Earnings Call: Q4 2020

May 11, 2020

My name is Yinswa. Thank you very much to be here to participate in this briefing. Before starting the explanation of the materials about the corona or COVID-nineteen, we have to be prepared for that since we are not able to see the solid decline in its trend. And we would like to express our sincerest condolences to all the people who have been infected and for the families who are surrounding them and for the people who are providing the medical services, we'd like to express our sincere appreciation to all of them. And many people have difficulty maintaining their social life. And Mitsubishi has been working in the area of energy, social infrastructure and other areas as well. And we have been working toward the final goal of the stabilization of people's lives. And we do believe that this is our mission. And we sincerely hope that we'll be able to work as an entire company to make changes here. Now at this point, we have the aerospace and also the automobile industries, which are heavily impacted. So today, in this meeting, we'd like to speak about these issues. And please refer to Page three. And as can be seen here, we will have the presentations for our fiscal year twenty nineteen financial results. And we would like to speak about how we are looking at the standing. And so Mr. Kozawa, CFO of the company, will make explanation for this, and then we will speak about how we are looking at fiscal year twenty twenty, the full year forecast and the strategic measures. So I'll be taking over. So without any further ado, we'd like to ask Mr. Hokuchi to take the floor. Gozawa is my name. Thank you. I assume the office of the Vice President and Senior Vice President taking over Mr. Kobuchi. So first is about the overview of the financial results. Please refer to Page five and also Page six. There have been the major the order intake increased solidly led by the Power Domain, which was the April up 315,200,000,000.0 yen The revenue decreased slightly due to a slowdown in medium products and then the and also the industry and the social domain decreased. So the total figure was the JPY 4,441,300,000,000.0. And then for the spaceship project, we had to work on the impairment. So we recorded a major loss for that. So that means that the profit from business activities declined significantly to 29,500,000,000.0 yen Profit attributable to owners of parent decreased slightly and as the loss of business activities was offset by the boosting of deferred tax assets on accumulated losses in previous years and the losses for the current the fiscal year for SpaceJet, the figure was 87,100,000,000.0 yen And as to the balance sheet, the balance sheet improved by reducing risk assets for the collection of indemnification asset for South African projects and the impairment of SpaceJet related assets. As to the free cash flow, it increased from the forecast announced in the third quarter financial closing from 100,000,000,000 yen to 212,900,000,000.0 reduction in working capital. As a result, interest bearing debt is at its lowest, which stands now at 598,200,000,000.0 yen This is a summary. Excluding the coronavirus or corona crisis, results were generally in line with our forecast. And the financial position remained from our owing to remained firm owing to operational excellence. So full year dividend payout of JPY 100,000,000,150 per share as planned at the beginning of the fiscal year will be maintained. Allow me to make supplementary remarks. Although this is not included here, but this is a comparison with the previously announcement. So we have about 100,000,000,000 yen increase and about the increase, the profit the revenue, it is about the 100,000,000,000 yen short and then the profit from business activities, the zero billion and also 100,000,000,000 yen was the forecast. And then here, we have the shortfall of about 30,000,000,000 yen Moving on to Page seven. Here, we looked closely into the fiscal year twenty nineteen financial results, and this is the separating out the SpaceJet related items. So remaining here is the business excluding the SpaceJet. And in the case of SpaceJet, the profit from business activities was negative 263,300,000,000.0 yen which is the so for and also the impairment is 22,200,000,000.0 yen And also for the space jet related items, we already the provision fits, so this has been carried over. So the profit attributable to owners parent is much less impacted. And then in 2018, the business was revenue was JPY 4,041,300,000,000.0 and the profit from business activities were JPY 233,800,000,000.0. And then in the case of these matters, we have to say that these are also declining. So this poses a major issue for us. And then next page, Page eight, this shows the financial results segment. I'm not going to read out all the numbers, but for the Power Systems, for order intake and revenue, we have seen increase. But in the case of I and I industry and the infrastructure, for order intake revenue and profit, all of them are down from the previous term. And for Aircraft and Defense and Space, the order intake and the revenue was up, but because of the space jet, the losses, the