Mitsubishi Heavy Industries Ltd

TSE:7011

Earnings Call Transcript 2021-Q3

[Hisato Kozawa, executive]

Good afternoon. Without further ado, I would like to explain Q3 fiscal year 2020 financial results. I'm going to be succinct in highlighting the important points.

Please take a look at Slide #4, and if you can kindly refer to Slide 5 as well. This shows the summary. Firstly, order intake and revenue. They actually are trending the way it did in Q2, and order intake revenue decreased in year-on-year. At a glance, the numbers may seem to indicate sluggishness. But as I have shared with you the full year guidance in May, given COVID-19, we are trending as expected, more or less. Under COVID-19, medium-lot products business continued to recover since Q2, with some businesses rebounding back to a year ago level. Meanwhile, the impact of COVID-19 still remains in some of the [ applied ] and commercial aircraft business. Details will be given in Slide 14.

Next, profit. Despite some negative impact of COVID-19 on profit from business activities due to the contraction of SpaceJet-related losses and gain on the shared transfer of MVOW, profit grew year-on-year. Our profit attributable to owners of parent decreased due to the absence of deferred tax asset on losses, which was recorded in the previous year.

I would like to add some color to the numbers written on Slide 5. The numbers for Q1 and Q2 as well as individual Q3 are not indicated here, but if we were to compare figures for the past 3 quarters, order intake was JPY 689.26 billion, JPY 707.6 billion and JPY 838.7 billion, respectively. Revenue was JPY 778 billion, JPY 880.6 billion and JPY 944.7 billion, respectively. Clearly, the results are improving sequentially. Likewise, our profit from business activities had trended favorably, being JPY 71.3 billion loss, JPY 12.7 billion profit and JPY 82.3 billion profit. And since onetime loss and profit are included in each quarter, apple-to-apple comparison is difficult to make. Nonetheless, even excluding those factors, we are seeing improvement.

Please look at 6. FY '20 Q3 numbers on Slide 5 have been broken down into SpaceJet and businesses excluding SpaceJet. Some comment on SpaceJet. As explained before, the impairment loss of CRJ program of Canada Bombardier, the acquisition completed on June 1 is included. Annual impairment loss of these 3 quarters we believe are trending within the budget of JPY 120 billion, which has been expected.

Slide 7, financial results by segment. And we will walk you through later, so I would like to skip to Slide 8. Here you see the balance sheet. The total assets decreased JPY 16.1 billion from the end of FY 2019, landing at JPY 4,969.5 billion. Though not shown here, FY Q3 total asset was JPY 5,547.1 billion. So it decreased by JPY 600 billion. In red box, you see our interest-bearing debt. Free cash flow was an outlay, pushing the interest-bearing debt. Nonetheless, there is no funding issue. Including green bond, new bonds worth JPY 65 billion were issued in November, pushing up the outstanding bonds.

Slide 9, it shows balance sheet metrics and cash flows. At a glance, both interest-bearing debt and D/E ratio may seem to deteriorate, but both metrics are trending within our expected range. Operating cash flow outlay increased year-on-year due to the decrease of profit and the increase of working capital. Although we are invested in the acquisition of CRJ, investment cash flow declined due to restraining the investment in SpaceJet development.

Slide 10, order intake and order backlog. Order intake was impacted by COVID-19. While Aircraft, Defense & Space slightly grew, other segments underperformed year-on-year. By product, nuclear power and defense aircraft increased. Order intake was below revenue in Q3, so as compared to the March end of FY '19, order backlog declined.

Slide 11, revenue by segment. Revenue in commercial aircraft, automobile-related products and other mass lot products, in particular, declined due to the market environment tainted by COVID-19. However, Logistics, Thermal & Drive Systems contracted its revenue gap year-on-year on a 3-month basis. Metals machinery and engineering MTO products revenue declined due to construction work put on a hold. Revenue fell in steam power due to the postponement of domestic after-service work. Nuclear power and defense-related domestic infrastructure business trended steadily.

