MHVYF - Mitsubishi Heavy Industries Ltd. (MHVYF) Q1 2023 Earnings Call Transcript

2023-08-07 01:04:06 ET

Mitsubishi Heavy Industries, Ltd. (MHVYF)

Q1 2023 Earnings Conference Call

August 4, 2023 02:30 ET

Company Participants

Takashi Inoue - Investor Relations

Hisato Kozawa - Chief Financial Officer

Conference Call Participants

Tsutomu Ito - Mizuho Securities

Sho Fukuhara - Jeffries

Toshiharu Morota - Okasan Securities

Presentation

Takashi Inoue

We would like to begin Mitsubishi Heavy Industries Q1 FY 2023 Financial Result Presentation. I am acting as a master of ceremony today. My name is Inoue, Senior General Manager of IR & SR.

Let me introduce today’s speaker, Director, Executive Vice President and CFO, Kozawa. Today, our CFO, Kozawa will take you through the Q1 FY 2023 financial results. We expect to end the session at 4:30 p.m. And I would like to ask for your cooperation in advance. We will be using the material titled Q1 FY 2023 Financial Result. Please refer to our website for the section of IR information.

Now I would like to hand the microphone over to our CFO, Kozawa.

Hisato Kozawa

Good afternoon, everyone. Nice to meet you today. Let me start my presentation. A table of contents is shown on Slide 2. Let me offer you key takeaways. Please refer to Page 4. This page shows the measure KPI results.

Highlights are shown on Slide 5. For the first quarter, we progressed as per the plan in general. Order intake, revenue, profit, all of them exceeded the previous year’s level, especially order intake grew significantly, progress against a full year forecast is approximately 35%, which is quite high. This is due to the fact that we have received a large defense related order at the beginning of the year. Our defense business order is normally skewed toward the end of the year. However, this year was exceptional. Business profit and net income, both of them have grown quite significantly from the same period last year, mainly thanks to the price optimization effort since last year, revenue growth and weaker yen and this will be detailed out later on in Slide 9. Free cash flow is almost the same level as the last year.

Slide 6 and onward gives you details of the financial results. Slide 7 is rather repetitive. So let me skip. Slide 8 shows balance sheet and cash flow. Total asset is JPY9.6559 trillion, up by JPY181.1 billion from the end of 2022. This increase has been driven by the impact of foreign denominated asset translation due to weaker yen. The impact was approximately JPY150 billion. Inventories also slightly increased. But this is within the normal range. As for the cash flow, investing in cash flow improved year-on-year and became a positive. This is due to the sale of real estate and securities.

Slide 9 explains profit bridge from the same period last year. The bar graph on your left shows the business profit of Q1 2022, which was JPY14.9 billion. Forklift and HVAC last year, the same period had negative impact from the cost increase, but this year, magnitude of the cost increase since last year has been suppressed. We had a cost optimization, which is the impact of the price increase exceeded the cost increase impact and the profit went up by JPY14 billion. Decreases in one-time expenses in the thermal power business means we no longer have a loss associated with European business structure reform unlike last year and we had other factors and our business profit was JPY51.9 billion.

Slide 10 shows a summary of the orders, revenue and profit from business activities by segment. Now, let me explain the results of each segment. Slide 11 shows our result of the energy segment. Orders, revenues and business profits all started positive against the full year’s forecast, especially orders intake for GTCC continue to be strong from the previous year. Although order intake and sales of steam powers are down year-over-year, this was expected under the current environment and the fact that we were able to make up that difference in other business is a good sign. Steam power increased its profit, mainly because it no longer has a restructuring cost of our European site from the previous fiscal year.

Slide 12 shows the plant and infrastructure segment. This segment also had a good start in terms of older intake, sales, revenues and profits compared to the full year forecast. Orders are down year-ob-year, but this was mainly due to the Metals Machinery business as I indicated in the table. Of course, this JPY108.2 billion in the current quarter is also a high enough level and the market continues to be strong.

Slide13 show the status of logistic thermal and drive systems. Orders, revenues and business profits are all roughly 25% to our full year forecast, so mostly in line with our plant. Price optimization effort says that latter half of the last year is contributing fully which is a positive sign. On the other hand, although the availability of electronic components is improving, it’s still unstable and we are closely monitoring the situation.

Slide 14 shows aerospace, defense and space. As I mentioned earlier, large orders received from the defense sector contributed to the segment’s total orders of JPY687.1 billion. Shown in this graph, orders received in the first quarter alone were equivalent to those of the entire last year. In the commercial aircraft Tier 1 business, both sales and income profit increased year-over-year due to increase in the number of 787 in the Boeing and the benefits of the weaker yen.

