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

Hello, everyone. I am Watanabe, President and CEO. Thank you very much for joining us today. I will explain the financial results announced today and the progress of the Medium-Term Management Plan. Today's agenda will be shown here. First, here is a summary of the FY 2025 financial results. Orders were JPY 1,158.4 billion. Net sales were JPY 1,066.9 billion. Operating profit was JPY 51.5 billion, and ROIC was 4.2%. As for the market environment, orders increased in all segments with a gradual recovery in Japan and steady growth in the U.S. However sales operating profit decreased in the Industrial Machinery and Logistics and Construction segments due to a small backlog of orders received in the previous fiscal year. Here is a summary of the financial results. Current profit was JPY 30.9 billion, an increase of over JPY 23 billion, partly due to a decrease in the large extraordinary loss in the previous fiscal year. This is an analysis of changes in operating profit. The decrease was mainly due to the impact of lower sales in the Industrial Machinery segment and higher SG&A expenses. In the others there was an improvement in gross profit margins in each business segment. Here are the financial results by segment. I will explain in more detail later, so I will skip this page. This is balance sheet. Total assets amounted to JPY 1,320.5 billion. Here is cash flow statement. Cash flow from operating activities improved significantly due to improvements in working capital. As a result, free cash flow has turned positive. Next, I will explain the performance forecast for fiscal year 2026. We abolished the business unit system as a reorganization in January of this year. Instead, we established an SBU system. Here, we show the details, so please have a look at it later. This is performance forecast summary. Orders are expected to be JPY 1,120 billion, net sales to be JPY 1,090 billion, operating profit to be JPY 60 billion and ROIC to be 4.8%. In the Energy & Lifeline segment, we expect a decrease in orders due to the impact of large orders received in the previous fiscal year, but we expect an increase in sales and profit. For the overall forecast, current profit is expected to be JPY 34 billion. ROE is planned to be 5%. The dividend per share for fiscal year 2025 is JPY 125 per share as planned. For FY 2026, we plan to pay JPY 145. Here is a comparison of operating profit with the previous fiscal year. In addition to the sales increase in the others, effects from personnel measures, which will be discussed later also been factored in. This is performance forecast by segment. The details will be explained on the following pages and beyond. From here, I will give you an explanation by segment. First is the Mechatronics segment. In FY 2025, orders for gear reducers, motors and inverters and cryocoolers all increased. Net sales and operating profit increased in line with the increase in orders. As for the outlook for fiscal year 2026, we expect orders for gear reducers and motors and inverters to increase due to strong demand in Europe and the United States. Net sales and operating profit are expected to increase due to the increase in orders. Here is the Industrial Machinery segment. In fiscal year 2025, orders for plastics machinery increased mainly due to a rush of orders before the price revision. Net sales decreased partly due to a small backlog of orders for semiconductor manufacturing equipment and operating profit also decreased due to lower sales. As for the forecast for fiscal year 2026, we expect an increase in orders for semiconductor manufacturing equipment, assuming the resumption of investment. On the other hand, plastics machinery will see a decrease, taking into account the reaction to the previous year's increase. As a result, the segment will see a slight decrease in orders. We expect an increase in net sales due to an increase in semiconductor manufacturing equipment, and we also expect an increase in operating profit, taking into account factors such as the increase in sales and the effects of structural reorganization for plastics machinery. This is about the Logistics & Construction. In fiscal year 2025, orders for hydraulic excavators increased mainly due to a rush of orders before the price revision in Japan. In addition, orders for industrial cranes also increased, mainly for shipbuilding and steel product applications. Net sales decreased due to a small backlog of orders for hydraulic excavators in the previous fiscal year and operating profit also decreased due to a drop in hydraulic excavator sales and an increase in the allowance for doubtful accounts for hydraulic excavators in the overseas market as well as a decline in highly profitable industrial crane projects. As for the forecast for fiscal year 2026, orders are expected to increase due to increases in hydraulic excavators and mobile cranes. On the other hand, industrial crane orders are expected to see a pullback following last year's increase and the segment orders will remain at the same level as the previous fiscal year. Net sales will increase due to higher orders for both hydraulic excavators and mobile cranes and operating profit will increase due to higher sales. Lastly, in the Energy & Lifeline. In fiscal year 2025, orders increased significantly due to increased orders for biomass power generation facilities in Japan and Europe as well as for water treatment equipment and marine structures. Net sales decreased due to a small backlog of orders, but operating profit increased due to improved project profitability despite lower sales and lower development expenses for LAES, which had been borne until the previous fiscal year. For fiscal year 2026, we expect a decrease, partly in reaction to the large biomass power generation projects in the previous year. We expect net sales and operating profit to decrease, taking into account the business transfer and other factors. From here, I will explain the progress of the Medium-Term Management Plan 2026. There is no change in the basic policy and key framework. However, as you are aware, we have reviewed the figures of our Medium-Term Management Plan in February 2025. We recognize that improving the profitability of our core businesses and semiconductor equipment business is an urgent issue. The changes are shown here. Changes from the first half of 2025 include the continuing economic stagnation in