Mitsubishi Steel Mfg. Co., Ltd. Financial Results for the First ...

Mitsubishi Steel Mfg. Co., Ltd. Financial Results for the First Half of the Fiscal Year Ending March 2017

November 18, 2016

1

Ⅰ. Opening Remarks

Ⅱ. H1 FY2016 Results

Ⅲ. Full-year Earnings Forecasts for FY2016

Ⅳ. Progress with the 2016 Mid-term Business Plan


2

II. H1 FY2016 Results





3

Summary

FY2015 ended March 31, 2016 FY2016 ending March 31, 2017

H1 Full year H1Year-on-year

change

Net sales 540 1,065 483 △57

Operating income 17 43 14 △3

Ordinary income 15 33 7 △8

Net income attributable to owners of parent 6 25 14 8

Foreign currency translation adjustments for overseas subsidiaries’ sales and a decline in the valuation of foreign currency-denominated assets due to the yen appreciation had a major impact on net sales and ordinary income.

The decline in operating income was almost equivalent to the increase in costs resulting from reinforcements to research and development and more aggressive capital investments.

The partial sale of cross-shareholdings ensured an increase in bottom-line profits.

(¥100M)

Factors contributing to a reduction in overseas subsidiaries’ net sales- ¥2,200 million

Factors contributing to decline in ordinary income - ¥400 million


4

Factors contributing to changes in net sales and operating income

17

Incre

ase in

R&D

costs an

d

depre

ciatio

n an

d

amortizatio

n c

osts

△2

△4 +3

+2 △2

0

10

20

Cost im

prove

ments

Declin

e in

profits

due to

fluctu

ations

in raw

mate

rial prices

One-off

14

Oth

er

H1 FY2015 H1 FY2016

(¥100M)

540 Oth

er

△22

△19△8

△8

400

500

Dro

p in sale

s prices

Follo

win

g declin

e

in raw

mate

rialpric

es

483

Fore

ign c

urre

ncy tran

slation

adjustm

ents fo

r ove

rseas

subsidiarie

s

’ net sale

s

Declin

e in

OEM

H1 FY2015 H1 FY20160

Operating income

Net sales


5

4.9

Declin

e in

net sale

s

Cost im

prove

ments

Flu

ctu

ations in

raw

mate

rial prices

Pro

duct m

ix

Oth

er

△0.7

＋0.3

＋0.3△2.3 ＋2.3△0.9

△0.3

△0.4

0.0

2.0

4.0

6.0

8.0

10.0

One-off

Inve

nto

ry valu

ation

Incre

ase in

R&D

costs

and de

preciatio

n an

d am

ortizatio

n c

osts

3.2

0.4

Incre

ase in

net sale

s

Fore

ign

exc

han

ge

Cost im

prove

ments

Pro

duct m

ix 為替

+1.1

+1.3+0.3 △0.5

△1.1 +0.4

0.0

2.0

4.0

6.0

8.0

10.0

Fixe

d costs

Quality

Other

6.1

Declin

e in

net sale

s

Dro

p in raw

mate

rial prices

Declin

e in

prices

Cost im

prove

ments

＋8.4

△1.4

△10.2 +1.7

△1.2△0.4

+1.4

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Inve

nto

ry valuatio

nan

d oth

er

Oth

er

Incre

ase in

R&D

costs an

d de

preciatio

n an

d amortizatio

n

costs

Other

H1 FY2015 H1 FY2016

4.6

Incre

ase in

net sale

s

3.4

+0.3△1.3

+0.6 △0.8

0.0

2.0

4.0

6.0

8.0

10.0

Impro

ved

profitability

Special Steel Bars Business (¥100M)Springs Business

Formed & Fabricated Products Business Machinery Business

H1 FY2015 H1 FY2016

H1 FY2015 H1 FY2016 H1 FY2015 H1 FY2016

NetSales183

Netsales219

NetSales

49

NetSales

45

NetSales

48

NetSales

44

NetSales239

NetSales213

1.9

Pro

duct

mix

Fore

ign

exc

han

geOther

Other

4.4


Factors contributing to changes in operating income in each segment

6

(¥100M)

