U.S. Markets closed

Edited Transcript of 7011.T earnings conference call or presentation 31-Oct-19 6:30am GMT

Q2 2020 Mitsubishi Heavy Industries Ltd Earnings Presentation

Tokyo Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitsubishi Heavy Industries Ltd earnings conference call or presentation Thursday, October 31, 2019 at 6:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Masanori Koguchi

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

* Seiji Izumisawa

Mitsubishi Heavy Industries, Ltd. - President, CEO, Chief Strategy Officer & Director

================================================================================

Presentation

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. I'm in charge of Finance at MHI. My name is Koguchi, and I would like to extend a welcome to all of you in attending our financial results session.

So I would like to use the materials in front of you to explain our financial results. If you can refer to Page 1, first and foremost, this shows you the highlights for our first half financials. And I would like to note that we do need to pay a close attention to the U.S.-China trade war and the slowdown in the economy as a result. We also have to keep a close watch on the Brexit issue occurring in Europe. So there are some factors that play to pushing the economics downward, and we do need to keep a careful watch over the markets.

Now, from our perspective we do believe that the impact is limited. But nevertheless, we will continue to monitor and keep close watch as to how things will evolve.

I will be introducing the numbers later on. But for orders received, revenue -- profit from business activities, they are in line with the full year forecast. Especially for Power domain, Gas Turbine, and Steam Turbines, respectively, orders are on the rise. Now for business activities profit, nuclear is concentrated on the second half of the year. And so for quarter 2, there is a decline in the profit line. But for full year, we do believe that we can recover. As for free cash flow, we have increased our investments and also trade payables and contract liabilities have decreased. And so there has been some suppression. However, we are more or less on par with our initial forecast. So based on these conditions, our interim dividend will be increased by JPY 10 to JPY 75, and this has been resolved at the BoD held today.

So next, let me move on to the results. For orders received, JPY 1,561.8 [billion] is where we stand. And Power is very strong, as I mentioned. And so we have increased by JPY 136.3 billion. So revenue is JPY 1,877.6 billion. So this is on par with last year. And profit from business activities, JPY 74.3 billion. And for profit attributable to owners of parent is JPY 29.2 billion. So again, we are overachieving versus last year. So EBITDA is JPY 141.2 billion. So this is an increase by JPY 21.1 billion. Free cash flow, as I mentioned earlier, because of the reasons that I stated versus last year same period, this is a minus JPY 136.2 billion decrease. And we stand at minus JPY 211.3 billion.

Now, next, this is excluding MRJ and you see the fundamental business results. Again, as you can note, we have JPY 88.2 billion from profit from business activities. And for profit attributable to owners of parent, JPY 42.8 billion. So there has been some losses in the nuclear power. And this has impacted some of the figures as you see. EBITDA is JPY 154.6 billion. Free cash flow is minus JPY 149.8 billion.

Next, I would like to move on to the next page. And this is by domain. For orders received, for Power, JPY 239.8 billion increase. And we stand at JPY 665.4 billion. Industry & Infrastructure, this is minus JPY 60.7 billion, and we stand at JPY 865.1 billion. So from the beginning of the year, as we have suggested, the mass and medium lot manufacturing has more or less saturated. And this has impacted our numbers. For Aircraft, Defense & Space, for this fiscal year, we have concentrated large defense projects towards the latter half, the second half. So we stand at JPY 192.3 billion. So this is a minus of JPY 33.2 billion. But for commercial aircraft, we are growing steadily. So all in all, in total, as I mentioned, you see the bottom numbers.

Now next is our revenue. So for Power, for the thermal power, this has grown steadily and it has rose. Now for nuclear, in terms of revenue, this is on the decline. Now for Industry -- I&I -- again, as orders implied, the mid/mass lot productions are on the decrease, and as a result it is a minus. Now for Aircraft, Defense & Space, we are pretty much on par. And for total versus last year, we are more or less on the same level at JPY 1,877.6 billion. And now, Power has deteriorated for business activities from profit. And again, this is because the nuclear power activities are concentrated in the second half of the year. And full year, we will plan to recover.

