Mitsubishi Heavy Industries Ltd

TSE:7011

Earnings Call Analysis

MHI Reports Strong FY2023 First Half

The company saw significant year-over-year increases in order intake, revenue, and profit for the first half of FY 2023, with order intake notably high at 68% of the initial annual forecast, leading to a raised forecast from JPY 4.6 trillion to JPY 5.6 trillion. Despite an Aero Engines one-time loss and lower operating cash flow, positive trends from price optimization and currency impacts drove profits up, with business profit reaching JPY 100.9 billion. The company also announced an interim dividend of JPY 80 per share. Energy Systems, Plant & Infrastructure, Logistics, Thermal & Drive Systems, and Aircraft, Defense & Space segments all demonstrated progress, contributing to the optimistic revision of full-year forecasts across multiple segments.

Robust Financial Performance with Record-High Dividends

The company has delivered a strong financial performance for the first half of Fiscal Year 2023, with order intake, revenue, and profit all surpassing previous year's numbers. The highlight is a substantial increase in order intake, reaching 68% of the initial annual forecast at JPY 4.6 trillion. This prompted an upward revision of the full-year forecast to JPY 5.6 trillion, primarily driven by exceptional progress in the GTCC and Defense segments. Both business profit and net income showed significant improvement despite a one-time loss in Aero Engines. The depreciation of the yen also played a role in boosting profits. Investors would be pleased to note a record-high interim dividend of JPY 80 per share, surpassing the JPY 75 paid out in 2019—reflecting the company's strong earnings and confidence in its financial health.

Solid Asset Growth and Cash Flow Management

The balance sheet reflects a sturdy position with an increase in total assets, primarily due to currency translation effects as the yen depreciated, although it is important to note that operating cash flow saw a significant decrease. However, the company's management has reinforced its commitment to maintaining careful control over trade receivables and inventories, indicating a focus on strong cash flow management. The slight uptick in investing cash flow, attributed to the sale of securities, further underlines the company's proactive financial strategies.

Segment Performance and Outlook

The segments within the company experienced varied performances. The Energy Systems segment saw increases across order intake, revenue, and profit, with the full-year order intake forecast revised upwards by JPY 200 billion, signifying strong growth. The Plant & Infrastructure Systems segment also reported higher revenue and profit, though order intake dipped slightly—attributed to a reduction in Metals Machinery. Contrastingly, the Logistics, Thermal & Drive Systems segment illustrated positive growth in both order intake and revenue, roughly in line with 50% of the full-year forecast. The Aircraft, Defense & Space segment stands out with order intake matching the initial full-year forecast, leading to a substantial increase in the full-year intake forecast from JPY 1 trillion to JPY 1.8 trillion—a testament to robust demand in Defense and increased shipments to Boeing.

Strategic Initiatives and Future Plans

The company's strategic initiatives under the 2021 Medium-Term Business Plan (MTBP) show promising results. With activities ranging from suspension of SpaceJet development to restructuring of thermal power and metals machinery, as well as the adoption of digital technologies, the company has made significant strides in strengthening its profitability. Moreover, the company has actively engaged in new growth areas, responding to market needs in energy and infrastructure sectors, and aligning with sustainability objectives. This includes projects in renewable energy, hydrogen initiatives, and CO2 capture in collaboration with industry leaders like ExxonMobil. With a keen eye on market trends such as 5G, AI, and energy security, the company is also exploring opportunities in nuclear power and defense, all while preparing for the next medium-term business plan for 2024 with a clear mission towards 'Mission Net Zero' and societal well-being.

Earnings Call Transcript 2024-Q2

[Hisato Kozawa, executive]

Good afternoon, everyone. Allow me to summarize the first half financial results using the first half FY 2023 financial results presentation materials. The materials are organized according to the table of content. First, I will provide an overview of our financial results. Please see Slide 4.

This page shows the key financial indicators. Slide 5 summarizes the highlight. Order intake, revenue and profit were all higher year-on-year. The increase in order intake was particularly large, and the rate of progress against the initial annual forecast of JPY 4.6 trillion was about 68%, an unusually high level. We have raised the annual forecast by JPY 1 trillion to JPY 5.6 trillion partly because of the progress in GTCC and Defense both of them have exceeded the plan.

