Earnings Call: Q3 2018

Feb 6, 2018

At this point, we'd like to start the financial results meeting. Thank you very much for being here out of your busy schedules. At this point, we'd like to start the earnings results briefing for the first to the third quarter twenty seventeen. My name is Nakabura. I'll be serving as a moderator today. Allow me to introduce the speakers. To the left is the President and CEO, Miyanaga. Sitting on the right hand side is Mr. Koguchi, Executive Vice President and CFO. Today, first and foremost, our CFO, Kokuchi, will give you the presentation for the first to third quarter financial results, and then we take questions. We would like to spend the next one hour. Good afternoon, ladies and gentlemen. My name is Koguchi. I am responsible for Financial Affairs within MHI. Thank you very much for being here to participate in this earnings results briefing for the first to the third quarter twenty seventeen. We'd like you to take a look at the colored sheet of paper. So based on this material, I'd like to give you a quick overview of the financial results. Please move to the page. This table outlines our financial results. First is orders received. Compared with the previous year, there have been the decrease of about 80,000,000,000 yen It now stands at 2,577,600,000,000.0 yen And then the net sales was 2,851 billion yen increase of 157,000,000,000 And then it is the operating income, let's see, 2.8%, which is increase of the about the 11,500,000,000.0 yen Then the ordinary income was 91,100,000,000.0 yen which is a large increase year on year. And then the ordinary income was higher than operating income, so it is the positive of about the 11,500,000,000.0 yen So I'd like to share with you the result, the background here. The for the interest rates, interest income and the also the foreign exchange, there has been a positive figure. And also income from equity method investment for the Mitsubishi Motors. Last year, there was a major loss, but this year, we don't have to have that kind of loss. So that means that the 1,300,000,000.0 yen positive figure, So that means that the compared with the previous year, there was a change of positive 40,200,000,000.0 yen which resulted in 91,100,000,000.0 yen And then the extraordinary gains and losses, it was negative 8,800,000,000.0 yen And so for the business structure improvement expenses, there was 10,800,000,000.0 yen And SP and TT and other so called the business improvement activities are related to this. So some of the temporarily the losses have been recorded for the extraordinary losses. So the total figure will see the JPY 24,700,000,000.0 for the profit attributable to auto owners of the parent, and this is the positive improvement of JPY 36,000,000,000 in the there have been an increase of $15,014,600,000,000.0 yen increase over the previous year, which is EBITDA. And then moving on to the segment information. I talked about orders received. There was a decrease of about 80,000,000,000 yen and then this shows the breakdown. Power Systems and also the Aircraft and Defense and Spaces, there have been negative growth. And in some cases, the business environment was not very good, as you're well aware. So that means that the orders received had not been very good in these segments. And then for the Aircraft and Defense and Space, in the fourth quarter, there have been a concentration of the defense related orders. So there have not been a major change, but when I say JPY44 billion, about half of this have been related to MRJ. In the last year, there have been the recognition, but here, they so there was no major shift in the fundamentals. Moving on to the sales. For three domains, there have been an increase, especially for Infrastructure and Industry, I and I. The figure was JPY118.89 billion, which means that there have been the major growth in the mass production products. And then for Aircraft, Defense and Space, the net sales grew by 43,200,000,000.0 yen Then the operating income, the Power Systems, 40,400,000,000.0 There was a slight change in the excuse me, the 40,400,000,000.0 yen which is a slight decrease. And there had been the delay of the electrical constructions. So on the fourth quarter, the large amount of income will come into the fourth quarter. So the if you consider this impact, the for the MHPS if you include MHPS, it is higher than the previous the share in last year. And then in the Industry and Infrastructure, this again is 40,400,000,000.0 yen operating income and the contribution for that is the again, the increase in the mass and medium load manufacturing machineries. And then for the Aircraft and Defense space, for the Defense and Tier one business, Tier one business have been progressing well, but because of the M1, there was a problem. So the result, the total final figure was 2,800,000,000.0 yen which is about the same as the previous year. Then moving on to the balance sheet. Please move on to the next page. We have been working on the improvement of the quality of balance sheet. And I am quite sure that all of you are quite aware of what we have been doing for the improvement. As of the end of the third quarter, the total asset was JPY5884.9 billion and compared with the previous year. And also, as of the 2017, there was an increase. Until the end of the fiscal year, the balance sheet is decreasing. So that would be the result of the payment of the receivables. And then because of the MRJ and the South Africa, again, the total asset side would be increasing. So I always pay attention to this balance sheet in terms of the soundness of the quality of the balance sheet, which is the inventory. So whether it has been covered by the advanced payments received on contracts and the so that means that the