Nabtesco Corporation (NCTKF) Earnings Call Transcript

Thank you for joining Nabtesco's Second Quarter of Fiscal Year 2025 Results Briefing. Please refrain from recording during the session. Presentation material is available on our website, www.nabtesco.com. Please note that this conference is being recorded. First, let me introduce today's speaker, Mr. Hiroshi Usui, Director, Executive Officer, Corporate Planning, Accounting and Finance, Information System and Corporate Communication Department; Mr. Yasushi Minegishi, General Manager of Corporate Communications Department. Mr. Usui will give a presentation followed by a Q&A session. Before presentation, I'd like to touch on the precondition. Nabtesco announced notice concerning the company's split of the Hydraulic Equipment business on July 31. This presentation mainly explained without the impact of the company split. There are a differential number from the impact of the company split from Page 16 through 23. We will disclose Hydraulic Equipment as a discontinued business from the third quarter of this fiscal year onward. Usui-san, please make a presentation.

[Interpreted] Thank you very much for joining today. So let me start from explaining the summary. So as for the first half results, we achieved increase in both the sales and profits for the first half of the year year-on-year. And more specifically, the consolidated sales increased by 8.6% and the consolidated operating profit increased by 65%. So you can see that there was a tremendous improvement in our profit. Next, regarding the full year plan. So as I said, the first half results were very good. So we decided to revise up the full year plan. More specifically, the sales is going to be increased by 2.4% against the previous plan and we're expecting this to be JPY 344 billion. And likewise, as for operating profit, with a 19.3% increase from the plan -- initial plan, we are now expecting this to be JPY 22.3 billion. And as for some of the highlights, the Project 10 progress will be explained. And also, we are going to talk about the U.S. tariff impact and the share buyback and the company split of the Hydraulic Equipment business. So first, allow me to explain the details of the first half results. So this slide summarizes the details of first half results. So both from the comparison against the previous year and comparison against the plan, we achieved sales increase and operating profit increase. So a couple of the factors here are the sales growth in the MRO business and also the Project 10, which we have been working on since last year to improve the profitability has been working out well and that contributed to the profit increase. And as you can see, these columns are -- the green one is showing the first half of last fiscal year. And then the blue part is the first half plan for this fiscal year and the dark blue is indicating the actual results for the first half. And you can see that the operating profit margin has improved very much. Now this slide shows the reasons behind those gaps. So in the sales, we achieved the increase year-on-year because we saw the good growth in the CMP, TRS and ACB businesses. Especially, we saw good demand for the Pressure Reduction Gears, PRG, the Railroad Equipment and Marine Equipment. Next regarding the operating profit. So as for the operating profit side, of course, we saw the good impact coming from the increased sales. But on top of it, the Project 10 profitability improvement activities have been working out well and we made the progress, which was exceeding our plan. So the operating profit turned out to be higher than our expectation. And on top of it, in the TRS, Transport segment, the Railroad Equipment and Marine Vessel Equipment, MRO business grew very much and that led -- that pushed up the operating profit. Now I'd like to talk about the revision of the full year plan for FY 2025. Now this slide shows the changes in the market trend. I'm not going to go into the details here, but just to summarize what's happening, the market environment has not been seeing much change. However, due to the U.S. tariff policy, the uncertainty remains with us. So based on such business environment and the actual performance of the first half of the year, we have revised the full year plan as shown here. So compared against the initial plan, we have revised up all those numbers. So as for the sales, which we projected to be JPY 336 billion, is now projected to be JPY 344 billion. And as for operating profit, it was previously JPY 18.7 billion, but now it's raised to JPY 22.3 billion. And accordingly, the operating profit margin has been improved from 5.6% over to now 6.5%. As a result, the basic earnings per share, which was considered to be JPY 109.07 this year is now raised to JPY 122.43. As for the dividend per share, as we had been planning, we are planning to pay out JPY 80 per share. Now let me tell you the reasons behind the gap from the initial plan. So in the sales, since we are anticipating some impact from the U.S. tariff in the packaging business, this business alone was revised downward. Other than that, the rest of the businesses, CMP, Transport and ACB are considered to do continually better -- continually well. So we revised upward. As for the operating profit, with the expected sales increase, we are also revising up the operating profit accordingly. On top of it, in the headquarter cost, you see this JPY 500 million improvement and that's because we have been making good progress with the Project 10. And likewise, as for the difference of the operating profit forecast compared against the initial plan. So partially, we are expecting profit improvement because of the sales improvement. But at the same time, we have been working out well with the Project 10. So there will be further cost reduction. And on top of it, there is the U.S. tariff impact. And in fact, after the first quarter, we thought the full year impact of the U.S. tariff would be around JPY 600 million. But now with further efforts on our end and also as the negotiation between U.S. and Japan resulted in a little lower tariff than which was initially expected, we are now expecting the maximum of JPY 300 million impact for the full year. So based on such great performances that we have been enjoying, we decided to do the share buyback. As shown at the top, let me recap the shareholder return policy that we have indicated in our mid-term plan. And we'd like to use -- stick to the DOE dividend on equity of 3.5% with the stable dividend and share buyback in accordance to the financial condition. And now this time around, we saw this increase in operating cash flow and also the reduction in the investment cash flow. So that led to the excess cash at hand of JPY 10 billion. So we decided to use this in order to do the acquisition of our own shares up to JPY 10 billion. Next is regarding the progress of the Project 10. Since 2024, we've been working