Earnings Call: Q2 2018

Oct 31, 2017

UNIDENTIFIED Now we would like to begin the financial results briefing of Mitsubishi Heavy Industries. Thank you for coming out of busy schedules. This is the financial results briefing for the 2017. My name is Nakamura from IR Group. I would like to introduce the participant, Mr. Kuguchi, Executive Vice President and CFO. Now Mr. Koguchi will take you through the presentation and that will be followed by a Q and A session. Good afternoon. Thank you very much for coming to our financial results briefing for the 2017. My name is Koguchi, I am CFO. Now I'd like to take you through the presentation material explaining the outline of the financial results for the 2017. Please go to Page three. This is a summary of the first half financial results. For orders received, it was JPY 1,600,500,000,000.0, which is a decrease of 60,000,000,000 yen or so year on year. This is due to the MRJ orders in Aircraft, Defense and Space business, which didn't occur this year, although we did have it last year. Net sales was JPY 1,825,400,000,000.0000, which is an increase of JPY 70,000,000,000 year on year. Operating income is 38,200,000,000.0 yen There were more sales as well as expenses. And as for ordinary income, compared with the last year, there was FX gain and income from equity method investment. We had some from Mitsubishi automobile last year, but it is out of the consolidation, so there was an improvement. Ordinary income, JPY41.2 billion, an increase of JPY43 billion year on year. Extraordinary gain and losses, we have a negative JPY4.7 billion related to business reorganization. And after foreign exchange gain and income from equity method, net income was JPY13.5 billion, an increase of JPY32.4 billion year on year. EBITDA was 129,200,000,000.0 yen which is almost at the same level as the previous year. Now I'd like to take you through the breakdown by segment on the next page. As for the orders received, as I said, because we didn't have MRJ orders this year, Aircraft, Defense and Space suffered from a decrease by JPY40 billion and the other segments had more or less the same results. For sales, Industry and Infrastructure saw some increase, especially from mass and medium load manufactured machinery with terrible forklift and air conditioning and refrigeration system, we had some increase year on year. On the other hand, there was a decline in Power Systems. As for Aircraft, Defense and Space, we had an increase. As for operating income, as for Power Systems segment, as I said in the first quarter announcement, the Nuclear Power business operating income for the first half is negative or almost flat. In the second half, we are expecting a concentrated profit coming from Nuclear business. That's the structure of the business. Because of that, in Power Systems, there was a decline of 18,000,000,000 yen Industry and Infrastructure saw an increase due to the mass and medium load manufactured machinery. For Aircraft, Defense and Space, because of the increasing investment of MR and J, but at the same time, there was an increase in the profit. Therefore, we had about JPY 300,000,000 for the first half. We'd like to move on to the balance sheet on the next page. We are trying to reduce the balance sheet and try to be more effective and realize the cash flow positive. That's the basic policy of the company. For the second quarter, assets level was JPY 5 and 99,600,000,000.0. With the MRJ investment as well as the progress in the construction works of South Africa, there was an increase in the asset level for those purposes, that's why the total asset increased. On the other hand, on the liability side, versus last year, the increase in the balance sheet that I talked about earlier is covered up by the increase in interest bearing debt. Interest bearing debt is JPY 1,098,400,000,000.0, which is an increase of JPY 172,800,000,000.0 from the end of the fiscal year last fiscal year. But our cash flow has a bottom in the third quarter and increased in the fourth quarter. That's the seasonality. Therefore, year on year on year basis, there was an improvement of about JPY 100,000,000,000 in interest bearing debt. Although the equity is increasing because of the profit as well as because of the recent rise in share prices, so there was an appraisal gain from the share prices. Based on that, I'd like to talk about the balance sheet and financial indicators. With regard to equity ratio, 32.8% was the number, so relatively healthy trend And year on year, 29.8%, so there was an improvement year on year. And interest bearing debt, as I said, in the year on year comparison, it declined. Debt equity ratio is 0.51. And to back up the cash flow status is shown at the bottom. As I said, our company's cash flow trends in the negative territory toward Q3 and then Q4 it recovers and minus 186,200,000,000.0 yen for the first half, but on a year on year basis, as I said, about 30,000,000,000 yen increase was achieved. It was due to the yearly forecast, yen 100,000,000,000 is what we have. So in third quarter at the end of the third quarter, we'll see the bottom and then we are expecting to have recovery in quarter four and we are making preparations for that currently. Next, let me take a look at orders received and sales and profit by segment. Please turn to next page for orders received in Aerospace, Aircraft, Defense and Space declined, but in Power Systems and Industry and Infrastructure, there was a flat performance on a year on year basis. With regard to order backlog, it has significantly declined because previously, MRJ order backlog was included in here, but delivery is now out in the future. So specification and delivery timing is unclear. So incorporating this into order backlog is a question mark. And if you look at Boeing and Bombardier and other companies in the industry, they are excluding this from the backlog. Therefore, perhaps it's not wise to put this on the order backlog if delivery is further down the road. And so we have decided to exclude the one for MRJ. But with regard to order backlog, orders received, you can see more details on Page 16, including number of orders received. Now the sales, as you can see, in Industry, especially mass and medium lot manufacturing machinery, it has increased. Next page, please. This is operating income. With regard to Power Systems, as I said, the nuclear business has had ups and downs. And so in this first quarter, it was declined, but it was offset by industry and infrastructure. So now we have the flat level in the But for the nuclear business, we are expecting it to catch up by the end of this fiscal year. So on a full year basis, we're expecting flat business. And based on the recent orders received, let me talk about full year forecast because we made some revisions. Please take a look at Page 11. With regard to orders received, 4,500,000,000.0 was the previous forecast, but it has reduced to 4,000,000,000,000 yen because of the power system from 1,950,000,000,000.00 yen to 1,450,000,000,000.00 yen and there were two, three large scale projects. Because of environmental assessment and financial closure, we are now clear that it will not be completed by the end of this fiscal year. So this was deferred to the next fiscal year. But for the thermal power system, the market itself has been quite challenging and has continued to remain that way. So JPY 500,000,000,000 was reduced from orders received forecast for the Power System. And net sales yen 4,150,000,000,000.00 was reduced down to 4,050,000,000,000.00 yen down by 100,000,000,000 yen because of the orders received for Power, including those for the short term, things were challenging, so net sales were reduced by 100,000,000,000 yen And then the operating income, because of the recent developments, the forecast of $230,000,000,000 yen was reduced to 180,000,000,000 yen in forecast. And majority of this is accounted for by Power and for JPY141 billion was reduced to JPY100 billion. And also there was some trouble in the industry business, but that was completed and some cost increase was expected and 85,000,000,000 yen was reduced down to 80,000,000,000 yen So in total, 50,000,000,000 was reduced from operating income and ordinary income was reduced from $210,000,000,000 yen to 170,000,000,000 yen and net income from 100,000,000,000 yen to 80,000,000,000 yen and ROE from 5.5% to 4.4%, EBITDA $430,000,000,000 yen to $370,000,000,000 yen That was the downward revision. For free cash flow, there was some backup, including asset management. So we are expecting the flat forecast of 100,000,000,000. And as for dividend, in the directors Board of Directors meeting today, we've decided to pay interim dividend. In the second half, the there was an integration of the shares, pre integration, 12 per share and after the integration, 120 per share for the yearly dividend. And the segmental forecast for the Power Systems, orders received, net sales and operating income, forecast has been reduced and downward revision has been made. That's what I said. And that's all from my side. Thank you.