IHI Corp

TSE:7013

Earnings Call Transcript 2024-Q1

[Yasuaki Fukumoto, executive]

This is Fukumoto, Director, Executive Officer, General Manager of Finance and Accounting of IHI Group. I will explain IHI Group's financial results for the first quarter of fiscal year 2023, based on the PowerPoint presentation materials disclosed at 3:00 p.m. today. Page 2 shows the contents of today's presentation.

Please turn to Page 4. This slide shows an overview of the results. In the first quarter of fiscal year 2023, generally, we were off to a good start against the operating profit target of JPY 90 billion for the year. In the civil aero engines business, sales of spare parts remained steady, along with the recovery in demand for aero transportation, although labor shortage in the airline industry and supply chain instability still persist.

In some businesses, the impact of the soaring prices of raw materials and equipment still remains. However, we have been able to reflect it in selling prices to a certain extent. We are also working on strengthening the cost structure further to respond flexibly to changes in business environment. As for cash flows, while we are preparing for increases in production, in the civil aero engines business in response to recovery in demand, IHI Group is accelerating our efforts to reduce working capital in order to secure cash flows from operating activities. I will explain details using the following slides.

Please turn to Page 5. This slide shows the consolidated results, including orders received and the financial summary. Orders received were JPY 315.4 billion, up 32.4% year-on-year. Revenue was JPY 298.4 billion, up 12.9% year-on-year. As shown at the bottom of the table, the average exchange rate for revenue was JPY 137.44 to the U.S. dollar. There was JPY 12.15 depreciation from the same quarter of the previous fiscal year.

Operating profit increased by JPY 1.3 billion year-on-year, up to JPY 8.9 billion due to recovery in sales of vehicular turbochargers as well as higher sales of spare parts in the civil aero engines business and also due to the impact from weaker yen. Despite decrease in profit due to lower construction volume in nuclear energy and increase in SG&A as we proactively invested in R&D and in our people. Profit attributable to owners of parent was JPY 5.6 billion.

Please turn to Page 6 for orders received and order backlog by segment. Orders increased in all the reportable segments with substantial increase achieved in Resources, Energy and Environment. In Resources, Energy and Environment, orders increased due to orders for a large-scale power plant projects in Southeast Asia. In social infrastructure, orders increased in bridges and water gates and shield systems.

In Industrial Systems and General Purpose Machinery, orders increased mainly in vehicular turbochargers. In Aero Engine, Space and Defense, orders increased in several aero engines. As shown on the right, Order backlog at the end of June was JPY 1,319.3 trillion, up JPY 19.8 billion from the end of the previous fiscal year.

Please turn to Page 7 for revenue and operating profit by segment. Revenue decreased slightly year-on-year in social infrastructure, but all the other businesses achieved steady revenue growth. Although year-on-year operating profit growth was not risk in some businesses, Aero Engine, Space and Defense achieved OP growth of JPY 7.3 billion, up to JPY 9.3 billion.

Change in operating profit from the previous fiscal year is explained on the next slide and on this slide, I will explain year-on-year changes in revenue. In Resources, Energy and Environment, revenue increased due to the progress of construction of large-scale power plant projects in Southeast Asia, despite lower construction volume in nuclear energy.

In Social Infrastructure, revenue decreased in shield systems. In Industrial Systems and General Purpose Machinery, revenue increased in vehicular turbochargers. Aero Engine, Space and Defense recorded increase in revenue due to higher sales of spare parts in civil aero engines.

Please turn to Page 8. This is a breakdown by segment of the year-on-year increase in operating profit. Change in revenue had JPY 3.4 billion positive impact on the operating profit. Despite a profit decrease in nuclear energy due to lower construction volume, change in revenue overall made positive contribution to profit growth as a result of recovering sales of vehicular turbochargers as well as higher sales of spare parts in civil aero engines.

Changing construction profitability pushed up operating profit by JPY 1.5 billion. Although there was a temporary change in profitability due to the impact of recording the necessary costs in advance in some bridges and water gates projects, we believe we can make up for it as we negotiate for increasing contract prices towards the end of the fiscal year. In addition, decrease in burden of the program-related costs associated with the improved performance of new engines in the civil aero engines business together with other factors contributed positively to operating profit.

