Kawasaki Heavy Industries, Ltd. (OTCPK:KWHIY) Q1 2022 Results Conference Call August 12, 2022 1:00 AM ET
Company Participants
Katsuya Yamamoto – VP and Senior Executive Officer
Katsuya Yamamoto
My name is Yamamoto. Thank you for your participation. Now I will present the financial highlights. As we disclosed at the Tokyo Stock Exchange and through our website at 11:30 today, the first quarter FY 2022 continued to be strong for Motorcycle & Engine business, but Aerospace Systems business had much lower production volume for Boeing at the last year. And Precision Machinery & Robot was adversely affected by lockdown in China.
For these reasons and other factors, the revenue and profit declined year-over-year. On the other hand, we expect a recovery of the Boeing business in the second half of the year and a moderate improvement of Precision Machinery & Robot as China’s lockdown impact had concentrated in the first quarter. Furthermore, the company changed the rate assumption of a U.S. dollar from ¥120 to ¥125.
As a result, we have revised to the full year projection upward from the prior outlook, now expecting improvement in business profit to ¥56 billion, up by ¥3 billion and net profit to ¥32 billion, up by ¥3 billion. This is a summary of our financials.
From Page 3, I will explain more details. The first quarter of FY 2022 ended with the orders received of ¥412 billion revenue of ¥350.3 billion, business profit of ¥4.5 billion, profit before tax of ¥10.6 billion and profit attributable to owners of a parent was ¥5.4 billion. The year’s weighted average exchange rate of Japanese yen was about ¥14 weaker than last year. The value of U.S. dollar-based transactions was $0.41 billion.
Page 4 shows orders received revenue and business profit by segment. As you see in the sales: number one, the Aerospace Systems declined considerably in sales and profit driven by fewer deals for Boeing; as indicated by number two, Precision Machinery & Robot decreased in sales and profit because turn of demand for hydraulic machinery became very weak in the wake of lockdown and other factors.
Last year, we posted ¥1.6 billion of gain on land sales in the first quarter in eliminations and corporate, which didn’t happen this year. As we explained at the beginning of the year, we will spend more on R&D at the headquarters this fiscal year. And the first quarter already saw a cost increase of about ¥1 billion year-over-year. These factors created a big drop in profit. As a result, the quarter ended with a revenue of ¥350.3 billion, down by ¥5.2 billion year-on-year.
The business profit decreased to ¥4.5 billion, down by ¥13.9 billion. Please look at the table for details. As you can see in the box 1, cost of sales rose in Motorcycle & Engine and other segments, driven by higher raw material prices. As you see in a box 2, selling, general and administrative expenses went up particularly in headquarter departments. The share of investments accounted for using equity method was negative in the same period last year because of a poor profitability at the ship and offshore structure joint venture in China under steel price pressure.
This year, the situation is getting a little better. The share in equity method subsidiaries produced ¥0.6 billion in profit, improvement of ¥1.6 billion year-over-year. As a reminder, there was a gain on sales of a land in the first quarter FY 2021, but this first quarter didn’t have gain on a land sale. The operating profit was ¥4.5 billion, down by ¥13.9 billion.
Let’s turn to income details in the operating profit. The first quarter saw a rapid depreciation of Japanese yen quarter-on-quarter, pushing up valuation of assets denominated in foreign currencies, creating foreign exchange gain of ¥7 billion. As a result, the first quarter delivered ¥10.6 billion of profit before tax, a bigger improvement than the operating profit. The profit attributable to owners of parent was ¥5.4 billion, down by ¥6 billion year-over-year.
I will explain the factors contributing to a change in business profit. The Japanese yen depreciated year-on-year, leading to a profit improvement of ¥9.3 billion. However, Aerospace Systems couldn’t sell a Boeing 787 components at all in this quarter because we had shipped a lot of 787 components to Boeing at the end of last fiscal year. Slow operation created operational loss and added more losses through changes to our sales mix.
Motorcycle & Engine faced soaring costs of raw materials and all logistics. Precision Machinery & Robot was slow in sales of high-margin hydraulic products for China. For these reasons, the profit was forced to shrink. As a result, business profit was ¥4.5 billion, down by ¥13.9 billion year-on-year. Please refer to Page 8 for more details by segment.
Page 9 shows the change factors in assets. As noted by: number one, Motorcycle, Rolling Stock and Precision Machinery & Robot increased inventories. Aerospace Systems had received advances at the year-end. Now in this quarter, as you see in number two, that Aerospace Assistance increased advanced payments to suppliers. The Aero Engine also increased accounts receivable. Primarily for these reasons, we have a higher level of current assets.
This slide shows change factors of liabilities and net assets. As is indicated by number three, interest-bearing debt increased since the end of March, but this is a normal business cycle, and the debt level is still lower than usual years and stands at the planned level. The first quarter ended with a net DE ratio of 106.8%. 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 improved asset efficiency.
