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Edited Transcript of 7013.T earnings conference call or presentation 19-May-20 10:59am GMT

Full Year 2020 IHI Corp Earnings Call

Tokyo Jun 26, 2020 (Thomson StreetEvents) -- Edited Transcript of IHI Corp earnings conference call or presentation Tuesday, May 19, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hiroshi Ide

IHI Corporation - COO and President of Resources, Energy & Environment Business Area

* Seiji Maruyama

IHI Corporation - General Manager of Finance & Accounting Division

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Presentation

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Seiji Maruyama, IHI Corporation - General Manager of Finance & Accounting Division [1]

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This is Maruyama, in charge of Finance & Accounting of IHI Group. I will explain IHI Group's financial results for the fiscal year 2019 based on the PowerPoint presentation materials disclosed at 3 p.m. today.

Please turn to Page 4. This slide shows the consolidated results, including orders received and the income statement. The forecast announced on February 6 and the difference of the actual result and the forecast is shown at the upper left for each item. Orders received were JPY 1.3739 trillion, down JPY 25.2 billion year-on-year.

As shown at the top right, the average exchange rate for sales in the year was JPY 109.16 to the U.S. dollar. There was JPY 1.93 appreciation from JPY 111.09 of the previous corresponding period. Net sales decreased by JPY 96.9 billion to JPY 1.3865 trillion. Operating profit was JPY 60.7 billion, down JPY 21.6 billion year-on-year, mainly due to lower sales.

Ordinary profit decreased by a bigger degree of JPY 33.4 billion, down to JPY 32.2 billion, owing to deterioration of share of profit and loss of equity method affiliates. Profit attributable to owners of parent was JPY 12.8 billion, down JPY 27 billion.

Please turn to Page 5. This slide shows orders received and the order backlog by segment. In Resources, Energy and Environment, orders increased year-on-year, mainly as a result of receiving an order for a boiler plant in Vietnam.

In Social Infrastructure and Offshore Facility, orders received increased, owing to receiving orders for bridge construction projects in Myanmar and Bangladesh in the bridges and water gates business.

In Industrial System and General-Purpose Machinery, orders received declined due to the decrease in the vehicular turbochargers business and the thermal and surface treatment business, despite the increase in the transport machineries business.

In Aero Engine, Space and Defense, orders received decreased year-on-year in the aero engines and the rocket systems and space utilization systems businesses.

Overseas orders received was JPY 691.3 billion, representing 50% of total orders. The ratio of overseas orders increased due to receiving large-scale orders overseas in the boiler and the bridge and water gates businesses, despite the decrease in the vehicular turbochargers and the civil aero engines businesses.

Order backlog totaled JPY 1.462 trillion, a decrease of JPY 16.2 billion from the end of the previous fiscal year.

Please turn to Page 6. This is for net sales and operating profit by segment. In Resources, Energy and Environment, net sales decreased due to a delay in project progress in the boilers business, and also due to a reverse effect of the progress of large-scale projects in the plants business in FY '18.

Operating profit increased due to the convergence of deterioration and profitability of the previous fiscal year in the plants business, despite the effect of a decrease of sales in the boilers business as well as the deterioration of profitability in the power systems business.

In Social Infrastructure and Offshore Facility, sales increased in the bridge and water gates business, despite the decrease in the shield systems business. Operating profit decreased due to the decrease in sales in the shield systems business, despite the increased profit in the transport systems business.

Sales in Industrial System and General-Purpose Machinery decreased due to lower sales in the vehicular turbochargers business, mainly in Europe and in the thermal and surface treatment business, in addition to the impact from the transfer of the small power systems business.

Decline in operating profit was due to lower sales in the vehicular turbochargers business and in the thermal and surface treatment business. Sales in Aero Engine, Space and Defense decreased in the aero engines for Japan Ministry of Defense. Operating profit decreased due to the effect of making its inspection process stricter in the maintenance business of civil aero engines, and also due to additional program costs, among other factors, while results of initiatives to cut costs for the new engine are appearing.

Regarding the civil aero engine programs that IHI participates in, previously, IHI had recognized sales a month behind from main partner sales. Since it became possible to obtain sales information earlier, IHI changed to recognize revenue upon main partner sales.

