Mitsubishi Heavy Industries Ltd

TSE:7011

Earnings Call Transcript 2023-Q4

[Hisato Kozawa, Chief Financial Officer]

Good afternoon. On my side, I would like to explain about the Summary of FY 2022 and the Outlook of FY 2023. I can see the content of Slide 2. First of all, I would like to give you the overview of our financial results.

Please turn to Page 4. This shows the major financial results. And Slide 5 is a summarized -- please turn to Slide 4. So that gives you some point in terms of order intake and revenue. In line with the third quarter, it has been growing steadily. Year-over-year, it has grown by 10% and 9%, respectively. Whether it be order intake or revenue, it has been the effect from the exchange rate from this fiscal year. So this has been an increase of ¥300 billion for each of the items. If we exclude this, order intake has increased in terms of the revenue, the same as last fiscal year.

In terms of profit, last fiscal year, we have experienced material cost and transportation inflation. Electricity cost and fuel cost has been going up, and there has been some one-off expenses as some of the business has seen some negative factors. But that said, with the revenue increase, price optimization, fixed cost reduction and the positive impact coming from the weaker yen, the business profit and net income has increased. Net income was ¥120 billion as an initial forecast, but it has improved by ¥10 billion. The full year dividend have improved from ¥120 to ¥130. This is a ¥10 increase against initial outlook and compared to last year is a ¥30 increase.

Going to Slide 6 to Slide 8. These are the topics of this year's financial results. Slide number 6, this is the Gas Turbine Combined Cycle business. Order intake was ¥834.6 billion. It has grown substantially from the last fiscal year. On the lower left-hand side, there is a doughnut graph. It shows the share of the newbuild. In terms of the order increase mainly in the JAC type, which has the global [indiscernible] power generation efficiency in the 2022 year, we were number one in terms of share globally. Services grew steadily in terms of the revenue. And for newbuild and service, it has been steady. In terms of order intake and revenue on a value base, it has been a little bit high level.

Slide number 7 is about the nuclear power business. In terms of revenue, FY '22 compared to last fiscal year, we saw a decline. This is due to the kick-out of the existing PWR restart or the construction of specialized security facility. Going forward, we think that the same type of construction will come with the PWR and the fuel cycle related work will continue. For '23, we think that this business will continue to grow.

Going to Slide number 8. This is the logistics, thermal and distribution business. You can see that in terms of the revenue, it has been growing very steadily. The impact coming from the ForEx and the price increase impact is included. Even if you exclude this on the volume base, forklifts and HVAC products has grown. In terms of the profit going to the second half of the fiscal year, price optimization has been -- we started to see its effect. FY '23, we hope to improve further.

Slide number 9 and onwards, this is more detail about our financial results. Slide 10 will be a repetition, so I will skip this slide. Slide 11 and 12 is about the balance sheet. Total assets compared to the end of fiscal 2021 has increased by ¥358.4 billion, reaching ¥5,474.8 billion. The breakdown with this is that compared to the year-end, the yen has weakened. And the foreign-denominated asset ForEx impact is about ¥120 billion. The increase of cash on hand is plus ¥33.4 billion. The increase in our inventories and trade receivables seems to be a bit large, but this comes from the impact from the ForEx conversion. And the sales itself has grown. If you look at the cash conversion cycle, it is basically the same level as last year. Although it has not worsened, we think there is still room for improvement. We will continue to conduct initiatives.

On the lower right-hand side of Page 11 is the gross interest-bearing debt but less cash on hand. And looking at the net interest-bearing debt, last fiscal year is ¥420.6 billion. FY '22 was ¥394.7 billion. Basically, we have been able to reduce ¥25.9 billion. In terms of the equity ratio, it has increased by 1 point to 31.8%. Equity ratio was 0.04 improvement to 0.40. We've been able to maintain a high level of fiscal soundness.

Page 13 is about the cash flow situation. Free cash flow has declined especially from last year, which was a record high, but we have been able to secure a positive ¥35.3 billion of free cash flow. Beginning of the year, we anticipated that the free cash flow will be in the negative territory due to the large advances received at the end of last fiscal year. But because the order intake has increased, so there was a recent [indiscernible], and we have been able to sell assets and [indiscernible].

Slide 14 explains profit bridge from the previous year. To your left, you see a bar graph. FY 2021 business profit was ¥160.2 billion. LTD and aviation businesses drove revenue by ¥39 billion. However, due to materials and logistics cost inflation, production adjustment caused by supply chain confusion, profits decreased by ¥8 billion. This negative ¥8 billion includes ¥40 billion improvement through price optimization.

Onetime impact in thermal power and other business was explained already in the third quarter earnings call. Back then it was ¥35 billion, but it grew by ¥15 billion in the fourth quarter, and now it's ¥50 billion. These were mainly caused by overseas constructions. We made an allowance for competitive projects. Other factors are also explained here, and FY 2022 business profit was ¥193.3 billion.

