Kawasaki Heavy Industries, Ltd.
Q4 2020 Earnings Call Transcript

Published: 12 May 2021

[Katsuya Yamamoto:]

I am Yamamoto. Thank you for joining our financial results meeting despite your busy schedule. Following the materials, I'll present the results. Please turn to the table of contents. I will follow the order of table of contents. As you see we change the format of the materials for financial results this time, breakdown of volume by segment and the sub-segment and variant factors of income statement balance sheet, cash flow statements are clarified. In the slides, specific efforts to achieve the target are added for the proactive communication so that your understanding of our company's management will be deepened. Based on this information, we'd like to promote high level dialogue with you to improve the quality of our corporate management. I would appreciate your continued support and cooperation. Page three shows summary of consolidated results for FY 2020. In FY 2020, net sales for 1,488.4 billion, operating loss was 5.3 billion, recurring loss was 2.8 billion, net loss expanded to 19.3 billion due to impairment loss of ship and rolling stock segment in addition to the recurring loss, but that improved slightly from the revised forecast as of the end of March. Weighted average exchange rate for this fiscal year was as shown here. 105.29 yen to $1, yen appreciated by 3.6 yen compared to 108.94 yen of the previous year, US dollar based transaction was about $1.6 billion. Page four shows consolidated results for FY 2020 by segment. Orders, net sales and operating income by segment are listed in the table. Aerospace systems, which has been earnings driver, marked drastic decline in sales and profit. On the other hand, in motorcycle and engine, initially substantial decline in sales and profit was anticipated due to COVID-19 and fundamental measures to cut fixed cost was implemented and more than 10 billion of cost was reduced. Furthermore, as a leader under COVID-19, demand of off-road motorcycle and automobile for North America increased and profit increased substantially. Popularity of off road vehicles are not waning in this fiscal year and we're continuing to work on this business actively. Income statement shows items from net sales to recurring income. Details are shown in the table. Gross profit decreased with decreased service by COVID-19 as shown in one and two, hydrogen related operating cost and SG&A cost including travel expenses due to COVID-19 decreased and as shown in three, year-end exchange rates showed depreciation of yen and gain effects was posted. As a result, recurring loss was 2.8 billion with smaller contraction compared to gross profit. Page six shows items below recurring profit. In this year, as shown in seven, we sold former dormitory and company housing sites. But as shown in 10 due to impairment losses for Sakaide Works of ship segment and Hyogo & Harima Works of rolling stock segment, recurring loss expanded substantially and net loss was 19.3 billion yen. Page seven shows details of change in profit. From FY 2019 to FY 2020, operating income decreased by 67.3 billion and the greatest impact was as shown here affected by the impact of COVID-19 by minus 54.2 billion yen and 70% of this belongs to aerospace systems. From this time, details of change by segment is shown on the following pages for your reference. Please refer to page eight later. Page nine, for balance sheet. As for the change in total assets of this fiscal year, as shown in three, inventories in aerospace systems increased due to the impact of COVID-19. But as shown in four, sale of former dormitory and company housing sites and impairment loss lead to almost unchanged total assets. Page 10. As for total liabilities and total net assets, net D/E ratio improved slightly year-over-year to 100% but still has some gap to achieve the guidance of 70% to 80%. In FY 2021, we will continue to work to collect trade receivables and curve inventories to improve asset efficiency. Page 11, operating cash flow as shown in one deteriorated in FY '19 after the liquidation of receivables in the previous year, ending FY 2020 collection of receivable progress mainly in motorcycle business and operating cash flow improved substantially year-on-year. Investing cash flow was supported by salary controlling CapEx from beginning of the year and by series of fixed assets marking substantial improvement year-on-year. As a result, free cash flow improved 82 billion yen year-on-year to minus 2.7 billion yen. In FY 2021, by further promoting the improvement of asset efficiency, we'd like to achieve free cash flow positive. Page 12, the change of cash flow over the last decade is shown from this time for your reference. Page 13 shows earnings forecast for FY 2021. In FY 2021, we plan orders a 1,480 billion yet, net sales of 1,500 billion yen, operating income 30 billion yen, recurring profit 20 billion yen, net income 17 billion yen, and annual dividend 30 yen per share. As shown here, due to mitigating impact of COVID-19, every item shows substantial improvement year-on-year. It would still be difficult for ship segment to return to