progress on kawasaki roic management envision stable market expansion through 2020-2030 and will...

Progress on Kawasaki ROIC Management - Group Management Model 2018 -

October 29, 2014

Kawasaki Heavy Industries, Ltd.

© 2014 KAWASAKI HEAVY INDUSTRIES, LTD. All Rights Reserved 2

Group Management Model 2018

KHI applies Kawasaki ROIC Management (hereafter, ROIC Management) throughout the Group to achieve sustainable growth and improve enterprise value into the future while monitoring the growth of Group businesses on a business unit (BU) basis, from a medium- to long-term perspective, at least three to five years down the road.

KHI recently established Group Management Model 2018 as a part of ROIC Management. This model shows where KHI should be by fiscal 2018, focusing on enterprise value improvement and achieving an ideal business portfolio.

Highlights of Group Management Model 2018

Shows where KHI should be for the medium to long term (fiscal 2018) Identifies suitable financial indicators, focusing on enterprise value improvement

• Sets targets for ROIC, operating income margin, net debt-to-equity ratio and total asset turnover Reviews BU-based strategies for growth matched to the specific nature of each business sectorVerifies our business portfolio from the perspective of profitability, stability and growth


Targets for Group Management Model 2018

Group Management Model 2018

Current (as of fiscal 2013)

Before-tax ROIC 12% or higher 8.1%

Operating income margin 6% or higher 5.2%

Net debt-to-equity ratio 70%-80% 109.3%

Total asset turnover 1.00 times or more 0.89 times

(Reference: Net sales) (¥1,800.0 billion) (¥1,385.4 billion)

Group Management Model 2018Assumed exchange rate: ¥100/$

Notes:• Before-tax ROIC = EBIT (income before income taxes + interest expense) / Invested capital at year-end

(interest-bearing debt + shareholders’ equity)• Total asset turnover = Net sales / Total assets at year-end


131.9%

109.3%

100.0%

0%

20%

40%

60%

80%

100%

120%

140%

0.0

100.0

200.0

300.0

400.0

500.0

600.0

Fiscal 2012 Fiscal 2013 Fiscal 2015 Fiscal 2018

Interest-bearing debt Shareholders' equity Net debt-to-equity ratio (right axis)(Billion yen)

• Investment capacity exceeding ¥100.0 billion

• Use this to accelerate growth and engage in M&A and other opportunities for growth

Operating cash flowMore than ¥110.0

billion/year

Investment cash flow¥70.0-¥80.0 billion/year

Payout ratio30%

Secure investment

capacity

Toward further growth

Cash Flow ManagementUnder Group Management Model 2018, KHI targets net sales of ¥1.8 trillion or more and cash flow from operating activities at ¥110.0 billion or more. KHI will utilize capital for investment for future growth and ensure return to shareholders, while allocating cash for further investment and using it to accelerate growth and engage in M&A and other opportunities.


Business Sectors

KHI will maintain an internal company structure. However, we have categorized our businesses into four sectors―Air Transportation Systems, Land/Sea Transportation Systems, Energy & Environmental Engineering, and Industrial Equipment―to clarify strategies for future growth projected in Group Management Model 2018.

Air Transportation

Systems

Land/Sea Transportation

Systems

Energy & Environmental

Engineering

Industrial Equipment

Ship & Offshore Structure 〇〇

Rolling Stock 〇〇

Aerospace 〇

Gas Turbine & Machinery 〇〇〇

Plant & Infrastructure 〇〇

Motorcycle & Engine 〇〇

Precision Machinery 〇


Growth Strategy 《Air Transportation Systems》

We envision stable market expansion through 2020-2030 and will therefore draw on technological strengths in both aircraft and aircraft engine fields, concentrating management resources into these fields, to grow associated businesses into core operations.

Aircraft1) Growth strategy

We will push ahead with mass production of large aircraft (P-1, C-2) but also utilize extensive technological strengths accumulated to date to tap into demand for modernized, derivative and successor models. To meet private-sector demand, we will increase production of component parts for the 787 and pursue the development of derivative models while dealing with new project requests, such as components for the 777X. We will strive to expand business with customers in the defense sector as well as the private sector in our quest to sustain high profitability.

