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Edited Transcript of 7011.T earnings conference call or presentation 6-Feb-20 7:00am GMT

Q3 2020 Mitsubishi Heavy Industries Ltd Earnings Presentation

Tokyo Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Mitsubishi Heavy Industries Ltd earnings conference call or presentation Thursday, February 6, 2020 at 7:00:00am 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. This is Koguchi speaking. The paper distributed in front of you, Financial Results for FY 2019 1 to 3 Quarter, I would like to use this material to explain.

Now for highlights of these results. I would like to first touch upon the procedures for SpaceJet. And unfortunately, we had scheduled to acquire TC in 2020 as well as the ANA commercial delivery. This would now be postponed to fiscal year 2021 and onwards. A SpaceJet development situation as well as various prospectus were taken into account. And as a result, for Q3 of this year, based on losses from business activities as a result of impairment on assets at the last fiscal year and losses this year totaled JPY 175.3 billion.

Now for profit attributed to owners of parent amounts, again, we have accumulated losses in previous years and losses for the current fiscal year reflected as deferred tax assets. And this results in a positive of JPY 3.3 billion. I will elaborate later on.

Now for our full year forecast for Q4. What we plan to acknowledge as well as what was scheduled for Q1 portion of impairment. All of this included, the business losses of -- from activities is JPY 270 billion, and losses attributed to owners of parent is JPY 60 billion. So that will be the full year forecast.

Now moving on to our overall financial results up to Q3. For order intake, Power domain has increased, and we are exceeding year-on-year for revenue. This excludes SpaceJet, and we are on par with year-on-year numbers.

Now for the full year forecast. The China and U.S. trade friction. Turbochargers have been impacted, and we are seeing some of the impact in our numbers. So for order intake and revenue, both included Industry -- or I&I, we have to create a downward number.

Now with the settlement with Hitachi. A portion of the settlement has been reflected. And during Q4 as well as for next year, 2020 numbers will also be acknowledged as well. So based on these situations for dividend, as scheduled, year-on-year, JPY 20 plus to JPY 150 per stock will be implemented.

So now let me further go into the details. If you can now move on to Page 4. Now for order intake, this is JPY 2,653.4 billion. So we exceeded the numbers from last year by JPY 174.1 billion. Revenue is JPY 2,856.5 billion. This is a minus of JPY 42.7 billion from last year, like-for-like. And from business activities profit, SpaceJet losses included JPY 12.7 billion profit and versus last year same period, minus JPY 92.5 billion.

Now for the quarter profit, this is JPY 101.4 billion. And for DTA related to SpaceJet, since we have acknowledged this number, the tax impact has changed dramatically. And this is a plus JPY 66 billion as a result. EBITDA and free cash flow, the numbers are shown on this slide.

Now moving on to businesses excluding SpaceJet, and the details are described on Page 5. So 1,000 -- excuse me, JPY 188.1 billion from profit from business activities to be on par with the trend of last year; profit attributable to owners of parent, JPY 98 billion; and EBITDA, JPY 290.3 billion. So you can understand that we have undertaken a solid management.

Now moving on to free cash flow. This is minus JPY 225.5 billion versus same period last year. This has deteriorated. However, for this number, we had planned this amount at the beginning of the year, and we are trending along with our forecast. So free cash flow management is on schedule.

Now next, I would now like to see the financial results by segment. For order intake for Power Systems, we had some carryover for large projects as well as the Gas Turbine is doing fairly well in terms of the order intake. And so in uptake of JPY 347.6 billion versus last year, and this amounts to JPY 1,104.1 billion; for Industry & Infrastructure, JPY 1,259.5 billion. So a deterioration of 100 -- approximate JPY 100 billion.

Engineering-related major projects have now been postponed or delayed, and so this has resulted in some of our mid- to mass products being delayed. Now for Aircraft, Defense & Space, we stand at JPY 322.7 billion. This is a minus. But for the full year, we will be able to absorb this deterioration.

Now moving on to revenue in Industry & Infrastructure. This, again, is the drop of the mass and medium lot manufacturing, and we stand at JPY 1,312.8 billion. But for Aircraft, Defense & Space, we are trending on par with last year's numbers.