Net sales/operating income by segmentFY2015 ended March 31, 2016

FY2016 ending March 31, 2017

H1 H1Year-on-year

change

Special Steel Bars

Net sales 219 183 △36

Operating income 6 4 △2

Springs

Net sales 239 213 △26


Formed & Fabricated Products

Net sales 44 48 4

Operating income 0 2 2

Machinery

Net sales 45 49 4


Other

Net sales 17 18 1


Consolidated adjustments

Net sales △23 △28 △5


Total

Net sales 540 483 △57


Special Steel Bars

・Sharp drop in sales due to lower OEM and sales

prices

・Drop in profits was relatively minimal since raw

material prices also fell

Springs

・ Lower net sales for overseas subsidiaries when

converted into yen was a major factor, but sales

volume fell only slightly.

・Materials prices overseas (North America) rose

and pressured profit.

Formed & Fabricated Products

・Sales of special melting materials and precision

forgings increased.

・In addition to higher sales, improved costs

contributed, and profit rose substantially.

Machinery・Net sales increased due to higher sales of can products for plant use.

・At the same time, exports of gas turbine products

with solid profitability declined, reducing profit.


7

(¥100M)

Due in part to the liquidation of some cross-shareholdings, bottom-line profits (net income for the quarter) rose significantly.

FY2015 ended March 31, 2016


H1 results H1 resultsChange over previous

period


Non-operating income △2 △7 △5

Translation (exchange profit & loss) 0 △4 △4

Other △2 △3 △1

Ordinary income 15 7 △8

Gains on sale of stocks ‐ 18 18

Other extraordinary income/loss 0 △2 △2

Income before income taxes 15 23 8

Tax expenses △8 △8 0

Net income attributable to owners of parent 6 14 8

Impact of non-operating income/loss and extraordinary income/lossII. H1 FY2016 Results

8

Business indicators and financial conditions

FY2015 ended March 31, 2015 FY2015 ended March 31, 2016 FY2016 ending March 31, 2017

H1 H1 H1

ROS （％） 3.9 3.2 2.9

ROE （％） 5.6 2.0 4.7

Dividends (JPY) 2.5 2.5 2.5

Dividend payout ratio （％） 24.7 64.8 28.4

Total assets (¥100M) 1,171 1,156 1,271

Net assets (¥100M) 620 642 636

Free cash-flow (¥100M) △41 2 18

Interest-bearing debt (¥100M) 202 171 350

Equity capital ratio （％） 48.0 50.3 45.0


9

III. Full-year Earnings Forecasts for FY2016





10

(¥100M)

Forecast for full-year results



Results

(A)Current forecast (B)

Change over previous period

(B)-(A)

Net sales 1,065 1,000 △65




We expect sales to be down in the fiscal year as a whole due to the impact of foreign exchange rates and lower OEM and sales prices in the second half as well.

Higher costs will pressure sales due to the recent steep rise in coking coal prices.

The sale of cross-shareholdings will contribute to bottom-line profits, ensuring higher profit for the full year.


11

Factors contributing to changes in net sales and operating income (full-year forecast)

43

Oth

erD

eclin

e in

profits

due to

fluctu

ations in

raw m

aterial pric

es

+8

△6

△16＋3

＋1

0

10

20

30

40

50

Incre

ase in

R&D

costs an

d depre

ciatio

n an

d am

ortizatio

n c

osts

Cost

impro

vem

ents

One-off

FY2015 FY2016

(¥100M)