Now for thermal power, again, we are quite strong at the moment. For I&I, again, we are at JPY 29.3 billion, pretty much the same level as last year. Now it is true that this is an area that fluctuated, but we do believe that we will be very close to the initial figure. For Aircraft, Defense and Space, MRJ-related impairment will be acknowledged in the second half of the year, and this is something that we have assumed from the beginning of the year. So JPY 80 billion minus for the full year. But for this period, for Q2, the first half of this year, that is, we will acknowledge this as cost and JPY 13 billion is acknowledged as costs. So JPY 34.7 billion plus is where we stand.

For others, if we combine all of these numbers, the total profit is JPY 74.3 billion, and this is an uptick of JPY 17.5 billion.

Now let me now move on to our balance sheet. So cash flow is our focus and also a healthy balance sheet is what we aim for. So this is a trend that we have followed. And in comparison to the end year, usually, first half, we see the horizon of the production. And so usually, we see inventories rising during this period. So in second quarter, we stand at -- as of September 30, JPY 5,187.4 billion. So this is an increase of JPY 44.6 billion. But with the application of IFRS, the lease assets, which is now on book. And so we have approximately JPY 100 billion impact from that. But in reality, this is a decline. And as a trend, again, this is a major shift. And so in terms of financial health, we do believe that we have been able to elevate and progress.

And therefore, talking about the cash flow in Q2. As mentioned before, we have the internal budget and against the plan, we see some improvement. And so in terms of the delta, meaning cash flow negative flow, we have short-term financing through commercial papers, and we believe that we will be able to see an improvement. So given that situation, these are the main financial KPIs or measures.

And regarding equity ratio, MRJ asset has been processed in the end of last fiscal year. So it was 27.8%. And now it has changed, but we believe that the interest-bearing debt is JPY 882 billion. And so this is on par with our plan, and cash flow is indicated at the bottom. And in terms of the investment cash flow because of the MRJ, we see an increase of the investment.

Next, about orders received and order backlog. And so far, Power was struggling for some time and for this fiscal year, and there has been some project from last year, and there was a new order from a gas turbine, and we are seeing an increase in the Power.

Regarding backlog, we have been seeing some downward trend. But fortunately, for the Power domain is concerned, we can see the bottoming out of the decline of the backlog. Next page, please.

This is revenue. I already explained about the gist of the revenue. And if I may summarize for the Industry and Infrastructure, it has declined because of the turbochargers decrease.

Next, about the analysis of the profit. Regarding Power, there was a decrease of JPY 10 billion because of the decrease of the nuclear power. But in others, there is not much change. And so year-on-year, we had impairment loss. And at this point in time, there are no [incrementals]. So there has been a positive impact on the profit. But in terms of the nuclear power, JPY 10 billion, it has been the negative impact. But for the full year, we will be able to recover this loss.

So this is the situation of the first half. And so we have maintained the financial robustness.

And also for the cash flow, it is on par with the plan. And regarding the earnings, we were able to trend according to our forecast.

So regarding the full year forecast, there is no change as compared to the beginning of the fiscal year. And so orders received, JPY 4.3 trillion; revenue, JPY 4.3 trillion; and the profit from business activities, JPY 220 billion; and net profit, JPY 110 billion; ROE, 8%; EBITDA, JPY 350 billion; free cash flow, JPY 50 billion. And dividend wise, we will have an increase of JPY 10, interim JPY 75 and year-end increase also. And therefore, there will be JPY 150 for the full year.

Next, this is ex-MRJ, so this is the same as announced at the beginning of the fiscal year. And next page, you see the situation by segment. And likewise, the numbers are the same as those of the beginning of the fiscal year. That was a brief explanation of the earnings before for the first half.

--------------------------------------------------------------------------------

Unidentified Participant, [2]

--------------------------------------------------------------------------------

Next, I would like to call about Mr. Seiji Izumisawa to update on 2018 medium-term business plan.