Now for profit from business. Industry has deteriorated, and this has pushed the numbers down. MRJ, SpaceJet, basically, related activities have also impacted in terms of losses. For Power Systems, we are improving profit. Now within Power Systems, we have the Trent 1000-related activities. And again, we have made adjustments to proceed or handle a Trent 1000.

Now moving on to the balance sheet. Now for the balance sheet, we take the TOP approach. And this is the main pillar that we focus on for TOP. So we need to efficientize these numbers, and that has been our focus. Especially in relation to the current assets, we are seeing much more efficientization. For instance, of -- in terms of inventories, JPY 818.4 billion, we have the trade payables as well as the contract liabilities. And the total of this is approximately JPY 1.6 trillion.

Now for -- it's about double inventories. And so inventories themselves is basically an investment of 0. In the past, these 2 numbers were on par. And so where we stand now is that we are collecting the trade payables, and interest-bearing debt is being suppressed as a result.

Now further, we will efficientize current assets. And so for fixed assets, this will also, in terms of asset management, become much more efficient. And this will be our approach for the future.

Now in comparison to the year-end, JPY 400 billion uptake for the full year. Because for Q3, usually, we have more inventory on hand, and there will be some timing delays as well. But some attributes for this current quarter, we have IFRS 16, which is leased. So this amounts to an increase of JPY 100 billion as well as with Hitachi with the South African project, we have settled out of court. And for Q3, all of the numbers through the settlement have yet to be reflected, so that is why we are seeing a bloated BS for the time being.

Now for interest-bearing debt, we stand at JPY 1.4 trillion. So this is again comparing us to year-end. So we have increased by JPY 348.9 billion. But again, as I mentioned in cash flow, we are trading as scheduled. So by the end of the full fiscal year, we believe that we will be below JPY 661 billion. And we will be able to suppress interest-bearing debt as a result.

Now moving on to key financial measures and cash flows. Equity ratio, 23.7%. So this is a lower ratio. This is in relation with the Nagano procedures, and everything is yet to be fixed. And so once again, the balance sheet has bloated as a result. But having said that, equity ratio is dropping. And this is due to some accounting technicalities, and it is going the opposite direction. But in 2020, the stock transfer will be complete, and this will be adjusted as a result in 2020. So the 23.7%, at that point in time, will rise to 25% or 26%.

In relation to SpaceJet assets, much has been done to contain and impair. And so as a result, we believe that the impact on the financial key measures is quite minimal. Now interest-bearing debt is JPY 1,014 billion, and the full year forecast will land around about EUR 600 billion. D/E ratio is as you see here.

Now for operating and investment and free cash flows. Again, we have cited the numbers on the bottom half of this slide, and we do put emphasis on cash flow in our management activities and we have sustained this activity. For this fiscal year, in comparison to last fiscal year, the cash flow is now much more improved because of the investment fees, and cash flow is much more healthier. Free cash flow is negative, but I have just cited the reasons for this occurring. But again, to be repetitive, versus plan, we are on schedule for free cash flow management. So once again, for the full year forecast, JPY 50 billion was the original schedule. We have increased this to JPY 100 billion.

And next, I would like to talk about order intake as well as order backlog. Please take a look at Page 9. Regarding order intake, Power, Gas Turbines, steam power and nuclear power increased. As far as Industry & Infrastructure is concerned, engineering-wise, as mentioned before, a large project has been postponed. And also turbochargers and machine tool, which are related to automotive industry, are in a challenging situation.

Regarding Aircraft, Defense & Space. Naval ships, defense aircraft and missile systems went down, but we believe that we can catch up during the fiscal year.

Please take a look at the right-hand side, which is change in order backlog. There has been a decrease of about JPY 280 billion. This is the comparison of Q3. But heading toward Q4, we will be accumulating the back order so that we will be able to recover the dip that we have encountered in the third quarter.

So Vestas Offshore is the equity-method company. And so if we include that, there has been in the backlog of about JPY 180 billion.

Next, revenue by segment, Power Systems-wise, compressors and aero engines increased. Figure-wise, it has increased slightly. Industry & Infrastructure segment-wise, there has been a decrease in the mass production items. Aircraft, Defense & Space, there has been increase of commercial aircraft.

The Boeing 737 was facing different challenges. But regarding the part that we are in charge of, it is a minor portion. Therefore, the impact of Boeing 737 on commercial aircraft is negligible.

