Kawasaki Heavy Industries, Ltd. (OTCPK:KWHIY) Q3 2022 Earnings Conference Call November 12, 2022 1:00 AM ET
Company Representatives
Katsuya Yamamoto – Executive Vice President/IR
Conference Call Participants
Katsuya Yamamoto
[Interpreted]
I’m Yamamoto. Thank you for your participation. Now I will like to present financial highlights.
Page one, as we disclosed at the Tokyo Stock Exchange and through our website at 11:30 today, the second quarter FY, 2022 continued to be strong for Motorcycle & Engine business, driven by sustained robust outdoor demand, where the sales grew in Robot business too and we could pass cost increase onto prices successfully.
The weak yen was also a tailwind for the company. As a result, the second quarter ended with far better performance year-on-year with ¥30.8 billion in business profit. The net profit is ¥23.7 billion, which is the second highest level since 2000, only after the record year of 2015.
Our outlook is the strong momentum will continue in Motorcycle & Engine and other segments. We made upward revisions to the full year projections for all segments, except Rolling Stock, which is affected by the project delay in North America.
The rate assumption of a U.S. dollar was also moved up from ¥125 to ¥140. The new projection expects that improvement in business profit will be ¥76 billion, up by ¥20 billion and profit attributable to owners of a parent will be ¥45 billion up by ¥13 billion. Accordingly, we decided to add ¥20 more to the year-end dividend, thus distributing a total ¥70 in full year dividend.
This is the summary of our financials. From page three, I will explain more details.
Page three, the second quarter of FY’22 ended with the orders received of ¥866.6 billion, revenue of ¥759.7 billion, business profit of ¥30.8 billion, profit before tax of ¥35.9 billion and profit attributable to owners of a parent was ¥23.7 billion. The year’s weighted average exchange rate of Japanese yen was about ¥20 lower year-on-year. The value of U.S. dollar based to transactions was $0.86 billion.
Page four, this page shows orders received, revenue and business profit by segment. As you see in a cell marked number one, Energy Solution & Marine Engineering drew in a business profit as a result of reversal of a loss provisions for Chinese shipbuilding and joint venture that was put up in the same period last year.
As marked by number two, Motorcycle & Engine grew in revenue and business profit by capturing robust outdoor demand with our competitive products, while successfully passing the cost inflation to the pricing. The weaker yen was another beneficial factor. As a result, the quarter ended with revenue of ¥759.7 billion, up by ¥78.7 billion year-on-year. The business profit increased to ¥30.8 billion, up by ¥13.1 billion.
Page five, please look at the table for details. As you see in the box number one, raw material costs went up, but the sales cost ratio improved due to more sales amount, price pass-through and depreciation of the Japanese yen. As you see in box two, selling, general and administrative expenses went up mainly in HQ departments, but this is in line with our starting plan, just like the previous quarter.
The box number three pertains to the share of investments accounted for using equity method, which have been negative in the same period last year, because of a loss provisioning due to bad profitability at the ship & offshore structure joint venture in China under steel price pressure.
This year the situation is getting better, and the weaker RMB is favorable for us, enabling us to reverse the provision. As a result, the share in equity method subsidiaries generated ¥1 billion in a profit improvement of ¥8 billion. The business profit was ¥30.8 billion, up by ¥13.1 billion year-on-year.
Page six. Let’s turn to income in the operating profit. This quarter saw a sustained depreciation of the Japanese yen, which inflated valuation again on assets denominated in foreign currencies, creating exchange gain of ¥7.8 billion. As a result, this quarter delivered ¥35.9 billion in profit before tax, a larger increment than the business profit. The profit attributable to owners of a parent was ¥23.7 billion, up by ¥16.5 billion year-on-year.
Page seven. I will explain the factors contributing to change in profit. The Japanese yen depreciated year-on-year, leading to profit improvement of a ¥25.8 billion. Higher material costs added cost of sales, but they were offset by a price pass-through and fixed cost reduction. Furthermore, Motorcycle & Engine continued to enjoy strong sales and made a positive contribution of ¥1.7 billion to revenue. As a result, the business profit was ¥30.8 billion, up by ¥13.1 billion year-on-year. Please refer to page eight for more details by segment.
Page nine; this slide shows the change factories in assets as marked by number one, Motorcycle, Rolling Stock and Aerospace Systems increased inventories. Box number two shows that Aerospace Systems increased advanced payments to suppliers from advanced money received at the last year end. Now in this quarter, aerospace engine has more accounts receivable. For these reasons and others, we carry more current assets.
Page 10. This slide shows change factors of liabilities and net assets. As is indicated by number three, interest bearing debt level is higher than at the year end. Well, this is the normal business cycle and the debt level is lower than usually is and is in line with our plan. This quarter ended with a net DE ratio of 106.4%. In order to return to the target range of 70% to 80% by the year end, we will continue to accelerate collection of accounts receivable, control inventory assets and improve asset efficiency.
