This is Maruyama, in charge of Finance and Accounting of IHI Group. I will explain the financial results of the Q2 of the fiscal 2020 followed by the full year forecast based on the PowerPoint presentation material disclosed at 3 p. M. Today. Please turn to Page 4.
This slide shows the consolidated results, including the orders fiscal year, and the effect of applying the standard is indicated at the top left corner of the relevant items. Orders received were 426 800,000,000 yen down 189,100,000,000 yen year on year. As shown at the top right, the average exchange rate for sales during the period under review was 107.24 yen to the U. S. Dollar.
There was 1.63 yen appreciation from 100 and 8.87 yen of the previous corresponding period. Net sales stood at 4 182,800,000,000 yen down 112,100,000,000 yen or 18.8 percent year on year, mainly due to the impact from the spread of COVID-nineteen and also as a result of effect of applying the accounting standard for revenue recognition. Operating profit was negative 6,100,000,000 yen down 16,600,000,000 yen year on year, mainly due to lower sales despite our effort to reduce fixed costs and others. Ordinary profit deteriorated to negative 10,000,000,000 yen due to factors such as increase in foreign exchange losses. Profit attributable to owners of the parent was a loss of 9,500,000,000 yen Please turn to Page 5.
Orders received and order backlog by segment. Orders received decreased significantly in all the reportable segments except for social infrastructure and offshore facilities. The decrease in resources, energy and environment mainly came from the boilers business that had large projects in the same period of the previous year. The decrease in industrial systems and general purpose machinery was due to factors such as the reverse effect of large scale projects in the transport machineries business and the impact from the spread of COVID-nineteen on the vehicular turbochargers business as well as the thermal and the surface treatment business, Aero, Engine, Space and Defense reported a significant fall in the civil Aero Engines business. Overseas orders received amounted to 166,200,000,000 yen or 39% of the total orders.
Overseas ratio fell by 9 points from the previous correspondent period affected by the boilers business and civil aero engines business. Order backlog stood at 1,000,000,000,130 point 5,000,000,000 yen down 331,400,000,000 yen from the end of the fiscal 2019. Order backlog decreased significantly in Aero, Engine, Space and Defense since we have changed the calculation method of orders received and order backlog in the Civil Aero Engines business as announced on October 26 in preparation for the adoption of IFRS upon closing the current fiscal year ending March 31, 2021. I'd like to explain in details on the next slide. Please turn to Page 6.
Orders received and order backlog in the civil aero engines business used to be calculated from expected future sales based on our customers' production plans, etcetera. Under IFRS, it is required to disclose the amount of recognized performance obligations and the transaction price allocated to remaining performance obligations. Therefore, we changed the calculation method on this occasion to better represent the remaining performance obligations, in other words, order backlog. The impact of this change on the order backlog at the end of fiscal 2019 is 269,000,000,000 Please turn to Page 7. Net sales and operating profit by segment.
This slide also shows the effect of applying the accounting standard for revenue increase in the boilers business. Operating profit made a turnaround from the loss due to the increase in the boilers net sales and a mostly stabilized decline in profitability previously experienced by the Power Systems, boilers and the plants businesses. Social infrastructure on offshore facilities resulted in sales increase in the urban development business and a decrease in the bridges and autogates business. Operating profit for the segment was almost flat year on year in a mixed picture of the increase on higher sales in the urban development business and the decrease on lower sales in the bridges and water gauge business, among others. Industrial Systems and General Purpose Machinery decreased sales due to lower sales in the vehicular turbochargers business and the thermal and surface treatment business despite higher sales in the transport machinery business.
Operating profit for the segment was almost flat year on year as a result of increase in the transport machinery business and a decrease in the thermal and surface treatment business linked with the changes in the net sales, lower sales in the vehicular turbochargers business and a positive effect from the progress we made in reducing fixed costs. Aero engine, space and the defense reported significant decrease in net sales in the civil aero engines business due to the effect of applying the accounting standard for revenue recognition in addition to the decline in demand for aero transportation following the spread of the COVID-nineteen. The segment reported operating loss despite our effort to reduce fixed costs and others due to the net sales plunge. In accordance with the moderate recovery trend in the civil aero engines business, its loss expanded from the Q1 of this year owing to the increase in the number of newly made engines delivered that carry heavier cost burden in the initial stage of mass production. Overseas sales were 187,300,000,000 yen representing 39% of total sales.