Let's look at profit from business activities. As you can see, because of the impairment that we have incurred on our jet business, SpaceJet, industry went down, but power went up, so we were able to net-net and be on par with the previous year.

Based on this, I will like to talk about the forecast of FY 2019. Please turn to Page 13. Regarding order intake, there will be increase in Power. But in the Industry & Infrastructure, the major product -- project will be delayed. And there has been a reduction in the mass production items. Therefore, the forecast will be changed from JPY 4,300 billion to JPY 4,050 billion, but then, there will be an increase of JPY 200 billion. And in terms of the profit/ -- or rather the revenue, it will be downward revised from JPY 4,300 billion to JPY 4,150 billion minus about 100 -- or JPY 15 billion -- or JPY 150 billion, rather.

And in terms of SpaceJet in Q4, there will be the additional cost in Q4, and there will be additional impairment. Therefore, for year-wise, the profit will be 0. And in regarding profit attributable to owners of the parent, it will be JPY 100 billion. And there will be upward revision of free cash flow of JPY 200 billion. And also, the dividend will be increased by JPY 20, up to JPY 150.

So regarding SpaceJet, you can take a look at how we factored this item in. And this is a repeat, so I will be very succinct. But if I may delve into it, please turn to the supplementary sheet, Page 17. In the cumulative figure of Q3, what were the numbers that we have registered? And so JPY 175.3 billion has been divided into the losses of current fiscal year of JPY 97.5 billion. And we have JPY 77.8 billion for the impairment loss for the assets under BS. So in terms of the full year loss, we have estimated about JPY 80 billion, and cash flow is more than JPY 100 billion. But some will be transferred to the asset. That was the plan. But we have decided otherwise and have both the numbers registered under losses. And also, last year, we have registered assets. And also the assets that were registered before the previous year, we totaled the loss to be JPY 175.3 billion.

And regarding the losses that we have incurred in the past, we believe that the potential for recovering is lost. Therefore, we have impaired that portion. And also regarding Mitsubishi Aircraft, we understand that we will be not able to recover. Therefore, we have registered the -- these are for the losses. Therefore, the profit before income taxes is JPY 175.4 billion in the negative. Therefore, in terms of the profit, it's JPY 3.3 billion.

And in terms of the full year forecast, you can see the numbers on the right. So for the business activities, minus JPY 270 billion. And also SpaceJet-wise, the part attributable to owners of the parent, will be minus JPY 60 billion.

If you can turn to the forecast page again. Please turn to Page 15. In terms of order intake, revenue and profit from business activities, you see the details. So if you can kindly look at the numbers, I do believe that you will be able to understand the details. As you can see, simply put, for Power Systems, the profit from business activities, we have estimated JPY 140 billion. But we have added JPY 20 billion and upward revised to JPY 160 billion. For Industry & Infrastructure, order intake, revenue and profit from business activities, all these component-wise, we have downward revised as compared to the beginning of the -- the beginning of the fiscal year. And Aircraft, Defense & Space, we have incurred the losses for the SpaceJet. Therefore, we have dramatically underperformed our budget. So in total, as mentioned before, you see the revisions that I have already explained to you.

If we turn to Page 18 of the supplementary document, we are aiming achieving TOP. And amid such a backdrop, we believe that the balance sheet will be very important, and optimization of the balance sheet is quite mandatory. And we have pursued this and especially in terms of the current asset, looking at the cash conversion cycle, we believe that we are attaining efficiency.

Talking about the risk assets, we did have risk assets on our book, and one is a South Africa project. And Hitachi, we had the right to ask for JPY 560 billion from Hitachi. And also we have SpaceJet losses. And also within our factories, they were low operating assets. And these were the assets that we have identified, and they have been included in quite a magnitude on our balance sheet.

And regarding South Africa project, we were able to settle the case with Hitachi. So in actuality, the risk has been nullified.

And regarding SpaceJet, based on the business plan we have at hand, we have to iron out the details still. But in the end of this fiscal year, related to the assets of SpaceJet, the risk will be 0.

And about the fixed assets, for the low operating assets, we can liquidify them. And also, we can sell off those assets. So we will be able to shrink our balance sheet.

So regarding the optimization of balance sheet, we will continue our effort.

And that's all for my presentation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]