Overseas sales was JPY 663 billion, representing 48% of total sales.

Please turn to Page 7. This is the breakdown by segment of the JPY 21.6 billion year-on-year decline in operating profit. Change in net sales had JPY 18.6 billion negative impact due to decrease in regular inspection and repair work in the boilers business in Resources, Energy and Environment, decline in sales of the vehicular turbochargers business in Europe as well as lower sales in the thermal and surface treatment business in Industrial System and General-Purpose Machinery.

Change in construction profitability had a JPY 2.5 billion negative impact.

In Aero Engine, Space and Defense, operating profit decreased due to additional program costs, among other factors despite the effect of the conversions of deterioration in the profitability of the previous fiscal year in Resources, Energy and Environment. The negative impact from the change in foreign exchange rate was JPY 1.8 billion. A change in SG&A had a positive impact of JPY 1.3 billion in total, as a result of the fixed cost reductions, mainly in Industrial System and General-Purpose Machinery.

Please turn to Page 8, nonoperating income and expenses. Net interest expenses worsened by JPY 0.9 billion year-on-year. Share of profit and loss of entities accounting for using equity method decreased by JPY 17 billion to a loss of JPY 12.9 billion. This is attributable to the worsening business performance at Japan Marine United.

Foreign exchange gains and losses was negative JPY 2 billion due to yen appreciation at the end of the fiscal year. Others, which is a net of miscellaneous income and expenses, improved by JPY 8.2 billion from the previous fiscal year. One of the factors was burden share of losses for delayed construction of SPB tanks we recognized in the previous fiscal year.

Please turn to Page 9, extraordinary income and losses. Extraordinary income in total was JPY 11.7 billion, which was comprised of JPY 4.4 billion gain on sales of noncurrent assets through a partial sale of land, building and structure of the headquarter representative's office in IT, JPY 3.8 billion gain on transfer of business through transfer of intellectual property assets under small power systems business, JPY 2.2 billion gain on transfer of equity interest of subsidiaries associates through partial transfer of investment equity in civil aero engine-related company, JPY 1.1 billion gain on insurance claims related to the typhoon damage during the previous fiscal year.

Moving on to extraordinary losses. Extraordinary losses was comprised of JPY 4.8 billion loss on valuation of investment securities and JPY 0.4 billion impairment loss.

Please turn to Page 10, consolidated balance sheet. As of the end of the fiscal year, interest-bearing liabilities was JPY 488.1 billion, an increase of JPY 133 billion from the end of the previous fiscal year, as a result of additional financing to secure the cash on hand.

Debt equity ratio was 1.38x. Equity ratio was 18.7%, down 2.2 points from the end of the previous fiscal year, not only because of this year's business performance, but also due to the JPY 14.4 billion worth repurchase of treasury shares conducted in November 2019.

Please turn to Page 11, consolidated cash flows. Cash flows from operating activities was positive JPY 14.5 billion, a decrease of JPY 31.8 billion from the end of the previous fiscal year. Cash flows from investment activities was negative JPY 75.8 billion. Investment spending was JPY 3.3 billion less compared to the previous fiscal year. Free cash flow, combining the cash flows generated by operating and investment activities, was negative JPY 61.3 billion.

Please turn to Page 12. Upper half of this page are the actual results of R&D, CapEx and depreciation and amortization. All of the 3 items have increased compared to the previous fiscal year. One of the CapEx items was the new plant for civil aero engine. Lower half of this page shows overseas sales by region, breakdown of the overseas sales figure we had on Page 6.

Sales in areas, including Asia, China and Europe, have declined from the previous fiscal year because of the sales decline, mainly in vehicular turbocharger business.

Please turn to Page 13. Assets balance by segment. Under Aero Engine, Space and Defense segment, working capital increased in several aero engine business due to less sales than expected.

Moving on to forecast for the consolidated results for fiscal 2020. Please take a look at Page 15. As of today, forecasts for fiscal 2020 are undetermined, and its announcement is postponed due to the difficulty to reasonably estimate the potential impact of COVID-19 on the business. We will announce the forecast promptly once it becomes possible to develop reasonable forecast after carefully assessing the potential impact on the business.