--------------------------------------------------------------------------------

Seiji Izumisawa, Mitsubishi Heavy Industries, Ltd. - President, CEO, Chief Strategy Officer & Director [3]

--------------------------------------------------------------------------------

I am President and CEO, Izumisawa and today, I would like to update you on 2018 medium-term business plan. Today, I'm going to explain about these 4 items. So firstly, what is the status of our 2019 activities. The first part of the mid-term plan has trended as planned. And Mr. Koguchi already explained to you the details. And as a result, we were able to embed cash flow management process, and we are strengthening financial foundation and also the reduction of steam power and market for medium lot products. We were able to address these near term issues. And we succeeded in coming up with robust financial foundation, and so we will be able to drive our future growth.

SpaceJet M90, we were working on the TC and also promoting in the first delivery as scheduled. The graph shows the orders received in revenue and profit from business activities and net profit as well as free cash flow. And so regarding the business case, as I repeat myself, because of China, and Europe, a medium lot product reduction, we are being impacted by that. And also, revenue-wise, because of the changes of the medium lot product demand, we are trying to come up with a fixed cost reduction.

From this page onwards, I will talk about the major topics of the first half of 2019. Firstly, energy. So Advanced Class GTCC, middle and small capacity GT orders have been received. And even though the market is in a tough situation, we are steadily increasing the received orders for those products.

And for the thermal power, we want to expand this business, and so we are expanding our thermal power service business. And we had MoU with [Uzbekistan] and we established service company in the Philippines.

And moving forward, in the East -- West Sydney development, we worked together with the University of New South Wales So that we were able to come up with index called the QoEn, which will quantitatively indicate optimal energy infrastructure. Also, our renewable energy is on the upward trend, and we are working on this area. So renewables, engine generator and storage batteries are combined together as a triple hybrid called EBLOX and also, we used the green energy by focusing on the windmill. And in North America, we have the M&A of the operating company, so we will be able to expand our business in the green energy area as well.

Next is industry and aircraft-related topics. Firstly, regarding logistics equipment, we are strengthening our business. And we acquired U.S. dealership so we can expand the direct sales, and we will be able to go into the used product business area as well. So we have to have a streamlined organization and model as well as these facilities, and we are working on the PMI. So at the end of the day, we will be able to improve our productivity and improve our profit-loss situation. At the center, you see marine scrubbers, and so we will remove sulphur oxide from ships' exhaust gases. And because of the emission regulation, we are seeing an emerging market. And so we would like to address that new demand as well. And also in the future, we have to further reduce CO2 emission. And so hydrogen based direct usage fuel will be used in the steel area, so that we will be able to start running this from 2020.

Next, EV is growing as well. And so we are focusing on the corporation. And in China, in Changshu, we are expanding our plant. And regarding the commercial aircraft, we want to improve our productivity and also for the engine for the airplane in Nagasaki shipyard, we will have a new aero engine part factory. So each and every business, we are definitively preparing the expansion of the business.

Let me move on to SpaceJet and namely 3 highlights. One is for M90. We are accelerating activities for the TC test for M100. Focusing on the U.S. market, this will be a focal model for us, and we are further advancing the study. We are also enhancing our service organization. We have installed simulators at our training center and also the CRJ program with Bombardier, we are propelling with the acquisition agreement, so we are creating the foundation for space jet business.

Now MRJ Business is now, as you see, migrated to CRJ program and the Tier 1 structure business and SpaceJet business. So we want to create a synergy out of these 3 organizations. And next, I would like to touch upon our progress in TOP management. At TOP, the triple 1 proportion focuses on the balance between revenue, total assets and market value, and we want to create a 1:1:1 balance. This is our group management indicator. So as you can know from the slide, by establishing this map based on TOP achievement, we would identify the issues that need to be overcome and proceed forward in implementing measures.

The yellow shows efficiency improvements, so SBUs that need efficiency follow to this category. So by efficienizing these activities, we believe that we can actually advance the business performance.

Now on the bottom right, fundamental reform is needed for this area. So yes, although reform is proceeding, strategies need to be reviewed to further promote the positioning of these SBUs.