Slide 15 through 17 shows our earnings forecast for FY 2023. Since there is no change from what we announced in May, I will omit the description of the contents. That’s all from for my presentation. Thank you very much.

Question-and-Answer Session

A - Takashi Inoue

Now, we’d like to move on to the Q&A. [Operator Instructions] Now I would like to take any questions. Anybody?

Operator

First person is Mr. [indiscernible] from Nomura Securities.

Unidentified Analyst

Hello, this is [indiscernible] speaking. Thank you very much for your presentation. I have a couple of questions. First is related to energy progress of this profit. Can you articulate on that?

Unidentified Company Representative

That restructuring cost is no longer needed in the magnitude of JPY10 billion, but IDC had JPY3 billion last first quarter than energy. Last year, it was a loss of JPY2.4 billion and this year, we are generating a positive JPY24.5 billion of profit. So I think the situation was much better. And when we look at the first quarter I was initially expecting like JPY10 billion business, however, it was better than my expectation. And can you explain the background? You haven’t changed your forecast, but good progress so far.

Unidentified Analyst

Well, thank you very much for the answers.

Unidentified Company Representative

Honestly speaking, in the first quarter, we didn’t have any like special customers. And in terms of the profitability for steam power, especially for steam power, we are in the middle of restructuring, but problem is are you still going to do it – and this is already – this is all due to the new installation. And further to that, it’s actually profitability of the business like that. So, it’s improving the product mix as it could be. For this segment, profitability increased in first quarter compared to the same period that of last year. In terms of cost, the result was not particularly to us. I mean, we didn’t have special negative factor, but it’s not particularly good. So, it’s just a [indiscernible] a plan we have now.

Unidentified Analyst

Thank you very much. I’d like to ask you a second question, aircraft, defense and space, especially defense I see that you have solid revenue from defense from the first quarter. And I wonder whether you are expecting more to come in the fourth quarter as well like other years. So, if you can give us a color on how you plan to land for the full year and regarding the time lag for the reveal business contributions, order taking to the revenue contributions and the impact of this defense sector business to this overall aircraft defense and space segment, please? How are we taking orders for this year, we did get a significant amount of large size order for this first quarter, but this project took some time?

Unidentified Company Representative

We will – we are expecting some sizable. We are getting some inquiry – some solid business leads. I am not sure how much we can see it convert. But I think we are relatively confident that we should see a sizable amount of product being booked in the fourth quarter for defense. And sure this April, this first quarter, we had a significant amount of business. And when things go as planned, we are relatively confident that we can do better than we have a plan for this segment. I mean, that’s our wish. That’s our not so for certain. And regarding the timing where we can see it contribute to our numbers, not this year from next year gradually, of course, we can book revenue depending on the progress rate of the project. But from FY 2025 onwards, we should see more revenue contribution coming from this defense business. Thank you very much.

Unidentified Analyst

And can I ask one more questions regarding the margin improvement for the defense business, I think that the industry-wide efforts. I understand that you are getting a great order taking. I wonder what kind of forecast do you have for that margin, including this year’s project?

Unidentified Company Representative

No improvement we experienced as much as we see in the media. But compared to the past, we do see signs of improvement for the fees that are paid to us the suppliers. So, in this regard, the margin say that when we actually say that the impact will be a few years down the road, but we are seeing improvement. Yes, thank you very much.

Operator

I would like to move on to the next person from SMBC Nikko securities, we have Mr. [indiscernible].

Unidentified Analyst

I have a follow-up question related to defense business. In the first quarter, you have got big order on missile systems. And if things go well, it should be able to make good contribution to that profitability in this fiscal year. Can you explain about that once again?

Unidentified Company Representative

I do have a confidence in that. And just to add some comment upon order intake, if we do assessment, so if things go well, we expect some profit contribution. But at the same time, if we are going to supply what’s been built and then the probability is very high in terms of our expectation to the profit, but for the development project, we have certain risk of the price may come down. Of course, we try – we do our best for that kind of thing to happen. I think we have been managing our conflicts and orders well enough. But if things go well and then the profit should improve steadily that we do our best, that’s all I can say.

Unidentified Analyst

Thank you very much. My second question, commercial aircraft, Boeing 787 numbers, 9 units. Your expectation for this year is same as last year’s level now that the 3 months has passed, do you see that the plan you had was a conservative one?