From Page 17 onward are financial results by segment, which I have already covered in my presentation, so let me skip. And Page 25 onward are appendices. Please take a look later. This concludes my presentation.

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Hiroshi Ide, IHI Corporation - COO and President of Resources, Energy & Environment Business Area [2]

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This is Ide, Chief Operating Officer of IHI Group. I would like to provide explanations on the management review.

Please turn to Page 4. Firstly, this is a review of the FY 2019. Details were already explained by General Manager of the Finance and Accounting Division earlier, and the overall assessment is at the bottom of the page.

FY 2019 was the first year of the Group Management Policies 2019. And one of the pillars of the medium-term management plan is acceleration of aftermarket business expansion. Although there has been delays in Industrial Systems and General-Purpose Machinery business, this business has also started to see some results in the aftermarket business. And other businesses such as Resources, Energy and Environment also started to deliver results, which we assess as meaningful considering the business environment post-COVID-19.

Secondly, in Resources, Energy and Environment, performance deteriorated, mainly in some small- and mid-sized projects. Even though we had already taken measures for the performance downturns of the past orders, we take quite seriously that we had seen performance deterioration.

In Industrial Systems and General-Purpose Machinery, sales of vehicular turbochargers to China declined, and operations decreased in Chinese businesses owing to COVID-19 pandemic, causing sales to decline.

It's not explained on the slide, but in Social Infrastructure and Offshore Facility, the situation was tough for bridges business in Japan. But one of the topics of the segment was that we had received large-scale orders overseas.

In civil aero engine business, even though there was a negative impact on profitability due to the decline in operating rate in the maintenance business for civil aero engines, increased sales of spare parts, combined with reduced sales of new engines whose initial costs are high, pushed up earnings.

Both operating profit and ordinary profit were broadly in line with the revised forecast announced in February. But considering a potential impact of COVID-19 on the taxable income in the future, we reversed the deferred tax assets. And the net income fell short than the announced forecast, and as a result, the year-end dividend is decreased.

Now please turn to Page 5. Fiscal 2019 was the first year of the medium-term management plan. As you can see on the page, our activities in the year were mainly focused on 3 reform initiatives. I would like to review our initiatives and challenges on the next page.

As you see, there are 3 initiatives. The first is strengthening business foundations, which in other words, is to accelerate and expand after-sales business. As explained at the beginning, we are working on various initiatives in each business area. We have made progress, to a certain extent, by rolling out solutions proposals, deploying operations and maintenance business, presenting corrective maintenance proposals, as written on the slide.

Especially in the boiler business, while we hardly see new installations, we have fully launched life cycle business in Southeast Asian countries and in Australia. And bit by bit, we have started to yield results.

In life cycle business, even though we have made some progress, there is still much room for expansion by generating added value through stronger collaboration, both internally and externally. And we would like to accelerate and expand life cycle business, especially overseas.

The second initiative is building a robust operation structure. We have worked on business integrations such as integration of our power systems business and our plant business, and we also leveraged IoT to reform business processes, and we made progress to a certain extent. But our major challenges on this initiative, as explained by the General Manager of the Finance and Accounting Division earlier, is improvement of cash flows and shifting resources to revenue-generating businesses in an accelerated manner amidst dramatic changes of the business environment. In this fiscal year, we will focus on tackling these challenges as well as other response measures to COVID-19 pandemic, which will be explained later.

Thirdly, accelerate preparations for tomorrow. As for this initiative, we have been working with other companies on various potential business projects to develop new technologies and to develop new business models.

In the energy area, though the scale is small yet, we have started projects on ammonia, biomass, methanation, to name a few. Social Infrastructure and Offshore Facility, we have been working on technological development to shorten construction periods. In Industrial Systems and General-Purpose Machinery, we are striving for automation and labor-saving projects. And in the Aero Engine, Space and Defense, development of various materials is underway. Each business area is working on distinctive development project. The key here is acceleration of product and business commercialization. Company-wide, we will speed up to tackle this issue.

Please turn to Page 7. I would like to explain key points on some of the key challenges we faced in fiscal year 2019. Firstly, on the civil aero engine business. After the inadequate inspection practices for civil aero engines were found out, we have carried out various initiatives company-wide, including education on compliance and transforming the corporate culture. And to rebuild a robust quality assurance structure, we have enhanced trainings and incorporated ICT, among other things. As a result, I wouldn't say back to 100%, but we are restoring engine maintenance capacity to close to the levels achieved before the inadequate inspection practices came to light.

