Earnings Call: Q4 2019

May 9, 2019

Good afternoon, ladies and gentlemen. My name is Koguchi. I'm responsible for Finance Matters at Mitsubishi Heavy Industries. Thank you for your attendance despite your busy schedule today. As usual, we'd like to start with the explanation of the handout material included in your package. First, please turn to the first page. I'd like to start with the discussion on the figures. That's on Page four. As you may be aware, starting in FY 2018, we have adopted IFRS. Therefore, for the fiscal year 2017 Japanese GAAP financial results, to explain the variance for the sake of convenience, we converted the 2017 fiscal year numbers into IFRS numbers as well, so that we can see the apple to apple comparison. First, orders received JPY 3,853,400,000,000.0000. This was almost unchanged from the previous year because during the 2018, there were some cancellations of the large sized projects in the past year. And if we exclude that factor, it is about JPY 4,000,000,000,000. In terms of the revenues, JPY 4,078,300,000,000.0000 was the result. And the profit from business activities was 186,700,000,000.0 yen This is 4.6% in terms of the margin. Net profit was 101,300,000,000.0 yen The profit margin was 2.5%. So there was an improvement of more than 100,000,000,000 yen on those two profits. ROE was 7.2% and EBITDA was 311,600,000,000.0 yen Free cash flow exceeded the guidance significantly at $243,000,000,000 yen and which is up 75,400,000,000.0 yen year on year. For the MRJ, if it is excluded, we have the fundamental business profit. That is profit from business activities was 271,900,000,000.0 yen net profit 184,800,000,000.0 yen EBITDA 396,400,000,000.0 and free cash flow JPY 352,200,000,000.0, excluding MRJ. First, we'd like to talk about the orders and revenues by segment. In Power Systems were unchanged from last year, but Industry is up JPY140 billion year on year, but Aircraft, Defense and Space is down year on year. So for the Power System, it is unchanged from the last year. In terms of the revenue, it was almost unchanged from the last year. However, for the Aircraft, Defense and Space, there was a decline. But because of the increase in Power and Industry, on a total basis, it is unchanged from last year. The guidance revenue, 4,200,000,000,000.0. Compared with that, there was a decrease of 120,000,000,000 yen This is mainly the postponement into FY 'nineteen next year. For the profit from business activities, in all of the business units, we had an increase, especially in the Power Systems and Industry and Infrastructure, we saw significant improvement. On the other hand, for the Aircraft, Defense and Space segment, the booking of MRJ was delayed into later years. And those are the main reasons for the variance. Next, I'd like to move on to the balance sheet. We are challenged in very tough times in order to increase the earnings. We are working on the improvement of free cash flow and the balance sheet as part of our business plan for some time, and we have been seeing some outcome. Total asset is 5,142,000,000,000.000 yen As of compared with the end of the last fiscal year, there was a decrease of about 100,000,000,000 yen If we include the increase from the South African projects, the decline is about JPY 200,000,000,000 in working capital. As a result, interest bearing debt is down by 148,000,000,000 yen to $665,000,000,000 yen So we have been continuously reducing the size of the balance sheet as we had planned. Based on that, these are the main financial measures. Equity ratio was 27.8%. As you are aware, the MRJ related assets impairment was made. As a result, equity ratio is less than 30%. So this remains at a healthy level, I would say. Regarding the interest bearing debt, because of the increase in free cash flow, we were able to make repayment and the interest bearing debt became JPY 665,100,000,000.0 and the debt equity ratio was 38%, down 10 points. For cash flows, free cash flow was $243,000,000,000 yen cash flow from operating activities of 404,900,000,000 and cash flows from investing activities was a negative 161,800,000,000.0 yen Regarding investment, compared with the last year, the investment was less this year. In the fiscal year for Arriva investment, we made those investment. But in FY 2018, we had a sale of Kanazawa plant And excluding those items, investment level would be appropriate, I would say. Next, I'd like to move on to the results by segment. For orders received, as you can see on the slide, the Power System was almost unchanged from last year. For the Power Systems, order is very much challenged. That was our perception. But in this period, gas turbine performed well. Therefore, on a year on year basis, gas turbine increased by more than 100,000,000,000 yen However, at the same time, steam power had a difficult time. Only in all, the Power Systems was unchanged from last year. In green, we have Industry and Infrastructure. The medium load manufacturing goods performed well and others performed well too. On the other hand, for Aircraft, Defense and Space, seven seventy seven related businesses is at a turning point because of the X and also for the Defense, because of the national budget situation for FY 2018, there was less orders and so there was a decline of about 100,000,000,000 yen Now moving on to the backlog. So, revenue has exceeded and the backlog itself has declined as a result. However, on the contrary, for renewable energies, we have taken some efforts in the offshore wind and we do have some JV. And so when we add the backlog orders there, then it gives us, pretty much an on par number. And so the Power decline has been offset by the offshore wind turbine activities. Now in terms of revenue, as you can see here, the numbers. So I do believe that this is quite self explanatory and I would like to skip this page. Now moving on to the activities by segment, all