2) Allocation of management resourcesWe will continually implement relatively large-scale capital investment programs, including a new factory at the Nagoya Works, to deal with new private-sector products (787 production increase and its derivative models, and the 777X).

Priority investment looking 10 years or more down the road

Aircraft Engines1) Growth strategy

Through participation in international collaboration of new engine projects with major engine manufacturers by taking responsibility of key modules, we willimprove life cycle profitability of our products including aftermarket services. The business initially requires front end investment in development but in the long term we will enter into MRO* business and secure high profitability and growth.

2) Allocation of management resourcesWe will actively participate in new projects, especially for key modules.

* Maintenance, repair and overhaul

2018

Large-capacity power generation systems for aircraft

Large aircraft engines©2014 Rolls-Royce plc.– Reproduced with Permission – All Rights Reserved

Next-generation high-efficiency aircraft engines

787-9 composite material fuselage

XC-2 Transport AircraftRegional jet engines©2014 United Technologies Corporation – Reproduced with Permission – All Rights Reserved

P-1 Maritime Patrol Aircraft

Participate in development of future civilian aircraft such as the 777X


Growth Strategy 《Land/Sea Transportation Systems》Assuming a self-sustaining cycle of investment and returns, we will achieve higher profitability through an enhanced global business operating structure and a strategy for high added value.

Ship & Offshore Structure1) Growth strategy

Achieve differentiation through strengthened GOOD—gas (G), offshore (O),* overseas (O), defense (D)—strategy; development of marine gas engines and propulsion systems for offshore vessels; and high-value-added technology.

2) Allocation of management resourcesIn Japan, we are concentrating on investment to support the expansion of our fleet ofsubmarines. We may revisit our investment plan for commencing production at No. 2 dock at DACKS, our joint venture in China, depending on the level of recovery in the market and whether or not ship prices rally.

Enhanced global structureStrategy for high added value

Rolling Stock1) Growth strategy

We will draw on leading-edge technology, quality and contract fulfillment capability to boost our reputation for reliability in Japan and overseas markets of North America and Asia. We will seek synergy with other business fields, including air transportation systems, especially for rolling stock bogie (efWING®) using composite materials, to outshine the competition in terms of technology and products.

2) Allocation of management resourcesWe will continuously invest human resources into design and production technology pursuits to meet diverse customer needs in Japan as well as local requirements in North America and Asia.

Motorcycles1) Growth strategy

With a premium brand strategy fine-tuned to global market characteristics and a highly efficient supply-and-demand chain structure, we will be the clear frontrunner in the industry and achieve higher profitability.

2) Allocation of management resourcesWe will selectively invest in development of supercharged engines and electric and fuel cell powersport models, such as high-speed utility vehicles and next-generation motorcycles. We will debut a supercharged engine in the high-output class, equipped in models beginning in 2015, followed by wider application of expertise in engines with enhanced fuel economy and environmental performance.

* “Offshore” falls under energy & environmental engineering.2018

Propulsion system powered by natural gas

Liquefied hydrogen carriers

Marine gas engine

Hybrid propulsion system for vessels

Superconducting propulsion system

Rolling stock bogie (efWING® [*1]) using composite materials

High-speed rail vehicles for overseas markets

Supercharged Ninja H2R

Railway system

Newly developed LNG carriers

Next-generation motorcycles

Free gauge train

*1 environmentally friendly Weight-SavingInnovative New Generation truck


Growth Strategy 《Energy & Environmental Engineering》

Distributed Power: Oil & Gas1) Growth strategy

We will enhance our engineering capabilities, deploy solution businesses with our diverse product base, including gas turbines, gas engines, steam turbines and boilers, and expand the distributed power generation and oil and gas businesses.

2) Allocation of management resourcesWe will concentrate management resources into key areas, such as promoting further product and technology development, strengthening international operations including aftermarket services, and accelerating globalization through collaboration with other companies. In addition, we will emphasize the skill development of our engineering personnel.