Slide 12, profit from business activities by segment. First, Energy Systems segment. Nuclear power's revenue increased, pushing up the profit. The share transfer of MVOW brought gains of JPY 83.1 billion. However, there were negative factors such as the absence of a onetime gain from the South African business which was recorded in FY '19, and plummeting of the aero engine business revenue, COVID-19-impacted delay and postponement of Mitsubishi Power service and the provision for loss for unprofitable construction work. As mentioned at the outset, medium-lot products bottomed in Q1, and we are seeing a trajectory to recovery. Logistics, Thermal and Drive Systems segment profit declined year-on-year, but following Q2 we maintained profit in Q3.

So after Slide 23, I will show you some details. So please refer to them at your leisure.

Slide 13, profit bridge. So the lower half is SpaceJet, and you see the fluctuations of the business profit. If I may add color to SpaceJet, we recorded loss of JPY 175.3 billion in Q1 to Q3 of FY '19, and you see JPY 77.80 billion included. And for this year, we have JPY 103.1 billion, but about JPY 60 billion of CRJ is included in this loss. So I would like to walk you through the profit excluding SpaceJet. So second from the left, you see the number related to South African project, and there was a onetime profit which we gained from the settlement. And next, you see the commercial aircraft business. And related to this business, we gave you the outlook and stated the guideline of minus JPY 140 billion. And on a quarterly basis, we have trended accordingly in Q1, and you can see that the negativity is compressing. And I will walk you through by product in other slides.

Here you see the power, steam power, a decline of JPY 45 billion, and the details are on Slide 15. And 2 bars away from that, which is the other business, a profit reduction of JPY 37 billion. This includes the delay of overseas plant construction due to COVID-19 and also the unprofitable construction works. Regarding FX, yen became JPY 2 strong against dollar, so it has been factored in the fluctuation of its impact. And so for the fixed cost reduction, we improved by JPY 26 billion and asset management improved by JPY 26.7 billion. And JPY 83.1 billion has been included in the numbers. Therefore, you see our numbers as indicated here to be -- as indicated on the very right.

So let me now move on to Page 14. So this is commercial aircraft Tier 1 as shown here. Until the third quarter, we have excluded the COVID impact, and so that gives us a minus 40%. But from Q1 to Q2, we have seen a major improvement, but thereafter it softened once again. For the fourth quarter as well, we cannot accept any recovery. So for the full year total, we will be slightly under the bottom anticipated at the beginning of the year.

Now for aircraft engines, for first quarter, we had advanced according to our expected bottom line. However, from Q2 to Q3, we saw a slight recovery. And for the full year, we do assume that we will be within the range that we anticipated at the beginning of the year.

Medium-lot business from Q1, Q2 and Q3, as you can see, we are within our assumption range or slightly above. This will depend on future COVID impacts, but we believe that we will be on a recovery trajectory slightly higher than we had anticipated in the beginning of the year.

Now moving on to Slide 15, I would like to briefly explain the state of the thermal power business and restructuring. Page 16, please. So this shows very briefly our thermal power business. So I'm showing you 2 graphs. On the left, you see the GTCC revenue. And then on the right side, you see steam power business, mainly focusing on coal-fired thermal business. So they are also further divided into new installations and after-service. For GTCC, for both installations and services, we are seeing an increase year after year.

Now for steam power, there are some slight fluctuations in services. However, we are able to sustain a specific volume. But for the new installations, starting around about 2020, we are seeing slight drops. And current orders, we assume that for '21 and onwards, there will even be a much greater decrease. This does mean that we need to focus on resource shift to our service business.