The year on year decline in overseas sales ratio is attributable to lower sales in the civil aero engines business. Please turn to Page 8. This slide shows the breakdown of the 16,600,000,000 yen year on year decrease in operating profit by segment. The spread of COVID-nineteen brought a negative impact of 34,000,000,000 yen to industrial systems and general purpose machinery and aero, engine, space and defense. Net sales decreased in the vehicular turbochargers business and the thermal surface treatment business due to the decline in automobile related demand and operating profit decrease in the civil aero engines business due to the sharp and significant decline in aero transportation demand.
Sales status of the civil aero engines business and the vehicular turbochargers business will be explained using the following slides. Changes in net sales had positive effect of 1,400,000,000 yen Increase in boiler maintenance and regular inspections in resources, energy and environment was among the contributing factors. Changes in construction profitability brought 6,800,000,000 yen positive impact, which is attributable to mostly stabilized decline in profitability previously experienced in some projects in Resources, Energy and Environment. As described on Page 37, the Elba liquefaction project has reached a key milestone of substantial completion of all facilities in August. Our customer has commenced commercial operation.
Changes in foreign exchange rates had a negative impact of 300,000,000 yen Changes in SG and A added a positive impact of 10,700,000,000 yen in total with an ongoing negative impact from applying the accounting standard for revenue recognition was 1,100,000,000 yen as a result of expanding scope of percentage of completion method application and deducting compensation for damage and others from sales, which used to be recorded as non operating expenses. Please turn to Page 9. Quarterly net sales generated by the Civil Aero Engines business. Quarterly net sales in the Q2 were 24,400,000,000 yen But if we exclude the impact of adopting the accounting standard for revenue recognition, net sales for the quarter were 42,800,000,000 yen showing a recovery trend from the Q1. Aero On the other hand, we recognize that circumstances remain difficult for international flights due to various immigration Most recently, we have been observing a moderate recovery trend with bottoming out of unit sales of small and medium sized newly made engines that offer high fuel efficiency and spare parts sales.
However, we expect that it will take a few years to make a full recovery. Please turn to Page 10. Quarterly numbers of deliveries and the net sales by region for the vehicular turbochargers business. Net sales in China have been on a recovery trend since the Q1. Other regions started to follow China in the second quarter.
But all in all, both number of deliveries and net sales recovered to the same level as the previous corresponding period. Please turn to Page 11, nonoperating income and expenses. Share of profit and loss in Equity Method Affiliates was up 2,800,000,000 yen year on year to 400,000,000 yen as a result of improved P and L in Japan Marine United. Please turn to Page 12, extraordinary income and losses. Extraordinary income includes 1,600,000,000 yen in gain on sales of noncurrent assets generated by selling land, etcetera, owned by our subsidiary.
Please take a look at Page 13. This is consolidated balance sheet. Balance of interest bearing liabilities at the end of the quarter has increased by 33,500,000,000 yen year on year to 521,700,000,000 yen which is shown in the middle of the graph. Debt equity ratio is 1.41x. Equity ratio is 20.5%, improvement of 1.8 percentage point.
This is due to application of accounting standard for revenue recognition, resulting in JPY 27,400,000,000 increase to retained earnings at the beginning of the fiscal year. Sum of payments associated with civil aero engine programs were posted as assets and amortized over the course of certain period. With the application of accounting standard for revenue recognition, the amortization period has been changed. Please take a look at Page 14. This is consolidated cash flows.
Operating cash flow resulted in negative 55,700,000,000 yen due to increase in expenditure of 22,800,000,000 yen from the same period last year. Investment cash flow is in a negative of 26,900,000,000 yen due to decrease in expenditure by 12,600,000,000 yen year on year. There was an increase in payment due to Tsurugashima Works completion. However, it was mitigated by partial freezing and control of current fiscal year CapEx. As a result, free cash flow is negative 82,700,000,000 yen Please turn to Page 15.
Upper table is results of R and D, CapEx and depreciation and amortization. R and D and CapEx amount were decreased due to partial investment fees and control. Bottom table is forecast for FY 2020. Excluding those investments that are mandatory from safety, compliance and quality perspective and business portfolio transformation, we are planning to continue freezing and controlling investment. Please go to Page 16.
This is a geographical breakdown of overseas sales explained in Page 7. Mainly due to decrease in sales of civil aero engine, North America saw a big drop in revenue. For a forecast of the consolidated results for FY 2020, please go to Page 18. Business environment surrounding our company is still unclear. However, we announced full year guidance with certain caveat attached.
With regards to COVID-nineteen, we assessed with information available to us. Starting from FY 2020, we apply IFRS. Therefore, our guidance is created based on IFRS. For your reference, we have provided JGAAP based one as well. Our assumption for foreign exchange rates for second half are 105 yen for U.