Box #1 shows the cash flow from operating activities. There is cash outflow of ¥61.9 billion, up by ¥32.4 billion year-on-year due to increases in advanced payments to suppliers from the money received in advance at the year-end. The cash outflow from investing activities was ¥24 billion, up by ¥10.4 billion. But this was due to a capital injection for one of equity method subsidiaries. Excluding this impact, there is no real change from the previous year. The total free cash flow was negative ¥86 billion, worsening by ¥42.8 billion year-on-year.
Page 12 shows historical cash flows over the past 10 years. Turning to earnings forecast for FY 2022. We have changed the rate assumption from ¥120 against the dollar to ¥125, reflecting the latest market rate. Weaker yen means higher cost of raw materials and other goods as well as labor. That said, we now project that the overall revenue will reach ¥1.690 trillion, up by ¥10 billion and business profit will be ¥56 billion, up by ¥3 billion. Profit before tax will be ¥52 billion, up ¥6 billion. The net profit will be ¥32 billion, up by ¥3 billion.
All financials are higher than the old forecast. The first quarter made a small progress against the business profit target of the year. So the Aerospace Systems had bottomed out in the first quarter, and we believe that earnings will make fast improvement once we start production for Boeing. We also expect that China’s lockdown impact on Precision Machinery & Robot will ease in and after the second quarter. In addition, timing of order base to business profit making concentrates in the second half of the year as normal years, and as we use foreign exchange hedge to take advantage of weaker yen, we are well positioned to achieve the earnings target.
Next, I will explain our forecast by segment. Forecast by segment is shown in the table. I will go into more details on segment specific slides. Aerospace Systems & Motorcycle Engine revised the forecast upward reflecting the weaker Japanese yen while Precision Machinery & Robot revised the forecast downward due to slowdown in the Chinese construction machinery market.
Eliminations and corporate attributable to headquarters made only a smaller progress in the first quarter, but the forecast remains the same as before. Aerospace Systems’ financial results are shown on this slide. Orders received increased due to an increase in component parts for Ministry of Defense and Engines. But revenue and business profit both declined mainly due to a slow business with Boeing. The Boeing business, however, bottomed out in the first quarter and is expected to recover in the coming quarters as we resume production and shipping. The revised full year forecast of a business profit is ¥3.5 billion more than the previous projection, supported by foreign exchange rate assumption change.
Page 16 shows orders received and the revenue of aerospace and AR engine separately. You will also find a number of aircraft component parts sold to Boeing and jet engine parts sold. Page 17 shows the quarterly revenue and profit. Please note that FY 2021 data were adjusted in conformity to IFRS. Page 18 describes our market overview regarding business environment and order trend as well as specific efforts to achieve the targets.
There is no meaningful change since last conference. We anticipate that it would take considerable time before the market environment returns to pre-pandemic status. The company continues to see production costs and tackle fixed cost structure rigorously to cope with changes in business environments. Rolling stock. As you find on this slide, there was no big movement in the first quarter. FY 2022 forecast remains the same as before. Page 20 shows orders received and revenue in domestic and Asia vis-a-vis in North America.
For your information, the appendix shows sales from high-margin aftersales and service and progress of M9 project for Long Island railroad in the United States. This page shows the quarterly trend of revenue and profit for your information. Like the Aerospace System, market overview of the Rolling Stock segment has not changed since last time. This slide shows the results of the first quarter FY 2022. Orders were saved to make a big jump propelled by orders for LPG carriers and the construction and operation of Japan’s municipal waste incineration plants plus other projects. But revenue declined slightly because this year is when busy seasons of municipal waste incineration plant sales. Profit improved at a Chinese shipbuilding and joint venture, but the revenue decline was so steep due to sluggish waste incineration of business that the overall profit slipped slightly. The revised FY 2022 group project orders received will grow faster than the prior outlook by ¥28 billion, supported by order growth from Japanese municipal waste incineration plants.
Revenue and business profit remained the same level as before. This page shows orders received and revenue of energy plant and marine machinery, shipping offshore structure as well as share of profit or loss of investments accounted for using equity method. Page 25 shows quarterly trend of revenue and profit. Page 26 shows the market overview and order trend in this segment. The top priority is to provide products and services to achieve a low-carbon and decarbonized society.
Kawasaki daily route a high-capacity battery propulsion system for the world of first pure battery electric propulsion a tanker. The main business of this segment is Energy & Environment Solutions but we will aggressively pursue carbon-neutral opportunities for ship applications as well. We are also focused on establishing a leading position in the decarbonization field in the mid to long term. Kawasaki is developing a future-proof technology for hydrogen energy society. For your information, I included a few good examples.
Page 27 shows the results of the first quarter FY 2022. The orders received grew year-over-year. Although orders for China’s hydraulic components declined fast while supported by robust robots for semiconductor manufacturing equipment and a depreciation of Japanese yen. On the other hand, revenue and business profit declined significantly year-over-year as they were seriously impacted by a slump in China’s hydraulic market.
