Mitsubishi Heavy Industries Ltd

TSE:7011

Earnings Call Analysis

Robust Financial Performance and Optimistic Forecasts

The company's financial results show year-over-year increases in order intake, revenue, and profit, with orders reaching levels comparable to the previous full year. Forecasts have been raised due to the yen's depreciation and strong advancements across segments, especially in nuclear power. Revenue growth occurred across all segments, accounting for currency fluctuations, and efforts in price optimization contributed positively to profits. Despite a negative free cash flow, larger inflows are expected in Q4. Investments and acquisitions have been made, including a U.S. company and a new Tokyo office. The balance sheet grew, with assets and shareholder equity both increasing notably.

Significant Surge in Orders with Boosted Full-Year Forecasts

MHI has witnessed a remarkable year-over-year growth, particularly evidenced by an enormous jump in order intake, matching the full year figures from the previous fiscal year by the end of Q3. The company has taken strides ahead with a reforecast for the fiscal year, lifting the order intake projection by JPY 1.4 trillion over the initial forecast, culminating in an anticipatory figure of JPY 6 trillion. This surge is attributed to the beneficial devaluation of the yen and better-than-projected performances in nuclear power and other segments.

Revenue Elevates Amidst Foreign Exchange Fluctuations

Revenue figures have likewise ascended across all segments compared to the previous year. Even after discounting for the JPY 100 billion foreign exchange impact, MHI notes an intrinsic revenue uptick. The revenue forecast also boasts an additional JPY 100 billion due to prosperous trends in plant and infrastructure systems and logistics, thermal and drive systems segments, pointing towards a total expectation of JPY 4.4 trillion.

Robust Profit Growth, but Negative Free Cash Flow

The company saw substantial increases in both business profit and net income. Aided by persistent price optimization endeavors and overall profit-sensitive initiatives, MHI has enhanced profitability. Nevertheless, it grapples with a negative free cash flow of JPY 400 billion, which, while lower than the previous fiscal year, is part of a calculated move expecting significant cash inflows in Q4 aligning with the annual plan.

Strengthened Assets amid Investment Decisions

Total assets burgeoned by JPY 543.3 billion, thanks in part to currency translation effects due to the yen's depreciation and an upturn in shareholders' equity caused by rising stock prices. The upward trajectory also springs from strategic acquisitions like Concentric in the U.S. and expanded infrastructure such as a new office building in Tokyo.

Operating Cash Flow Dips as Investment Outflows Grow

Notwithstanding the revenue success, operating cash flow dwindled from the previous year, stemming from topside expansion and the phase of advances received coloration due to altered product mixes. Conversely, investing cash flow reflected higher outflows due to hefty growth investments and reduced inflow from asset sales.

Business Profit Impacted by One-time Expenses

The business profit has been influenced by a gamut of one-time expenses, from organizational changes to losses on international projects. Despite these, concerted price optimization efforts coupled with cost containment in forklifts and HVAC have borne fruit, with a notable JPY 30 billion increase in profits.

Segment-Specific Success Stories

Different MHI segments narrate their own success stories. The Energy Systems segment especially enjoyed an uptick in performance, leading to a revised order intake forecast up by JPY 200 billion. Similarly, the logistics system and Aircraft, Defense, and Space segments have adjusted their forecasts upward on account of consistent positive results and the yen's continued depreciation.

Final Thoughts and Stock Split Announcement

MHI rounded off the report with the declaration of a 10-for-1 stock split, a move in response to the Tokyo Stock Exchange's directive to bring down the share unit trading price, demonstrating the company's adaptability and commitment to maintain market compliance and investor accessibility.

Earnings Call Transcript 2024-Q3

[Hisato Kozawa, executive]

Hello. Good afternoon. My name is Kozawa. Allow me to summarize the quarters' 1-3 financial results, using the presentation materials. So material has been released in advance.

I will give you the overview of the financial results according to table of contents on Slide 2.

Please refer to the Slide 4 of the slideshow of the results for several financial indicators.

Slide 5 summarizes the highlights of order intake, revenue and profit, all increased year-over-year. The increase in order intake was particularly large with the order intake results through quarter 3, [JPY 4,51.3 billion], attaining the same level as of full year FY 2022.

Regarding the full year forecast, while we raised our order intake forecast by JPY 1 trillion at the time of our first financial results release, due to continued depreciation of the yen and progress in nuclear power and other businesses, which exceeded the projections, we further increased the book by JPY 400 billion to JPY 6 trillion.

Regarding revenue, all segments increased year-over-year, although the effect of the difference in foreign exchange rates versus FY '22 was around JPY 100 billion, even when excluding this revenue increased.

Based on progress through quarter 3, we raised the revenue forecast in the plant and infrastructure systems and logistics, thermal and drive systems segment by JPY 50 billion each JPY 100 billion in total, arriving at a company-wide full year total of JPY 4.4 billion.

