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Edited Transcript of 7011.T earnings conference call or presentation 5-Aug-19 6:30am GMT

Q1 2020 Mitsubishi Heavy Industries Ltd Earnings Presentation

Tokyo Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitsubishi Heavy Industries Ltd earnings conference call or presentation Monday, August 5, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Masanori Koguchi

Mitsubishi Heavy Industries, Ltd. - Senior EVP, CFO & Director

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Presentation

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Masanori Koguchi, Mitsubishi Heavy Industries, Ltd. - Senior EVP, CFO & Director [1]

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Good afternoon, ladies and gentlemen. I am Koguchi, CFO of MHI. I would like to take you through the financial results for the first quarter of fiscal year 2019.

I'd like to begin with some remarks. As you know, since last year, IFRS has been adopted. And this time, IFRS 16 was adopted, which is related to these assets. From off-balance to on-balance process, we are changing. In the last fiscal year, the numbers we have announced for cash [transactions] are staying as they are, but we have adjusted to make apple-to-apple comparison. In your presentation material, for the apple-to-apple comparison, the actual results and the financial results for the last fiscal year have been shown in the material. I just wanted to make this clear before I start.

So please go to the highlight, which is the highlight for the fiscal '19 Q1 results. And we see the results in comparison with the full year forecast and so far, we have made a steady progress, which means that in terms of orders received, revenue and profit from business activities, we were able to exceed the levels of the last year. For orders and revenue, GTCC and commercial aircraft performed well and improvement in Aircraft, Defense & Space segment was seen in terms of the profit.

For the full year forecast for the free cash flow compared with the last year, there was some deterioration. However, this is due to the decrease in trade payables and contract liabilities. This is not a fundamental issue.

Based on that, interim dividend increased by JPY 10 per share year-on-year to JPY 75 or JPY 150 per year, and we have kept this forecast unchanged.

Now I'd like to move on to the financial results for the first quarter. Please go to the next page. Orders received, JPY 750.2 billion. Gas turbine performed well. Mainly on account of that, we were able to see JPY 43.1 billion increase in orders received. Revenue was JPY 919.3 billion, up JPY 13.2 billion year-on-year. Profit from business activities was JPY 40.4 billion, up JPY 8.9 billion from a year ago. Profit attributable to owners of parent was JPY 16.3 billion. So all of the items exceeded the last year's level.

EBITDA was JPY 71.2 billion, up JPY 7.6 billion year-on-year. Free cash flow, as I stated earlier, on the liability side, there was some decrease. Therefore, there was a decrease of JPY 72.5 billion compared with the last year. However, this is not a fundamental problem. The improvement of the balance sheet and improvement of the asset turnover is proceeding well. Therefore, there is no major issue here with the cash flow.

Next, please go to the next page. Related -- excluding MRJ, the fundamental business profit as shown on this page. Regarding SpaceJet MRJ investment, there was a cash-out of JPY 33.1 billion. However for this fiscal year, business profit impact was about JPY 5 billion, so which means JPY 25 billion is booked in the balance sheet. That is the balance because based on the business plan this year, we are applying the similar level accounting process as last year. That is the result. Later on, we will explain. But for the full year, there is about JPY 100 billion cash out, out of which JPY 80 billion will be subject to accounting process, but there is no major change in our policy.

Next, Q1 financial results by segment. For orders received, Power, Industry & Infrastructure and Aircraft, Defense & Space, all of the segments exceeded the last year's level, especially Power Systems. Although steam turbines showed a deterioration, gas turbine made up for the loss and/or decrease and performed well. For the revenue, Power Systems increased the revenue, but I&I decreased the revenue because the medium manufactured products compared with the last year did not perform well, especially for turbocharger engine and the forklift did not perform well. Aircraft, Defense & Space are almost unchanged from the previous year.

In terms of the profit, in Power Systems, there was a decrease of JPY 5.9 million to JPY 19.2 billion. The main reason is the nuclear power construction progress compared with the previous year was much slower. For the full year, we think that we can make a recovery to exceed the last year's level, but for Q1, that is the reason for the decrease. For thermal power, compared with the last year, the performance is better. For Industry & Infrastructure, last year, there was a negative profit in commercial ships and metals machinery. Those businesses, the commercial ship is showing a positive profit, and metals machinery is improving the loss level. As I mentioned at the time of the revenue, for the medium products, there's a certain sluggishness in the growth of sales or sales are even declining. That is the reason for the deterioration of I&I. For Aircraft, Defense & Space, as I said, for MRJ, the impairment was recognized and the difference is giving the positive impact for this. And Tier 1 business has been performing well. That's another reason. So all in all, overall we have seen an increase both in revenue and profit.