3) Establishing business base for the futureWe will promote the development of a broad product range, such as hydrogen production and storage tanks and hydrogen power generation systems for a future “hydrogen society.” We will apply technology-driven synergies cultivated companywide through participation in natural gas and LNG projects to establish a hydrogen supply chain and build an overwhelming competitive superiority in the business.

Strengthen solutions businessLay business foundation for the future

Against a backdrop of power system reform in Japan and heightened demand for electricity and other energy, particularly in emerging nations, we will roll out solutions that combine a diverse range of products and technologies with plant engineering capabilities. Furthermore, in the oil and gas business and the hydrogen energy field, we will not only provide a fusion of products and technologies but also enhance partnerships to grow Energy & Environmental Engineering into a core business of the future.

2018

Distributed power systems

FLNG [*4] marine boilers

GTG [*2] plant

Hydrogen-fueled gas turbines

Liquefied hydrogen storage systems

*2 Gas to gasoline*3 CONCH Kawasaki Kiln*4 Floating liquefied natural gas

High-end offshore support vessels

FLNG/FPSO

LNG tanks

Liquefied hydrogen bases

Environmentally friendly waste gasification (CKK [*3]) systems

Compressed hydrogen trailers


Growth Strategy 《Industrial Equipment》

We will accelerate global expansion, underpinned by domestic mother factories. We will pursue synergies through greater sharing of management resources among the machinery and robot divisions and sustain ROIC at the top of the industry. Looking for further growth, we will seek to cultivate new markets, such as medical-use robots, where growth is likely.

Hydraulic Components1) Growth strategy

Taking advantage of globally recognized, leading-edge product development capabilities in the excavator field, we will establish a presence in the construction machinery and agricultural machinery fields—notable for such products as wheel loaders, bulldozers and tractor loaders—and expand sales with an emphasis on HST* systems. * Hydrostatic transmission: Hydraulic adjustable speed drive consisting of pump

and motor2) Allocation of management resources

We will continue to differentiate constituent technology, particularly for core parts,* and invest in new product development as we endeavor to cultivate demand in emerging markets, such as India, and expand sales through the introduction of new products. * Basic parts for hydraulic components, requiring sophisticated precision-processing technology; production is concentrated in Japan

Robots1) Growth strategy

We will accelerate sales to emerging markets, especially China, by emphasizing mass production of standard products at facilities in China. In addition, we will actively promote the production line builder operations by reinforcing system solution capabilities and expand the business. We will also cultivate new demand through the application of technology from a helpful, coexistent perspective to enhance the efforts of humans, with our sights set on the field of medical-use robots.

2) Allocation of management resourcesWe will effectively utilize management resources by integrating robot operations with the hydraulic components business and push ahead with increased automation in robot production. We will also actively engage in investment geared toward the cultivation of new business fields.

Cultivating new fieldsGreater sharing of management resources

2018

Robots to support global production

HST systems

Line builder business

Medical robots

Human-robot-cooperation system

Hydraulic components for construction machinery

Automated cell culture system


0%

10%

20%

30%

Air TransportationSystems

Land/SeaTransportation

Systems

Energy &EnvironmentalEngineering

IndustrialEquipment

ROIC (Fiscal 2013)

Business Portfolio (Profitability, Stability, Growth)

0%

10%

20%

30%



Systems


IndustrialEquipment

ROIC (Fiscal 2018)

0.0

100.0

200.0

300.0



Systems


IndustrialEquipment

Invested Capital (Fiscal 2013)(Billion yen)

0.0

100.0

200.0

300.0



Systems


IndustrialEquipment

Invested Capital (Fiscal 2018)(Billion yen)

《Profitability》



Air Transportation

Systems27%


Systems37%

Energy & Environmental Engineering

18%


18%

Fiscal 2018《Stability》

Domestic-Defense-sector

demand16%

Domestic-Private-sector

demand27%Developed

nations41%

Emerging markets

16%

Fiscal 2013

Domestic-Defense-sector

demand16%

Domestic-Private-sector

demand23%

Developed nations40%

Emerging markets

21%

Fiscal 2018

Net S

ales Com

position

(by field

of bu

siness)

Net S

ales Com

position

(by reg

ion)

Air Transportation

Systems 28%


Systems42%


12%


18%

Fiscal 2013


0.0

500.0

1,000.0

1,500.0

2,000.0

Fiscal 2013 Fiscal 2018

Air Transportation Systems Land/Sea Transportation SystemsEnergy & Environmental Engineering Industrial EquipmentOther

(Billion yen)


《Growth》 Consolidated net sales growth of 6% a year.