on these cost reduction activities. And ultimately, by FY 2026, we'd like to achieve the operating profit margin of 10%. And with that as a target, we have also set the targets for FY '24 and '25. And in FY '24, the actual profit margin was 4.6%. And in this year, FY '25, we are now forecasting this to be 6.4%. So we are making progress. That is much greater than our plan. And especially in these Project 10 activities, the one that would have the greatest impact will be the Component Solutions segment profitability. And we have been making good progress according to the plan. And initially, for this fiscal year, this CMP segment margin was expected to be 4.8%, but now we have revised it up to 6.1%. And in fact, I'm going to explain that company split later for the Hydraulic Equipment business, but if that Hydraulic Equipment business would be excluded from this number, the OP margin would actually be 6.8%. So by the next fiscal year, we're targeting 11% OP margin to be achieved by this segment and now the probability of achieving that is higher. Next regarding the Precision Reduction Gears order trend as well as the production capacity. And as for the second quarter order, on the Q-on-Q comparison, it was plus 9%. And on year-on-year comparison, it was plus 15%. So basically, it's in line with our expectation. Of course, it's always difficult to foresee the future, but we think it's going to be basically in line with this dotted line that we are showing here. Now on the right, we are showing the utilization ratio of each plant. And since the order income trend has been improving, we are seeing the pick-up in the utilization rate at each plant, too. And as for the major plant in Japan, the utilization which was 60% is now -- was 65% in the second quarter. And likewise, in China, that 95% was 110% in the second quarter. Now switching the topics, I'd like to talk about the future growth opportunities for transport business and the MRO business. So in both the first and second quarters, Transport Solutions business saw good sales and good profits. And the future outlook is also good. We're expecting both the sales and MRO business sales to be growing like this toward 2027. And with a good increase of the MRO business, we are also expecting the OP margin to be improved like this. Now within this Transport Solutions segment, there is the Marine Vessels Equipment business. And here in this chart, we're showing the historical trend for this marine business. For the total TRS segment, we're expecting the CAGR of the sales – sales CAGR to be 10% between 2022 and '27. But that for the Marine Vessel Equipment business is expected to be 15%, which is much higher. And in fact, when you look at the global trend, from 2027 to 2036, it is expected that the global new shipbuilding volume would be increasing by 2.5x from the current level. So we can expect to enjoy this dramatic increase of the Marine Vessel business as well. And finally, I'd like to touch on the company's split of the Hydraulic Equipment business. Now this slide shows the background behind this decision. Now this Hydraulic Equipment business was positioned as a business to rebuild for us. And over the past years, we have been discussing and trying to figure out how we can improve this hydraulic business to the position that we desire to be in. And the conclusion was that as long as this business is within the Nabtesco Group, we cannot aim at -- we cannot realize the potential -- maximum potential of this business. And also in order to go into the new market or develop the new products and expand the business, we need to find a strategic partner. So as a result, we decided that having the best owner for this Hydraulic Equipment business shall be the best solution. Now this slide shows the details of hydraulic equipment business, and I'm going to skip this slide. And this slide shows the transaction scheme. So we're establishing this new company, Comtesco Corporation. And to this Comtesco, we're transferring all the Hydraulic Equipment business. And on top of it, we are going to transfer 70% of the stock holdings of Comtesco over to an Italian company named Comer Industries. Now this slide shows the impact on our business from this transaction. Central column, this mid blue one, this is the new revised plan that I just explained earlier. And this navy column is indicating the impact of the actual sales and operating profit after excluding this hydraulic business. Since the hydraulic business would become a non-continuing business, the numbers will be excluded from the sales and operating profit. But with that, the OP margin would be improved from 6.5% to 6.9%. And as for net profit, it's going to improve from JPY 14.6 billion over to JPY 14.9 billion, but it's going to be only a slight improvement. So basically, there is not going to be much impact for the whole company. Next is regarding the cash allocation. Of course, with the transaction and the transfer of stocks, we will be getting certain gain. But on the other hand, we would have to exclude the cash that we would have been generating from this hydraulic business in the 3 years' time. So when you do this math, the plus and minus turn out to be about the same. So there is plus/minus 0. As a result, our mid-term plan cash in of JPY 160 billion would not have any changes. And accordingly, those investments for growth that we were planning to do throughout this mid-term plan is going to be carried out according to that plan. This is my final page. First, regarding the expected outcome from this program -- project. First, the Hydraulic Equipment business would have a potential for further growth under the new ownership. As for us, Nabtesco, we can promote optimization of portfolio balance and build a resilient corporate foundation. At the same time, we can concentrate our resources on the promotion of smart motion control, which is very core project within our mid-term plan. As for the quantitative effects, as you see, we can expect to improve the consolidated operating profit margin and also we can reduce the asset, as shown here. Finally, regarding the business portfolio management going forward. So now that we would continue to focus on the major businesses, excluding Hydraulic Equipment, we can make appropriate activities that -- we can engage in appropriate activities to realize more optimal corporate value for the company throughout this mid-term management period. So we'd like to strive to do that. On the other hand, we still have some other smaller businesses that are not the major businesses and that are not satisfying the internal criteria. So we'd like to continue to work on these and consider what we can do to make them grow. So that concludes my presentation. Thank you very much.

[Operator Instructions] Since we don't have any questions, we will now wrap up this meeting. Thank you very much for joining us. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]