Secondly, on initiatives to prevent project downturns. As explained at the beginning, in the energy business, we are seeing some downturns. To tackle this challenge, we have been reinforcing company-wide monitoring, especially in the last fiscal year, we have significantly strengthened responses in business area. We have enhanced monitoring by providing appropriate instructions and guidance at timings like screening of quotations, various phases before and after receiving orders, for instance. As a result, we are not seeing profitability downturns in new and large-scale projects. But as explained, we have seen downturns in orders in the past years. Going forward, regardless of the size of the projects, we will implement thorough monitoring.

Please turn to Page 8. The third challenge we face is on JMU, Japan Marine United. JMU posted massive losses in FY 2019 due to construction process turmoil stemming from technological problems, stronger yen, decline in operating rate as well as recording impairment owing to Maizuru Works specializing in vessel repairs. We will have JMU accelerate its structural overhaul so it can build a robust construction setup that competes better with overseas players. As part of this effort, we are trying to fully leverage benefits of alliance with Imabari Shipbuilding by working mainly on 3 initiatives on the slide, namely: leading market with eco-friendly technologies, overhauling business structure to enhance production efficiency and consolidating resources to optimize business structure. We will have solid plans based on this and execute it steadily.

Now on Page 9, I would briefly like to explain impact of COVID-19 pandemic on FY '19 results. Firstly, in the civil aero engine business, international transportation demand is plunging, as you are aware, which will inevitably affect operations significantly. However, we hadn't seen dramatic decline in unit sales of engines in the fourth quarter of fiscal year 2019.

In the vehicular turbocharger business, our sales decreased for the Chinese market in the fourth quarter of FY '19, but it started to recover already in March. So as for the fiscal year 2019, it's fair to say the impact from COVID-19 on the vehicular turbocharger business was limited.

Businesses other than engines and turbochargers, customer plants and group affiliates stopped production, scaled down operations or suspended corporate activities from the middle of March 2020 in Europe, North America and Southeast Asia. But these factors minimally affected FY '19 results. Although lockdowns and supply chain turmoil hampered progress in some overseas projects, impact on FY '19 result was limited.

Page 10, please. Let me now talk about fiscal year 2020 initiatives. On Page 11, we have fiscal 2020 performance outlook. As Mr. Maruyama mentioned earlier, we have postponed formulating and announcing forecast for fiscal 2020. Our plan is to announce forecast as soon as possible after carefully assessing and accurately determining performance impact. As you might be aware of, civil aero engine business and vehicular turbocharger business can be affected significantly. I would like to share some details later.

Page 12, please. Impact of COVID-19, especially on the civil aero engine business. Recently, travel demand has plunged significantly. And therefore, airline business conditions have deteriorated, leading to some bankruptcies. Aircraft and engine manufacturers have been taking emergency measures, including to slash jobs and constrain investments.

Talking about the potential impact on civil aero engine business. Since we cannot know when the pandemic comes to an end, it is difficult to share clear forecast for the time being. But it should take several years to see recovery in new aero engine installment business. The size of negative impact on the business should be extremely large in fiscal year 2020. Specifically speaking, sales decline in engines and spare parts should have large-sized negative impact on our profit and cash flow. It seems to be inevitable to prevent the large-sized impact in fiscal 2020. But the question is, how fast the recovery is going to take place in the future?

Under the situation where we do not have clear visibility, we would like to be flexible to catch up with the changing demand by revisiting our production structure and by shifting some of our resources.

By the way, IHI engines are installed in relatively new aircraft, and we enjoy high market share among new aircraft. From airline companies' perspective, when they resume flight operation, they should prioritize those relatively new aircraft models with higher fuel cost efficiency and lower operating costs, which should lead to recovery in our aftermarket business, which is highly profitable business. Relatively early recovery can be expected with our aftermarket business compared to new installment business.

All in all, although it seems to be difficult to achieve recovery in fiscal year 2020, we would like to be ready to support our customers in the industry as soon as they see pickup in their businesses. And to make it happen, we will further strengthen our aftermarket services.