S. Dollars and 120 yen for euro. Our forecast for orders received is 1,100,000,000,000 yen. Revenue is 1,150,000,000,000 yen. Operating profit is expected to be 20,000,000,000 yen.
Profit attributable to owners of parent is 1,000,000,000 yen in profit. Against fiscal year 2019 results, it is going to be a decrease in both revenue and profit. FY 2019 result is presented in IFRS based as we have announced in October 26 about our early application of our IFRS. Foreign exchange sensitivity is 300,000,000 yen for every 1 yen exchange against U. S.
Dollars. Please go to Page 19. Due to COVID-nineteen, big drop is expected mainly in civil aero engine, which leads to JPY 110,000,000,000 58,000,000,000 decline in revenue and operating profit, respectively. Meanwhile, Resources, Energy and Environment Business factors in life cycle business expansion, such as maintenance and regular inspection and decrease of low profitable projects. At the same time, company level SG structure reinforcement are reflected here.
Furthermore, we are thinking of selling properties in order to source money for necessary investment to transform business portfolio. We factor in proceeds from sales of fixed assets at operating profit level and planning to secure 20,000,000,000 yen profit. Impact of COVID-nineteen will be explained from next slide. Please see Page 20. Civil aero engine has been experiencing sharp and significant decline in demand for aero transportation.
Revenue is almost halved year on year, in particular due to decline in sales of profitable aftermarket and a loss from volume variance of operation due to decrease in the production. According to IATA, International Air Transport Association, the global aero transportation demand in 2020 will decrease 66% year on year, and recovery is expected from 2024. Please see Page 21. Vehicular turbocharger sales did not recover to last year's sales level, except China, due to decline in automobile related demand. Meanwhile, thanks to increase in sales in China, driven by market recovery and reduction in fixed costs globally, we are expecting to see increase in profit in the vehicular turbocharger business as a whole.
Thermal and Surface Treatment business profit is expected to decline due to decrease in sales of contract processing services for automotive parts. In other business segments, orders received and sales are expected to decrease to a certain extent due to customers' postponement and revision of their capital investment plans, but impact on profit is expected to be immaterial. Next, Page 22. This is orders received for each segment. Resources, Energy and Environment business is forecasted to be flat growth from previous fiscal year.
Social Infrastructure and Offshore Facility business will decrease due to nonexistence of large overseas bridges and water gates project this year. Industrial system and general purpose machinery business is expected to decrease in transportation machineries and vehicular turbocharger, thermal surface treatment. Aero engine space and defense businesses decrease is attributable to civil aero engine. Please go to Page 23. This is a list of revenue and operating profit full year forecast.
Factors affecting changes in operating profit will be explained in next slide. Let me talk about revenue change here. Resources, Energy and Environment business is expected to grow, thanks to boiler and power system. Social infrastructure and offshore facility is going to be flat. Industrial system and general purpose machinery's revenue decrease is due to vehicle turbocharger and thermal and surface treatment.
Aero, engine, space and defense is expected to drop significantly due to decrease in civil aero engine because of decrease in aero transportation demand and application of accounting standard for revenue recognition. Please go to Page 24. This slide talks about changes in operating profit from the result of FY 2019 in relation to each affecting factors. In Resources, Energy and Environment Business, in addition to growth in boiler revenue and decrease in lowprofitable part system boiler plants businesses, reduction in SG and A contributes to the forecast of 12,000,000,000 yen profit increase. Social Infrastructure and Offshore Facility will grow profit, thanks to transportation system profitability improvement.
Industrial System and General Purpose Machinery segment will be impacted by spread of COVID-nineteen, but at the same time, SG and A reduction will offset it somewhat, bringing segment profit to decline of 1,000,000,000 yen Aero, Engine, Space and Defense, while it enjoys reduction in fixed cost, it will be impacted greatly from spread of COVID-nineteen. Therefore, we are expecting this business segment profit to drop 55,000,000,000 yen from previous fiscal year. Full year information, changes in other income expenses column in adjustment line includes the effect of asset sales to secure funding resources for investments to transform our business portfolio and a buffer against the risk of performance volatility. Please go to Page 25. IHI aims sustainable increment of dividends as basic stands and sets target consolidated dividend payout ratio as around 30%, taking into consideration a broad range of factors, including investments for improvement of corporate value enhancement and reinvestment of equity capital.
However, in view of the profit level in the forecast for the current fiscal year, as we have explained today, we regret to announce not to pay a dividend in FY 2020 forecast. Financial results by segment provided hereafter are already explained today, so I would like to skip them. Also, please take a look at appendices at your leisure time. This concludes my presentation. Thank you.