33

1,065

Fore

ign c

urre

ncy

translatio

n

adjustm

ents fo

r

ove

rseas su

bsidiaries

’

net sale

s

＋19

△12

△29

△27

△16

900

1000

1100

Dro

p in sale

s pric

es fo

llow

ing

declin

e in

raw

mate

rial prices

1,000C

onso

lidated

adjustm

ents, o

ther0

Incre

ase in

sale

s volu

me

Declin

e in

O

EM

FY2015 FY2016

（105¥/＄）

Operating income

Net sales


12

11

Sale

s mix

Incre

ase in

R&D

costs an

d

depre

ciatio

n an

d amortizatio

n

costs S

teep rise

in

cokin

g coal pric

es

Dro

p in sale

s prices

＋12

△3

△16

＋3

△8＋4

＋2

-10

-5

0

5

10

15

20

Cost

impro

vem

ents

Dro

p in raw

m

aterial pric

es

Oth

er

5

In the second half, we expect higher domestic sales due to stronger demand in China for the construction machinery industry and an increase in sales for industrial machinery, but we forecast lower sales in the full year due to the impact of factors spilling over from the first half (lower OEM and sales prices).

Although we will strive to improve costs by building the optimal production system, this will not be enough to absorb the steep rise in coking coal prices and higher R&D costs and depreciation and amortization and accordingly we forecast lower profit.

Earnings forecasts by segment (Special Steel Bars Business)

(¥100M) (¥100M)Factors contributing to changes in operating income

Netsales406



Results ForecastsChange over

previous period

Net sales 406 383 △23


Operating income margin

2.7% 1.3% △1.4%

FY2015 results FY2016 forecasts

Netsales383

Other


13

Iron ore and coal markets and fluctuations in sales prices in Special Steel Bars Business

100

80

90

100

110

120

130

140

150

上期

下期

上期

下期

上期

下期

上期

下期

上期

下期

上期

下期

上期

下期

上期

下期

上期

下期

上期

下期

上推

定

8/3期 9/3期 10/3期 11/3期 12/3期１3/3期 14/3期 15/3期 16/3期 17/3期 18/3

Ave

rage

sal

es

price: I

ndex Average sales price: Index

0

40

80

120

160

200

240

280

320

360

0

20

40

60

80

100

120

140

160

180

上期

下期

上期

下期

上期

下期

上期

下期

上期

下期

上期

下期

上期

下期

上期

下期

上期

下期

上期

下期

上推

定

8/3期 9/3期 10/3期 11/3期 12/3期１3/3期 14/3期 15/3期 16/3期 17/3期 18/3

Coki

ng

coal

mar

ket

conditio

ns;

FO

B U

SD

/to

n

Iron o

re m

arke

t conditio

ns;

FO

B U

SD

/to

n

鉄鉱石-市況＄/㌧

原料炭-市況＄/㌧

◆ Conditions will be harsh in H2 due to the sharp rise in coking coal, and negotiations over sales prices for the Company’s products are underway with customers.


H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 FY2017 estimates

FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016

Iron ore – market conditions USD/ton

Coking coal – market conditions USD/ton

14

15

Cost im

prove

ments

△3

＋4△3

＋3△1

0

5

10

15

20

25

15

FY2016forecasts

FY2015results

Incre

ase in

R&D

costs an

d depre

ciatio

n an

d am

ortizatio

n c

osts

One-off

Oth

er

Decre

ases in

profit du

e to

flu

ctu

ations in

raw m

aterial pric

es

Other

Earnings forecast by segment (Springs Business)

If exchange rates are at current levels at the end of the fiscal year, sales will inevitably decline due to a drop in the foreign currency-denominated sales of overseas subsidiaries when converted to yen.

We expect research and development costs and depreciation and amortization to be higher, and raw material prices will also be up, but profit will be in line with the previous year due to improved profits resulting from changes in the North American subsidiaries’ materials procurement sources as well as automation of the production line.

Factors contributing to changes in operating income(¥100M) (¥100M)

Netsales482

Netsales450

FY2015 ended March

31, 2016



previous period

Net sales 482 450 △32



3.1% 3.3% 0.2%


15

5

Oth

er

Cost im

prove

ments

Flu

ctu

ations in

raw

mate

rial prices

Sale

s mix

+1△1△1+1

0

5

10

15

20

25

5

Other

Earnings forecasts by segment (Formed & Fabricated Products Business)

We expect higher sales due to an increase in sales of precision forgings.