profit was not was declining. But if you exclude the space jet, the profit is also increasing. So I'd like to continue providing you with the explanation using the size starting Page 11. And then Page 10 shows the financial position overview. And then going back to Page nine and then the financial position overview, the total assets was JPY 4,985,600,000,000.0. So we have introduced IFRS 16, so we have to see the expansion of the SCO to be covered. So there was the increase of 97,200,000,000.0 yen But as we mentioned, we were able to recover some of the receivables and also we were able to increase the efficiency of the working capital. So we were able to improve the balance sheet. About the interest bearing debt, there has been an increase decrease of billion. So now it is JPY5898.2 billion. And then capital, there have been a sharp decline to the JPY1900. So this is related to the for the minor minority share issues, so for the South African project. And then about the equity attributable to owners of the parent, there has been a decrease of 212,500,000,000.0 yen And this is the also this is related to the profit of the term and also there have been the other issues related to the changes of the exchange rate. And then these are the figures for the financial figures. Please refer to 10. So about this, we'd like to explain the give you the further explanation starting Page 14. Intake and order backlog by segment. The order in 2019, especially in the power domain, GTCC and the nuclear increased. In Industry and Infrastructure, we saw the major decline in turbochargers and machine tools. In Aircraft, Defense and Space, the Space Systems, Defense Aircraft and Missile Systems increased. As for the order backlog, Power Domain increased and as a result, this has increased after three years. Page 12 shows the breakdown of the revenue and turbocharger decline was the major one. There was about 20% decline year on year. Page 13 shows profit from business activities by segment. As we mentioned on Page seven, there is a major decline due to the SpaceJet. Excluding the SpaceJet, the profit has changed from 271,900,000,000.0 yen to 233,800,000,000.0 yen So there has been a decrease of 38,100,000,000.0 yen So we believe this is very serious, the decline of the profit, including the space excluding the space jet business, and this will be mentioned by our President later. And we also expect a major impact from the new coronavirus epidemic. So this is going to be difficult for some time to come. On Page 45 and onwards, I have some additional information on the orders, revenue well as profit. From Page 14, this is an analysis of financial position and business performance based on the fiscal twenty nineteen results. Please turn to Page 15. Here, we are talking about the balance sheet optimization that we conducted in fiscal twenty nineteen. First of all, let me explain the numbers. Total assets on the left hand side, as you can see, is JPY 5,100,000,000,000.0. On the right hand side, the total assets is shown as JPY 4,600,000,000,000.0. On Page nine, we mentioned that total asset was JPY 5,142,700,000,000.0 and that changed to JPY 4,985,600,000,000.0 at the end of fiscal 'nineteen. In this balance sheet, there has been the asset of the South African project that is 407,800,000,000.0 yen that was included at the settlement with Hitachi. And excluding that, this would be 4,577,800,000,000.0 yen or about 4,600,000,000,000.0 yen So we are trying to reduce the negative legacy and risk assets and transform into the productive assets, and we believe that we managed to do so. We also reduced the size of the balance sheet. And those shifting to the productive assets, the details are shown in the middle. As for the indemnification asset of the South Korean project, cash is 200,000,000,000 yen and also there has been the change of the MHPS into 100% subsidiary. And this cash was already deposited at the March. And after we clear all the antitrust issues, we will complete the procedure. As for the space jet related, we have cleared this from the asset. And there is also uncertainty about the possibility of collecting the asset. And therefore, we book the impairment loss, but we would also try to book the deferred tax asset so that we can control the future cash out as a tax cost. And we also mentioned the cross holding shares, which were being disposed as well as operating factory. On Page 16 shows the reduction of the working capital. And as you can see, we have been making progress in terms of the cash conversion cycle as well as the reduction of the working capital. And a year ago a year ago, we mentioned that we have already reached the limit, but we have continued to make some improvements as for the conditions of the making deposits and so forth, and we made further improvement, as you can see. And as for the fiscal twenty twenty, based upon the progress of the projects, which have been already received, we expect that the working capital to increase, unfortunately. Page 17 shows the fact that we are trying to maintain the financial stability. On the right hand side, the bar graph, which is shown in the dotted line, this shows the pro form a balance