Both business profit and net income increased significantly year-over-year. As shown later on Slide 9, although a one-time loss was booked in Aero Engines related to an international joint development project, the effects of price optimization, which began to be seen last year, increases in revenue, and the impact of the depreciation of the yen contributed similarly to the first quarter.

Moreover, free cash flow decreased by approximately JPY 80 billion year-on-year but remained at roughly the same level as forecast in the first half of our full year plan, indicating progress as planned. We will pay an interim dividend of JPY 80 per share as announced at the beginning of the fiscal year. The interim dividend is a record high, exceeding the JPY 75 paid in 2019.

Slide 6 and a few pages beyond, provide a little more detail about our financial results. Slide 7 includes information already provided, so let me skip on explanation. Slide 8 shows balance sheet and cash flows. Total assets increased by JPY 286.3 billion from the end of FY 2022 to JPY 5,761.1billion. The majority of this increase is attributable to the impact of currency translation effects related to foreign currency denominated assets due to the depreciation of the yen.

This amounted to approximately JPY 180 billion. Although, inventories have increased slightly, we believe this is a normal trend for MHI within the range of normal fluctuations. As for cash flow, operating cash flow decreased significantly year-on-year. While revenues are expanding, we are in a phase of working through advances received due to changes in our product mix. However, we will continue to carefully manage trade receivables and inventories. Investing cash flow increased slightly year-on-year due to the sale of securities.

Slide 9 shows factors which contributed the year-over-year changes in business profit. The leftmost bar shows first fiscal year 2022 business profit, which was JPY 54.8 billion. To the right, the variance in one-time expenses in the Thermal Power and other businesses, which is a difference in losses incurred during the first half of fiscal year 2022 which are organizational transformation expenses for European operations, and the one-time loss related to an Aero Engines program, which is booked in the current fiscal year.

Regarding price optimization, where cost increases in Forklifts, HVAC and other businesses were down year-over-year. Benefits of price optimization or price increases exceeded, this resulting in an increase of JPY 24 billion. Due to other factors shown here, business profit in first half fiscal year 2023 was JPY 100.9 billion.

Slide 10 shows a summary of order intake, revenue and business profit by segment. With the next few pages, I will explain the situation in each segment.

Slide 11, total status of Energy Systems segment. Order intake, revenue and profit all increased year-over-year. Particularly based on GTCCs continued good performance and favorable overall progress, we have revised our full year order intake forecast by JPY 200 billion. In terms of profit, although, progress has been slow compared to the full year forecast due to the booking of onetime losses and other factors, we have maintained the current forecast as positive impact from the depreciation of the yen is expected.

Slide 12 shows the situation in the Plant & Infrastructure Systems segment. In this segment, revenue and profit increased year-over-year despite a decrease in order intake. As shown in the table, the main cause of the decrease in order intake was Metals Machinery. However, the level of order intake in the first half at JPY 226.9 billion was high, and the market continues to be strong.

Slide 13 shows the situation in the Logistics, Thermal & Drive Systems segment. Order intake, revenue and profit increased year-over-year. Order intake and revenue are showing steady progress at around 50% of the full year forecast. We have raised profit forecast by JPY 10 billion based on the progress made in the first half and the impact of the foreign exchange rate assumptions.

Slide 14 shows the situation in Aircraft, Defense & Space. Order intake, revenue and profit increased year-over-year. Specifically, order intake booked in the segment totaled JPY 999.4 billion, which is roughly equal on the same level as the initial full year forecast. This was due to continued strong growth in Defense in the first quarter. Based on the progress made thus far as well as our future plans, we have substantially increased the full year order intake forecast from JPY 1 trillion to JPY 1.8 trillion.

Revenue and profit increased year-over-year due to an increase in the number of 787 aircraft [ shipped ] to Boeing in the Commercial Aviation Aero Structures businesses and the benefits of the depreciation of the yen. With this, we have increased the full year forecast by JPY 10 billion.