As to forecast, we revised orders received revenue and business profit all downward in spite of weaker yen and robot growth, considering the impact of a slump in hydraulics in China. Page 28 shows orders received and revenue of Precision Machinery & Robot as well as share of profit and loss of investments accounted for using equity method. Appendix shows sales of hydraulic components to our China and sales of a robot by segment.
Page 29 shows the quarterly trend of the revenue and the profit. Page 30 shows market overview and specific efforts in this segment. One thing that is different from the last time is China’s demand slump triggered by lockdown. Specific efforts remain the same as before. This slide shows the results of our first quarter FY 2022.
Revenue grew year-on-year due to an increase in motorcycles for North America and Southeast Asia and weaker yen despite a decrease in off-road 4-wheelers for North America and motorcycles for Europe due to product supply shortage.
Business profit decreased slightly due to a higher cost of raw materials, logistics and fixed costs. In the revised FY 2020 forecast, we ramped up revenue projection through stable production, supported by a strong market and a low inventory levels. The business profit was revised to a record high of the ¥45 billion, up ¥2 billion from the previous outlook, driven by higher profitability and driven by weaker yen and by passing on a higher cost of raw materials and logistics to product prices.
Page 32 shows revenue and business profit by subsegment, namely motorcycles for developed countries, motorcycles for emerging markets, utility vehicles, ATVs and PWCs and general-purpose gasoline engines. Appendix shows wholesales of motorcycles by country. Page 33 shows the quarterly trend of revenue and profit. Page 34, market overview for Motorcycle & Engine. There is no change from the last time.
Page 35, shareholder return. Propelled by weaker yen and other factors, the net profit attributable to owners of parent is expected to reach ¥32 billion, up by ¥3 billion from the previous forecast. But the market environment is changing extremely fast, and we maintain the full year dividend at ¥50 per share for now. However, we plan to distribute ¥30 as interim dividend, and the company will decide the year end dividend later, watching the company’s performance going forward. I will like to report 4 project topics today. The first topic is for Motorcycle & Engine business, a driver of KHI group earnings. This is Teryx KRX4 1000, a 4-seater sports off-road 4-wheel car launched this year.
North America sees growing demand for off-road 4 wheelers for outdoor recreation. Adding to the popular 2-seaters sports model, now we offer a 4-seater model to share fund with the family and friends. We expect the sales of 4 wheelers and the PWCs will go up about 40% year-on-year. We will continue to launch many more attractive models in a timely fashion to ensure motorcycle and engine continues to drive the earnings of the group.
The next topic also comes from a Motorcycle & Engine. This is an initiative to facilitate carbon neutrality. As you know, we are committed to building a supply chain of a CO2-free liquefied hydrogen. Decarbonization is regarded as a big challenge for motorcycles. To address this challenge, we started selling the group’s first electric bikes for kids, the so-called first Kawasaki electric bikes, targets the age group of 3 to 8, which was missing in our line of coverage before.
With [ Versys ] Kawasaki, along with on-road and off-road motorcycles, 4-wheelers and electric bikes, noseless, Kawasaki provides a fun to lifestyles of all generations from kids to seniors. 2-wheel electric motorcycle launches are planned this fiscal year with more models coming one after another.
Please keep excited about our initiatives towards carbon neutrality. Page 38 shows our service of robots in a demonstration phase. This robot restaurant is located in the Future Lab HANEDA, next to Haneda Airport. It has received a broad mass media coverage and reservations are pouring day after day.
Children get very excited when mills are served by robots. We are proud that the people can really fill that happier life with robots is coming very close to us. The photo in the right upper hand shows Tokyo Governor, Ms. Koike interacting with the delivery robot of Kawasaki during the demonstration.
The tester delivery on the public road was successful. Delivery is a social problem today due to a labor shortage and is called the last one mile in logistics. Kawasaki is proud to contribute to solving this problem by expanding the Service Robot business.
The last but the least project is hydrogen. It is expected to become the core business for a Kawasaki. At the last conference, we reported that the world’s first liquified hydrogen carrier, Suiso Frontier had sailed between Japan and Australia with liquified hydrogen loaded before the departure.
Following the successful technical administration, we obtained approval for this design of large liquified hydrogen carrier for commercialization for the first time in the world. The commercial liquefied hydrogen carrier is capable of loading 128x more liquified hydrogen onboard than Suiso Frontier. We expect that one carrier vessel will become operational around 2025 for demonstration aiming commercialization.
More carriers will be launched in the future as the use of hydrogen becomes more widespread. Kawasaki Group will generate more profit from hydrogen business in proportion to the number of new constructions of carriers. We are making a steady progress towards that goal. From this slide onwards, contain information regarding a capital expenditure, depreciation, research and development spend, the headcount at the year-end and so forth. Thank you very much for listening.
Question-and-Answer Session
End of Q&A
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