Unidentified Company Representative

Yes, we forecasted that same year, same numbers. But that was coming from Boeing and Boeing’s number was conservative for us. Our plan was a rather conservative one for the first quarter. Result was better than we expected. But the most recent quarter that we are in right now and our numbers are declining. So actually, we are hitting very close to our exact plan. So, we are hoping that we will do better than this conservative outlook. But we do think when we call the year we should do better than previous year. I wonder whether we will be able to receive the orders for 3 aircrafts per month really, I am not sure.

Unidentified Analyst

My third question is related to the order of the gas turbine. You said you are seeing good progress. Are we expecting flat number of orders for this fiscal year? I think that’s your plan. But when you look at the progress in the first quarter or is it better than your initial plan or as per your plan, can you explain about that, please?

Hisato Kozawa

Please take a look at the Slide 19. We have a reference data. In the past a quarter, we’ve received three units, quarter and this was within our expectation. So we are not planning to make revision on our forecast. And the number of orders in Chinese a licensee, this is also within still our expectation. And, [indiscernible] a several factors, including economy, outlook have been discussed, but we’re still seeing a strong order, and it’s progressing. Well. That’s all.

Unidentified Analyst

Thank you very much.

Hisato Kozawa

Thank you, Mr. [indiscernible].

Operator

Next from JPMorgan, Mr. Sano, please.

Unidentified Analyst

Thank you for taking my question. This year’s – your full years outlook 740 one-off lose and you are expecting 540 recovery, this [indiscernible] JPY220 billion buffer that you’re seeing now that you have 3 months of [indiscernible] in the first – after the first quarter, are you going to be able to see this one-off? If you could please give us an update now that you call it the first quarter?

Hisato Kozawa

[indiscernible] that reverse we are seeing in full for the first quarter that we experienced last year. And so we didn’t have to use the buffer. So that is another reason why we’re saying that this year started off positive. And how the future will unfold is yet to be seen. Of course, if we didn’t have to use a buffer, that’d be great. But when we need to, we can. So what we are – we do believe that we can stay within this buffer. That’s where we’re start right now.

Unidentified Analyst

Thank you. My second question is related to China other than Gas Turbine. The current slowdown of CapEx in China – economic slowdown in China. Do you have any impact from those on to your business and it can you maybe explain about your outlook into China?

Hisato Kozawa

As far as our business is concerned, Metals Machinery business, we see some slowdown. Last fiscal year, the demand in China was quite strong. So compared to that in a high level, we see some slowdown in Metals Machinery and auto China is making a shift toward EV quite significantly and in turbocharger business for China is dropping if I can use the term drop of a compared to what we had before it’s somewhat becoming weaker.

Unidentified Analyst

Thank you. Last question is your Aircraft engine business. Your stake is low but ready to announce DW JPY1800 additional cost. What kind of impact are you expecting from this project?

Hisato Kozawa

Honestly speaking, I wish I can have somebody to explain to me what’s the situation is, flip side still, I believe is not able to grasp the whole situation, but what for now so far is on the plus side JPY500 million. But that had to deal with, yes, so I’m not sure how much impact it will have to it’s P&L. If JPY500 million is the correct information, and the impact to us will be a little less than JPY20 million or JPY50 million to JPY20 million impact. That’s all cash base story, the impact in the P&L will be different. My sense is that the impact will be smaller. If the cash is JPY20, then that impact the P&L should be a bit smaller. So that’s a level of the impact that we’re presuming. But I still don’t have the certainty of their grounds evidence is behind JPY500 million. So if they are JPY500 million, our impact would be JPY15 million to JPY20 million. So that will be the steak we – that will be the impact we have. MTU was in that same situation. So I’m sure it’s quite difficult to grasp the whole situation yet. But that’s all for my question. Thank you very much.

Unidentified Analyst

Thank you very much.

Operator

Next person is Mr. Ito from Mizuho Securities, please.

Tsutomu Ito

Hello. My name is Ito. My first question is related to [indiscernible] result. I think the largest next disclosure is at the level and when we look at the change in profit, the forklift made a good contribution as I understand and can you talk about the profit of the other sub segments? Can you talk about like largest scale engines each [indiscernible] and turbo charger seems to be dragging the [indiscernible] But can you give us more colors? Can you explain more about the changes in the profit in the different sub segments?

Hisato Kozawa

Turbo charger revenue however, impact is not so big. Hold on, let me check. Sorry. As you said and logistic systems made a biggest contribution next age [indiscernible] and a turbo charger dropped the profit slightly. And I think that’s the big picture. Did I answer to your question?

Tsutomu Ito

Do you consider that as a risk factor? Or are you not so serious about that? Can you give us some impression?