Europe, the delayed recovery of semiconductors other than AI in the semiconductor business and a decrease in shipments of hydraulic excavators to both the U.S. and Japan. As a result, the actual results for FY 2025 were JPY 8.5 billion lower than the revised plan. For fiscal year 2026, we are now forecasting JPY 60 billion as it is difficult to achieve the revised target of JPY 80 billion in operating profit. We have a strong sense of urgency regarding this situation. As I will explain later, we have made a decision to implement structural reorganization for our core businesses, including personnel measures and to strengthen our management foundation for the future. This is a summary of our structural reorganization. The 3 main items are structural reorganization of our core businesses, business portfolio reformation and sales of assets. With regard to the structural reorganization of our core businesses, we will incorporate personnel measures. Although we have achieved a certain level of improvement in earnings from gear reducers and plastics machinery, we will further accelerate the speed of this improvement and ensure it. Also, in the Construction Machinery business, where sales recovery has lagged, we will rebuild a more robust structure. We will combine these efforts with the acceleration of portfolio reformation to steadily improve ROIC and ROE. Here is the progress of KPAs on strategic issues. Progress in earning capacity improvements in the gear reducers, electric control and plastics machinery businesses is generally in line with plans. However, progress in improving earning capacity and capital efficiency has been slow. In light of this, we have decided to implement structural reorganization, including the personnel measures, as I mentioned earlier. This is about capital policy. In response to the downward swing in operating cash flows, we plan to curb capital investment and sell business assets to strike a balance while adhering to our original policy of returning profits to shareholders, aiming for a DOE of 3.5% or higher. Here is the status of investment execution. Capital investment is being restrained. This is the business portfolio. We will move forward with the business portfolio based on the classifications shown here. This page shows the status of progress. We are proceeding with structural reorganization of underperforming businesses as well as the reorganization of businesses whose strategies need to be rebuilt. In addition, we are making progress on measures to strengthen each of our key investment areas. Here is the growth and the status of progress in the key investment areas. In the robotics and automation field, we expect a certain level of growth in line with our plan. On the other hand, in the semiconductor field, the semiconductor equipment business has been severely affected partly due to the delayed recovery of the market and has not yet achieved its goal. However, we have received strong inquiries for the laser annealing equipment of the former LASSE, which we acquired, and we are in the process of adding production capacity to respond to these inquiries. This page shows the progress in low-profit businesses. The gear business, electric control business and plastics machinery business have been progressing as planned. We will build a more robust structure by implementing personnel measures, including for the hydraulic excavator business, which has not yet achieved its goal. This is the status of reforms in businesses whose strategies need to be rebuilt. As separately disclosed, the company has decided to transfer 2 businesses as part of its portfolio reformation. As we indicate, steam turbine and process pumps and then parking systems are subject to transfer. From here, I will explain the status of each segment. First is the Mechatronics segment. The target profit has been revised downward. However, in the gear business, consolidation and price revisions are underway and profitability is improving. The electrical control business is also growing. In the area of semiconductor components, we are expanding our business with a development center in the U.S., which was established last year. In addition, in the area of gear business, we are further strengthening our installation base business by utilizing Riverside Spline & Gear, a U.S. company we acquired last year. This is about the Industrial Machinery segment. The target profit has been revised downward significantly. In the semiconductor manufacturing equipment market, ion implanters have been struggling due to sluggish demand. However, we are in the process of enhancing our production system for laser annealing equipment for cutting-edge semiconductors in light of strong inquiries from major customers. In the plastics machinery business, we have made progress in model consolidation, but we are now considering additional measures to deal with the decline in demand in Europe. This is about the Logistics & Construction segment. The target profit has been revised downward here as well. We have made some progress in our key investment areas by increasing the number of staff at a development center for this segment and exhibiting new products such as electric hydraulic excavators at trade shows in response to the future shift to electrification and automation. Lastly, this is about the Energy and Lifeline. The target profit has been revised upward. In the area of carbon neutrality and resource recycling, progress has been made in demonstrating carbon capture technology, biomass gasification and the start of demonstration operations at LAES. Here, we have shown 2 examples of key initiatives. In the semiconductor-related area, we have long been talking about strengthening collaboration between ion implanters and laser annealing equipment. For laser annealing equipment, in particular, there are strong inquiries for cutting-edge semiconductors, and we are making a company-wide effort to increase the production capacity. In the area of industrial cranes, based on the shipbuilding industry revitalization road map formulated by the government, demand for cranes for the shipbuilding field is expected to increase. We are currently considering the expansion of production capacity, and we will further increase sales on orders received. The following pages are for reference purposes only and include figures by strategic business unit or SBU, which will constitute a segment from this time onward. That is all from me.