Page 11, box number one shows the cash flow from operating activities. There was cash-out of ¥70 billion. Improvement of ¥14.1 billion yen year-on-year, driven by better profit margin in spite of increase in advance payments to suppliers from the money received in advance at the year end. The cash outflow from investing activities increased by ¥4.7 billion. This was due to capital injection to our equity method affiliate. Excluding this impact, there is no real change from the previous year. The total free cash flow was negative, ¥105.4 billion, improvement of ¥9.3 billion year-on-year.
Page 12 shows historical cash flows over the past 10 years. Page 13, turning to earnings forecast for FY’2022, we grew revenue through aggressive business activities in Motorcycle and other segments. The risks we were prepared for became less material and we have changed the rate assumption from ¥125 against a dollar to ¥140 reflecting the latest market trend.
Now, we project that the overall revenue would reach ¥1.720 trillion up by ¥30 billion and the business profit will be ¥76 billion, up by ¥20 billion. Profit before tax will be ¥68 billion, up by ¥16 billion. The profit attributable to owners of a parent will be ¥45 billion, up by ¥13 billion. All financials are higher than the previous forecast.
This quarter made sufficient progress against the business profit target of the year. The Aerospace Systems expects to restart production for Boeing in the second half of the year. We changed the delivery schedule of the Rolling Stock project in North America and put up a provision for loss. For this reason and others, we believe that now we face less uncertainty regarding these plans. The foreign exchange rate could sway the earnings, but other than that, we are well poised to achieve the target. Next, I will explain forecast by segment.
Page 14. Forecast by segment is as shown in the table. I will go into more details on segment specific slides.
Page 15. Aerospace Systems financial results are shown on this slide. Orders received increased due to an increase in component parts for Minister of Defense and Engines, both revenue and a business profit grew year-on-year, driven by a commercial aircraft jet engine growth.
The revised full year forecast of a business profit is ¥4.5 billion yen higher than last, supported by revenue growth and a currency exchange rate assumption change, although we plan to post one-time cost in jet engine development for a certain program in the second half of this year.
Page 16. This slide shows orders received and revenue of Aerospace in Aero Engine separately. You will also find the number of aircraft component parts sold to Boeing and jet engine parts sold.
Pages 17, Aerospace Systems. This page shows the quarterly revenue and business profit.
Page 18. This page describes our market overview regarding business environment and order trend, as well as specific efforts to achieve the targets.
Page 19, Rolling Stock. The Rolling Stock deliveries schedule of a Long Island railroad project was moved down to Q2 of FY 2023. The second quarter posted a provision for a loss due to the delay. As a result, the segment increased in revenue, but the business profit declined year-on-year by ¥1.3 billion. The revised fully year forecast for FY 2022 projects the orders received will increase ¥220 million to ¥300 billion, due to the expected subway Rolling Stock orders from New York City Transit.
I will talk about this option contract later in one of the topics sides. The business profit is ¥2 billion less than the last projection due to the impact of the Long Island railroad project delay in U.S.
Page 20. This page shows orders received and revenue in domestic and Asia vis-a-vis in North America. For your information, the appendix shows sales from a high margin after sales or service and progress of M9 project for a Long Island railroad in the United States.
Page 21. This page shows the quarterly trend of revenue and business profit for your information.
Page 22. The market overview of the Rolling Stock segment has not really changed since the last time.
Page 23. This slide shows the results of the second quarter FY 2022. Orders received made a big jump, propelled by orders for LPG ammonia carriers and construction and operation of Japan’s Municipal Waste Incineration Plant, plus other projects.
The revenue is dramatically up due to increase in energy, business and construction work for submarines, despite a decrease in construction work for Domestic and Municipal Waste Incineration of Plants.
The business profit improved considerably as a result of a profit improvement at a Chinese building joint adventure. The full year forecast was revised upward again, because we expect a growth in energy projects and LPG ammonia carrier orders. The revenue was revised down due to a period shift in energy projects. However, this is compensated by improved equity and gains from a joint venture. The new business profit forecast is ¥5.5 billion, ¥3 billion, higher than the last projection.
Page 24. This page shows orders received and revenue of Energy Plant and Marine Machinery and shipping offshore structure, as well as share of a profit or a loss of investments accounted for using equity method.
Page 25. This page shows quarterly trend of revenue and business profit.
Page 26. This page shows the market overview and order trend in the segment. The top priority is to offer products and services to achieve a low carbon and a decarbonized society. We received orders for a Kawasaki Green Gas engines from Thailand. We also delivered LPG ammonia carriers and received more new orders for them.
KHI is also focused on establishing a leading position in a transition products towards decarburization. To meet the need to lower or even eliminate carbon emissions from small to meat sized gas turbine power generators, KHI started selling dry-low emission combustors DLE. DLE allows hydro energy transition without modification to existing gas turbines. Customers don’t have to make big initial investment while they can reduce carbon emissions. This product will make important contribution to energy transition to decarburization.
Page 27. This slide shows the results of the second quarter FY 2022. The orders received to grow year-over-year as the impact of lockdown in China east and robots for semiconductor manufacturing equipment and others were strong. On the other hand, revenue and business profit declined, mainly due to decrease in hydraulic components for China and rising raw material costs.