The positive impact from the change in foreign exchange rate was JPY 3.7 billion centered on civil aero engines. Changing SG&A lowered operating profit by JPY 5.3 billion, which was attributable to the increase in R&D and personnel costs. Changing other income and expenses mainly reflects a reaction to other income recorded in the previous fiscal year.

On the following page, we will explain about the finance income costs, et cetera. Breakdown for civil aero engine business and vehicular turbocharger business, which had been explained in the section titled, financial results by segment until last fiscal year, are available as part of appendices for later reference.

Please turn to Page 9. Finance income, costs, et cetera. IHI Group recognized JPY 6.9 billion foreign exchange gains as yen depreciated at the end of Q1 compared to the beginning of the year, as shown below. Since the move of yen was smaller in Q1 this year compared to Q1 last year, the size of foreign exchange gains decreased on year-on-year basis.

Other finance costs was JPY 3.9 billion. The major factor was fair market valuation of the currency option IHI Group is mainly using as of the -- as one of the foreign exchange hedging measures. When the BoJ's monetary policies were expected to change in the future, we have been proactively hedging for FX to get prepared for a potential rapid yen appreciation. But since yen was weaker than expected at the end of June, we had to recognize the valuation loss. Share of profit of investments accounted for using equity method was JPY 800 million.

Please turn to Page 10, financial position. Total assets were JPY 1,988.8 billion, increased by JPY 46.9 billion from the end of the previous fiscal year as inventories increased in the civil aero engine business since we are continuously prioritizing to secure parts inventory for our future production enhancement when the supply chain system is unstable.

Interest-bearing liabilities, the number in the middle of the chart increased following the higher inventory level and was JPY 588.7 billion. Total equity was JPY 466.8 billion, increased by JPY 10.6 billion. As a result, debt-to-equity ratio was 1.26x, ratio of equity attributable to owners of parent was 22.2%.

Please turn to Page 11. Consolidated cash flows. Cash flows from operating activities was minus JPY 59.5 billion as working capital increased following the increase in civil aero engine inventory as explained earlier. IHI Group will continuously promote initiatives to shorten the cash conversion cycle to reduce working capital and strengthen cash generation ability. Cash flows from investing activities was negative JPY 13.8 billion. Free cash flow was negative JPY 73.4 billion.

On Page 12, you will see the actual results of R&D, CapEx and depreciation. And on Page 13, revenue by region and assets balanced by segment. Talking about investment. After the first 3 months, we believe that roughly speaking, we are being able to make progress in line with our expectation.

Next is the forecast of the consolidated results for fiscal 2023. Please turn to Page 15. No change in the forecast from the ones we announced on May 9, including the breakdown by segment. Orders received is expected to be JPY 1.5 trillion; revenue, JPY 1.45 trillion; and operating profit, JPY 90 billion. Assumed FX rate for U.S. dollar from Q2 onward is JPY 130, no change from before. JPY 1 move will have approximately JPY 1.0 billion impact on the operating profit during the remaining 9 months. No change in the annual dividend forecast.

Please turn to Page 18. No change in operating profit forecast by segment, but some changes within aero engine business by factor, reflecting more recent situation. Under the ongoing unstable supply chain system for our civil aero engine business, parts deliveries have been still delayed, resulting in delays in PW1100G engine maintenance. And since the size of negative impact on the maintenance volume has been worse than expected, now we are expecting some pushout of aftermarket sales recognition into next fiscal year, which is the factor we are incorporating this time. On the other hand, as a positive factor, yen has been trending weaker than expected during Q1. And therefore, we are not revising the annual OP guidance.

Please turn to Page 28. As you see below, with our civil aero engine business, we have had a situation where we need to conduct additional inspection for part of the delivered engines under the PW1100G-JM engine program, which is a program IHI Group participates in. IHI Group will appropriately action while collaborate with other air program participating partner companies to minimize the potential future impact. Including the response to this case, IHI Group is determined to provide the utmost support to enable our customers' smoother operation.

Please turn to Page 19, cash flow forecast. No change in cash flow forecast. As explained on Page 18, delay in parts supply for civil aero engine business is expected to have some impact on our cash. IHI Group is aiming to secure JPY 100 billion cash flows from operating activities by further reducing working capital by promoting collection of construction payments. Following pages are financial results by segment and appendices. Please take a look at them later. This concludes our presentation.

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