Mitsubishi Electric Corp
TSE:6503
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Mitsubishi Electric Corp
Earnings Call Analysis
Q2-2025 Analysis
Mitsubishi Electric Corp
Mitsubishi Electric Corporation reported a record high performance for the first half of fiscal year 2025, achieving revenue of JPY 2.6435 trillion, marking a year-on-year increase of JPY 105.1 trillion. Operating profit (OP) also saw growth, reaching JPY 176.6 billion, or JPY 40.8 billion higher than the previous year. The operating profit margin improved by 1.3 points to 6.7%, indicating a robust financial health driven by strong demand across multiple segments.
Several segments contributed to this growth. The Infrastructure segment thrived due to strong demand for utility systems and a solid performance in transportation, while the Life segment benefited from the recovery in domestic and international demand, particularly in building systems. The Business Platform and Semiconductor and Device segments also achieved increased orders and profits, indicating a diversified revenue base.
Despite overall growth, the FA Systems sector faced stagnation in demand, particularly in decarbonization-related offerings. Orders were affected by lower consumer demand and overall market softness, resulting in lower revenue and OP. Similarly, the Industry & Mobility segment saw declines, although automotive equipment revenue grew due to new car sales outperforming expectations abroad.
Looking forward, Mitsubishi Electric maintained their full-year guidance for FY25, projecting revenue of JPY 5.39 trillion and an operating profit of JPY 400 billion. This guidance remained unchanged, reflecting the company's confidence in successful profitability improvement efforts across various segments despite current market dynamics.
A notable contributor to revenue increase was the impact of a weaker yen, which added JPY 84 billion to sales growth and JPY 24 billion to operating profit. This currency fluctuation underscores the importance of foreign market performance to Mitsubishi Electric's overall financial health.
In terms of shareholder returns, Mitsubishi Electric declared an interim dividend of JPY 20 per share, with year-end dividends expected to be JPY 30, totaling JPY 50 for the full fiscal year. This is seen as a reflection of the company's balanced approach to maintaining strong financial health while returning value to its shareholders. The company is adhering to a moderate debt-to-equity ratio of 0.3x, ensuring financial stability for future growth.
Cost management has been a priority, with the cost of sales improving from 71% to 69.3% of revenues year-on-year, and selling, general, and administrative expenses rising due to labor costs and research & development expenditures. However, the overall cost efficiencies implemented contributed positively to maintaining profitability even amidst increasing costs in some sectors.
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It's time. So we would like to start Mitsubishi Electric consolidated financial results briefing for the second quarter of fiscal 2025. Let us introduce the speaker, Executive Officer and CFO, Kuniaki Masuda. Mr. Masuda, over to you.
This is Masuda of Mitsubishi Electric Corporation. Thank you very much for coming to the financial results announcement today. And so I will explain the overview of the financial results for the second quarter of fiscal year ending March 2025. So first, please refer to Page 3.
Well, these are the key points for today's presentation. For the first half of FY '25, in addition to the weaker yen due to the sales growth of Infrastructure segment as well as the Lifestyle segment as well as the overall profitability and efficiency improvement conducted by each business, we were able to achieve JPY 2.6435 trillion worth of sales and OP of JPY 176.682 billion. And so we were able to achieve a record high for the first half for the sales and profit.
And for the guidance for the full year for FY '25, it will be kept at the same as the previous guidance at JPY 5.39 trillion and OP of JPY 400 billion, and we will continue to -- with the profitability efficiency improvement to secure the result. And for the dividend, we have decided at JPY 20 per share for interim dividend and year-end dividend at JPY 30. And so for the full year is expected to be JPY 50. And in terms of the dividend, to provide appropriate return based on the shareholder equity level and also to maintain the financial health to continue the growth investment, we will be using 3% of adjusted DOE as the dividend.
And when I say adjusted DOE is that we are using shareholder equity as a basis, excluding other comprehensive income, and we are able to pay the dividend without being impacted by the valuation change of the overseas assets due to the FX fluctuation. And for the growth investment, we will be using our own capital and also flexibly using external financing. And for the financial investment, in terms of the use of leverage, we will be using 0.3x D/E ratio as a financial discipline.
Page 5. This is the result for the first half of our group. And as I mentioned earlier, revenue grew by JPY 105.1 trillion year-on-year and achieved JPY 2.6435 trillion and also marked a record high, exceeding FY '24. And for OP, we grew JPY 40.8 billion year-on-year to JPY 176.6 billion, and we marked a record high, exceeding the result of H1 in FY '18. And OP margin grew by 1.3 points to 6.7%.
And in terms of profit before tax, it includes a valuation loss due to foreign denominated bonds and debt due to a stronger yen in September end. And also, there is some net profit, including group company reform-related tax costs impacted plan in the second half, but this will be resolved for the full year. And excluding those onetime factors, the first half net profit is actually positive compared to the previous year.
And Page 6. For the second quarter of FY '25, we marked a record high for both our revenue and OP as well as OP margin as the second quarter.
Please refer to Page 7. And as I explained earlier, for the first half revenue and OP variance against the previous year is shown as a waterfall chart. And FX impact accounted for JPY 84 billion in sales growth and also JPY 24 billion worth of OP growth and worsening due to higher component and logistic costs accounted for JPY 12 billion, plus the worsening mix due to a lower weight of FA system division is there. But through improvement efforts, including JPY 33 billion worth of price improvement, even excluding FX, we were able to grow both sales and OP compared to the before.
And for -- by segment, FA system and profit went down due to softer market, but the profitability efficiency improvement efforts in infrastructure as well as automotive, equipment and life and semiconductor device offset the decline.