profitable this year. And impairment loss of about 1 billion on fixed assets to be acquired in Sakaide Works is already included in extraordinary profit and losses. Exchange rates to assume this forecast is 106 yen to $1. From this year, due to application of the new revenue recognition standard, net service will be down by about 100 million [ph] yen, aforementioned figures reflect the change in standard. And please take note that based on the convention standards, net sales in this fiscal year will be 1.6 trillion yen, up by 7% or more year-on-year. Page 14 shows forecast by segment. I explained the forecast for the whole company and this slide shows focus by segment. As shown in one, aerospace systems will recover year-on-year but as recently announced by IATA, air passenger demand recovery in this year will be slower than initially anticipated and the segment will continue to be loss making in tough condition. Rolling stock will mark substantial improvement year-on-year due to stable North America business and motorcycle and engine will also improve substantially due to the recovery in demand for motorcycle among others. Details will be explained on the page of each segment. Page 15 shows aerospace systems. FY 2020 results and FY 2021 forecasts are shown on the slide. FY 2020 results deteriorated markedly from the forecast as of February. This is mainly due to the decline of after sales service business, which is a source of our earnings with slower than initially expected passenger demand recovery in aero engine business. Aircraft business secured profit for the full year. For FY 2021, aircraft business will remain profitable. Engine business will improve substantially year-on-year. But due to slower than initially expected passenger demand recovering if FY 2021 and the impact by new revenue recognition standard to be adopted from this year, it will be loss making. As for the application of the new revenue recognition standard, conventionally [ph] sales of spare parts for after sales service which were provided by partner companies were proportionally included in our sales first, but under the new standard, they will not be included and that reduces segment sales by about 70 billion. So sales appear to decrease substantially year-on-year, but that does not indicate the business scale contraction. Conventionally transactions of spare parts and maintenance services were recognized separately, but under the new standard, they'll be treated as one transaction and the revenue recognition timing of spare parts will be adjusted to the timing of service provision. As a result, revenue recognition timing will be pushed back by three to six months than usual and that reduces the profit by about 10 billion yet. Please take note that this is simply due to time lag and it will not impact the profitability of the entire program. Page 16 shows orders and sales of aerospace business and aero engine, number of aircraft sold to Boeing and number of jet engine component parts sold for your reference. Page 17 shows quarterly sales and operating income which clearly shows historical trend. Please refer to it later. Page 18 shows market overview in our perspective and the specific efforts to achieve a FY 2021 targets. Our view is that MOD aircraft the business is stable but commercial aircraft business is severely affected by COVID-19. And demand for both sub-aircraft and the engine remain weak in the recovery would take time. In this year, improving revenue in air engine business would be the prime challenge and we reduced manufacturing costs and thoroughly reviewed the fixed cost structure with the change of business environment. Page 19 shows Energy System and Plant Engineering. FY 2020 results were almost in line with the forecast in February. From FY 2021, this segment will include ship and offshore structure and the segment will be renamed to Energy Solution and Marine Engineering. As for forecast, let me explain in the following pages. Page 20. This slide is show series of major products including gas turbines and gas engines in the energy business, sales of municipal waste incineration plants and series of their after sales service. In both businesses after sales services are the major earning source and we hope you to acknowledge that we aim to expand these high added-value businesses in value chain. Page 21 shows quarterly sales and operating income for your reference. Page 22 continues to describe the Energy System and Plan Engineering. As for market overview, in Japan, demand for major repair work on municipal waste incineration plants is expected to continue and in emerging countries, demand for distributed power plants and other energy infrastructure is expected in the mid-to-long term. As for the impacts of COVID-19, as shown here, we have concerned for the postponement of orders of some projects and impacts on after civil service activities overseas. Specific efforts will be presented on the following pages. Page 23 shows Precision Machinery and Robot. In FY 2020, market environment was solid, in particular for hydraulic components, and sales and profit were up compared to the forecast in February. In FY 2021, we