sheet after the transfer of MHPS shares, as you can see at the bottom on the right hand side. So interest bearing debt is about JPY 600,000,000,000. And if you offset this with the cash and cash equivalent, net debt is JPY $320,000,000,000 yen Debt to equity ratio is 0.46%, which is up by 0.38% from the year before, but this is not a problem. Ratio is 24.4, which is lower. But as we explained, if you add the adjustment in relation to the South African asset, it will go up to 26.7%, which is quite stable level. So based on that, this page Page 18 shows the highlights and challenges for fiscal twenty nineteen. The blue letters shows the positive factor and the red negative factor in the power domain, which was very strong. We obtained JPY 4,000,000,000,000 or higher order, which was good, and we have reduced the size of the balance sheet and improved the quality. And we have made sure that we have our liquidity in hand, and we also secured some additional funding to buffer for the risks such as COVID-nineteen. As for the negative factors, we can mention that the profitability is has been declining. The major factors, first of all, is the drastic changes in the market environment due to the coronavirus pandemic and also the higher fixed costs of the steam power business and unprofitable projects among the overseas plants and the higher SG and A. And we believe it is crucial for us to take the appropriate measures very quickly. With that, I'd like to end my presentation. Next, our CEO, President, Isumi Sawa, will present the FY 2020 strategic measures. Thank you very much. So here, we'd like to speak about the fiscal year 2020 strategic measures. Ms. Mizawa, the President, will be the speaker. Please refer to Page 20. Here, we make a comparison between the time at establishment or launch of 2018 mid term business plan and today at the time when the 2018 MTBP was launched for the fuselages and engines and the logistics, thermal and turbochargers, these activities were considered to be a growth engine or a growth business. And then after that, there was the decision by the Boeing to cut their production and also U. S.-China Trade War occurred. About the space jet, we were planning to have a first dribbly of the first space jet in the 2020, but there have been a delay and this has been delayed until fiscal year twenty twenty one or later. And then on top of that, we had a huge impact by the COVID-nineteen, so emergency measures are now needed. And then in the middle, please take a look at what we conduct for the power. At the time of the launch of the MTBP twenty eighteen, we were focusing on the carbon abatement against the backdrop of the climate change. And also we tried to work on the power, the thermal power JV. And then here, we try to work on the further abatement of the carbon and also energy transition is gaining momentum. Against this backdrop, we were able to have a settlement over the South African project. So that means that we now are able to capitalize the MHPS, the figure stands at 100%. So with that, we try to work on the new system on organization. And in the past, there have been some limitation and the restriction because of the status of the JV. We are now able to have the business structure transition and through that, we are able to realize group synergies. And then about the defense and the airspace, we have been working on this and then we see them as a new segment. So this way, we are able to have much better decision making. Back in the 2018 MTBP, we had three domains, but this term we are planning to have three domains and four segments. And also for the future activities, we have been working on the MHI future stream. And then in order to promote its further direction, we decided to launch the growth strategy office. So we have to work on the growth of the growth domain. So this way we will have further growth for the entire company. Please refer to Page 21. So we are now looking at a major change of the environment and then we are trying to look at the strategic countermeasures for fiscal year 2020. First is related to COVID-nineteen impact and the emergency measures for that. And we'd like to make further explanation starting next page. The second point is about the earning capacity. In what way are we able to increase earning capacity against the backdrop of major change? And one thing that is shown here is the expansion of the service and the group synergy. And the third point is space jet. So we try to work on the further process for the planning. And then finally, we will work on the increase of the earnings using the strong and growth areas. Then moving on to the next page. First is about evaluating the impact of COVID-nineteen, Starting from the left hand side, please look at this on the counterclockwise for the commercial aircraft and also the medium lot, the products in the automobile, we do have a major impact. So the emergency measures should take place. So we have already done that. So this is about onethree of the business. And then about the older products, because of the emergency measures of the entire country, there have been some delays of some construction work. And so for the new construction