And in terms of the consolidated P&L, I will focus on the other points that I have not explained before. For cost of sales, it was 69.3%. And compared to 71% of the previous year, we improved by 1.7 points. And there is an improvement of 0.5 points due to FX improvement, but this is the result of the price improvements, profitability, efficiency improvement of each business. And for SG&A, it grew by JPY 35.3 billion year-on-year. But in addition to weak yen impact of JPY 14.5 billion, it is also caused by the labor cost and R&D cost increase.
Please refer to Page 9. This is the consolidated P&L for the 3 months of our second quarter. Cost of sales got better by 3 points year-on-year, but we're seeing especially stronger improvement in second quarter. In addition to the dormant stock translated into sales, but also -- this has also contributed by the cost of goods improvement.
I would now like to explain the consolidated statement of financial position. For the assets, this has gone down by JPY 74.5 billion compared to last fiscal year-end. And inventory increased by JPY 7.9 billion and FX was an impact of JPY 15.2 billion. So it was actually JPY 23.1 billion increase. And for individual production business, due to the progress of construction, inventory is increasing. But for mass production business, HVAC and home appliance and the other FA system semiconductor device has a balance increase -- balance is lower versus last fiscal year-end.
And so for inventory, the balance is JPY 51.5 billion and impact from FX is JPY 5.1 billion, and we are seeing a better inventory mass in production. And total equity is JPY 13.5 billion increase compared to the year. And of that, Mitsubishi Electric Corp. shareholders' equity increased by JPY 118.6 billion. But on the other hand, due to dividend as well as buyback, it has increased by JPY 14.4 billion to JPY 3.753 trillion, and that is the ratio of Mitsubishi Corp. shareholder equity against net asset grew by 1.0 points to 61.6%.
Page 11, please. For cash flow from operating activities due mainly to decreases in payment of trade payables and expenditures of inventories, the inflow increased JPY 89.5 billion to JPY 271.4 billion. For cash flow from investing activities due to a JPY 12.4 billion increase in property, plant and equipment, the outflow increased JPY 35.1 billion to JPY 118.5 billion from the same period of last year. As a result, free cash flow is up JPY 54.4 billion year-on-year to JPY 152.9 billion.
Please go to Page 12. Next is breakdown of revenue and operating profit by segment. Infrastructure, Life, Business Platform and Semiconductor and Device saw year-on-year increases both in revenue and OP, while Industry & Mobility saw decreases in both revenue and OP. Next several pages show details by segment. Breakdown by subsegment is shown on Page 22, supplementary materials.
Page 13, please. First, Infrastructure segment. In Public Utility System, due to the strong performance of the UPS business for overseas data centers and solid performance of the Transportation business, order revenue and OP all exceeded the previous year level. In Energy Systems, due to a strong demand for power stabilization associated with expansion of renewable energy in Japan and overseas as well as the impact of profitability improvement efforts, revenue and OP exceeded the previous year level.
In Defense and Space Systems, both revenue and OP increased year-on-year. Orders for the first half was lower than in the previous year due to the absence of large-scale defense system projects last year. However, orders for the full year are expected to increase significantly year-on-year, and so our revenue and OP helped by the ongoing profitability improvement measures.
Page 14, please. Industry & Mobility segment. In FA Systems, demand for lithium-ion battery and other decarbonization-related offerings remained stagnant. However, demand for smartphones and machine tools in China continued to increase, leading to an increase in orders year-on-year. However, a full-fledged strong recovery is yet to be seen, and both revenue and OP fell below the level recorded last year. In automotive equipment, thanks to strong new car sales in almost all regions except for Japan, where sales were on par with the previous year and significant price and cost improvements compared to the previous year, revenue and OP both exceeded those of the same period last year.
Page 15, please, Life segment. In Building Systems, due to a continued recovery in demand in Japan and overseas and a successful outcome of the strategy to focus on maintenance and renewal, which helped increasing domestic renewal business, the business posted a year-on-year increase in orders, revenue and OP. In Air Conditioning Systems and Home Products, despite the continued stagnation in demand for home air conditioning in Europe, thanks to a strong demand in North America and Asia, excluding China, positive impact of foreign exchange rates and the price improvements, revenue and OP increased from the previous year.
Next is Page 16, Business Platform segment. Due to the firm demand for system upgrades and DX-related offerings, orders received and OP all increased over the same period last year. In Semiconductor and Device, despite the stagnant demand for power semiconductors, the business saw a strong demand for optical devices for telecommunications. Orders increased year-on-year due to a decrease in large-scale deals for power semiconductors for electric power and railway. Revenue remained at the same level as last year, and OP was higher than in the previous year, mainly due to the impact of sales mix.
Page 17, revenue by location of customers. For overseas, despite a decrease in demand in some regions and fields, thanks to a weaker yen, revenue increased JPY 52.2 billion or 4% year-on-year to JPY 1.419.6 trillion. Meanwhile, revenue in Japan increased by JPY 52.7 billion or 5% year-on-year, resulting in an overseas revenue share in the total consolidated revenue of 53.7%, which is slightly below last year.
Page 20, please. FY 2025 full year forecast, revenue of JPY 5.390 trillion and OP of JPY 400 billion are both unchanged from the previous announcement. The segment breakdown of revenue and OP is disclosed also on Page 24, supplementary materials. For the FA Systems business, despite the ongoing recovery in demand of some sectors, overall demand still is yet to be fully recovered. In the light of the absence of significant recovery in demand within the year, we have revised our outlook. On the other hand, in the automotive equipment and infrastructure businesses, our efforts to improve profitability and efficiency are proving to be successful. So we have revised the forecast upward.
This concludes my explanation.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]