Operating income will remain in line with the previous year due to improved costs, despite a rise in materials prices.

FY2015 ended March

31, 2016



previous period

Net sales 91 94 3



5.5% 5.3% △0.2%

(¥100M) (¥100M)

FY2015

results

FY2016

forecasts

Netsales

91

Netsales

94


Factors contributing to changes in operating income

16

10

Sale

s mix

Fore

ign

exc

han

ge

△2△1

0

5

10

15

20

25

７

Other

Earnings forecasts by segment (Machinery Business)

We expect the order environment for gas turbine parts and forging machinery to be harsh, and predict

lower sales in the full year.

We also predict lower profit due to the impact of the product mix and exchange rate fluctuations.

FY2015 ended March

31, 2016



previous period

Net sales 98 93 △5



10.2% 7.5% △2.7%

(¥100M) (¥100M)

FY2015

results

FY2016

forecasts

Netsales

98 Netsales

93


Factors contributing to changes in operating income

17

(¥100M)

Earnings forecasts by segment


Actual

(A)

Current forecast

(B)

Change over previous period (B) - (A)

Special Steel Bars

Net sales 406 383 △23Operating income 11 5 △6

SpringsNet sales 482 450 △32

Operating income 15 15 0Formed & Fabricated Products

Net sales 91 94 3Operating income 5 5 0

MachineryNet sales 98 93 △5


OtherNet sales 34 34 0


Consolidated adjustments

Net sales △45 △55 △10Operating income 0 0 0

TotalNet sales 1,065 1,000 △65



18

Full-year earnings forecast (impact of non-operating income/loss and extraordinary income/loss) In addition to temporary special factors such as investment losses on equity method and extraordinary losses in the

previous fiscal year, the addition of gains on the sale of stocks will increase income before income taxes by 1.5 times over the previous year.

Nevertheless, tax expenses will return to regular levels, and thus we expect after-tax income to increase only about 20%.


Results Forecast Change over previous period


Non-operating income/loss △10 △9 1

Translation (exchange profit & loss) △2 △5 △3

Investment gains & losses on equity method △11 △6 5

Other 3 2 △1


Gains on sale of stocks 3 24 21

Other extraordinary income/loss △8 △2 6

Income before income taxes 28 45 17

Tax expenses △1 △14 △13


(¥100M)


19

Fluctuations in earnings at overseas subsidiaries

FY2014 ended March 31,

2015

FY2015 ended March 31,

2016

FY2016 ending March 31,

2017

Full year Full year Full-year forecasts

ROS （％） 4.2 4.0 3.3

ROE （％） 6.2 4.2 5.2

Dividends (円） 6.0 6.0 6.0

Dividend payout ratio （％） 26.1 37.1 30.8

(¥100M)

Fiscal year ended March 2015

(USD/JPY120)

Fiscal year ended March 2016

(USD/JPY113)

Forecast for fiscal year ending March 2017

(USD/JPY105)

Net salesOperating income



Consolidated subsidiaries overall 335 4 308 6 307 8

Business indicators*Operating income includes royalty revenue.


20

Capital investment and depreciation and amortization

15

31

22

3032

30

58

33

0

10

20

30

40

50

60

H2 results

19

H1 results

13

H2 results

15

H1 results

15

Depreciation and amortization



Capital investments



forecasts

H1 results

21

H1 results

16

(¥100M)


21

R&D costs

8.1 8.3 8.0

12

0

5

10

15

FY2013 FY2014 FY2015 FY2016 forecasts

H1 results

3.6

H2results

4.4

(¥100M)

As a result of the establishment of the Research & Development Center, specialist research will be concentrated at this Center, and the Company will accelerate basic research and product development. As a result, we forecast a 150% increase in R&D costs.