Next, I'd like to move on to the balance sheet. Please look at the bottom. The asset total was JPY 5.216 trillion, up JPY 73.3 billion from the end of the previous year because towards the first quarter from the end of the previous year, the construction progressed and the inventory increased together with the increase in the construction completeness. Actually, out of JPY 73.3 billion increase, the IFRS 16 application impact is included. In the past, these assets were out of the balance sheet, but they are put onto the balance sheet. The impact was about JPY 100 billion. So concerning this, the balance sheet compared with the end of the previous fiscal year, the asset level is down, which is quite unusual for our company because our company has been working on the improvement of balance sheet for some time, making it more efficient. And in the Q1 this year, we have been continuing with this effort.

On the liability side, as I mentioned, in the cash flow, I mentioned this, the trade receivables and our receivables are decreased year-on-year. Because of the cash outflow, this has happened. But overall, this is something that to be absorbed in the overall balance sheet. Therefore, for the future financing, we'd like to focus on commercial paper financing, and the borrowings themselves are not to be increased going forward.

Regarding the equity, it is down to a certain extent, but this is noted at the bottom. This is due to dividend and comprehensive income and so forth. Because of the yen's appreciation, there was a write-down or there was an evaluation decrease of overseas assets, and these are the nature of the equity decrease. For the balance sheet, the cash conversion cycle, it's not in the materials. In the first quarter, it was 37 days, which represents an improvement compared with the same period of the last year.

Please go to the next page. So based on this backdrop, I am now showing the main financial measures and cash outflow. So 26.5% for equity ratio is where we stand at the moment, and we are in Q1. And usually, versus the end of the term, the revenue is usually lower, but we believe that this is an adequate ratio at the moment. And interest-bearing debt is JPY 855.6 billion, so this is an increase by JPY 190.5 billion. However, at year-on-year, it was an improvement of JPY 91.42 billion -- JPY 914.2 billion. And debt/equity ratio is 50%, an increase of 12 percentage points. And so we are still on a good path to improve the health of our financials.

Now for cash flows. If you can reference the bottom half of the same slide. And as I have detailed about the items earlier on, I would like to eliminate this explanation, but now we have created transparency in terms of our segments. And again, you have seen the numbers earlier so I will not go through the details on this slide. About Power, GTCC increased and steam power decreased. In I&I, metals machinery increased and decreased was machine tool. For Aircraft, Defense & Space, commercial aircraft are on the rise.

Now for order backlog in accordance with this trend. So we now stand at the current moment, JPY 5,150.1 billion. So usually, the orders received have been trending higher than backlog. And so currently, the backlog is on the decline at the moment. However, in 3 years' time or perhaps if we look at a longer 3-year period, the biggest decrease will hit us in 3 years' time. And this is obviously impacted by the major deals from last year. But for the upcoming 3 years, we do have an abundant order backlog. And for reference, the MHI Vestas venture capital -- joint venture, you do have the numbers here, and these are off the books.

Now moving on to the revenue by segment. We have an increase in Power Systems. The entire GTCC decreased with nuclear power, and I did explain this in the profits through business activities. For Industry & Infrastructure, transportation systems, commercial ships are on the decline. Aircraft, Defense & Space, Tier 1 commercial aircraft are on the rise.

MRJ first quarter, we had impairment, but this was not recorded. So on an annual basis, JPY 80 billion loss is the forecast. But for Q1, this is an extension of our previous business. And so you see the results on this slide, profit from business activities by segment. For Power, gas turbine has increased and again, nuclear power has dropped in terms of profit from business activities. For I&I, commercial ships is in the negative, but we are improving the profit, loss and turbochargers have decreased. For Aircraft, Defense & Space, Tier 1 has grown.

So based on the Q1 results, I would now like to illustrate to you the fact that our forecast for the full year is more or less on track. Now the yen is becoming much more appreciated. Year-on-year comparison, the finance-related profit loss, approximately JPY 14 billion minus is where we stand at the moment. So if we look at the basic fundamental business and our competency level, we do believe that we are on a recovery track at the moment. And again, based on these results, the full year forecast for the orders received, JPY 4,300 billion; revenue, JPY 4,300 billion; profit from business activities, JPY 220 billion; and profit, JPY 110 billion; EBITDA, JPY 350 billion; free cash flow, JPY 50 billion is the unchanged forecast. And for dividend, again, we will maintain the year beginning announcement.

Now if we look into fundamental business eliminating MRJ as well as the segment breakdown, and once again, we are not changing our initial forecast.

So this, I would like to conclude the Q1 financial explanation. Thank you.