segments have improved, especially for Power Systems as you see here. Nuclear power compressors have increased their revenue line and grown. For I and I, Transportation Systems, especially in the area of material handling equipment, we have increased sales and enhanced profit. Now for transportation systems, as of last year, we have, made some advances or procedures have been applied. And as a result, we have been able to improve our profits. And for Aircraft, Defense and Space, we have been able to enhance productivity in this realm. And especially for Commercial, there has been a drop, it is true, but all in all, for Aircraft, Defense and Space, things are progressing smoothly. And for MRJ, we have decreased some of the, cash out because some there has been some delays. And so if we include that in the improvement, then all in all, we can say that this segment is treading fairly as well. So this was a quick depiction of our financial performance. And based on this, we would now like to analyze the current state of our business. So this is listed on page on the following pages. So we are focusing on enhancing profit in the items that we have stated in our business plan. And so we have been making efforts to efficientize our management, and we do believe that we are bearing fruit. So for the just closed 2018 fiscal year, our working capital itself, is has been compressed to all the way down to 3,450, and we have now improved the cash conversion cycle to twenty eight days. So at some point, we had exceeded one hundred days CCC, but now we have improved productivity dramatically and resulted in these numbers. So if we further utilize cash flow to analyze this trend, as you can see on this next page, so I would like to highlight a few points on this page. The first is, if we exclude the extraordinary factors, the free cash flow related to fundamental business earnings, which is shown in the green line, approximately JPY 200,000,000,000 plus. And so this number has been trending for quite some time. But starting from 2016, 2017 and 2018, we have been able to exceed, this number quite dramatically, as you can note. So this goes back to the, suppression of working capital. And in the past, we had invested more than 1,000,000,000,000 yen and, operated, projects of 3,000,000,000,000 yen But now 4,000,000,000,000 yen is now brought down to $310,000,000,000 or 15,000,000,000 yen to operate, and we have now, generated approximately, more cash flow as a result. So, we are improving. So during this, midterm plan, the cash inflow expectations as well as if you look down below on the side for the past three years, I know it's a bit difficult, but, approximately inflow of 20,000,000,000 yen as expected. And we are now utilizing this, approximately $370,000,000,000 yen for new investments for interest bearing debt. We will be focusing on investments from year onwards. So rather than suppressing this, we would like to, we had been focusing on new investments. But for the just ending financial term, we have, been able to, reduce it by approximately 150,000,000,000 yen and shareholder return is on par with the plan. So cash flow, emphasis has been made in our management and this is due to our focus to enhance our net profit. So when we look at the, free cash flow, you can see that there is an alignment. So for the past, one year 2018, there has will be a slight delay year or eighteen months. But this improvement in free cash flow will be contributing to our future solidification of the company. Now there are some challenges, which I would like to refer to. So for the current assets, we have seen some improvement. But for if you look at the fixed assets, we are still challenged. So in comparison, fixed assets are difficult to improve versus, the current assets. However, there's also a fact that we have yet to do to create more focus on fixed asset and improve its turnover. So in other words, we have to make new investments and replace the old assessments as well as convert from hard assets to soft assets. And so once again, we have to take this trend and further enhance the quality of the overall fixed assets that we possess. So this is our focus. And this will further promote a shorter path to generating better profit. So we will take, steadfast improvements in this direction. So the TOP has been stated to overcome these challenges. We do have some stable cash flow generation and we do have, the solid financial foundation to further promote that TOP. But there is still some unbalance between the total assets and revenue and there are some imbalances between total assets versus the market value. So again, we want to diminish, this imbalance as much as possible. And 2020, which will be the first year, the next midterm plan, we will hopefully create a better, rectangle close to the 01/2011 and we plan to land at 0.9, one and zero point five. So obviously, we do have some challenges along the way to generate this. And so I would like to use this slide to explain this. So we will, further promote asset management, but obviously, cash flow directly from the balance sheet. But at the same time, we want to focus on the balance sheet old assets. So the nonperforming businesses as well as the low value businesses, we would like to eliminate this and improve the PL. And with the generated cash flow, we would like to convert that to, investments in new businesses as much as possible and reflect that on our profit and loss sheets. So this will be the cycle, as you see depicted, that we would like to follow through. And we do and we have focused on the 111 proportion program, the TOP, based on this. Now you can see some imbalances in this structure. Portfolio management and cash flow management has been our focus for the past few years. And if you take this perspective, 50%, 60% of our revenue is the focused on the new growth on the transformation and improvement