Earnings Call: Q1 2021

Aug 3, 2020

Good afternoon. My name is Kozawa. Thank you very much for gathering today. Based on the slides, I would like you to walk you through the presentation. We already provided you with the presentation, and so I am not going to read each and every number, but rather, I am going to be highlighting the key points and add some color to the information. So firstly, I would like to give you the outline. Please take a look at Slides 45. As you can see, for the order intake and revenue and profit, we are under the year on year comparison, and the results may look bearish. But when compared to the outlooks given in May, under the backdrop of COVID-nineteen, we are trending within our scope. To achieve our full year forecast, we will continue recovering our construction schedule and reducing fixed costs. Revenue and profit will be explained later. Please turn to Slide 6. Q1 2020 results on Page 5 are broken down into excluding SpaceJet and SpaceJet by itself. If I may add on SpaceJet, under SpaceJet's business activities, a profit of negative €68,800,000,000 impairment loss on Canada's Bombardier CRJ program, which was acquired on June 1, is included. And nonetheless, since Space J's development cost has been already capitalized as asset in Q1 2019, the loss was contained at 5,400,000,000. Last year, as I repeat myself, we conducted asset capitalization as PayJet, so there is a difference between the previous year and this term. And please was split into 2, 1 being plants and infrastructure system and another one being logistics, thermal and drive systems. To ease the year on year comparison, we have reclassified Q1 FY 'nineteen figures accordingly. Please refer to the numbers at your leisure. The details will be given on Slide 10 and onward. Slide 8, this shows the balance sheet. Total assets increased by 87,200,000,000 year on year, landing at 5,000,072,900,000,000 yen MHI has a tendency to see an increase in total assets and an outflow of cash in Q1, and this Q1 is not an exception. It is not indicated here, but in Q1 2019, total assets were 5,216,100,000,000. In comparison, therefore, total assets are down by about 140,000,000,000 We announced on July 31st the transfer of MHPS stocks to be executed in September. Once completed, total assets will decrease by 407,800,000,000 yen As shown in the red comment box, since free cash flow was in the negative interest bearing debt increase. Nonetheless, no funding issue exists. Slide 9, please. Major financial KPIs and cash flow are shown. Please look at the numbers by yourself later. All the numbers did deteriorate, but are within our assumption. When factoring in the MHPS stock transfer, which I have explained to you before, equity ratio will change from 22.5% to 24.4%. Year on year operating cash flow fell due to a decline in profit and an increase in inventory. These are the two major reasons. Investment cash flow increased due to outlays or due to outlays related to the acquisition of CRJ. Slide 10. Order intake and order backlog are shown here. Under COVID-nineteen, in terms of the order intake, it trended steadily. But in terms of the energy due to GTCC plant order received, order intake of of Energy Systems segment grew. Order backlog wise, Q1 revenue exceeded order intake as compared to the end of FY 'nineteen. Therefore, order backlog decreased. And figures within the total line on the left bars, NDK, our Offshore Wind Power business jointly executed with the Danish company, Vestas. This portion of our backlog increased due to a large project received in June in Scotland. Page 11 shows the breakdown of revenue. Businesses that are significantly affected by changes in economic environment due to the spread of COVID-nineteen such as aircraft related products, automobile related products and other mass produced products are experiencing a decline in revenue. Among them, the nuclear power and defense related businesses centering on domestic infrastructure are performing steadily. Page 12 shows a breakdown of profit from business activities by segment. The year on year trend is similar to the revenue mentioned above. In addition, we have seen some ups and downs. In addition, exposure in the supplementary material after Slide 19. Please take a look at it later. Slide 13 explains the factors behind the increase in profit from business activities compared to the same period of the previous year using the Steph chart. Profit from business activities for the Q1 of 2019, excluding SpaceJet Business, was 45,900,000,000 yen The profit for the Q1 of the fiscal year was negative 2,400,000,000 yen And this is the difference. The profit for the Q1 was 2,400,000,000 and the 68,800,000,000 yen was additional figure. I'd like to start with explaining from the left. The negative 4,300,000,000 yen shown in pink on the left shows a decrease in profit due to a decrease in revenue mainly due to the impact of COVID-nineteen in the commercial aircraft and medium lot products business. This corresponds to €140,000,000,000 decrease in profit at the time of the announcement of the forecast at the beginning of the year. As for the impact of COVID-nineteen, we assume that the Q1 will have the greatest impact on a quarterly basis and are within the expected range compared to the full year forecast. A supplementary explanation will be given on the next page. Negative 10,000,000,000 yen on the right is a decrease in profit due to changes in revenue in businesses other than the one just mentioned. This includes the effects of delays due to temporary suspension of overseas plant construction due to COVID-nineteen. There has been a partial delay of the operations. The impact of exchange rates was a decrease in profits due to the fact that the average recording rate moved upwards by 3 yen per dollar compared to the same period of the previous year. This resulted in the fixed cost reductions and other cost improvements of positive 11,000,000,000 and negative 3,300,000,000 by product fluctuations and others. Please turn to Page 14. We have incorporated the situation at the end of the Q1 to the assumption of the COVID-nineteen impact shared with you when we explained our initial plan on May 11. The bar chart shows the figures presented to you in May and then we have the downward arrow on the right hand side that shows the situation in the Q1 alone. Allow me to explain from the top. Commercial Aircraft Tier 1 is a business of supplying larger because we have also adjusted the production in response to larger because we have also adjusted the production in response to the OEM production adjustment. For the full year, we expect the bottom to be in the Q1, but we are paying close attention to the trends because the future production plan still has some uncertainties. For some projects, we are implementing measures while taking into account the risk of slightly exceeding the initially planned maximum decline. Regarding aero engines, we made progress in line with the bottom line that we initially assumed in the Q1. We do believe that it has bottomed out. So if this trend continues, we expect it to fall within the initially assumed range for the full year. Revenue of medium lot products may seem to fall short of expected range in the Q1, but this is not the case. The impact of automobile parts has been particularly significant, but this is also showing a trend of recovery with April as a bottom. All in all, medium lot products with this fell slightly better than the initial forecast. To summarize, allow me to repeat myself. Due to the recording of an impairment loss associated with the acquisition of CRJ and a decrease in revenue due to the impact of COVID-nineteen, there was a significant decrease in revenue and profit year on year. However, we are able to control the extent of the loss within the full year forecast, and we believe that we are progressing solidly. Next, I'd like to explain our forecast for the current fiscal year. Please take a look at Pages 15 and over. Simply put, we maintain the outlook announced on May 11 as is. The progress in the first quarter may seem a little sluggish compared to the forecast for the year. But as has been mentioned repeatedly, we assume that the largest negative impact due to the COVID-nineteen is in the Q1. Since it is not far off the line, we decided to maintain the initial outlook. Needless to say, future economic situation is still largely uncertain. So I will continue to pay close attention and take measures depending on the changes in the situation. With this, I will end my explanation. Thank you very much.