Earnings Call: Q3 2020

Feb 6, 2020

Good afternoon, ladies and gentlemen. This is Koguchi speaking. The paper distributed in front of you, financial results for FY twenty nineteen, one to three quarter, I would like to use this material to explain. Now for highlights of this 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 will now be postponed to fiscal year 2021 and onwards. A space jet development situation as well as various perspectives 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 up to last fiscal year and losses this year totaled 175,300,000,000.0 yen 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 3,300,000,000.0 yen 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 from activities is $270,000,000,000 yen and losses attributed to owners of parent is 60,000,000,000 yen 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 INI, 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 20 yen plus to 150 yen per stock will be implemented. So now let me further go into the details. If you can now move on to Page four. Now for order intake, this So we exceeded the numbers from last year by JPY174.1 billion. Revenue is JPY2856.5 billion. This is a minus of JPY42.7 billion from last year like for like. And from business activities profit, space jet losses included 12,700,000,000 profit and versus last year same period, minus 92,500,000,000.0 yen Now for the quarter profit, this is 101,400,000,000.0 yen And for DTA related to SpaceJet, since we have acknowledged this number, the tax impact has changed dramatically, and this is a plus 66,000,000,000 yen 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 five. So 1,000 excuse me, 188,100,000,000 from profit from business activities. We are on par with the trend of last year. Profit attributable to owners of parent, 98,000,000,000 and EBITDA, yen 290,300,000,000.0. So you can understand that we have undertaken solid management. Now moving on to free cash flow. This is minus 225,500,000,000.0 yen 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 an uptake of JPY 3 and 47,600,000,000.0 versus last year, and this amounts to 1,104,100,000,000.0 yen For Industry and Infrastructure, JPY 1,259,500,000,000.0, so a deterioration of approximately JPY 100,000,000,000. 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 and Space, we stand at 322,700,000,000.0 yen This is a minus, but for the full year, we will be able to absorb this deterioration. Now moving on to revenue. In Industry and Infrastructure, this again is the drop of the mass medium manufacturing, and we stand at 1,312,800,000,000.0 yen But for Aircraft, Defense and 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 1,000 related activities. And again, we have made adjustments to proceed or handle Trent one thousand. 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 efficient For instance, in terms of inventories, yen 818,400,000,000.0. We have the trade payables as well as the contract liabilities. And the total of this is approximately 1,600,000,000,000.0 yen Now for it's about double inventories, and so inventories themselves is basically an investment of zero. In the past, these two 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, management, become much more efficient, and this will be our approach for the future. Now in comparison to the year end, 400,000,000,000 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 100,000,000,000 yen 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 1,400,000,000,000.0 yen or so. This is again comparing as to year end. So we have increased by 348,900,000,000.0 yen But again, as I mentioned in cash flow, scheduled. So by the end of the full fiscal year, we believe that we will be below $661,000,000,000 yen 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 floated 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 space jet 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 $1,014,000,000,000 yen and the full year forecast will land around about 600,000,000,000 yen DE ratio is as you see here. Now for operating and investment and free cash flows, again, we have cited the numbers 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 advancement 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, 50,000,000,000 was the original schedule. We have increased this to 100,000,000,000 yen And next, I would like to talk about order intake as well as order backlog. Please take a look at Page nine. Regarding order intake, power gas turbine, steam power and nuclear power increased. As far as industry and 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 and 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 $280,000,000,000 yen 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. Vestas Offshore is the equity method company. So if we include that, there has been in the backlog of about JPY 180,000,000,000. Next revenue by segment. Power Systems wise, compressors and aero engines increased. Figure wise, it has increased slightly. Industry and Infrastructure segment wise, there has been a decrease in the mass production items. Aircraft, defense and space, there has been increase of commercial aircraft. Boeing seven thirty seven was facing different challenges. But regarding the part that we are in charge of, it is a minor portion. Therefore, the impact of Boeing seven thirty seven 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 would 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 and infrastructure, the major product project will be delayed and there has been a reduction in the mass production item. Therefore, the forecast will be changed from 4,300 billion yen to 4,050 billion but then there will be an increase of 200,000,000,000 yen And in terms of the profitor rather the revenue, it will be downward revised from JPY 4,300 billion to JPY 4,150 billion minus about JPY 115,000,000,000 or 150,000,000,000 yen 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, profit will be zero. And in regarding profit attributable to owners of the parent, it will be 100,000,000,000 yen And there will be upward revision of free cash flow to 100,000,000,000 yen And also the dividend will be increased by 20 yen up to 150 yen 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? So JPY 175,300,000,000.0 has been divided into the losses of current fiscal year of JPY 97,500,000,000.0, and we have JPY 77,800,000,000.0 yen for the impairment loss for the assets under BS. So in terms of the full year loss, we have estimated about 80,000,000,000 yen and cash flow is more than 100,000,000,000 yen but some will be transferred to the asset that was the plan, but we have decided otherwise and have all 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 175,300,000,000.0 yen 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 Air craft, we understand that we will be not able to recover. Therefore, we have registered reserve for the losses. Therefore, the property before income taxes is JPY 175,400,000,000.0 in the negative. And therefore, terms of the profit, it's JPY 3,300,000,000.0. And in terms of the full year forecast, you can see the numbers on the right. So for the business activities, minus JPY $270,000,000,000. And also SpaceJet wise, the profit attributable to owners of the parent will be about minus JPY 60,000,000,000. 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 JPY140 billion, but we have added JPY20 billion and upward revised JPY160 billion. For Industry and Infrastructure, order intake revenue and profit from business activities, all these component wise, we have downward revised as compared to the beginning of the fiscal year. And Aircraft, Defense and Space, we have incurred the losses for the space jet. Therefore, we have dramatically underperformed our budget. So in total, as mentioned before, you see the revisions that I have already explained to you. Please turn to Page 18 of the supplementary document. We are aiming on achieving TOP. And amidst 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 South Africa project. And Hitachi, we had the right to ask for $560,000,000,000 yen from Hitachi and also we have space jet 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 zero. And about the fixed assets, for operating assets, we can liquidate 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.