trade receivables should be in line with this. So that's something we have to seek for balance. So this is about 1,500,000,000,000.0 yen or lower, which is slightly over 1,400,000,000,000.0 yen So this is over the figure of the inventories. So that means that the balance sheet has not been deteriorated. So as of the end of the third quarter, this is considered the bottom in terms of the balance sheet. So interest bearing debt at this point is $1,215,000,000,000 yen So it is slightly less there has been the increase of about the 300,000,000,000 yen But still, toward the end of the full year, we would be able to reduce this. So we have been using the short term borrowings and the commercial papers. And then on the net the assets, there has been an increase. And then as can be seen here, our net worth has been increased, and we have the increase of the other comprehensive income because of the increase of the investment securities. Moving on to the next page on the in the lower part. So equity ratio is 31.3% interest bearing debt, $1,215,000,000,000 debt to equity ratio, 56%. So compared to the March, it has been slightly smaller. But compared to a year earlier, we see an improvement in all of these items. In terms of cash flows, as you can see, free cash flows, minus 268,500,000,000.0 yen The end of the third quarter tends to be the bottom. So when we compare the bottom and bottom, yen 125,300,000,000.0 more. And in terms of free cash flow, as will be explained later, for the financial strategy of Mitsubishi Heavy Industries, This is considered to be one of the key items. And so we are making a detailed analysis in managing this. And so far, we are proceeding as planned. So 100,000,000,000 yen target for the full year. We believe that we are getting closer to achieving that. Moving on to orders received and order backlog as well as net sales and operating income by segment. I gave you the details already. And in terms of orders received, the orange portion, Power Systems and purple. Aircraft, Defense and Space segments saw a decline year on year. Altogether, a little less than 80,000,000,000 yen less order backlog. As we explained at the second quarter earnings briefing, MRJ related order backlog has been excluded from the information because that's going to be down the road. Excluding these differences, figure is about the same as in the previous year. Net sales by segment. In all segments, we saw an increase year on year, especially in Industry. As I explained earlier, forklift trucks and turbochargers and other mass manufactured products are doing well. Operating income by segment. For Power Systems, in Nuclear Power, due to a delay in construction work, the profit recognition has been pushed back, resulting in decreased. But excluding that, as for thermal power, things are moving as planned. As for industry, as I explained earlier, we see contribution from the mass produced products. So overall, forecast for 2017 at the time of the second quarter, the thermal power system and other factors resulted in the downward revisions. But looking at the end of the second quarter results, we believe that we don't see the need for the revisions to be made from the current forecast. So orders received 400 net sales billion yen net sales, yen 4,050 billion. Operating income, 180,000,000,000. Ordinary income, 170,000,000,000. Profit attributable to owners parent, 80,000,000,000. ROE, 4.4% and EBITDA, yen $370,000,000,000. And as for dividend, we are keeping as is. And you can see the impact of the exchange rates. And as for the segment information, you can see some notes at the bottom. And before I close, in recent media reports, there are some comments that there is an issue with our financial structure. And for analysts, I'm sure you are well aware of what's shown here, but I'd like to once again go over the efforts being made to improve on our financial structure. As you are aware, used to be that our balance sheet and cash flows were not being receiving much attention. But after the Limon crisis, with the liabilities growing, we had some concerns regarding the global competitiveness. And so we have shifted to the cash flow management. And in 2012, in the business plan and in the 2015 management plan, we have stressed the improvement efforts on the financial structure, MRJ development and the commercial aircraft or the commercial ship the cruiser ship projects, I'm afraid, had been the source of concern. But despite this, we have been improving on our structure. The green bars represent the interest bearing debt in 2015. In fiscal twenty fifteen, UniCarrier acquisition was made. And UniCarrier balance sheet borrowing and others resulted in increase in the interest bearing debt. But since then, we have been able to make up for the difference in fiscal twenty sixteen. And for this year, with the free cash flow of 100,000,000,000 yen being achieved, we can further reduce the interest bearing debt. In other words, the balance sheet improvement is what we are working on today. Through this, we want to enhance our global competitiveness And at each of our divisions, be it sales or production, efforts are being made, including the shortening of the delivery. So as to contribute to the cash flow so as to enhance our financial structure. And we believe that these steady efforts are important for us to win in the global competition. And that mindset is being spread throughout the company group. And we do have the targets for each domain set. And whether it could be implemented as committed is what we are closely monitoring. We are continuing with these very steady efforts, and I'm hoping that you would appreciate these efforts being made. And that is the reason why we added this sheet. Thank you very much for your attention.