for fiscal year 2025. We expect the market environment in Japan to remain stable. We expect North America to see a pickup in demand for hydraulic excavators and Europe to bottom out and gradually recover. China will continue to experience a downturn, with uncertainty remaining over the U.S. policy towards China. In this market environment, in fiscal year 2025, we plan to achieve orders of JPY 1.13 trillion, sales of JPY 1.09 trillion and operating profit of JPY 60 billion. In fiscal year 2025, we plan to pay a dividend of JPY 125, aiming for a return on invested capital of 5.0%. I will explain our capital policy later. This is a comparison of operating profit with the previous fiscal year. In FY '25, sales growth and other factors will be positive factors, while currency effects and increased selling, general and administrative expenses will be negative factors. Next, we have our performance forecast by segment. Starting in fiscal year 2025, we will reorganize certain operations between Mechatronics and Industrial Machinery. I will explain the details later. I will now explain by segment. First, Mechatronics. Despite firm demand in Japan for small- and medium-sized gear reducers, orders in 2024 fell due to a decrease in demand for semiconductor-related products. Sales and operating profit decreased as demand for gear reducers and motors did not recover in Europe and China. Orders in 2025 will increase as market conditions recover in Japan, Europe and the semiconductor sector. Sales and operating profit will increase due to a rise in orders. Now let's turn to Industrial Machinery. Orders in 2024 were flat because in plastics machinery, Europe remains sluggish, although the China market for electrical and electronic-related products bottomed out. Other businesses declined due to the continued impact of inventory adjustment and investment postponement by customers amid stagnation in semiconductor market conditions. Sales for plastics machinery decreased due to low order backlogs at the start of the fiscal year, especially in Europe. However, other businesses saw an increase because of existing order backlogs around semiconductor-related products. Operating profit decreased due to a decline in sales of plastics machinery. Orders in 2025 will increase as deterioration in the European market bottoms out and as the Japan market for plastics machinery recovers. Other businesses will also see growth from the recovery of the semiconductor market and orders for medical projects. Sales will decrease in the semiconductor-related sector due to a decline in orders received in the previous fiscal year, but will increase due to higher orders for plastics machinery. Operating profit will decrease mainly due to a decline in semiconductor-related sales. Next is Logistics & Construction. In 2024, orders for hydraulic excavators decreased, mainly due to reduced demand in the rental markets in the U.S. and Japan. Mobile cranes decreased on weak demand in Japan. Industrial cranes increased because of large projects in steelmaking and shipbuilding. Sales for hydraulic excavators decreased due to fewer orders, while mobile cranes and industrial cranes increased because of backlogs. Operating profit decreased mainly due to a decline in sales of hydraulic excavators. Orders in 2025 will increase due to a recovery in hydraulic excavators in the U.S. market. Mobile cranes and industrial cranes will increase as demand strengthens. Sales will increase due to higher orders for hydraulic excavators, and the industrial cranes will also increase due to a high level of order backlog. Operating profit remains flat due to model lineup despite an increase in sales. Finally, let's look at Energy & Lifelines. In 2024, orders for biomass power plant projects in Japan increased in the energy plant sector, but orders decreased in other businesses due to our withdrawal from the new shipbuilding business. Sales in the energy plant business saw a decline due to a smaller order backlog. Other businesses increased due to a large number of orders that were recorded as sales in this fiscal year. Operating profit decreased due to increased development costs for LAES, although sales remained flat. Orders in 2025 are expected to increase due to an increase in biomass power plant projects, both in Japan and internationally in the energy plant sector and anticipated orders for large structures in other businesses. Sales will decrease due to the continued decrease in order backlog in the energy plant sector, but other businesses will see an increase as order backlogs contributing to this period's sales increase. Operating profit will increase due to a reduction in development costs despite a decline in sales. Next is the revision of the medium-term management plan. Our basic policy in medium-term Management Plan 2026 is to develop a robust entity. We are implementing basic strategies from both corporate and segment perspectives for the following three priorities: improve profitability, enhance capital efficiency and strengthen new business exploration. MTMP '26 was set back [ casting ] from our ideal state by 2030. However, our performance has been below expectations, partly due to a change in the business environment and delays in improving the profitability of our core businesses. We have determined that the basis for our FY '26 plan has been undermined by stagnant orders in FY '24 and have, therefore, revised our targets. The business environment has significantly changed from initial expectations, especially in the European semiconductor and hydraulic excavator sectors. As shown in the slide, given the current business environment, we have determined our targets for fiscal year 2026 would be difficult to achieve. We have, therefore, revised the MTMP '26 target for operating profit down from JPY 100 billion to JPY 80 billion. Our ideal state by 2030 and targets unchanged, we have revised our strategies for achieving them. By adding initiatives and speeding up their execution, we aim to quickly get back on track with our targets. To this end, we will actively move ahead with reorganizing the European business, strengthening the semiconductor business, reviewing the production system and improving the quality of operations in the construction machinery business and reforming our portfolio. In light of the sluggish orders in 2024, we are revising the MTMP '26 targets to JPY 1.2 trillion in orders, JPY 1,173 billion in sales, JPY 80 billion in operating profit, an