Also by developing and supplying highly efficient, high fuel efficiency new engines, we would like to keep contributing to lower the burden on the environment. IHI would like to keep contributing to secure the safety in the airline business as one of the companies in the industry.

Page 13, potential impact on vehicular turbocharger business. Current situation in auto sector is, as you see on the page, according to a private research firm, global automobile unit sales may fall by 10% to 20% year-on-year in fiscal '20.

In the meantime, JAMA, Japan Automobile Manufacturers Association, has postponed to announce domestic demand forecast. The outlook is unclear. As you know, leading Japanese and foreign automakers have halted plant production worldwide, have announced temporarily layoff.

Vehicular turbocharger business will be affected by the current auto market situation. First of all, sales have been already slowing down following the declining automotive demand worldwide. There is a possibility of production halt and operation slowdown since supply chain of automotive sector and the group's vehicular turbocharger business span across multiple countries.

In the meantime, we are expecting to see a recovery in China, which is one of the key markets since the pandemic has already passed the peak in the market.

We'd like to achieve the same for the turbocharger business as our aero engine business, meaning we would like to be ready to catch up with the customers' demand as soon as they start to recover.

Please turn to Page 14, COVID-19 impact on other businesses. For projects for Resources, Energy and Environment and Social Infrastructure and Offshore Facility business areas, work progress in overseas can be affected, owing to such factors as travel restriction and lockdowns.

We are now discussing how to minimize the potential impact on the projects when, for example, people are working from home. Industrial machinery, plant and other new facilities orders could decline, owing to stagnant capital investment. Demand could drop for automobile parts treatment services in thermal and surface treatment businesses.

As it is unclear when pandemic will end, we will take measures assuming prolonged impacts on all businesses, including aero engine, vehicular turbocharger and other businesses.

Page 15, please. The specific responses or actions we are to take, assuming the impact will last for a long period of time. We would like to take any possible measures under the current tough situation.

On the financial side, needless to say, we will secure the liquidity and temporarily freeze or constrain capital and R&D expenditures. On the business side, the highest priority is to secure safety and health of our employees, their families, customers and other stakeholders. We will also reduce total and fixed expenses and inventories, adjust production volume when needed. And starting from April this year, executives have been partially returning their remunerations.

Also under the pandemic situation, we will adopt new work practices. In addition, since companies are likely to spend less large-sized CapEx, we would like to further accelerate and expand our life cycle business, with which customers can extend the lifetime of their equipment and improve the efficiency of them.

We will also flexibly shift human resources to growth areas and life cycle businesses. Although these are measures to overcome the current situation, we will not work on them only temporarily. These are going to be a large-scale initiative for IHI Group to create a lean and flexible corporate structure.

Page 16, please. This page is the final page. Operating climate or business environment has been changing; COVID-19 has reshaped the business climate and has transformed socioeconomic landscape. Under such circumstances, making change-responsive management is going to be vital.

There are 4 challenges we need to overcome. Number one is to determine post-pandemic business directions. Specifically, we need to identify and predict social and value changes, industrial and market trend and determine business direction. We also need to swiftly revitalize and reorganize businesses subject to countermeasures.

Number two is to create growth businesses. Nothing new, but we need to create key future businesses and pursue sustainable growth. We will allocate our business resources to these businesses.

Number three is to overcome operating climate changes. As I have been discussing, we need to shift our resources to respond flexibly to business climate changes. We also need to continuously work on operational process reform.

As an urgent challenge, number four, we need to improve cash flow and strengthen financial position. Based on these 4 items and the group policies 2019 direction, we will keep taking measures to overcome the current pandemic situation. And again, these measures will be taken not only on a short-term perspective, but even on a longer-term basis through reforming corporate culture to withstand business climate changes.

We will also develop sustainable business portfolio, which will be a one assuming post-pandemic socioeconomic situation. Talking about the midterm plan, we will be based on the current one, revisit it and develop a revised version, hopefully, during the second half.

At any rate, we aim to transform our results to catch up with the new norms in post-COVID-19 environment, revisit the current midterm management plan to make sure it will reflect new IHI, serve as a bridge to connect the current plan with the next one.

This concludes my presentation.

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