Slide 15 explains order intake, revenue profit for our business activities by segment. And let me explain it segment by segment. Slide 17 shows the result of Energy Systems. Order intake and revenue grew from the previous year. However, profit slightly declined. As I mentioned earlier, [indiscernible] project generated significant losses, and this drove overall segment profit down. Other business were flat or a slight increase from the previous year.

Slide 18 shows Plants & Infrastructure segment. Order declined from the previous year. However, it still kept a high level. Both revenue and profit grew.

Slide 19 shows Logistics, Thermal, Drive System, LT&D. Revenue and order intake grew from the previous year. For profit, as I mentioned earlier in Page 8, increase.

Now on Slide 20, Aircraft, Defense& Space. Commercial aviation Tier 1 business saw an increase in shipment of freighters and business jets and enjoyed weaker yen benefit. As a result, both revenue and profit increased. Defense business is trending strong.

Slide 21 and beyond explains FY 2023 earnings forecast. Slide 22 showed a summary of the outlook. I'm not going through all the numbers. However, order and revenue is forecasted to grow. Profit is expected to jump up significantly after taking some initiatives.

Please take a look at Page 23. FY 2023 is the final year of our midterm business plan. This table shows changes in major financial KPIs from FY 2020 to FY 2023. Numbers until FY '22 are actual. And as highlighted, there are three focus area for us, and we've been taking some improvement initiatives. Based on our current forecast, business profit margin and interest-bearing debt will achieve initial target. Equity capital is growing more than we initially expected, so we may underachieve ROE. As for dividend in FY 2023, as we explained in midterm business plan, we are expecting ¥160 per share. This makes an annual dividend record high in our history.

Slide 24 highlights explain what I have already mentioned. So please take a look at that later. Slide 25 onwards explains profit bridge outlook for each segment. Please take a look at them in your spare time. Thank you.

So next, I would like to ask Izumisawa, CEO, to make a presentation.

[Seiji Izumisawa, Chief Executive Officer]

From my side, I would like to give you a summary. First of all, for FY '22, just as a review, FY '22, we're seeing a recovery of the market from the COVID pandemic and saw the weaker yen and the price optimization showing effects. On the other hand, with the prolonged Russia invasion to Ukraine and the continuation of inflation, the instability of energy supply, the semiconductor shortage, the disruption of supply chain, there has been a lot of volatility in this year.

Again, this stacks up in terms of what actually Kozawa, CFO, has explained in terms of order intake, revenue, business profit, each of the items has been able to overachieve last fiscal year. This is due to the external factors such as the recovery of the market from the pandemic. In the midterm business plan, we have been focusing on the growth of our business, expanding our service business, improving productivity. These implemented measures have shown effects.

Specifically, gas turbines, aero engines, metal machinery, corrugating machinery, logistics systems, these were the areas that have shown good results. More specifically, we have seen a solid network on gas turbines and the aero index growing compared with COVID level. And there has been active investment in green steel for the nickel machinery business. Existing business has grown. The corrugating machinery and the logistic systems expansion are seen. On top of that, due to the heightened awareness of the economic security, there's new business opportunities.

Some of the projects have seen more than expected losses. In terms of the business profit, that is underachieved. But in our midterm management plan, we have seen profitability. This is going in line with the plan.

This is my evaluation. As I have explained on the 1st of April presentation, in terms of growth strategy initiatives, it's not included in today's presentation. I'd like to touch upon that as well. There has been some variations depending on the business, but we have [indiscernible] results.

For the energy transition, there is heightened interest in energy security. Feasible road maps have been drawn. Initiatives for realistic approaches are being made. The need for the gas turbines, which enables hydrogen-powered gas turbines in the future, has been expanding. Demand for the combination with carbon capture is growing. On top of that, carbon capture itself is seeing higher demand for feasibility studies. We are going to take initiatives to make sure that we can implement those.

Another pillar is smart social infrastructure. We've been working on proof of concept for automated warehouse, energy saving and carbon-free solution for data centers. We are now working on concrete projects. These are something that we would like to expand in the future. However, for the mobility area, including autonomous driving, we've been doing a lot of studies. However, we are still halfway through.

Now for FY 2023 outlook, CFO has already mentioned earlier, but the order intake and revenue faced geopolitical risks, changes in the market environment, and there are some other uncertain factors. But we expect the gas turbines, nuclear power and defense can grow into the future, and they can overshoot the plan.

For business profit, we are going to -- we set the even higher target for FY 2023 as the final year for our midterm business plan. Material cost inflation and FX change are still uncertain, but through price optimization, service expansion, enhancement of the profitability, we are going to increase our capability to improve the earnings of core businesses. That's all from me. Thank you.