Q: Regarding the Solution Business, which is a newly added business segment, please let us know the business contents and the forecast of revenue and adjusted operating income in FY2017.
A: The Solution Business is composed of the H-E Parts group companies and Bradken group companies. H-E Parts provides service solutions related to mining, crushing, and construction machinery and equipment. It also conducts development, processing and sales of the accessory parts for these machineries, mainly in Australia and the United States. Bradken globally conducts a wide range of value chain businesses, such as manufacturing of casting parts for mining and infrastructure industry, providing mining equipment and expendable parts for mining machinery, and providing maintenance services. The revenue forecast for FY2017 is ¥89.6 billion, and the adjusted operating income ratio is forecasted to be approximately 8%.
Q: How is the demand forecast of mining machinery in FY2017? Please let us know the demand for hydraulic excavator and dump trucks separately.
A: The demand for ultra-large excavators increased by 10% in FY2016, due mainly to an increased demand for 100t class models, which are relatively small ultra-large excavators. We expect the demand in FY2017 will increase by 10% year-on-year. Regarding dump trucks, the demand decreased by approximately 20% year-on-year in FY2016, and we expect the demand to remain flat in FY2017. The demands for both ultra-large excavators over 200t and ultra-large dump trucks over 150t are at low levels.
Q: ¥7 billion was recorded as the structural reform expenses in FY2016. Please explain a breakdown of the expense and how these expenses have been incorporated as profit and loss variable factors.
A: The following is a breakdown of structural reform expenses: (i) ¥3.5 billion for a reorganization of the production structure, including the loss of ¥2.5 billion resulting from the sale of the second plant in China incurred by the end of the third quarter, (ii) ¥ 3.2 billion for the reorganization of the dump truck business, and (iii) ¥300 millions of other impairments. The inventory valuation loss of ¥2.6 billion due to the reorganization of the dump truck business in the fourth quarter affected the adjusted operating income, and ¥4.4 billion of other operating expenses have only affected the operating income.
Q: The net D/E ratio of FY2016 was 0.46, which is higher than “0.4 or lower”, the target of the previous Mid-Term Management Plan. Is this due to the acquisition of H-E Parts and Bradken? Also, please let us know the amount required for the acquisitions of the two company groups and the D/E ratio excluding such amount.
A: There is an increase of ¥40.7 billion in borrowing, resulting from the acquisition of HE Parts and Bradken. The net D/E ratio excluding the acquisitions is equivalent to 0.36. The amount required for the acquisition of these two company groups totaled ¥74.4 billion, of which ¥56 billion was reflected in the investment cash flow in FY2016. The remaining ¥18.4 billion is expected to affect investment cash flow in FY2017.
Q: How much are the operating cash flow and free cash flow outlook for FY2017?
A: The operating cash flow of FY2017 is expected to be approximately ¥60 billion. Free cash flow is expected to remain positive in spite of the acquisition amount of Bradken and the increased capital investment for the purposes of production reform and establishing a new core operation system.