Now as I showed on Page 13, the steam power versus like-for-like last year, and there has been a profit decline. So we have analyzed that there are basically 3 major reasons. The first is a steep rise in construction cost for domestic projects. Now due to special Olympics demand, this has elevated and boosted construction fees. Now for Olympics demand, needless to say this has stopped. However, construction labor, especially for the experienced labor, we are seeing less and less, and this has also on top of the higher fees, we are seeing productivity decline in various projects, and there are various projects that are not coming in within the assumed budget.

Now the second point, unfortunately, the first commercial IGCC, the coal gas hybrid unit was impacted by nonconformance during test run. Improvements and restoration is underway; however, huge repair costs and additional costs due to delay are anticipated, and we have set aside provisionings for this as well.

Third is impact of COVID-19. We have mentioned this in our Q2 announcement as well, but scheduled outages and either canceled or postponed. So if we carve out just Q3, in other words, just the past 3 months, we are recovering to the level of the same period last year. And we assume that negative impact will shrink for the full year.

Allow me to move on to Slide 17. So this shows the current structure reform that we are considering based on the current thermal power business. The left side, which is shown in the red in trends, I do believe that we all have a good understanding of this current status. And so the impact that this places upon on, on the thermal power, on the upper half you see the existing thermal power business. Down below, you see the new business opportunity impact. And then further to your right, we are showing you some assumptions. So for steam power, we want to further bring down costs and also elevate our activities and services.

So as you see here, 2 points. One is we will be consolidating our production as well as factory alignments -- or realignments, rather, will take place. Mitsubishi Power Kure Works, they handle new boiler installations, service engineering and manufacturing as well as environmental plant engineering functions as well. So out of this, for the boiler manufacturing, Mitsubishi Power Nagasaki Works will overtake this. And at the same time, at the Kure Works, boiler service and environmental solutions, these functions will be strengthened.

For bringing down SG&A, Mitsubishi Power is now 100% subsidiary and MHI is its parent company, and there are some redundant corporate functions that are deemed in operation. So at this point, we are for a portion of these tasks pursuing shared services, but we will further accelerate this activity. And in this manner, we would like to further bring down fixed cost SG&A.

Now down below, you see the carbon neutral business expansion opportunities. So energy transition announcements. As was made, we will further enhance this. And especially for the second point listed here, Mitsubishi Power energy transition. This will be migrated to MHI, and we will further focus on research shift. And so this will take place this coming April. And by doing so, the MHI entire energy transition will be streamlined and further promoted.

So these initiatives have been initiatives that we had considered in the past, but considering the speed of the environmental change that surrounds us, we are further accelerating and fast-forwarding our initiatives. Energy transition promotion does mean that we do need to shift further our resources, and we will be further detailing our plan and executing these plans.

On Page 18, you see our thermal power energy transition. This is the overall image that has been depicted, and we have explained this on a separate occasion. So I will not go through the details today.

And from pages 19 to 22, this is the forecast for the full year. So there has been no change since the announcement made in Q2 October. So this will conclude my explanation. Thank you.

[Ken Kawai, executive]

So if I may make a few comments. My name is Kawai. I am from Mitsubishi Power. And there are some slight overlaps, as what Kozawa-san has explained, but I would like to explain our stance as Mitsubishi Power.

So steam power has been our pillar business, and the business environment surrounding this has changed dramatically. There are lesser and lesser new installments; and decarbonization. Inclusive of this trend, we need to shift to a very high-demand services. So we are very focused on shifting our resources. We need to stabilize the delivery of electricity, power but also ammonia biopass as well as hydrogen as well, as well as CCUS, CCS, CCU combination as well. And also covering renewable energy, which does include batteries as well. So lower carbon or decarbonization, we need to contribute to this trend, which means that we will further expand our services and enhance our profitability.

For the Kure Works, we were highly valuated for our very finite services. Boiler service, and again, environmental operation, plant services, we will further increase this because this is in high demand from society. So times are ever evolving. However, we need to make sure that we keep in pace with the environment change, and we will evolve ourselves to make sure that we are in need by society. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]