areas. But, it's also true that there is are some nonperforming businesses that will remain. So once again, the we would like to further promote this activity and make sure that we will create focus in moving forward. So 50%, is grow maintain and 60% is the remaining that we will focus on at TOP. So we will also like to further improve, cash flow and this has been the foundation of our midterm plan and we do believe that we are bearing, specific fruits. We are coming to the next stage where we have to grow new businesses. So that's the phase that we are in at the moment. That's our perception. But on this point, later on, President of the company is going to take you through the details later. So with that, based on the financial results that we just explained, I'd like to now move on to the forecast for fiscal year twenty nineteen. Please jump to Page 22. Orders received. Earlier, I talked about the cancellations of orders. Last year, there was about JPY 100,000,000,000 large sized orders that was postponed from FY 'eighteen to FY 'nineteen. So that was a postponement, and that is the reason for the downward revision of the orders received at the end of at the beginning of the year. That's why for this forecast, we have JPY 4,300,000,000,000.0. And for revenue, our forecast of JPY 4,200,000,000,000.0 before. However, because of the postponement of the revenues, we increased it to JPY4.3 trillion. And this is much higher than the same period of last year. For profit from business activities, it is up JPY33 billion to JPY220 billion and the net profit up 8,600,000,000.0 yen to 110,000,000,000 yen ROE is projected at 8% and EBITDA $350,000,000,000 yen Free cash flow is estimated at this point with great improvement. So therefore, we are investing into growth domains, that's why free cash flow will be limited to 50,000,000,000 yen And for the dividend, last year in FY2018, based on the results of FY2018 and we decided to distribute JPY150 per share. This is an increase of JPY20 per share. On data pages, there are different reference materials, so please take a look at them at your leisure. This concludes my presentation on the financial results for fiscal year twenty eighteen. Thank you. Now we would like to introduce Mr. Izumi Sawa, President, to talk about the FY 2018 medium term business plan progress. Thank you. I am Izumisawa. I'm President and CEO, CSO. I'd like to take you through the progress on fiscal year twenty eighteen business plan progress. First of all, I'd like to talk about what we have achieved so far. And then after that, we'd like to give you the current status of the various initiatives. In terms of the progress, earlier, our CEO has explained some of this, so there may be some overlap. But the targets for 2020 is 5,000,000,000,000 yen in business scale and total asset 5,300,000,000,000.0 yen or less, ROE 11% and cash flow 1,320,000,000,000.00 yen so that we can make investment into growth domains as well as the healthy balance sheet. For FY 'eighteen, free cash flow exceeded our guidance drastically. And for the achievement of fiscal 'eighteen business plan, that gave a good momentum. Going forward, in order to cope with the difficult market situation, we'd like to further drive efficient management so that we can secure profit from business activities. For FY 'nineteen, medium load products were doing well. However, because of the steam power cancellation and the market shrinkage, there was some decline. So going forward, we would like to secure orders by strengthening service business. For the growth domains, both from short term to middle to long term, we are promoting these growth business domains. These are the results for fiscal year twenty eighteen, but our CFO has just taken you through these details. In FY 'eighteen, there were cancellations and delays of large sized projects. Because of that, we couldn't achieve the targets. For the profit from business activities, because of the cash flow management and the successful implementation of the strategy at each business unit, we were able to make the steady progress. And as for free cash flow, we also exceeded the plan and guidance. The management reform is now bearing fruits and we are generating good financial results based on these. These are the guidance for FY 'nineteen. There were some postponement of the projects from FY 'eighteen. Therefore, we like to secure those sales, and we like to increase revenue as well in the Power Systems and I and I. For the profit from business activities, for the I and I made to order, we were able to make some improvements, so we will see some improvement in the earnings as well. And we would like to further promote productivity and asset efficiency so that we can secure profits. For FY 2020, we kept the target for 2018 business plan unchanged. Now I'd like to talk about the progress of status on core measures. You can see the summary here. Regarding MHPS, gas turbine, for FY 2018, there was a shrinkage of the market, but we focused on the new model introduction with competitiveness so that we can increase the share position in the market. For the gas turbine, we think that we have a good outlook going forward. Therefore, we would like to further enhance our share in the market. Regarding the reduction of the fixed cost, our efforts are going well on plan in line with the plan. But as you are aware, the steam power plants market is likely to shrink further. Therefore, we'd like to further transform this business and shift to the service business. Regarding MRJ, starting in March, we have started the flight test for the acquisition of the type certification. The growth strategy is supported by both short term and the middle to long term measures, and we are looking at the new framework for this as well. In terms of the global group management, we would like to further enhance and stabilize the measures that we have taken so