The latest testing facilities are being introduced in the Research and Development Center.

H1 results

5.2


22

Measures in this fiscal year

Additional measures in H2

・About ¥13 billion is currently being invested in steel bar facilities. Strategic investments that will lower costs will be brought forward.・US subsidiaries will invest about ¥1.6 billion in facilities to improve productivity and streamline operations over the next three years.・A new factory for the springs joint venture in northern India will begin operating in December, and we will establish a supply network throughout India.

Progress with measures already established in H1

（１）Investments for growth・We are accelerating the adoption of cutting-edge testing facilities at the Research & Development Center, launched in April.・We are seriously considering M&A such as breaking into European markets.・The Corporate Planning Section was organized to execute new business and strengthen follow-through.・To make use of internal synergies, we are currently planning a scheme whereby steel bar would be processed by a steel manufacturer in North America, delivered to our springs manufacturing location in North America and then sold externally.

（２）Cost reductions・Cut costs by ¥200 million in a six-month period by continuing with standardization of operations in Muroran.・At the Canadian subsidiary, two robots have begun full-scale operation, and two more have been ordered.

（３）Hedging foreign exchange risks・In addition to changing from yen-denominated parent-subsidiary loans to Chinese subsidiaries to loans denominated in the local currency, a Thai subsidiary also switched to loans denominated in the local currency.


23

IV. Progress with the 2016 Mid-term Business Plan





24

Role of 2016 mid-term business plan

2015 results 2020 target 2025 target

Net sales 1,065 1,700 2,500

Operating income 43 90 -

Ordinary income 33 85 -

ROE 4.2％ 8.0％ Over 10%

Overseas ratio 38％ 47％ 65％

(¥100M)


25

Summary of 2016 mid-term business planIV. Progress with the 2016 Mid-term Business Plan

Build foundation to pursue three main policies

26

[Progress] (1) Build a worldwide supply chain

We are steadily building plants and production facilities in Mexico, China (to begin operating in April 2017), and India (to begin operating in December 2016 and August 2017).

We aim to be a global supplier by entering markets in Europe and Southeast Asia.

[Springs Business]IV. Progress with the 2016 Mid-term Business Plan

27

[Special Steel Bars Business] Investments to update Muroran and strategic investments

Steady progress with capital investments to improve quality and strengthen cost competiveness (¥13 billon)

These investments will cut costs by about ¥1.3 billion in fiscal 2020.

Entering overseas markets with steel bars (Indonesia project) Rolling plant is almost complete (to begin production in December 2016)

Integrated production model covering materials to products is complete in Indonesia (leaf springs)

(Sales will start in Thailand and India as well as Japan and Indonesia) Start of steel bar and flat steel sales in ASEAN region

[Progress] (2) Processing special steel

PlanCompleted amount as of

end-September 2016

¥13 billion ¥2 billion

・Five-year plan beginning in 2015・Expand sales target by improving quality level

・Cut costs with improved yield by conserving energy, automating, and raising quality


28

[Progress] (3) Build a model for "creating added value from materials"

[Formed & Fabricated Products Business] Entry into turbocharger assembly business Strengthen existing businesses

(precision castings, precision machinery products,

alloy powders)

・Enhance capacity of precision machinery processingfacilities (up 133%)

・Consider introducing mass-production test lines forprecision castings and alloy powder at the Chiba Works

Casting by VIM (vacuum induction melting)

・Introduce VIM facilities (next fiscal year) →Aim for in-house production of materials

・Production of high-alloy steel

→Start of experiments and research on material development

We are moving ahead with materials development in affiliation with the Research & Development Center.