projects, we are now seeing the impact of the delays. So we have to pay more attention to that to make sure that we will minimize the impact. And then looking at the entire company, we for the companies that for the kind of project orders, which are centering around the domestic market, the impact is small. But for other items, we will have a major impact, so we have to work on the emergency measures. Please refer to Page 23. Here, these are the items in areas in which there is a major impact from the COVID-nineteen commercial aircraft and aerostructures and also medium lots products rather. For the commercial aircraft, because of the reduction of the production by Boeing, we will be impacted 1020% to 30% reduction of sales is something we are looking at. And about the commercial aircraft, we have to say that the airlines would have difficulty having their activities. So we have to work on the fixed asset and also the fixed cost. And then we try to make sure we have the business profits. And then about the Oya plant in the Oya, they are now we have already closed down. We have suspended and reduced operations in Nagoya plant in OA. And then about the commercial aircraft aero engines, we have to say that we will not be free from the impact. So we will see the reduced sales and reduced revenue. As can be seen here, the impact will be about 35% to 55%. And then against its backdrop, we have to make sure that we will reduce or postpone outflows and reduce investment. And then about this, with the improvement of the operation, we are quite sure that we will see the improvement. And then the third item, medium lot products, including the turbochargers and car air conditioners, they are very much impacted. And so again, it is important to reduce the fixed cost and also the production adjustments and the utilization of the various games. And then when we are able to see the finalization of this period, we are not sure. But we, at this moment, believe that or expect that this will be over in one year. So this is the basis of our plan. Please refer to Page 24. Here, we talk about 100% capitalization of Mitsubishi Power. So this chart shows the future direction of this. In the past, it was MHPS, so there have been some limitation of our activities because of the very nature of joint venture. But now that it is 100% capitalized, we now are able to see this as the comprehensive the overall energy company. So to be more specific about for the gas turbine, we will maintain our top global market share since we are able to see the market. So we would like to continue working on the quality and performance and the prices. So this way, we are able to beat our competitors so that we are able to remain in the top arena. And then for SIM Power, it is very difficult to see the new orders, but we try to shift to the maintenance of the existing services. And then about renewables, the collaboration with renewable energies is important. And also at the same time, we will have to we will look into the hydrogen society, which is going to be enabled in the future. So and also we try to work on the becoming the world leader in hydrogen fired gas turbines and fuel cells. So this way, we are providing new solutions for the hydrogen society. Next, please refer to 25. This shows the countermeasures. And these are the related companies and also SBUs. And as can be seen here, we have we are working on the integration of the technologies and products so that we are able to provide energy solutions to the society. Moving on to Page 26. This is about the increase and the stability of the profitability. It is important to focus more on the services. In the past, there have been the 1,300,000,000,000 but what we try to do is to increase this by 20%. For that purpose, it is important to look into the shift of the human resources to the service and we have to expand the service network. And we have to have the much the more lineup utilizing the AI and especially important is the menu expansion. We will focus on ST and then group wide approaches would take place for that. To be more specific, we'd like you to take a look at it. These are the items to be looked at. In the case of power, we will have the much better efficiency for the existing plant. And also, we will have the much lower carbon and for the compressors and the logistics, we will have much better services coverage. And for defense, we will provide much more services for that. And also for the commercial aircraft, we will work on the MRO businesses in this area. Moving on to Page 27. Here, we have to work on the reduction of corporate expenses. For the corporate businesses, with the M and A, we will expand the businesses. And then the business, the size had not been expanded. So it is important to work on the elimination of the redundancies. And also in order to deal with the corona, the COVID-nineteen, people are now working home. So we were able to identify some of the problems that we are faced with. And then allow me to repeat myself, we have to go back to the review of the processes we already have, so reconciliation of the work processes. And also, on top of that, we work on the work side reforms. This