far. Now I'd like to go into details about the MHPS restructuring. In the gas turbine market, as I mentioned earlier, at the moment, the market is shrinking. However, for the middle to long term basis, we believe that the market will perform well again. Therefore, we like to further enhance our product competitiveness so that we can make a share gain in the market. For the large sized models, we have the highest efficiency, 64% in the world. We have achieved this so that we can contribute to the reduction of CO2. This is the JAC type. We have already received unofficially the offer for 25 units. We are planning to make the first delivery in November year. For the next generation model, we are also promoting RLT as well and launching them sooner or later. For the middle sized small sized guest driving, we have the expected potential order for the load falling, stand alone and machine driving applications. And from the oil major companies, for their compressor machine driving purposes, we have got the product type certification. Therefore, we like to increase the order for this. And also, as new technology, in order to promote carbon free society, we are trying to achieve 100% hydrogen gas turbine. And for 30%, we have already confirmed this. And auto operation technology for the power generation facility is being promoted, and this should help contributing to the reduction of CO2 and efficient operation of the plant. Regarding steam power business, as I said earlier, up until 2020, we can maintain the utilization at a high level with the existing orders in place. But for the carbon free society, after 2021, the new installation should decline. Therefore, we'd like to contribute to the low carbon society with the existing plants. We would like to focus on the optimization of operations using AI and IoT technologies. And also, in order to contribute to the reduction of the environmental burden, we would like to expand the scope of the utilization of the low carbon and the low CO2 desulfurization equipment. And also, we like to focus on the shorter lead time inspection and provision of the service to other companies' products utilizing drones. And for the reduction of fixed cost and relocation of the sites, we are promoting our plan as scheduled, and we are accelerating those plans going forward. Next is MRJ business. In MRJ, starting in March, we have started the flight test for the type certification acquisition. And furthermore, on March 14, from FAA, Federal Aviation Administration, we have acquired letter of authorization for our flight test. So this has come to a very important stage for the TC acquisition. So we like to work closely with various business departments so that we can get the type certification. Next is the growth strategy. Regarding growth strategy, the growth strategy is supported by short term measures initiated by SBUs as well as middle to long term measures promoted by the group headquarters. For the implementation of the strategy, we would like to strategically allocate resources to growth domains, and we like to promote the usage of the common platform such as digitalization and other technology and globalization technology, we like to promote the use of the platform so that we can generate and maximize our synergy for the group. And moving on to our short term strategies. As for the mass and medium lot manufacturing, we would like to generate capital from a solidified financial platform and further promote M and A as well as enhancing our structure for manufacturing. We will also leverage our technology synergy and we have also focused on creating very competitive products versus our competition. So as a result, in comparison to 2012, our business scale has expanded by threefold. For the future, we still enjoy minimum share, in this area. So we do believe that there's potential for growth, especially for sales services, we need to strengthen. And also, there is a movement towards electrification as well as automation. So components, products and services that relate to these factors will be developed and further promote growth of the business. So for instance, in terms of technology synergy, gas turbine, which is state of the art advanced technologies that have been developed for other products can be applied to, for instance, electrical CAC and forklift automotive driving, and we can hence create more competitive products. Now for offshore wind offshore, this is expanding quite greatly, and we do believe that we can expect more potential growth. So we have a joint venture with the onshore Vista. And in twenty fourteen April, we established NHI Vistas Offshore Wind. The market share is growing steadfastly. And for our group, we believe that we can contribute to production technology, management and quality and hence, prepare for a large scale expansion as well as support the evolution in the Asian region. Now we do see some growth in areas relating to SDGs as well, and we do believe that there is growth potential in this element as well. So as you see here, we have utilized many technologies and products in this realm, and we have focused on low carbon as well as mitigating environment burden and promoting EV. And we have contributed to many aspects of society in this way. So for instance, the barrier free, passenger boarding bridge or station home doors are iconic examples of our developments. And by creating systems out of such products and also combining these systems with AI and IoT, we do believe that we can resolve many more social challenges. To give an example, in the country Australia, to order to disperse the functions of the metropolitan areas in West Sydney, we are involved in the planning of a city area, and we are considering offering solutions for energy management in this district. So we are focused on very strong solutions that are closely tied to the community. Now for total solution activities, we