Hitachi Construction Machinery


Outline of Answers to Main Questions at Explanatory Meeting for the First Quarter Ended June 30, 2017

Q: What are the factors behind the increase of revenue and adjusted operating profit in the first quarter?

A:  Revenue increased ¥50.2 billion year-on-year. The factors behind this increase include (i) an increase of ¥24.6 billion generated from solution business, which comprises H-E Parts group companies and Bradken group companies that became consolidated subsidiaries last fiscal year, (ii) a decrease of ¥7.6 billion due to the conversion of Hitachi Sumitomo Heavy Industries Construction Crane Co., Ltd. (HSC) to an affiliated company, accounted for by the equity method, (iii) an increase of ¥3.4 billion as positive impact of the foreign exchange fluctuation, and (iv) an increase of ¥29.8 billion generated from construction machinery business.
Adjusted operating income increased by ¥14.3 billion year-on-year to ¥16.8 million. Factors behind the increase include an increase of ¥19.1 billion due to sales volume, model mix and others, consisting of (i) an increase of ¥17.4 billion in sales volume (the net effect of an increase of ¥8.8 billion by solution business, a decrease of ¥2.5 billion due to HSC deconsolidation, and an increase of ¥11.1 billion due to increase in sales volume of construction machinery business), and (ii) an increase of ¥1.7 billion due to changes of model mix and others. Other factors for its increase are  (i) an increase of ¥1 billion resulting from an increase of selling price in Europe and the United States, (ii) a decrease of ¥100 million due to foreign exchange fluctuation, (iii) a decrease of ¥200 million due to increased material costs, and (iv) a decrease of ¥5.4 billion due to increased overhead expenses. Incidentally, the increase in overhead expenses is derived from (i) an increase of ¥1.7 billion due to deconsolidation of HSC, (ii) a decrease of ¥6.3 billion due to consolidation of the two group companies operating solution businesses, and (iii) a decrease of ¥700 million due to increased R & D expenses.

Q: Please tell us what caused the free cash flow to be negative ¥12.3 billion in the first quarter, and the future outlook for the fiscal year.

A: Net cash provided by operating activities amounted to ¥9.4 billion, a decrease of ¥11.4 billion year-on-year, due to an increase of ¥15 billion in inventories caused by increased production. Net cash provided by investing activities resulted in expenditures of ¥21.7 billion, mainly due to spending of ¥17.6 billion for continuing TOB toward conversion of the Bradken group into a wholly owned subsidiary in this first quarter. Consequently, the free cash flow in the first quarter was negative ¥12.3 billion. We forecast the free cash flow for the full fiscal year will turn positive, despite an increase in capital investment.

Q: What is the demand forecast for mining machinery in FY2017? Please let us know the demand for excavators and dump trucks separately. Also, how large are the order backlogs of mining machinery?

A:  Demand for mining trucks over 150t rebounded to show increases in this fiscal year, and we see that the entire market has bottomed out. We expect that the demand of ultra-large excavators and dump trucks over 150t will increase by approximately 20% year-on-year. We have already received orders of ultra-large hydraulic excavators and dump trucks accounting for 70% and 50%, respectively, of our sales forecasts for mining machinery in and after the second quarter of this fiscal year.

Q: Please explain why the FY2017 full-year demand forecast has been upwardly revised while the consolidated earnings forecast has not been revised.

A: We upwardly revised the global demand forecast for hydraulic excavators by 10,000 units, including the increase of 7,000 units in China, by reflecting the increased demand in the first quarter. We also expect the demand for mining machinery will be on a recovery trend.  However, we have not revised the consolidated earnings forecast made at the beginning of the fiscal year because (i) the global economy and foreign exchange fluctuation trends are still uncertain, so we need to carefully judge whether this improvement in the business environment will last, and (ii) we are going through PPAs (revaluation of acquired assets) of HE-Parts and Bradken, both of which are newly consolidated subsidiaries.

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