way, we will work on the much the realization of much efficient the organization. And starting April, we will have the flatter the organization, have the domains and the systems. And then this way, we are planning to decrease the figure by 20%. So starting May, because of the very harsh situation, we will reduce the compensation for the executives. Page 28, this is about SpaceJet business. About SpaceJet, to acquire TC, we had the air flight test, but there was a delay. And then we decided to delay the first delivery to 2021 or later. And so this is on the second box. And then at that point, if the final the new development schedule to be assessed after FTB-ten ferry flight is considered to be the milestone. However, because of the COVID-nineteen, we are not quite sure. We do not have the final plan for that. And also the airline business is very much impacted by the COVID-nineteen crisis. And then the against this backdrop about the M90 development, we will continue working on the further review of the schedule. And then about the investment figures, I'd like to go back to this, but it is important to set an appropriate budget considering challenging financial headwinds for MSI Group as a whole. Page 29, please. Here in Page 29, I would like to speak about something new, which is the development of offshore wind. Here, I'm talking about the offshore wind in Japan and Asia. So we are now seeing the increase of the projects in Japan and Asia following the West. So here, what we try to work on is to make the best use of the expertise and technologies of MVOW, which have been accumulated in Europe. So we try to deploy that in Japan and Asia. Moving on, I would like to speak about forecast for 2020. So now let me talk about the forecast for fiscal twenty twenty. Please turn to Page 31. On this page, fiscal twenty twenty forecast of the profit from business activities as shown. There is an impact of COVID-nineteen, so it's very difficult to forecast. But based upon the trend, we try to make a forecast. Fiscal twenty nineteen space jet impairment loss and also there was a onetime effects, but excluding that profit from business activities, the left from sorry, the third from the left, that is JPY215 billion. So in fiscal twenty twenty, there have been an impact of COVID-nineteen in aircraft and the automobile. Those are the major ones, and there will be other impacts, and we try to forecast. And currently, about 140,000,000,000 yen negative impact is expected from COVID-nineteen. And as I mentioned, we'll be taking countermeasures and the effect of the emergency measures is expected to be about 45,000,000,000 yen to offset this negative impact. Now the budget of the space jet will be made into more appropriate level. So fiscal twenty twenty profit from the business activities is expected to be zero. Of course, we would take the additional measures and accelerate them so that we can increase the positive side. Page thirty two and thirty three are the tables, which gives you the summary of order intake, revenue and other numbers summarized in a table. Page 33 shows the businesses excluding SpaceJet and SpaceJet. So those are for your reference. Page 34, this is the forecast by segment. The revenue and the profit from business activities are shown here, especially the logistics, drive systems are the major factors. Lastly, let me talk about the strategic direction. Please turn to Page 36. After the resolution or the end of the COVID-nineteen, we would like to continue to be a crucial company for the society. So we will be bringing forward the next medium term business plan by six months. So based on the COVID-nineteen, we would like to do this. And as for the direction of this plan, we will try to grasp the changes of the needs of the market and so forth. We will focus on the decarbonization, electrification as well as the Intelligent Systems, and we will try to accommodate the changes in the market, customer and societal needs. And we try to realize the forward growth strategy, including the organic growth and the developing to the new areas. And also, we try to streamline the business operational functions. More specifically, reorganize and integrate the domestic factories and also group companies and increase the staff mobility. Also, as for the challenged businesses, we will try to review the business portfolio and reorganizing them. Pages thirty seven and thirty eight shows one of the ideas. And Page 39, let me explain our way of thinking to promote this strategy. So A represent expanding the upstream So existing hardware businesses will be expanded into the upstream and downstream. For example, the business investment, expanding services and digitalization and so forth. And as for the new businesses, especially the cross domain, across SBU areas, I already talked about the Energy Solution company as changing the MHPS. So that's one of the examples of our efforts. And three days, we would like to work focus on the SDGs, mobility, energy and safe and secure society. And based on this, we would like to make a more concentrated investments into those areas. And with that, I'd like to end my presentation. Thank you for your attention.