are rather conservative for hydraulic components sales for China but expect robots will increase sales further and as a whole segment, both sales and profit will increase. Page 24 shows orders and net sales of hydraulic components and robotics. Sales of hydraulic components to China and sales of robots by segment are shown for reference. Page 25 shows quarterly sales and operating income for reference as before. Page 26. As for the market overview, regarding construction machinery, demand in major markets of China expanded strongly and has been robust. In other markets, except China, initially markets were sluggish due to COVID-19 but currently recovery trend has been clear. Robots demand for semiconductor has been strong. As for specific efforts, in order to compete the follower companies that try to catch up in the field of construction machinery, we will develop electrification and automation leveraging our technology to secure solid profit. As for robots, capturing market needs, we would promote open innovation through collaboration not only with competitors, but with academia, government and the startups as well to explore for market and through our re-phased market orientation approach, we would expand businesses. Page 27 shows Ship and Offshore Structure. FY 2020 results showed slightly better profit compared to the forecast in February. From FY 2021, this segment to be incorporated into new segment Energy solutions and Marine Engineering and the forecast will be explained in the following pages. Page 28 shows the delivery here by type of ship, order backlog and the change in order backlog for your reference. Page 29 shows quarterly sales and operating income for reference. Page 30. As for market overview, as shown here, submarines and governmental ships are stable, but difficult condition for commercial ships continued. For the time being, we revealed LPG carriers which have relatively strong competitiveness as energy carriers and gas fuel vessels and link them to the shipbuilding of our large liquefied hydrogen carriers on commercial base in the future. Page 31 shows Rolling Stock. In FY 2020, especially North America was affected by COVID-19 pandemic and the process delayed and unfortunately the business failed to turn profitable and operating loss was 4.5 billion yen, as forecasted in February. As reported at the end of March, in fourth quarter of FY 2020, as extra ordinary loss impairment of 11.2 billion on fixed assets in Hyogo & Harima Works were posted. Through this, majority of ratio residual book value of depreciation asset except site was disposed as expenses. In FY 2021, COVID-19 impact was weakened and sales for North America were increased and this segment will be profitable for the first time in five years since 2016. Page 32 shows order, sales of domestic and Asia and North America. As appendix, sales seemed profitable after sales-related business features focused in the business and the progress of M9 project for Long Island Railroad in the US are shown for reference. Page 33 shows quarterly sales and operating income for reference. Page 34 continues on Rolling Stock. As for market overview of Rolling Stock, market will expand in the mid to long term but imminent issue is to stabilize North America business. In order to be profitable in this fiscal year, stable operation in North America business is indispensable. And this year, we set up the company-wide, North America business task force to provide a company-wide support so that process will be streamlined and productivity and quality will be improved. Page 35 for Motorcycle and Engine. FY 2020 results are as shown here. In addition to the robust sales, better than February forecast, in particular, demand for off-road vehicles for North America has been strong and the search promotion cost was less than expected and that improved profit substantially. In FY 2021 recovery of demand for motorcycles and sustained demand for off-road models in North America are expected and both sales and profit will increase substantially. Page 36. This slide shows orders and sales of motorcycles for developed countries; motorcycles for emerging market; utility vehicles, ATVs and PWC; and general purpose engines. Wholesales of motorcycles by country are also shown for reference. Page 37, this slide shows quarterly sales and operating income for reference. Page 38, as for market overview of Motorcycle and Engine, in FY 2020, due to initially expected substantial sales decrease affected by COVID-19, we cut fixed costs by 10 billion yen plus. In this year also, we will control our fixed cost ratio to sales to improve business structure. At the same time, we improved marginal profit rate by reducing sales promotion cost and cutting manufacturing cost. And by reviewing inventory level, we're pursued to improve asset efficiency. In the mid-to-long term perspective, we work on development of EV with an eye on decarbonisation. Page 39 shows Energy Solution and Marine Engineering. This slide show the FY 2021 forecast of the New Energy Solution and Marine Engineering combining Energy System and Plant Engineering, and Ship and Offshore Structure, established in