Both business profit and net income showed large year-over-year increases as will be shown on Slide 9 later in the presentation. The benefit from price optimization efforts, which has continued as FY 2022, the effect of revenue increases and the [indiscernible] contributed positively to profit similarly to the first half of the fiscal year.

Value of free cash flow was negative JPY 400 billion, which is JPY 200 billion lower than FY 2022. That said, we are planning for large cash inflows in quarter 4, so this progress is mostly in line with the full year plan.

Slide 6 [and] such beyond that, provide a little more detail on our financial results.

Slide 7 includes information we already provided, so I will forgo the explanation.

Slide 8 shows balance sheet and cash flows. Total assets increased from the end of FY 2022 by JPY 543.3 billion to JPY 6,018.1 billion. To provide a breakdown of this increase, the impact of currency translation effects related to foreign currency-denominated assets caused by further depreciation of the yen was around JPY 130 billion and the impact of increase in stock prices of our shareholders was around JPY 50 billion.

Moreover, trade receivables and inventories increased, but we believe that these accounts are trending within the range of normal fluctuations for MHI. The main cause of the increase in fixed assets and other noncurrent assets with the acquisition of Concentric in the U.S. and a new office building in Tamachi, Tokyo.

Regarding cash flows, operating cash flow significantly decreased year-over-year. One reason for this is that we are both expanding the top line while entering a phase of working through advances received due to changes in our product mix.

We are, therefore, continuing to carefully manage accounts, particularly trade receivables and inventories.

Regarding investing cash flow, although there was income from the sale of securities and other activities, a decrease in inflows from asset sales and increase in growth investments, including the acquisition of Concentric caused outflows to significantly increase year-over-year.

Slide 9 shows factors contributing to year-over-year changes in business profit. The left most bar shows business profit in quarters 1-3 FY '22, which was JPY 105.2 billion. To the right of this is changes in onetime expenses, which is a difference between onetime expenses booked in each fiscal year. In FY 2022, in addition to organizational transformation expenses related to our European thermal power operations, we booked onetime losses from several international projects.

During FY 2023, in addition to the onetime losses associated with in aero engine program, which we incurred in the first half, we booked claim expenses for some international projects as well as a write-down for an international investment.

Regarding price optimization, cost increases contracted year-over-year in forklifts in HVAC. Well, the benefits of price optimization that is price increases exceeded this resulting in an increase of JPY 30 billion. Quarter -- for the first quarter, it was JPY 14 billion. Second quarter was JPY 10 billion, and the third quarter was JPY 6 billion.

So due to these other factors shown here, the business profit in quarter 1 was JPY 191.6 billion. And in terms of the impact was diminishing quarter-over-quarter.

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

Slide 11 shows the status of the Energy Systems segment. Order intake, revenue and profit all increased year-over-year, particularly of note, based on good performance in GTCC, which continued since fiscal '22 as well as a favorable progress in the segment overall, including nuclear power, we have raised our full year order intake forecast by JPY 200 billion.

Slide 12 shows the [indiscernible] financial results in the plants and infrastructure systems. In this segment, although order intake decreased year-over-year, revenue and profit both increased. As indicated in this table, main cause of the decrease in order intake was metals machinery. That said, considering that the current level of orders is stronger than original forecast, we have raised the full year guidance by JPY 50 billion to JPY 750 billion.

Based on the progress through quarter 3, we have also raised the guidance for revenue by JPY 50 billion to JPY 750 billion.

Slide 13 shows the status of the logistics, thermal and drive system. Order intake, revenue and profit all increased year-over-year. Based on the progress in logistics systems thus far as well as continued depreciation of the yen, we have increased the full year forecast for order intake and revenue by JPY 50 billion to JPY 1.3 trillion.

Slide 14 shows the situation in the Aircraft, Defense and Space segment, particularly, the order intake was mainly from plant project in the defense area. Based on the progress thus far as well as plans going forward, we have increased the original full year forecast of JPY 1.8 trillion by JPY 100 billion to a total of JPY 1.9 trillion.

Regarding profit due to an increase of 787 deliveries to Boeing as well as benefits from the weak yen in the commercial aviation aerostructure business and based on the progress through the quarter 3, we have increased the full year forecast by JPY 10 billion to JPY 60 billion.

Slide 15 to 18 shows the fiscal '23 earnings forecast.

A summary of the revisions made this time is shown on Slide 16.

I will forgo an explanation of these slides. Outline information I have already shared.

This concludes my presentation on our financial results, but allow me to maintain one more point regarding the stock split.

Our stock price is currently around JPY 10,000, which means that 1 unit of 100 share costs around JPY 1 million. I'm sure that you're aware that the Tokyo Stock Exchange has issued a request to lower share unit trading price with a specific guideline of JPY 500,000. And based on this guideline, we have decided to do 10 for 1 stock split.

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