Hisato Kozawa

I think we’ve seen good improvement so far. But still the timing, the timing of incoming part, we have some concern because of that inventory of parts that we try to ensure that we have a little more number of inventory of parts. But we are not yet in a full fledge of impact.

Tsutomu Ito

My last question is about your Defense business. In the Q&A section. You mentioned that you are expecting more business to come in Q4. If you can please give some more color. I would think that first quarters business was about the people recognition and span of missile defense and others in defense to build a program, I’m sure there are many inquiries and business opportunities for you. So if you could please give color to what you’re expecting to receive for the Q4.

Hisato Kozawa

In that regard, for us we have business with or as the EFA forces, maritime, ground and air. So I’ll think that we will have some business with Japan Maritime Self Defense Force and we will continue to receive business from here as well.

Tsutomu Ito

Thank you very much. That’s all for me.

Operator

Thank you, Mr. Ito. Next is from Daiwa Securities, Mr. [indiscernible], please.

Unidentified Analyst

Hi, this is [indiscernible] speaking. Thank you for picking me up. I have a couple of questions. My first question is related to IGCC. What is the current situation right now? And that’s my first question. Accounting wise, the [indiscernible] Europe, it’s gone. But I think that’s all I know, as an update. So can you give me the clarity into the current situation for IGCC?

Hisato Kozawa

We are in the middle of the improvement and upgrading work. So we’ve been working on the plan that’s been created at the beginning of that year. And there are some areas which turns out it’s better than we expected, or there are some areas that’s, worse than expected, but anyways things are progressing or constructions being, or it’s been progressing as per plan. So there are no major updates in the first quarter, thanks. Okay. My understanding is that last year in Q1 a couple of billions of yens of additional loss was made. And this times the magnitude of quality is almost the same as previous year. Yes.

Unidentified Analyst

My second question, and this is a big topic, but from next year, you have a new NTP, I am sure you are already starting a discussion for what will be in this NTP. And I visited your Hiroshima plant and Takasago plant recently, then I thought that you have quite a lot of land. And from the asset management perspective, I am sure you are optimizing your portfolio. But the land that are not being used for full scale manufacturing, I wonder what you plan to do with them. Of course, you can sell or you can ask – you can do asset management, extraordinary income that you receive from, do you have a way of how do you plan to use that income?

Hisato Kozawa

Currently, I don’t have – we don’t have any specific plans over our land assets. But of course, optimization is in our plan. And you mentioned that we have many lands that’s not being used, but in my understanding our land at Takasago plant is really all used up. Hiroshima there are some vacant spaces, but actually, we have been divesting. We have been selling off from those side little by little. So, at this moment, we don’t have too much vacancy really in the plant that you did now mention. You are right, we do have some land that are not being used. So, for those, we are considering what would be the best use and how to use them, those lands that are not used for plants and manufacturing. Many of the past sales of the lands are being used to pay-off our interest-bearing debt. So, with that extraordinary income, we can reinvest in the gross area of transition. And others, of course, we will need to continue to invest in R&D. And also, there is a possibility to use such income for our future M&A. And we put up the announcement, the press release in the U.S. acquisition of the battery maintenance company of the USA that’s already been fixed and amount is not disclosed, but it’s a sizable price. So, we are reclassifying our assets. And the question was about how we best utilize our land assets. We are also proceeding to sell our holding of our shares, and so we are working on.

Unidentified Analyst

And let me make a different question on top of that, in the businesses are you discussing? And we hear more active discussion about business portfolio reshuffling?

Hisato Kozawa

Yes, that’s I do feel that such sentiment is within our senior management. Thank you very much. Regarding I said Takasago and Hiroshima, you are right. Regarding Takasago plant, yes, all the lands are there. But when I visit Hiroshima, Mihara and Kure plant, I recognize that there are some vacant land, I am sorry, I miss called the location of your land was vacancy. That’s all thank you very much.

Operator

From Jeffries, Mr. Fukuhara, please.

Sho Fukuhara

My first question is related to asset management, the first quarter it was minus JPY4 billion and the annual plan for asset management – I think asset management is not factored into the 4-year plan, but the first quarter minus JPY4 billion. Can you explain what’s included in here?

Hisato Kozawa

Yes. This is an impact on the P&L, these ones. And in terms of the impact on P&L, last year, this year, the sale of the proceeds on sale of real estate. In this new one, we have seen the proceeds on sales of real estate. But that proceed was less compared to last year by JPY4 billion, that’s why it says minus JPY4 billion. And asset management as a whole, the sale of the securities, if I can comment on that, either sell of real estate or securities in terms of cash compared to last year, Q1 this year, Q1 we received more cash. So, that’s making a positive.