will focus on safety and securities. For instance, to embrace cyber attacks as well as natural disasters, the needs of safety and security are expanding within society. So in the past, we have accumulated much knowledge within defense and space, but we do believe that these can be actually applied to cybersecurity needs as well as ambient monitoring and a wide area monitoring systems. And so we would like to make sure that we offer solutions to accommodate these needs. Now moving on, I would like to explain briefly of NHI So, Future this activity, NHI Future Stream focuses on the long term potential society phenomena. So we first focused on Megascan, which is to generate business opportunities. We also have a mid- long term perspective that focuses on shifting existing businesses. This has shifted the path. And then we also have technology scouting, focuses on the necessary technologies and game changing possibilities to further embrace advanced technologies. So for the year 2018, we focused, in the area of Megascan, the innovation of technology as well as the changes in society. And we realized that the shift is happening from supply to demand or the user side. And so we believe that more and more machinery systems will be equipped with intelligence and we further probed into what we needed to do to accommodate this change. So in light of these changes, we considered the perspective from energy in the area of Shift the Path and also carbon cycling from the area of Shift the Path as well. And for technology scouting activities, we are currently coming up with new technology and business model ideas, and we will create occasion for co creation. Now from the energy perspective, as you see on the left, for Shift the Path, we had been exerting a value in providing the infrastructure. For instance, a good example is centralized power sources, and we will further enhance these activities to offer low cost and stable supply as well as focusing on low carbon. However, at the same time, the social infrastructure is changing as well and technology is ever advancing as well. So we do believe that we need to offer more value. So electrifying the logistics or automating logistic activities as well as infrastructure. So digital technologies will be utilized and we will further promote solutions that will open new gateways for new businesses as well. Now moving on to shift the path from the perspective of carbon cycling. Now from the aspect of protecting the planet, the needs for a carbon neutral society is heightening. And as you see on the very, left and rights as well, we are reaching the limit of carbon cycle within, world of nature. And so this is due to the fact that society has been very focused on exploiting fossil resources. So to further enhance the supply systems and also focus on creating much more, efficient energy, we believe that we do have to proceed with carbon neutral activities. So we will efficientize our green gas energy systems as well as focus more on off shore wind, activities and biomass utilization as well as plant factories and capturing and storing carbon. So again, we have developed many products surrounding these themes, and we would like to further create systems to promote society's carbon neutral. We are also considering a co creation, for internal and external partner, and this is, under the umbrella of NHI Future Stream. So we will focus on nurturing, venture, activities and also give back to society as a result and also nurture and cultivate the entrepreneurship mindset of our employees. So different from IT venture activities, we have technologies that are very focused on, the creation of things, and we have offered many, many utilities as well. So this is a means and ways as how we can promote, various new start Now lastly, I would like to focus on our global group management. Now, the Japanese market, which has been our main focus, is now becoming more mature and saturated and, our Thermal Power business as well has also become much more mature. So for future growth, we have to focus on areas that have potential growth on the global markets as well as make sure that we participate in such activities. So, since, the 2010 business plan, we have undergone various structural reforms and the focuses have been, as you see here, simultaneous achievement of stability and growth, autonomous management business sections of group synergies and flexible, speedy management. Now this slide is quite a conceptual depiction, but in the area of autonomous management, SBUs and group synergies, we are focusing on creating a stable portfolio. And within the MHI future stream activities, we would like to set a strong direction as a group for the mid to long term and selectively allocate our resources within the group. We also need to make sure that we further go beyond our existing business as well. So we do have a directly, guided function under our head office to and we have allocated specific budget and authority for this team so they can be mobile and agile in establishing their activities. Now for the autonomous management of the group and synergy, again, we believe that we will further be able to promote optimal management structure and at the same time, create a common platform to extend group synergy that we can share amongst ourselves. Now in the area of flexible and speedy management, we would like to be as simple and flat in terms of management as possible. But at the same time, human resources are the most treasured asset within the company. So we need to nurture, cultivate new talents, existing talents as well as enhance employee engagement. And these initiatives are underway. So this is a depiction of how we put this all together. So you see the check marks, these are still, these are in progress. And for those that still are unchecked, we will further enhance, these activities throughout 2018 business plan. Thank you.