Sumitomo Heavy Industries Ltd

TSE:6302

Earnings Call Transcript

[Shunsuke Betsukawa, executive]

I will start my presentation. This presentation is scheduled for 20 minutes. Please bear with me as I have to skip some of the materials.

Here is the financial summary for the second quarter of fiscal year 2018, which was disclosed yesterday. The table shows the results for the first half of fiscal year 2017, first half of fiscal year 2018 and year-on-year change. The figures are shown in billion yen.

Orders were JPY 461.4 billion, which was the record high. I'll discuss segment breakdown later in my presentation. We had strong orders for the mass production machinery, such as construction machinery, net sales were JPY 423.7 billion, which was also record high. Again, I will discuss segment breakdown later.

Operating income was JPY 34.1 billion, operating profit margin was 8%.

Ordinary income and extraordinary loss are as shown here. Current net income was JPY 21.4 billion. As mentioned, operating income was JPY 34.1 billion. The table shows year-on-year change by segment.

Machinery Components JPY 4.5 billion, down JPY 800 million year-on-year, mainly due to large-scale gear reducers and temporary cost associated with acquisition this year of stock of Lafert Group.

Precision Machinery JPY 7.7 billion, almost unchanged year-on-year. Construction Machinery JPY 13.1 billion, major improvement year-on-year, increased demand, sales and profit of hydraulic excavators.

Industry Machinery JPY 3.6 billion, unchanged year-on-year with some change in sales mix. Ships JPY 1.1 billion, down JPY 1 billion year-on-year. Last, but not least, Environmental Facilities & Plants up JPY 2 billion to JPY 3.6 billion. Thanks to the improved profitability of boiler business, including Sumitomo SHI FW or SFW.

Next page shows a simple analysis of changes in operating income. JPY 11.9 billion is attributed to the effect of increased revenue. There was an increase in SG&A expenses due to the addition of acquired companies, namely Lafert Group and SFW. As a result, operating income was JPY 34.1 billion.

Next is balance sheet. Total assets increased JPY 34.8 billion from March 2018 to reach JPY 929.6 billion as of September 2018. This is simply due to the acquisition of Lafert Group.

All of these assets, including intangibles are consolidated into the balance sheet. There is a slight increase in interest-bearing debt. Net interest-bearing debt, however, remains negative.

Next page shows overseas sales by region. Total is shown to the left and hydraulic excavators to the right. The numbers are shown in billion Japanese yen. The total global sales for the first half were JPY 423.7 billion, of which Japan accounted for JPY 174.2 billion, which represents a positive growth from the same period last year. Japan's share of sales is 41.2% and 59% comes from overseas. The biggest contributor is North America with JPY 67.1 billion. It is followed by 3 growing regions, namely Europe, Asia ex China, and China. Their sales are around JPY 50 billion each. And shares of sales are growing due to different factors. First instance, China is growing due to the strong sales of hydraulic excavators and Europe due to the recent acquisitions.

Next, I will take you through performance forecast for fiscal year 2018. Please take a look at the right-hand side columns. Second from far right is forecast as of May. On the far right is forecast as of October. We have JPY 920 billion in orders, JPY 890 billion in net sales, JPY 70 billion in operating income, individually revised upward from the May forecast, in view of strong performance during the first half.

Other profit items are also revised. Dividend per share is also revised up to JPY 100 per share, which is split into JPY 50 per share for the first half and another JPY 50 per share for the second half, with payout ratio of 29.9%, nearly 30%. For the second half, projected currency exchange rate is JPY 110 to the dollar.

Let me give you a highlight of each of the 6 segments. Machinery Components. The bar chart shows the second quarter fiscal year 2017, full year 2017, Q2 FY 2018 and full year 2018, which forecast has just been revised. The line chart on the far right shows the OP margin.

During the first half, both orders and sales recorded a positive year-on-year growth. Thanks to the strong performance of mainstay small-to-medium scale gear reducers, and the consolidation of new subsidiary. For the full year, mainstay small-to-medium scale gear reducers should continue to show strong performance. As for MCD, however, slightly severe prospects are anticipated during the second half due to customers' inventory adjustments for robot applications. Large-scale gear reducers remain on recovery track.