Sho Fukuhara

Thank you. My second question is your logistic thermal and drive system in the first quarter, you told us about positive impact of price optimization. 4-year plan was a JPY20 billion, but comparing against JPY14 billion, I wonder whether we can expect that upside against your plan for the full year?

Hisato Kozawa

Last year for the first quarter or up to second quarter?

Sho Fukuhara

Did you do the material costs increase which was offsetting the contribution from price taking?

Hisato Kozawa

But from the second half of previous year, price taking impact, the sales were made with higher prices. So, from the second half, we are seeing positive contribution from our pricing action. So, when looking at quarterly, and first quarter and the second half, we are seeing some solid contribution, but in the second half the margin of improvement in year-on-year comparison will be significantly less or more less, So, JPY14 billion downwards, so we should see declining. I mean this is a little bit with optimism, we are saying JPY20 billion, but we hope that we can do better than JPY20 billion, honestly speaking.

Sho Fukuhara

Thank you very much. I understand.

Operator

Next Mr. Morota from Okasan Securities.

Toshiharu Morota

Can you hear me?

Hisato Kozawa

Yes.

Toshiharu Morota

Thank you. I have a question related to defense business. In terms of the profitability, you said that it’s not yet profitable as people talk about, but based on the QCD evaluation, a maximum of 10% cost change today to 5%, the total 15%, that’s what the Ministry of Industries [ph] says. And I don’t think your evaluation result is so low on QCD. And if you can expect the cost to change part, I think percentage wise it should be close to 10% or so. And your current profitability, normally, people say 5% in general, but I think your profitability is better. So, let’s say you have about 6% profitability, if it’s below 10%. And maybe the profitability wise is not so big, but I would like to better understand your earlier statement, your profitability is it close to 10%, or is it just better than the average?

Hisato Kozawa

Well, it’s very difficult for me to respond to this kind of question. But Mr. Morota, I think you have got your guess almost right. But some people say that profitability is – our profitability is more than 10%, but ours is not as high as that level.

Toshiharu Morota

So, maximum 15% or double digit percentage?

Hisato Kozawa

No, no.

Toshiharu Morota

So, maximum of 15% may be difficult, but you are hoping to achieve 10%, is that correct estimate?

Hisato Kozawa

Well, of course, we want to achieve 15% or 20%, but realistically speaking, I think the best case is like 10%.

Toshiharu Morota

My other question is the Japan Defense Builder program covers the next 5 years. And I have picked up the project that over JPY100 billion scale. And there are about 60 projects, over JPY100 billion. And I think many of the businesses involves you. And when looking at where you should be the prime contractor, that’s really a third of that 60. So, before 5 years, I suppose to be JPY43 trillion plus, but I would think that the you have more robust business outlook, if you can give some color for what kind of business that you are expecting from this Japan Defense program. I think in April, you probably recorded JPY200 million, for the 5 years it’s JPY1 trillion, so that means that you have JPY200 billion every year, roughly speaking.

Hisato Kozawa

I am not sure which way you are referring to, Morota-san. I would think that their spend will not be the same every year. The visibility we have, we still don’t know how we land this year. But this year is if we do better than our plan, then we expect that as far as order take into concern, we will see a decline compared to our plan for that next year. For revenue, that’s a different story. Revenue we should see a sizable increase. I would think that 2026 onwards, we should see significant – some significant contributions from defense.

Toshiharu Morota

So, do you have some numbers that you have in mind for the upcoming business for that 5 years?

Hisato Kozawa

I am sure our defense sub segments have some calculation, but nothing with me. The Takasago, Hiroshima I attended decisions at both locations and flat order agenda, I think is expected in the future.

Toshiharu Morota

So, if that is the medium to long-term outlook, then what about your top line goal is the driver in coming 5 years?

Hisato Kozawa

I think that the driver will be defense business.

Toshiharu Morota

But how do you say about that?

Hisato Kozawa

Defense is one of the growth drivers.

Toshiharu Morota

So, it’s not the main driver?

Hisato Kozawa

When we think about the organic growth that will – defense will be the main growth driver.

Toshiharu Morota

Thank you.

Hisato Kozawa

Any other questions? Anybody? No. We do have some time left. But this concludes our first quarter results presentation. Thank you very much for joining us. Thank you very much.

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Mitsubishi Heavy Industries, Ltd. (MHVYF) Q1 2023 Earnings Call Transcript