this year. Order and sales of Ship and Offshore Structure were decreased but order and sales in former Energy System and Plant Engineering were increase. As a result, for the whole segment, orders will be up substantially with slight increase in sales. On the profit front, in addition to the deteriorating profit in Ship and Offshore Structure business year-on-year, due to reduced shipbuilding of commercial ships, in Energy System and Plant Engineering business FY 2021 will have fewer profitable projects than FY 2020 and as a whole segment, profit decrease substantially. Page 40, orders and sales are shown in the former category of Energy System and Plant Engineering and Ship and Offshore Structure, so please refer to them later. Page 41, quarterly sales and operating income in the former category of Energy System and Plant Engineering and Ship and Offshore Structure are shown, so please refer to them later. Page 42, still Energy Solution and Marine Engineering. As for specific efforts in the segment, recovering orders is the primary challenge because recently ordered in Energy System and Plant Engineering in particular has been well below the initial forecast. By steadily capturing the project, that have been temporarily frozen due to the impact of COVID-19, and the new project post COVID, we will improve profitability in the next year and onward. This segment covers diverse products involving hydrogen supply chain including liquefied hydrogen carrier, hydrogen liquefier, on-site liquefied hydrogen tank, and hydrogen gas turbine for power generation. In order to establish the leading position in decarbonisation field, this segment set up the Hydrogen Business Solutions Office. In cooperation with Hydrogen Strategy Division and head office, we are accelerating efforts for commercialization demonstration scheduled in 2025 and commercialization in 2030 or beyond. Sakaide Works will serve as the engineering plant in future shifting resources to hydrogen tank created a good maintained facility. Page 43 shows shareholder return. This slide on shareholder return was added newly. As shown here, in our dividend policy, with stable a dividend in mind, mid-to-long term consolidated dividend payout ratio is set at 30% and in FY 2021, based on this policy, we assumed a dividend of 30 yen per share. However, this is purely bottom line and when the revenue from PCR Testing Service, which is not included in the plan today, our forecast is more visible we'd like to review dividend. Due to these conditions, interim dividend is undecided but with more certain forecast of the aforementioned conditions, we'll consider the announcement. Page 44 shows project topics. Since the previous results meeting in February, we have decided to explain the topics which would show the mid-to-long term growth potential of the company on separate pages. Firstly, let me explain progress of the hydrogen-related project. As shown by picture, in January 2021, we conducted berthing test of liquefied hydrogen carrier SUISO FRONTIER and in the same month, we commenced operations of a brown coal gasification and hydrogen refining facility and the hydrogen liquefaction and loading station in Victoria, Australia. As mentioned before, as of April 1, Hydrogen Strategy Division was established to promote hydrogen-related business across a company with company-wide oversight. We formed a consortium with Yanmar Power Technology and Japan Engine to pursue joint development of hydrogen fuel, the marine engines and developed cargo containment system for large liquefied hydrogen carrier with world's highest carrying capacity and obtained AiP from ClassNK. Please refer to this later. Page 45 shows another project topic, progress of the PCR viral testing service, which is increasingly highlighted. In the system, one container can test 2500 samples a day and result is available within 80 minutes. In the test process, all stages are automated by robot after obtaining sample and workload of medical stuff will be reduced. Currently, we received many inquiries from local municipalities and medical institutions. As of today, projection of annual revenue is difficult and the business forecast that is announced today does not include this, as mentioned. When we can have certain visibilities, I will let you know in timely manner. Page 46. From this time, we will show our efforts in non-financial sector as ESG Topics. In March, we reached the agreement to standardize the swappable batteries with four major motorcycle manufacturers in Japan. It will contribute to reduce environmental impact and to promote electrification. In the field of governance, in June 2020, Kawasaki transition to a company with audit and the supervisory committee from a company who has [ph] auditors to separate the governance of management and execution. The ratio of outside directors increased to 46%. Our ESG related evaluations by society are shown here for reference. Page 47 and onward show the CapEx depreciation, R&D expenses and number of employees at the end of fiscal year among others in the appendix for reference. This concludes my presentation.

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