operating margin of 6.8% and ROIC of 7%. Next, I will explain the reorganization of the models that make up the segment. We have reconfigured businesses between segments to streamline segment management and promote synergies. We have reallocated the laser systems business to Industrial Machinery and the cryo coolers business to Mechatronics. In semiconductors, we have integrated the components business into Mechatronics and the semiconductor equipment business into Industrial Machinery. Here are the FY '26 target values by segment. The results of fiscal year 2024, the first year of MTMP '26, were far below the initial plan with a weakening of our profitability. With this in mind, to bridge the gap between our ideal state by 2030 and the current situation, we are revising our strategies while accelerating the implementation of measures to rebuild our profitability. Through these efforts, we will work to restore profitability, aiming to quickly exceed our capital costs. In the European business, the prolonged market downturn significantly affected Lafert in the electric control and Demag in the plastics machinery. Boiler market conditions have also worsened, and SFW has also been significantly affected. We will quickly turn around the businesses of Lafert, Demag and SFW so that they can contribute to business performance. This will include staff reductions, factory closures and streamlining product lines. In the semiconductor-related business, we have integrated our ion implantation and laser annealing businesses. We will use synergies between these 2 product categories to strengthen our business in the power semiconductor field. We will work on strengthening our business in Europe and North America through efforts such as collaborating with LASSE and establishing an evaluation and development center in North America. Next is our progress on business portfolio reformation. We will categorize businesses outside our key investment areas into three types: businesses that will serve as a stable revenue base, underperforming businesses and businesses whose strategies are being rebuilt. We will proceed with reforming our business portfolio based on this approach. Next, we will discuss the capital policy. In Medium-term Management Plan 2026, we will maintain a minimum dividend of JPY 125 and aim to achieve a DOE of 3.5% by the final year while continuing our basic policy of flexible share buybacks. Next, I would like to talk about our sustainability initiatives. The 7 targets of sustainability material issues and the 2024 results and 2026 targets are as shown here. Now let's look at our segment initiatives. First, Mechatronics. In 2024, the segment was affected by the prolonged downturn in Europe. However, we will continue to promote sales expansion for drive modules, with demand expected to remain high for high-efficiency motors and collaborative service robots. In the semiconductor-related components business, we are advancing our approach to top global clients and preparing facilities for joint development. In the foundational business area, we will work to improve capital efficiency by narrowing down our product lineup to ensure stable revenue. The second page for each segment provides specific examples of initiatives. We are developing autonomous mobile robots for the transportation and logistics industry, which is expected to have high demand as well as various drive modules for service robots that can work alongside people. We aim to enhance customer value by expanding our installation base business and providing total maintenance solutions to secure a stable revenue base. Then let's turn to Industrial Machinery. In the key investment area of the semiconductors field, we will focus on power semiconductors. In the advanced medical devices field, we will focus on projects centered around proton beam cancer treatment equipment and BNCT cancer treatment equipment. In the plastics machinery business, one of our foundational business areas, we will improve profitability by implementing structural reorganization at Demag, reorganizing product lines and reforming business processes. In semiconductors, we will complete the development of ion implanters for power semiconductors and next-generation ion implanters for the memory market. We also aim to expand our business through LASSE by acquiring channels with major European semiconductor clients. In the advanced medical devices field, we will focus on acquiring projects centered around proton beam cancer treatment equipment and BNCT cancer treatment equipment. We will strengthen our aftersales service for plastics machinery, ion implanters and advanced medical devices as we work to improve profitability. Next is Logistics & Construction. By establishing a development center, we will accelerate development in the robotics/automation field, focusing on shared segment challenges like electrification, remote and automated operations and digital transformation. We aim to differentiate our business by introducing new models and thereby improve profitability. We will also use digital transformation to develop and enhance services that offer high added value. In robotics/automation, we are developing a 13.5 ton electric excavator and plan to showcase a demo unit at an exhibition. In automated ARTG, we are pursuing development for differentiation in automation and carbon neutrality. In the service field, we will strengthen our business by offering added value services such as the large crane productivity improvement support, digital transformation tool, which uses the group's dedicated cloud. Finally, let's look at Energy & Lifelines. In this segment, we are advancing our efforts in the fields of carbon neutrality and renewable energy promotion. For carbon neutrality, we are advancing carbon capture equipment and biomass gasification facilities. In renewable energy promotion, we are working on LAES demonstration and the construction of base structures for offshore wind power generation. In our foundational business areas, we will carry out structural reorganization and strengthen our aftersales service. In boilers, we will strengthen our aftersales service in areas such as proposals for fuel conversion modifications and basic maintenance. The renewable energy promotion business, we will advance the demonstration of LAES. We are also enhancing our production system to mass produce base structures for offshore wind power generation. 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.