Earnings Call: Q1 2020

Aug 5, 2019

Good afternoon, ladies and gentlemen. I am Koguchi, CFO of MHI. I would like to take you through the financial results for the 2019. I'd like to begin with some remarks. As you know, since last year, IFRS has been adopted. And this time, IFRS 16 was adopted, which is related to lease assets. From off balance to on balance process, we are changing. In the last fiscal year, the numbers we have announced for Kesu and Tanshin are staying as they are, but we have adjusted to make apple to apple comparison. In your presentation material for the upper to upper comparison, the actual results and the financial results for the last fiscal year have been shown in the material. I just wanted to make this clear before I start. So please go to the highlight, which is the highlight for the fiscal 'nineteen Q1 results. And we see the results in comparison with the full year forecast. And so far, we have made a steady progress, which means that in terms of orders received, revenue and profit from business activities, we were able to exceed the levels of the last year. For orders and revenue, GTCC and the partial aircraft performed well and improvement in Aircraft, Defense and Space segment was seen in terms of the profit. For the full year forecast for the free cash flow compared with the last year, there was some deterioration. However, this is due to the decrease in trade payables and contract liabilities. This is not a fundamental issue. Based on that, interim dividend increased by 10 per share year on year to JPY 75 or JPY 150 per year, and we have kept this forecast unchanged. Now I'd like to move on to the financial results for the first quarter. Please go to the next page. Orders received, 750,200,000,000.0. Gas Turbine performed well. Mainly on account of that, we were able to see JPY 43,100,000,000.0 increase in orders received. Revenue was JPY 919,300,000,000.0, up JPY 13,200,000,000.0 year on year. Profit from business activities was JPY 40,400,000,000.0, up JPY 8,900,000,000.0 from a year ago. Profit attributable to owners of parent was 16,300,000,000.0 yen So all of the items exceeded the last year's level. EBITDA was 71,200,000,000.0 yen up 7,600,000,000.0 yen year on year. Free cash flow, as I stated earlier, on the liability side, there were some decrease. Therefore, there was a decrease of JPY72.5 billion compared with the last year. However, this is not a fundamental problem. The improvement of the balance sheet and improvement of the asset turnover is proceeding well. Therefore, there is no major issue here with the cash flow. Next please go to the next page. Related excluding MRJ, the fundamental business profit as shown on this page. Regarding SpaceJet MRJ investment, there was a cash out of 33,100,000,000.0 yen However, for this fiscal year's business profit impact was about JPY5 billion. So which means JPY25 billion is booked in the balance sheet. That is the balance because based on the business plan this year, we are applying the similar level accounting process as last year. That is the result. Later on, we will explain, but for the full year, there is about JPY 100,000,000,000 cash out, out of which JPY 80,000,000,000 will be subject to accounting process, but there is no major change in our policy. Next, Q1 financial results by segment. Orders received, Power, Industry and Infrastructure and Aircraft, Defense and Space, all of the segments exceeded the last year's level, especially Power Systems. Although steam turbine showed a deterioration, gas turbine made up for the loss and or decrease and performed well. For the revenue, Power Systems increased the revenue, but I and I decreased the revenue because the medium load manufactured product compared with the last year did not perform well, especially turbocharger engine and forklift did not perform well. Aircraft, Defense and Space are almost unchanged from the previous year. In terms of the profit, in Power Systems, there was a decrease of JPY 5,900,000,000.0 to JPY 19,200,000,000.0. The main reason is the nuclear power construction progress compared with the previous year was much slower. For the full year, we think that we can make a recovery to exceed the last year's level. But for Q1, that is the reason for the decrease. For Thermal Power compared with the last year, the performance is better. For Industry and Infrastructure, last year, there was a negative profit in Commercial Ships and Metals Machinery. Those businesses, the Commercial Ship is showing a positive profit and metals machinery is improving the loss level. As I mentioned at the time of the revenue for the medium product, there is a certain sluggishness in the growth of sales or sales are even declining. That is the reason for the deterioration of I and I. For Aircraft Defense and Space, as I said, for MRJ, the impairment was recognized and the difference is giving a positive impact for this. And Tier one business has been performing well. That's another reason. So all in all, overall, we have seen increase both in revenue and profit. Next, I'd like to move on to the balance sheet. Please look at the bottom. The asset total was JPY 5,216,000,000,000.000, up JPY 73,300,000,000.0 from the end of the previous year. Because towards the first quarter from the end of the previous year, the construction