I am Ide, President of IHI Group. I would like to talk about the reviews on our medium term management plan. Please turn to Page 2. As we review the medium term plan on this occasion, we would like to implement initiatives under the name of Project Change. As you know, group management policies 2019 covers the 3 years from FY 2019 to FY 2021.
But due to the impact of COVID-nineteen, business environment continues changing dramatically that we have set a preparation and transition phase to transform ourselves, which is named Project Change from FY 2020 to FY 2022 as a step toward the next medium term management plan. During the 3 year period, FY 2020 to FY 2022, we will carry out initiatives toward the future. Group Management Policies 2019 set a long term direction. And in line with that, we have been implementing various initiatives. Basic concept under the Group Management Policies 2019 will be carried on.
The lower half of the slide shows the focus points under project change. I mentioned the following 4 challenges in my management review when we announced the results for FY 2019 in May: determining post COVID business direction, creating growth businesses, overcoming operating climate change and improving cash flows and strengthen financial position. Initiatives to address them are as follows: returning to growth trajectory through further strengthening of our earnings foundations and expansion of life cycle businesses shifting to resilient business structure to survive and thrive in the changing business climate through human resource reallocation and introduction of new way of working as part of our financial strategies, strengthening cash generating capabilities, optimum allocation of funds, robust financial position. Regarding the creation of growth businesses, redefining growth businesses for the creation of next core businesses. These are the focus under project change.
Please take a look at Page 3. And these are the agenda for today. And going to Page 4, so this is the management targets. FY 2019 excuse me, the group management policy 2019 is going to be accomplished 1 year after to the original plan. As was explained, the 2020 net sales forecast is JPY 1,150,000,000,000 operating profit, 20,000,000,000 yen Against this, our management target for 2020 is going to be net sales of 1 point 4 trillion yen or so, operating profit margin of 8% and over and ROIC is 10% and over and CCC, 80 days.
So these are the management targets for FY 2022, and we will be working towards that. Moving over to Page 5. And this page is talking about the journey to achieve the management target. And for the FY 2020 forecast, we are expecting that the civil aero engine to see a significant drop in revenue and a vehicle turbocharger is going to see the drop in top line but increase in profit. On the other hand, we are seeing the lifecycle business expansion and the we have done the SG and A and fixed cost reduction, which led to the cost structure reinforcement.
And we are starting to see the improvement in the revenue, thanks to the business structure reform. And we have stated the 4 performance recovery driver. The first one is aircraft and automotive industry recoveries. So due to the recovery from the COVID-nineteen, we are expecting that the aero engine business to hit the bottom in the second quarter. But FY 2020, it is short in recovery to the level of FY 2019.
However, having said that, the older countries are expecting to see the recovery in the domestic routes mainly. And if that happens, then the engine program regime that IHI take a part in are having a very good fuel efficiency and durability. So we're expecting that our engines will be having enjoying the priority in being used. So we're expecting the recovery. And for the vehicular turbocharger, as the automotive sales improve, our sales is expected to improve as well.
So FY 2020, we are reinforcement. This year, we already have seen the outcome. That is the cost reduction, SG and A and fixed cost reduction. Those benefits, we do not believe that are the one off. In FY 2020, the vehicular turbocharger performance is doing well.
That is because we have reduced the breakeven point and we will be enjoying this in the next fiscal year as well. Businesses where IHI cannot exercise its ownership, we will continue to take drastic measures. And we're going to shrink the low profitability business and products and shift them over to the high profitability business and the products for the people as well as the resources. And 4th, the life cycle business expansion, we will be explaining about that later.
Please turn to Page 6. Further strengthening of our earnings foundations. On the previous slide, I talked about reinforcing cost structure and a business structure reform. Since FY 2019, we have been implementing foundations. We are determined to further drive those initiatives to transform ourselves into a business structure that is resilient and robust against the external factors.
On the cost structure front, we will continue our cost reduction thoroughly across the value chain. On the fixed cost front, we will build a structure which is less susceptible to fluctuations in sales through human resource allocation based on the capacity utilization levels among production site and efficient use of production facilities across the group. Looking at our business structure reform, we will further drive resource shift for life cycle businesses and revitalizing revitalization and reorganization of less profitable businesses. At the bottom, you see strengthening of risk management. As for the large scale projects in Resources, Energy and Environment business area that often resulted in downturns, we have completed addressing issues to eliminate loss making project.
Going forward, we will further step up our risk management to prevent downturns from happening in a stringent manner. Please turn to Page 7. Expansion of life cycle businesses. Under the Group Management Policies 2019, we upheld expansion of life cycle businesses in all four businesses to drive further strengthening of our earnings foundations, and we have been carrying out initiatives for that. I'd like to briefly talk about the achievements to date and activities going forward.
