Explanatory Meeting for the Third Quarter Ended December 31, 2016 Outline of Answers to Main Questions
Q: What is the degree of impact of foreign exchange on revenue and operating income in the cumulative third quarter and the full-year of FY2016?
A: ¥50.9 billion of foreign exchange loss affected the revenue of the cumulative third quarter (¥507 billion). The amount of foreign exchange loss on the adjusted operating income of the same period (¥11 billion) was ¥19.7 billion. We estimate ¥71.1 billion foreign exchange loss on the full-year revenue forecast (¥700 billion), and ¥26.3 billion foreign exchange loss on the full-year adjusted operating income forecast (¥28 billion).
Q: What was the cumulative third quarter revenue of the mining machinery business, excluding the foreign exchange loss? Do you see any sign of recovery in the mining market? Please also share with us your outlook for FY2017.
A: Excluding the foreign exchange loss, sales of the mining machinery remain mostly unchanged year-on-year, and the revenue of the mining parts and services increased by 16%. Regarding the demand forecast of mining machinery for FY2016, the demand for hydraulic excavators will remain unchanged year-on-year (provided, however, the demand for large machineries over EX1900 will be decreased by 20% year-on-year), and the demand for dump trucks will be decreased by 20% year-on-year. Regarding machineries for contractors and quarrying business, such as EX1200 and EX1900, demand does appear to be recovering. However, there are still no signs of recovery in the demand for hydraulic excavators and dump trucks over the size of EX2600 and EH3500, which are mainly for major mining companies. We expect recovery of the demand for new mining machinery may start in or after the second half of 2017.
Q: What is the breakdown of the increased or decreased amount caused by the variation of the sales volume, model mix and overhead cost in the variation factors of profit and loss in the cumulative period?
A: The ¥9.7 billion decrease in sales volume and model mix in the cumulative third quarter are attributable to the ¥3.5 billion increase in sales volume and the ¥13.2 billion decrease in model mix. ¥8.5 billion of the unrealized income of inventory has largely affected the decrease in model mix. An increase of ¥22.3 billion in income by overhead cost down consists of (i) an increase of ¥12.5 billion due to the return of the restructuring expenses of the previous fiscal year, (ii) an increase of ¥6.9 billion due to reduction of personnel expenses, (iii) an increase of ¥8.4 billion due to reductions in overhead costs, and (iv) a decrease of ¥5.5 billion due to the increased expenses to convert KCM into our consolidated subsidiary.
Q: Regarding H-E Parts, acquired in December 2016, how much of their performance and assets are reflected in HCM's P/L and B/S of FY2016?
A: By acquiring H-E Parts, we estimate that FY2016 revenue will increase by ¥6.2 billion in the fourth quarter, and the adjusted operating income will increase by ¥500 million. Furthermore, ¥25.9 billion of H-E Parts’ assets have already been reflected in HCM’s total assets at the end of the third quarter of FY2016.
Q: There was an announcement regarding Hitachi Sumitomo Heavy Industries Construction Crane Co., Ltd., currently a consolidated subsidiary, becoming an equity-method affiliate in FY2017. What is the estimated impact of such a change on HCM's business performance?
A: We estimate a decrease of approximately ¥40 billion in FY2017 revenue. On the other hand, we expect an increase of approximately ¥24 billion in revenue from the acquisition of H-E Parts. Therefore, we expect the decrease will not be significant in total. If TOB for Bradken progresses as planned, we expect a further increase of approximately ¥65 billion.