Now next is allocating investment for growth. And as was mentioned in the onset by our CFO, we are strengthening our financial foundation as scheduled. And so funding is more or less on par with what we have planned. So what we planned in the 2018 midterm business plan, our capital allocation plan is being attained, and this will be the foundation for our future growth at MHI.

On the right side, you see a graph, and this shows the financial foundation and operational efficiency and respective indices, cash conversion cycle as well as the DE ratio. As you can note, both are on an improvement trajectory.

So under these circumstances, we have revised our 2020 fiscal year forecast. JPY 5 trillion was the target, so JPY 4.6 trillion and for revenue, EUR 5 trillion down to JPY 4.7 trillion. So the backdrop, if I may. The M&A activities. We have to implement this based on the balance between the current state of the company, but we do have committed and made deals already, and we also have the medium lot product market which is struggling at the moment. So as we revised these activities, we have amended our forecast. So we will further implement growth strategy built on mega trends and execute business expansion for the future.

Next, I would like to focus on our growth strategy. So this spring, Mitsubishi FUTURE STREAM was declared, and we keep an eye on our mega trends to establish what we will deem as our strategic domain. So we are still in the midst of this discussion, so this will be an interim report to you, but we want to inform you as to which areas we believe have strong potential. So we are focusing on manufacturing at the core. We will obviously take into account social value changes as well as technological innovations.

So what are some of the social trends that have been confirmed? And we show that in the gray box on the slide. Technical innovation is on the rise as well. So when we look at these technology advancements, what would impact our company, which would be the domains? And what would be the key words that we need to focus on? So first, I would like to highlight decarbonization. Another is electrification or another is intelligence. In other words, the evolution of mechanical systems, and we believe that these 2 domains hold potential for us. For decarbonization, in the short term, we will focus on low carbon in existing business and in the long term, we will focus on a new decarbonized business. For electrification, converting products to electro-drive. And in the future, next-generation products, which will be remotely controlled. And so we have some ideas in these domains that we are working on.

So again, based on these mega trends, I would like to depict some major initiatives that we are considering: decarbonization as well as electrification and intelligence. And as you see, the domains that stem from these keywords. We will now further pinpoint what these domains should be for us, and we will reshift our resources to make sure that we adhere to these new trends.

Now a bit more in detail, what are some of the possibilities? I would like to highlight on this occasion for existing power business. Decarbonization or lowering carbon emissions will be the first focus. Now for electricity demand, it will be on the rise in the future as well. So for us at MHI Group, we do have to focus on decarbonization and lowering carbon emissions and making sure that we develop latest technologies and implement that in society. And by doing so, we can offer these solutions and products to our customers. So on the left, you see projected power generation and CO2 emissions and the current scenarios that we are considering. So what are some of the possibilities that we have to offer? For instance, in the area of decarbonization, 100% hydro and gas turbine or CCU and CCUS, as well as light water reactor and offshore wind. So we do believe that they will be strong business opportunities for us.

Now when we look at the existing low carbon, for instance, next-generation GTCC, as well as thermal power, we need to focus on decarbonization as well, so this is IGCC; and existing steam power replacement or biomass and ammonia as well will be [co-fired or co-firing] will have to take place.

Now if I may move on to the next topic, which is quite a buzz at the moment, the hydrogen power generation and energy storage. And I would like to explain our endeavors. So we do realize that hydrogen society is right around the corner. So we do have to make sure that we take a timely approach in our innovation and advancements. So we do have insight and with existing turbine, we have already a rich track record of hydrogen co-firing in more than 3 million hours to be exact. So we want to expand this to large scale. So step 1 is 30% hydrogen co-firing and then, the step 2 will be 100% co-firing. And then further, we would like to evolve this to step 3, which is high efficiency, 100% co-firing. So these will be the steps that we adhere to, to this innovation.