For Precision Machinery, the charts show orders net sales and operating income. The blue bar at the top indicates plastic machinery, and the gray bar Precision and other equipment, such as Cryogenic coolers and semiconductors.

First on Plastic Machinery. We had strong orders at JPY 54.4 billion for the first half of fiscal year 2018. Thanks to the continuously high demand from the Chinese electric and electronic industries. For the second half, the demand from China is projected to be steady. For Precision and other equipment, orders and sales increased year-on-year to JPY 43.7 billion and JPY 37.2 billion, respectively. Thanks to a higher demand for cryogenic coolers for medical applications.

On the other hand, some of the semiconductor production equipment we have may experience a decline in demand going forward.

Construction Machinery. At the top, we have hydraulic excavators from our subsidiary, Sumitomo Construction Machinery. The gray bar at the bottom is mobile cranes. In the first half, hydraulic excavators, orders and sales exceeded JPY 100 billion. Thanks to the strong demand from China, Asia, North America and other overseas markets.

For the second half, the market is projected to stay firm. The 3 plants, which are operating at full capacity, are planning to undertake capacity expansion through productivity enhancement and cost reduction. As for mobile cranes, at the bottom, steady increase during the first half. Thanks to the recovery of the North America market and the strong domestic market. Domestic market, however, may slow down during the second half.

Industrial Machinery consists of [ more ] products, such as industrial turbines, material handling systems, forging press and medical equipment. During this year, the industrial turbines business is declining year-on-year, amid difficult market conditions. The other products, such as material handling systems, forging press and the medical equipment are showing strong trends as reflected on the bar chart.

Ships. During the first half, we received no order for new vessels. We only received old orders for ship repair. Orders for the first half was JPY 12.1 billion. For the second half, our order target is 3 vessels. New vessel market is expected to remain tough.

Although we secured JPY 1.1 billion positive operating profit for the first half, for the second half, we are projecting a negative profit, partly due to a provision for loss on construction orders.

Last but not least, Environmental Facilities & Plants. This business mainly consists energy plant and biomass power generation equipment. Both orders and sales are expanding. Thanks to the consolidation of SFW last year. Orders for the first half reached JPY 83.6 billion, also driven by the increase in the water treatment plants year-on-year. For the second half, the domestic plant market is expected to remain strong.

I will skip Page 17. Let me now move on to the progress on the Medium-Term Management Plan 2019. Page 19 shows progress status of MTMP '19. I have just discussed the FY 2018 forecast. The FY 2019 forecast is based on our review of each business unit. The latest plan is JPY 900 billion and 8%. Capital investment has been front-loaded and so is the R&D expenses. Progress status of MTMP '19 is shown here. The gray bar is forecast and the orange bar is actual or revised plans for sales and operating income, respectively.

Progress on basic policy. This is unchanged from last year. We are making steady progress including M&A. This is a new product, called Magic Rack, which is a compact and efficient high-density pallet storage system. We have just started sales activities. The product is receiving very positive reviews from customers.

In terms of Biomass, our main products are boilers, but we also have water treatment plants. Recently, we have received orders from a paper and a pulp company, as well as a plum seasoning company. The facilities are currently under construction.

This is Aftermarket business. We opened our service and technical center in a location adjacent to the Nagoya Works, where we manufacture our mainstay gear reducer products. We will support both Japan and overseas and provide training to service personnel.

Next page shows newly consolidated affiliates, last year and this year. Lafert Group is an Italian motor manufacturer we have acquired at the end of June this year. This is the size of the company. Contribution is for 9 months.

Persimmon Technologies is a startup company manufacturing vacuum robotics. The company was acquired at the end of March last year. We newly consolidated Hitachi Sumitomo Heavy Industries Construction and renamed it to Sumitomo Heavy Industries Construction Cranes in April this year.

SFW was already mentioned a number of times. The company was our technology partner, and we acquired the company at the end of June last year.

Given the ongoing tough market in Europe, we have reduced this year's order forecast to JPY 30 billion.

Next, active promotion of CSR. We are lagging behind in this area, but are currently working on CSR, including diversity, disseminating messages, both internally and externally.

With this, I'd like to conclude my brief presentation. Thank you.