The forecast of orders received and revenue and a business profit remains the same as before. Considering the foreign exchange assumption of change, the business profit forecast was revised up ¥1.5 billion to ¥10.5 billion.
Page 28. This page shows orders received and revenue of a precision machinery and robot, as well as share of a profit or a loss of investments accounted for using equity method. Appendix shows sales of hydraulic components to China and sales of Robots by segment.
Page 29. This page shows the quarterly trend of revenue and business profit.
Page 30. This page shows market overview and specific efforts in this segment. The market overview has not yet changed since last time. Regarding specific efforts, we updated open innovation in cooperation with multiple camera manufacturers, Kawasaki achieved 10x faster pulse output of visual inspection for products with complex surfaces. With this innovation we wanted to further stimulate the demand in the inspection market.
Page 31. This slide shows the results of the second quarter FY 2022. Revenue grew strongly year-on-year due to an increase in Motorcycles for North America and Southeast Asia, as well as four wheelers and a general purpose gasoline engines coupled with weaker yen despite a transient impact of lockdowns in China and a decrease in Motorcycles for Europe due to a product supply shortage. Business profit improved, thanks to an increase in revenue and a price pass-through, in spite of a higher raw material prices, logistics and fixed costs.
In the revised FY 2022 forecast we ramped up business profit projection to ¥56 billion, up by ¥11 billion from the last published forecast, another record number in row after the previous year, supported by revenue growth due to foreign exchange rate assumption change and greater sales of Motorcycles in emerging countries.
Page 32. This page shows revenue and business profit by sub-segment, namely motorcycles for developed countries, motorcycles for emerging markets, utility vehicles, ATV’s, PWC and general purpose gasoline engines. Appendix shows wholesales of motorcycles by county.
Page 33. This page shows the quarterly trend of revenue and business profit.
Page 34. Here is market overview for Motorcycle & Engines. We feel that we are coming out of the impact of supply chain disruption. In addition to kids products I introduced last time, we released two HEV motorcycle models just yesterday at a show in Milan. They will be launched in FY 2023. The slide has description of a hybrid motorcycles to be launched in FY 2024. Please keep excited about Kawasaki’s decarburization initiatives in the motorcycle sector.
Page 35. As explained earlier, the prophet attributable to owners of a parent is projected to reach ¥45 billion yen, up by ¥13 billion from the previous forecasts. We decided to increase the year-end dividend from ¥20 to ¥40 distributing ¥70 in total, as full year dividend.
Page 36. I would like to report five project topics today. The first topic is from Motorcycle & Engine business, a driver of the KHI Group earnings. It is about off-road four wheelers. Kawasaki sees mid-to-long term growth potential in this market and we are adding production capacity. The North America has been a traditional market, but we launched off-road four wheelers in the Japanese market as well.
We will start selling in more countries, because we believe that they to have big potential demand for leisure four wheelers. We demonstrated hydrogen fueled off-road four wheelers in September this year to show our commitment to creating a new valor in the future carbon neutral society.
Page 37. The next topic comes up from Energy Solution in a Marine Engineering. Orders keep coming from a domestic municipal incineration plants. The Japanese market is strong and we expect that a demand will stay at a high level for the time being. Kawasaki successfully automated waste sorting by introducing AI based robotic systems, facilitating improvement of the working conditions for the field workers. We will like to create new value in the traditional market, taking advantage of our own robotics line as a strength, so that we can help solve social problems.
Page 38. This slide introduces our helicopter business. A new helicopter model we launched in 2019 has been successful. Now our share in Japan’s Medical Helicopter market is 40%. Kawasaki has also launched services around Medical Helicopters such as Helicopter Web Booking Platform and simulator based training. We go beyond selling just hard products; we provide total solutions to reinforce our earnings.
Page 39. The next is option order from R211. In addition to 535 cars end of this contract, R211 project informally ordered additional 640 cars. R211 project is supposed to be completed in 2026, but Option 2 order will extend the project until 2028 if the Option 2 is exercised. This means Kawasaki’s share in New York area will go well above the present level over 30%, where about 50% of all American Rolling Stock concentrate. Our presence there will become ever more meaningful.
Page 40. The last topic is sustainable finance. Recently, the demand for sustainable finance is growing in the finance industry. It is not easy for all financial institutions to spend human resources and the costs to exclude sustainable finance contracts in order to assess eligibility and to monitor borrowers.
To help them overcome such a hurdle, Kawasaki has established sustainability linked loan of framework and a positive impact finance framework. Using these frameworks, eligibility check and a follow-up monitoring are performed by rating agencies on behalf of our financial institutions that are not fully ready yet for these types of loans.
By the end of this fiscal year, sustainable finance is expected to reach 10% of Kawasaki’s long-term loans. Through this framework, we hope this will reach 100% in our long term loan portfolio by year 2050.
Page 41. From this slide onward, contain information regarding capital expenditure, depreciation, R&D spend, the headcount at the year end, and so forth.
Thank you very much for your listening.
Question-and-Answer Session
Q –
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