So currently, we are planning proof of concepts. And you can see on the bottom right, in the Netherlands, we do have a project. And this is at 30%, but we would like to focus on 100%. This is natural resource related, but we would like to focus on this project as well in the Netherlands. And in the U.S., this is the world's largest renewable energy storage project. So this is advanced clean energy storage project. And this is evolving in the state of Utah in the United States.

Now moving on, this will be a bit of the future for us, and this will also be a social need in the future. So converting from fossil fuels to green fuel and also carbon recycling implementation. So in other words, renewables will be created. In other words, electrolysis and nuclear thermal water decomposition using HTGR will be leveraged. And with fossil fuels, we will use CO2. And by using these activities, as you see in the middle, we can create the separation and capture of CO2. And also with hydrogen, along with ammonia synthesis, we can utilize this as an energy carrier. Or you will be able to recycle and fix CO2. And this is the need of the society. And we will have a dialogue with the market at large, so that we will be able to address the new demand that is arising.

Next page, please. This is the medium lot product initiative. We're focusing on reducing the environmental burden. I believe that we do have the strength in this area. And so logistics, mobility and comfortable space are the key words. And in terms of usage of lithium ion, we can use next-generation forklift. And for EV, we have different components available. And low [Tg], low CWP (sic) [GWP] as well as CO2 can be provided in the air conditioners. And these are the needs that we see expanding in the society. This is the endeavor for the intelligence domain. So far, we had remote monitor using IoT and the different diagnostic applications have been provided. In the future, we will use AI and combine it with the manufacturers' technology so that we will be able to assist the operation. And also, there are different KPIs for the power plants and using digital technology, we will be able to optimize the operations. And so automatic and autonomous operation can be configured using our technology. And that will be the very service that we would like to provide in the future.

Talking about the logistics equipment. I believe that making them more intelligent, smarter is a must. And one is the automation. The shortage of labor power is becoming more severe a problem, so we would like to address this issue. The second bullet point, in the R&D center, we have established the logistic testing center so that unmanned forklift can be tested to see what kind of new solutions we can provide to the customers. And we are conducting dialogue with our customers, so we will be able to really cater to their actual demand. And also, human and autonomous devices will coexist. And so we will leverage on our technology. And so we will have the camera and using the deep learning, we would like to conduct services that will be equipped with anti-collision function.

So regarding the growth strategy, I have reported to you the status, and we will further laser focus on these initiatives, so that we will be able to allocate the resources in the appropriate manner. In order to realize the growth strategy, what are the important points? There are different technologies, and we will be acquiring those technologies. And this is just an example that lists the technologies -- and on the vertical axis, you see the domain and on the horizontal axis, you see the trends. And what kind of technical developments are being sought for or what kind of skills we have to equip ourselves? These are actually written on this matrix.

In order to acquire those technologies, I do not believe that we cannot only depend on our in-house resources, but rather, we want to leverage on the external know-how as well.

Innovation Promotion Research Institute has been established to create innovative idea in April 2018, and this entity was established and we collaborate with different universities and research institutes, as well as other companies. We haven't actually harvested any fruit of success from this institute. But indeed, we can say that we are conducting innovative researches.

Technology Scouting is a venture capital and venture company direct investments, so we will be able to uncover and discover new technologies. And I'm sure that other endeavors like this are already available.

Lastly, Testbed Hub. We have the know-how of manufacturing. And we have network with companies. On the other hand, venture companies have ideas and so this is a competitive platform where we can converge those. And this is under plan right now.

And lastly, about the status of global group management reform. In order to materialize the growth strategy, we have come up with management reform. One is we will be establishing or we are considering the establishment of growth promotion department, and this will come directly under CEO, so that the incubation can be promoted. So tangible discussion is underway.

So we have the overall structure for the business already available. And so we have Mitsubishi SpaceJet, CRJ and Tier 1 businesses are under Commercial Aviation Systems and the similar endeavor will come.

And regarding HR management, we want to have a different talent. And we need to nurture them, so that we will be able to have the right talent in the future to come.

2018 midterm business plan, as stated, has been reported to you as an interim stage, and I do hope that you did understand what is the current status of our medium-term business plan. Thank you.

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