On Slide 15, through 18, shows FY 2023 earnings forecast. A summary of the revisions made is shown on Page 16. I'll go and explanation as this page outlines information already shared. This concludes my explanation. Thank you very much.

[Seiji Izumisawa, executive]

Now please allow me to start my presentation. As been discussed by our CFO, the second quarter of FY 2023 have surpassed the previous year's level in terms of order intake, revenue and the business profit. This is the result of the various initiatives that we've been promoting as a part of 2021 MTBP. In terms of the operating environment, it remains still uncertain with the weaker yen and unstable energy supply due to the geopolitical risk as well as the confusion of the value chain.

However, we believe that 2021 MTBP is progressing as per plan, and it is still possible to achieve the target. Please let me recap 2021 MTBP. We have seen a rapid change in the market condition due to COVID-19 pandemic in 2021 MTBP. So we decided to strengthen profitability rather than pursuing the expansion of top line. And we have implemented various initiatives. One of the challenges that we have faced was the development of SpaceJet.

We looked at the changes in the market environment, and we have decided to suspend the development. And also, we have worked on the restructuring of boiler base for thermal power business and consolidated unprofitable businesses in metals machinery. We have also adopted digital technology to expand the area of service to stabilize the profit. In terms of the business portfolio, we have incorporated Mitsubishi Power, Mitsubishi Heavy Industries Engineering into MHI. We have made the acquisition of the electrification business as well as the naval and governmental ships. And we have sold the machine tool business.

Another important initiative of 2021 MTBP was to grow the new growth segment of businesses. And we are now seeing some tangible effect. As for the energy transition, we have promoted our renewable energy initiative. And on top of that, we have gained further understanding of the more realistic energy transition based on the customer needs, which is compatible with S+ 3E concept.

In terms of the social issue, we are now pursuing both sustainability of the society as well as securing the business profit. From that perspective, we have implemented various initiatives in a wide range of business domain. More specifically speaking, we have promoted a [ fuel ] conversion of existing facilities. We have responded to the future hydrogen needs, and based on US IRA, we've been working on the clean hydrogen hub project.

In the area of the CO2 capture, we are collaborating with ExxonMobil. And on top of that, we've been working on the demonstration project in Takasago Hydrogen Park to achieve the demonstration of hydrogen and ammonia. In terms of the Smart Infrastructure, we are seeing a rapid growth of data center market, driven by the higher needs of the high communication for 5G and generative AI. We have a business base of high efficiency cooling equipment as well as carbon-free electricity for this industry, and we have made the acquisition of U.S. company Concentric. With this as a foundation, we are aiming to achieve one-stop solution in the most cutting-edge total energy solution.

And we are seeing heightened interest in the security area due to the heightened attention of geopolitical risks and also seeing a higher interest in energy security as well. That is leading to the new business opportunity in Nuclear Power as well as Defense businesses by progress update on 2021 MTBP initiatives to conclude, I believe that it is possible to achieve our targets under the plan.

Next, I will explain the overall direction of our next medium-term business plan, the 2024 MTBP, which we are currently formulating. First off, MHI's mission is to integrate cutting-edge technology into expertise built up over many years to provide solutions to some of the world's most pressing issues and provide better lives to the people. With this mission in mind, in order to realize our medium- to long-term goals of Mission Net Zero and a safe, secure and comfortable society. During the 2024 MTBP period, we will provide realistic solutions tailored to each region and customer while aiming to become a hub for transitional ecosystems founded in craftsmanship, connecting upstream and downstream.

We will work on 3 key priorities to this end, decarbonization, energy saving, automation and contributing to national security. Furthermore, during the 2021 MTBP focus has been on strengthening profitability. But during the 2024 MTBP, the focus will be on achieving both profitability and growth, aiming sustainable growth as a company. We aim to achieve business growth in line with our competitors while improving profitability and capital efficiency.

To this end, we are considering expanding business area areas upstream and downstream, taking on project origination, enhancing competitiveness through mergers and acquisitions and shifting resources to growth areas by further optimizing our business portfolio. To realize this, we will invest more than JPY 300 billion and grow our businesses as such. I will explain the specific initiatives when the next MTBP is announced in May of next year. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]