Sub-assembly

High-alloy steel production(new VIM facilities)

Precision casting

Alloy powder

Precision machinery processing

ＭＩＭ

Existing

Development

M＆Ａ

Assembly

Processing

Materials


29

2016

April: Research & Development Center opened・Research and development functions of each business section concentrated in Center (31 staff members)・About ¥2.2 billion in capital investment over three years

October: Establishment of new Corporate Planning Division・Organize interdivisional projects → Create synergies

December: Set up new Public Relations and Investor Relations Department・Set up new Public Relations and Investor Relations Department in the Administration Section to proactively carry out corporate publicity activities for the Company both internally and externally

[Progress] Build execution foundation

Research & Development Center


30

Section Research and development items 2016 2017 2018 2019 2020

Springs

Make springs lighter in weightAdapt to autonomous vehicle technologyAddress electric vehicles

Develop high-stress spring steel

Evaluation tests for local procurement of spring material

Steel bar Development of high-purity steel

Materials development and mass production with VIM(VIM: vacuum induction melting)

Formed & Fabricate

d Products

Development of heat-resistant steel (for turbochargers)Improvements to high-frequency characteristics of soft magnetic powder

Company-wide

IoT: Development of high value-added productsIoT: Greater efficiency of production line

Research & Development Center (development plan)

Move ahead with systematic development looking to the future

India, North America

Mexico, otherEurope, other; Evaluation

tests

High-stress spring steelSTEP 2

High-stress spring steelSTEP 1

Development of high-stress spring steelSTEP 3

High-temperature compatibility STEP 1 High-temperature compatibility STEP 2

Improvements to high-frequency characteristics STEP 1

Improvements to high-frequency characteristics STEP 2

Steel bar prototypes

Utilization of IoT technology

Compliance with increase in foundation brake weight

Bearing steel, spring steel, steel for gears, etc.

High-alloy steel for precision casting; master heat

Adaptation for global expansion, support for new business, etc.

High stress and hollowed, crystal grain fined, resin spring


31

ClassificationFY2016 ending March

31, 2017FY2017 ending March




31, 2021

Basic research

Experiments and research

Evaluation of materials for local

procurement

Updates to aging facilities

[Evaluations for development and survey equipment]Laser microscopes, inclusion measuring equipment, combined-cycle testing machine, other

[Updates to aging facilities, infrastructure installation]Updates to controls, updates to aging facilities and utilities

[Increase of survey equipment]Microscope, hardness meter, embedding machine, other

[By theme; Survey equipment]Shot-peening, CAE, vacuum furnace, particle size distribution measurement, etc.

[Melting and manufacturing facilities]Vacuum melting furnaceGas atomizer

[Property improvement equipment and analytical equipment]Shot-peening, induction heating and cooling, 3D printers, CAE

[Evaluation for development and survey equipment]X-ray CT, auger electron spectroscopy

[Under consideration]Facilities for considering new businessCutting-edge survey and research equipment

Total capital investmentsAbout ¥2.2 billion

Research & Development Center (facility plan)

Introduce facilities ahead of schedule and boost development speed

3

13

6

0

5

10

FY2017FY2016 FY2018

(¥100M)


32

Strengthen execution foundation (organizational system)

Marketing and Sales Planning Department

Realize marketing synergiesSupport global expansion of Springs BusinessPromote M&A

Production Planning Department

Corporate Planning Department

Realize procurement synergies, multi-source procurers Establishment of a global quality management system

Consolidate functions of Corporate Planning Department and Overseas Planning DepartmentProgress and follow-through on mid-term plan

Public Relations and Investor Relations Department

Strive to fulfill disclosure responsibilities to shareholders and investors and publicize corporate activities both internally and externally to improve corporate value.


<Notes on Forecasts>

These materials are meant solely to provide investors with information, and are not intended to solicit trades. The

forecasts provided in these materials are based on targets and projections and the Company does not promise or

guarantee future performance. Please use this information with the understanding that the Company’s future

performance may differ from this business outlook. Although these earnings materials were prepared based on

data believed to be reliable, we cannot guarantee their accuracy and safety. Regardless of the purpose of these

materials, the Company bears no responsibility and we encourage all investors to make final investment decisions

based on their own judgment.

Mitsubishi Steel Mfg. Co., Ltd. Financial Results for the First ...

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