1st, Resources, Energy and Environment business area. Boilers for coal fired thermal power plants and other existing core business is going to face difficulties amid the carbon free trend. It will be more difficult to make new investments in this field. We moved ahead of the time and have drastically reallocated the majority of engineers from new installment to life cycle businesses since FY 2017. As a result, rolling out of preventive maintenance services, level HNGX, improvements and upgrading constructions in South East Asia have been steadily progressing.
Recently, there is growing demand for higher efficiency, fuel transition to biomass and others, stabilization of renewable energy. We are also making progress in providing services on these fronts. Next, social infrastructure and offshore facilities business area. We have been making steady progress in large scale and advanced corrective maintenance. Going forward, we will tap into comprehensive corrective maintenance services and preventive maintenance services while we take creative approaches in pursuit of meeting our customers' needs, such as shortening of lead times, advancing in inspection and diagnostic technologies, to name a few.
Next, Industrial Systems and General Purpose Machinery business area. We have been working on business process transformation. Our first step forward is to roll out the business into Southeast Asia. Aftermarket services in the vehicular turbochargers have not been the primary focus until recently, but we started to drive them in earnest this fiscal year. Lastly, Aero Engines, Space and Defense Business Area.
The Civil Aero Engines business is in a very tough are expanding support scopes and advancing the level of logistics support. On the space front, as you know, we have entered the launch services business. Through these initiatives during the period of project change, we are moving forward to achieve 30% increase in net sales for life cycle businesses. Next, Page 8.
Shift to operating climate change resistant business structure. We have number of initiatives lying out here. So the first one is allocate human resources flexibly and optimally in line with business portfolio. So as we have explained, we are going to expand the life cycle business using DX by promoting other people mobility. And the second point is motivate employees or the 3rd line, attract professionals.
The 2nd job, outside and inside of company or the carrier shift. Those are the kind of things that we are promoting at the moment. And also, in terms of acquiring the professional talent, by creating other high skilled professional mechanism in place, we are trying to invite other people from outside of the company. And at the very bottom, hybrid teleworking and office work setup, October 16, we have created a new organization called the Work Restructure Planning Group underneath the President. And they will be thinking about the new way of working a style amid the COVID-nineteen and post COVID-nineteen era.
And talking about the financial strategies, as you can see, the financial soundness and the fund allocations. Especially for the fund allocations, we are going to secure and boldly deploy investment capital to swiftly create new core earnings sources. And with regard to the reinforced cash generation capabilities, the cash flow improvement is a very important issue for our company. So we will be tackling this with earnest.
Next slide. Please turn to Page 10. We envision our future in the group management policies 2019, but there are some major changes to it. To address social issues listed on the slide, IHI Group would like to create society where nature and technology can promote each other in harmony. In pursuit of that, we are envisioning near future social infrastructures, 5 of them as shown on the slide.
As we continue making progress toward such envisioned future, our growth drivers will be in the three areas as presented on Page 11, namely air transportation systems, carbon solutions and maintenance disaster prevention and mitigation.
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] I will elaborate more in detail in next page. Starting with the air transportation systems. This industry is struggling at the moment. However, this aerospace industry will continue to be our core business, and we would like to establish a way to become the main player. And we list up 5 initiatives that we would like to do in this project change period.
The production method to be established using DX or the factory operation that enables to achieve the world class productivity and to expand into the material business. And FRP and CMC, those promoted our own proprietary technology development in this advanced area. And next one is a carbon solution. For not only in the energy business area, but in this industrial or machinery area too, we would like to achieve the carbon free society because this is a very important topic for the global society. So we would like to develop a technology that will contribute to the carbon free society for both the energy and industrial machinery front.
And another one is the maintenance and disaster prevention and mitigation. While we are seeing a lot of the natural disaster taking place, we believe that our role is extremely important. So in that respect, not only limiting to the bridges in our water gates, we would like to doing we would like to do our business in infrastructure development that would contribute to the prevention and the mitigation of the disaster, and we would like to develop the technology related to that. Moving over to Page 13. This is a summary.
So we consider this project change to be the preparation and the transition period to optimize our business portfolio and creating a new business that will be the 2nd pillar after the aero engine business. And to return to the growth path, we will work on further strengthening earnings foundation and expansion of lifecycle business. In this fiscal year, unfortunately, we have not been able to pay the dividend to our shareholders. But we would like to start repaying excuse me, paying the dividend again from FY 2021. And thus going back to this growth trajectory, and we would like to create a new growth business so that we can be the strong IHI once again from 2023.