progressed and inventory increased together with the increase in the construction completeness. Actually, out of 73,300,000,000.0 yen increase, the IFRS 16 application impact is included. In the past, these assets were out of the balance sheet, but they are put onto the balance sheet. The impact was about JPY 100,000,000,000. So concerning this, the balance sheet compared with the end of the previous fiscal year, the asset level is down, which is quite unusual for our company because our company has been working on the improvement of balance sheet for some time, making it more efficient. And in the Q1 this year, we have been continuing with this effort. On the liability side, as I mentioned, in the cash flow, I mentioned this, the trade receivables and receivables are decreased year on year. Because of the cash outflow, this has happened. But overall, this is something that to be absorbed in the overall balance sheet. Therefore, for the future financing, we would like to focus on commercial paper financing. And the borrowings themselves are not to be increased going forward. Regarding the equity, it is down to a certain extent, but this is noted at the bottom. This is due to dividend and comprehensive income and so forth. Because of the yen's appreciation, there was a write down or there was evaluation decrease of overseas assets and these are the nature of the equity decrease. For the balance sheet, the cash conversion cycle, it's not in the material. In the first quarter, it was thirty seven days, which represents an improvement compared with the same period of the last year. Please go to the next page. So based on this backdrop, I am now showing the main financial measures and cash flow. So 26.5% for equity ratio is where we stand at the moment. And we are in Q1 and usually in versus the end of the term, the revenue is usually lower, but we believe that this is an adequate ratio at the moment. And interest bearing debt is JPY 855,600,000,000.0. So this is an increase by JPY190.5 billion. However, year on year, it was an improvement of JPY914.2 billion and debt equity ratio is 50%, increase of 12 percentage points. And so we are still on a good path to improve the health of our financials. Now for cash flows, if you can reference the bottom half of the same slide. And as I have detailed out the items earlier on, I would like to eliminate this explanation. But now we have created transparency in terms of our segments. And again, you have seen the numbers earlier, so I will not go through details on this slide. But Power, GTCC increased and Steam Power decreased in I and I. And Metals Machinery increased and decreased with Machine Tool for Aircraft Defense and Defense. Commercial Aircraft are on the rise. Now for order backlog in accordance with this trend, so we now stand at the current moment, 5,150,100,000,000.0. So usually, the orders received have been trending higher than backlog. And so currently, the backlog is on the decline at the moment. However, in three years' time or perhaps if we look at a longer three year period, the biggest decrease will hit us in three years' time. And this is obviously impacted by the major deals from last year. But for the upcoming three years, we do have an abundant order backlog. And for reference, the NHI Vistas joint venture, you do have the numbers here and these are off the books. Now moving on to the revenue by segment. We have an increase in Power Systems, Steam Power GDCC, decreased with Nuclear Power. And I did explain this in the profits through business activities. For Industry and Infrastructure, Transportation Systems, commercial ships are on the decline, Aircraft, Defense and Space, Tier one Commercial Aircraft are on the rise. MRJ, first quarter, we had impairment, but this was not recorded. So on an annual basis, 80,000,000,000 loss is the forecast. But for Q1, this is an extension of our previous business. And so you see the results on this slide from proper business activities by segment. For Power, Gas Turbine has increased and again, Nuclear Power has dropped in terms of profit from business activities. For I and I, Commercial Ships is in the negative, but we are improving the profit loss and trooper chargers have decreased. For Aircraft Defense and Expense, Tier one has grown. So based on the Q1 results, I would now like to illustrate to you the fact that our forecast for the full year is more or less on track. Now the yen is becoming much more appreciated year on year comparison. The finance related profit loss approximately JPY14 billion minus is where we stand at the moment. So if we look at the basic fundamental business and our competency level, we do believe that we are on a recovery track at the moment. And again, based on these results, the full year forecast for the orders received of JPY 4,300, revenue for the JPY 300,000,000,000, profit from business activities, $320,000,000,000 and profit JPY 110,000,000,000 EBITDA, $350,000,000,000 free cash flow, 50,000,000,000 is the unchanged forecast. And for dividend, again, we will maintain the year beginning announcement. Now if we look into fundamental business, eliminating MRJ as well as the segment breakdown. And once again, we are not changing our initial forecast. So this I would like to conclude the Q1 financial explanation. Thank you.