Explanatory Meeting for the First Quarter Ended June 30, 2015 Outline of Answers to Main Questions
Q: Regarding the disclosed earnings forecast for the first half, what are the potential opportunities and risks that apply to sales and operating profit targets for the second quarter?
A:While risks cannot be grasped in full, sales in China declined dramatically in the first quarter, and we foresee that decline will becomes less severe in the second quarter as the Chinese market enters a period of low demand. These risks have already been reflected in our targets. We have slight concerns on sales during the second quarter; however, our mining business and parts and service business are contributing significantly, and we will continue to promote cost reductions intensively. Specifically, HCM (non-consolidated) has tightly controlled travel and outsourcing expenses with effective results. Overseas, we have been adjusting production operating days mainly in China and Indonesia, and expect a decrease in indirect costs.
Q: As Chinese market conditions in the first quarter was weaker than projections, I assume that production and inventory adjustment may take longer than originally planned. How is the situation surrounding production?
A:As the decline of demand in China during the first quarter was larger than expected, we are carrying out intensive production adjustments there. However, inventory adjustments are taking longer than originally planned. Company-wide inventory reductions did not reach target levels despite upwards fluctuations in foreign exchange rates. Finished machinery inventory levels fell mainly overseas; however, in Japan, inventory was affected by the advanced bulk production of mini excavators and mini wheel loaders in anticipation of the replacement demand prior to the changeover to new emission regulations, among other factors. Mining machinery continues to be subject to inventory adjustment. At Hitachinaka-Rinko Works, we are currently performing tight production adjustments, and continue to transfer direct employees to other busy factories.
Q: Based on variance analysis for the first quarter, selling price improvements and foreign exchange sensitivity appear to be low relative to target values. Please explain the situation surrounding foreign exchange sensitivity and selling price.
A:The foreign exchange sensitivity on operating profit from the second quarter onwards is (i) ¥800 million by a ¥1 fluctuation against the US Dollar, (ii) ¥400 million by a ¥1 fluctuation against the Euro, and (iii) almost ¥0 by a fluctuation against the Chinese Yuan. Sensitivity has decreased based on a decrease in sales volume. Selling prices in North America have been affected by incentive plans implemented by each manufacturer. In China, the launch of emission regulation-responsive machinery has been delayed due to a deterioration in the market environment, and as such, we were unable to raise the selling price. Meanwhile, we are also carrying out sales promotional measures for specific inquiries. In addition, we plan to conduct an increase in ordinary selling prices in areas that include those where new models are not to be launched. This will be reflected in results from the second quarter onwards.
Q: Regarding capital expenditure and research and development expenses for FY2015, which were explained at the beginning of this fiscal year, have there been any changes in the amount of investment as a result of reviewing the respective items?
A:As of today, there has been no changes in targets for capital expenditure and research and development expenses. However, with respect to capital expenditure, we intend to carry out strict preliminary evaluations and conduct reviews during the course of formulating our plan for the second half.
Q: The company announced a plan to pay a dividend of ¥60 for this fiscal year, while you said you will ''maintain a stable dividend payout ratio''. Based on current net income, the dividend payout ratio you announced is extremely high. Does HCM consider the current level as a stable dividend payout ratio?
A:We do not plan to change the annual dividend of ¥60. Despite our underwhelming current net income figure, we have managed to generate cash flow; therefore, we will pay dividends regardless of the dividend payout ratio.