Scale of Air Transportation Systems sales is large and will exceed 6% in the long term.

Energy & Environmental Engineering sales should show annual growth of 15%, mainly from distributed power and oil and gas businesses.

Annual net sales growth: 6%0.0

200.0

400.0

600.0

800.0

Fiscal 2013 Fiscal 2018 Around fiscal 2025

Air Transportation Systems Sales Growth

Annual net sales growth exceeding 6%

Annual net sales growth: 5%

(Billion yen)

0.0

200.0

400.0

Fiscal 2013 Fiscal 2018

Energy & Environmental Engineering Sales Growth

Annual net sales growth: 15%

(Billion yen)


2018

Hydrogen energy infrastructure

*1: environmentally friendly Weight-SavingInnovative New Generation Truck

*2: Gas To Gasoline*3: CONCH Kawasaki Kiln*4: Floating Liquefied Natural Gas*5: HydroStatic Transmission


©2014 United Technologies Corporation – Reproduced with Permission –All Rights Reserved

©2014 Rolls-Royce plc.– Reproduced with Permission –All Rights Reserved

New Value Creation Through Pursuit of Technology Synergies

Participate in development of future civilian aircraft such as the 777X

Large-capacity power generation systems for aircraft

Next-generation high-efficiency aircraft engines

XC-2 Transport Aircraft

Regional jet engines

787-9 composite material fuselage

P-1 Maritime Patrol Aircraft

Large aircraft engines


Medical robots

Human-robot-cooperation system

HST [*5] systems

Hydraulic components for construction machinery

Line builder business

Robots to support global production

Automated cell culture system

FLNG marine boilers

Distributed power systemsCompressed hydrogen trailers GTG [*2] plant

CKK [*3] systems

FLNG [*4] platformLiquefied hydrogen bases

Liquefied hydrogen storage systems Hydrogen-fueled

gas turbines

Land/Sea Transportation Systems

Railway system

Next-generation motorcycles

Hybrid propulsion system for vessels

Superconducting propulsion system

Liquefied hydrogen carriers

High-speed rail vehicles for overseas markets

Free gauge train

Marine gas engine

Propulsion system powered by natural gas

Rolling stock bogie (efWING® [*1]) using composite materials

Supercharged Ninja H2R

Aerospace

Newly developed LNG carriers

Strengths Through Group Integrated Management

Gas Turbine & Machinery

Precision Machinery

Plant & InfrastructureShip & Offshore

Structure

Motorcycle & Engine

Rolling Stock

Air Transportation Systems

High-end offshore support vessels


Figures recorded in the business forecasts are forecasts that reflect the judgment of the Company based on the information available at the time of release and include risks and uncertainties. Accordingly, the Company cautions investors not to make investment decisions solely on the basis of these forecasts.

Actual business results may differ materially from these business forecasts due to various important factors resulting from changes in the external environment and internal environment. Important factors that may affect actual business results include, but are not limited to, economic conditions, the yen exchange rate against the U.S. dollar and other currencies, the tax system, and laws and regulations.

Figures presented in the business forecasts are forecasts that reflect the judgment of the Company based on the information available at the time of release and include risks and uncertainties. Accordingly, the Company cautions investors not to make investment decisions solely on the basis of these forecasts.

Actual business results may differ materially from these business forecasts due to various important factors resulting from changes in the external environment and internal environment. Important factors that may affect actual business results include, but are not limited to, economic conditions, the yen exchange rate against the U.S. dollar and other currencies, the tax system, and laws and regulations.

progress on kawasaki roic management envision stable market expansion through 2020-2030 and will...

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