Earnings Call: Q1 2018

Jul 31, 2017

Thank you very much for joining out of your busy schedule. It is time, so we would like to begin the meeting for financial results for first quarter FY twenty seventeen. My name is Nakamura from the IR Group, and I would like to serve as moderator. Joining me is Mr. Koguchi, DE Executive Vice President and CFO. Well, first of all, CFO Koguchi is going to give an explanation with regard to the financial results for first quarter and followed by question and answer. And we are planning to have a question and answer for about one hour. So we would like to close the meeting by 04:30. So I would like to ask for your cooperation. Now Mr. Koguchi is going to give the explanations with regard to the financial results of the first quarter twenty seventeen. Well, good afternoon. My name is Koguchi. I'm in charge of the financial finance. And thank you very much for coming out of your busy schedule. So please refer to the materials because I'm going to give explanations for the financial results for first quarter for fiscal year twenty seventeen based on the materials. Please look at Page one. First, the summary. And as for the orders received, it's 698,100,000,000.0 yen which is a minus of $226,000,000,000 yen on your own. And I am going to explain later on, but last year, there had been a big order for the power. So this year, there was no big orders. So that is the main reason. For the net sales, JPY888 billion, so increased by JPY40 billion year on year. And then on operating income was a little bit sluggish, which I'm going to explain later on. Power in the Power Systems were tentatively due to the differences in the size of the nuclear power and the MRJ, comparing year on year, that the expenses for the research is increasing. So that is why the operating income stands at JPY 16,100,000,000.0. In first quarter in our company, we are going to start a little bit sluggish. And so year on year decreased by JPY 8,700,000,000.0. Ordinary income, 18,100,000,000.0 and net income, 4,400,000,000.0. So that the ordinary income is more than operating income. One of the reason is because of the foreign exchange gain and income from equity method investment increased. So for the fiscal year, the foreign exchange and so the income had the loss of about JPY 19,000,000,000 for the Mitsubishi Auto, and so that was negative. However, now for this fiscal year, it went up on the positive side. So that is why the ordinary income increased as well as net income. Looking at this by segment, first of all, Power Systems orders received on a year on year basis, this was down by about JPY150 billion. This is due to the timing of the deals included. I will explain later, but for Power Systems, the environment is relatively tough. And for the net sales, it's more or less the same as the previous year. Operating income was JPY600 million for Power Systems. This was low last year as well, but it is struggling mostly due to the nuclear power. Next line, Industry and Social Infrastructure. The order received was JPY $384,000,000,000, down by JPY 15,000,000,000, but generally a good trend. We are on Page four right now. And in terms of net sales, it was up by about JPY 50,000,000,000, JPY $434,000,000,000 and the operating income was JPY 16.1. Aircraft, Defense and Space. Depending on how the defense projects come in, the orders received a fluctuate, but it was JPY86.4 billion, down by JPY59.4 billion. But net sales was JPY160 billion, which was basically the same as last year. There were some, expenses increase, but the Tier one cost reduction is progressing. So all in all, we ended this business line in a positive number. So based on that, orders received and net sales add up to the numbers that I mentioned in the previous page. On the next page, Page five, you can see the balance sheet. As for the balance sheet, the basic idea is trying to compress. Compared to the previous fiscal year end, there was an increase of about $442,000,000,000, excuse me. South African project continued to progress. And for Hitachi, we have the right to invoice or charge and this value is increasing. In terms of inventories, some inventory buildup in the beginning of the fiscal year happened. We do not believe it's a good idea to, have a high level of inventory, so we need to make further effort to compress the inventory. But excluding the South African project issue, more or less all the numbers are basically the same as the previous year. Moving on to the second half of this slide, there is cash flow. Operating cash flow, 79,200,000 negative. This is Page six and free cash flow is negative 115,000,000,000 yen and investment cash flow was minus 36,000,000,000 The cash flow tends to be negative in the this quarter. The investment is decreasing and the free cash flow is more or less the same as the previous year, just up by 9,000,000,000 yen or so. For the full year forecast, JPY100 billion is planned and this has not changed from the last time. Interest bearing debts, while free cash flow was approximately JPY100 billion negative. So on a year year on year comparison, this was JPY1.042 trillion. And the balance sheet, PL and cash flow, putting them all together, we have the equity ratio, which is one of the main financial measures, which ended up at 32.3%, which is more or less the same as the previous year. And we have seen slight improvement. And then the equity ratio was at 0.49%, which also showed a slight improvement on a year on year basis. I have talked about the free cash flow, 100,000,000,000, positive. We will continue to maintain this number because the situation has not really changed from the previous forecast. So we have not really changed the forecast for the interest bearing debt, which is JPY $580,000,000,000. Now Page seven, please. I would like to explain by segment about for the orders received, it's about a decrease of JPY $220,000,000,000. And please look at the orange portion to see the causes. And that is the because of the large scale plant order was less compared to the previous year. And the green portion, I and I, the industry and infrastructure, relatively speaking, it had a smooth going. That is what we thought. And as for the commercial ships, there had been no order for this fiscal year. However, there it seems that the metals machinery will hit already the bottom and is going is likely to increase. And also the turbochargers show some increase, and so that compensated the commercial ships. And as for the Aircraft, Defense and Space, it depends on how the orders will be received. But through the year, yes, it seems that there's no particular program. So that the order backlog, well, the orders received is about the same. So the order backlog is decreased because the it doesn't include the mass manufactured products. So the green one, if you plus about JPY 1,000,000,000,000, then you I think you will be able to get the total picture. Now for the net sales by segment, it is as shown here on this slide, Page eight. But there's no specific things to be noted. So if you can look at this Page eight, then I think you will be able to understand. But the order with related to the middle machineries is recovering. However, in the past, it was very tough. So in terms of the sales, it is still on decrease. But this the Metals Machinery, well, there had been some expenses reduction. However, because of the, well, Metals Machinery hit the bottom in the order, so we hope that we will be able to see recover. However, for this fiscal year, still the sales is impacting negatively. Next is on Page nine, which is the operating income by segment. And you can see that the Orange Power System has decreased largely. And that well, the absolute number is very low. So the impact is not so large, even though the operating income on orange part seems to have decreased greatly. And then there is a recovery, so there's not so much concern. The green portion, which is Industry and Infrastructure, is about the same like previous year. And the Aircraft, Defense and Space, the MRJ development cost in whole year, there seems to be a tendency of minus. However, compared to the 4Q, well, it is decreasing. However, year on year compared to the first quarter previous year, it's about the same. And so from that then Page 10. Page 11, the summary of forecast. So first quarter usually sees low sales and low orders. But based on the explanation that I have given, we do not believe that any major changes happened from the beginning of the year when we made the plan. So we decided to keep the numbers as they are. So orders received at JPY 4,500,000,000,000.0 net sales, 4,100,000,000,000.0 operating income, $230,000,000,000 ordinary income, $210,000,000,000 and free cash flow, 100 and dividend, 12. You can see the segments divided on the next page and they will stay the same as well. But because of the business, reconfiguration, based on the most current segment, we have to reallocate some of these numbers from the previous year. That concludes my brief explanation of the Q1 result.