IHI Corp

TSE:7013

Earnings Call Transcript 2019-Q3

[Takeshi Yamada, executive]

This is Yamada speaking. I will give an overview of IHI Group's financial results for the third quarter of fiscal year 2018 based on the PowerPoint presentation materials disclosed at 3:00 p.m. today.

First, I will explain the summary of the consolidated financial results for the third quarter. Please turn to Page 4.

This page shows the consolidated results, including orders received and income statement. Orders received were JPY 934.5 billion, down JPY 43 billion year-on-year. For your information, in fiscal year 2017, the closing date of the fiscal year for certain overseas consolidated subsidiaries was changed from December 31 to March 31. Although not described on the slide, these changes resulted in an increase in orders received by JPY 31.4 billion in the third quarter of the previous year.

As shown on the top right, the average exchange rate for sales in this quarter was JPY 111.39 to the U.S. dollar. The rate for the same period last year was JPY 111.68, so it was almost the same year-on-year.

As explained in the notes section, the effect of changing the closing date of the fiscal year was an increase of JPY 57.9 billion in net sales and an increase of JPY 1.4 billion in operating profit.

Net sales decreased by JPY 84 billion to JPY 1,047.2 billion due to the effect of these changes and the pullback from the progress made in large-scale contracts in the corresponding period last year. Operating profit increased by JPY 5.1 billion to JPY 56.6 billion. This was, among other things, due to the profitability deterioration issue in the Process Plants projects underway in North America being brought mostly under control, although profitability in the Civil Aero Engines business declined as the sales of the new PW1100G engines increased.

Ordinary profit increased by JPY 27.9 billion to JPY 57.5 billion due to decrease in nonoperating expenses and an upturn in share of profit of entities accounted for using equity method. Profit attributable to owners of parent was JPY 34.1 billion, up JPY 24.3 billion.

Please turn to Page 5 for orders received and order backlog by segment. In Resources, Energy and Environment and in Social Infrastructure and Offshore Facility, orders received year-on-year decreased as large-scale overseas projects were awarded in the Boilers business and in the Bridges and Water Gates business, respectively, in the previous year. In Industrial System and General Purpose Machinery, orders decreased due to the impact of changing the fiscal year period in fiscal year 2017. Excluding this impact, orders received increased in the Transport Machineries business, Logistics and Industrial Systems business and in Vehicular Turbochargers business, among others. In Aero Engine, Space and Defense, orders increased in aero engines for Japan Ministry of Defense. Overseas orders received were JPY 385.9 billion, representing 41% of the total orders. This ratio declined due to decreased orders in overseas large-scale projects for the Boilers business, the Bridges and Water Gates business and others.

Order backlog amounted to JPY 1,469.7 billion, down JPY 97.3 billion from the previous fiscal year-end.

Please turn to Page 6 for net sales and operating profit by segment. Net sales in Resources, Energy and Environment decreased due to pullback from progress made in large-scale projects for the Process Plants business in the same period of last year in addition to the impact coming from changing the fiscal year period in fiscal year 2017.

Operating profit increased as the issue of profitability deterioration last year in the Process Plants Business is being brought mostly under control in addition to the decline in SG&A expenses. In Social Infrastructure and Offshore Facility, net sales increased in the Bridges and Water Gates business, but decreased in F-LNG and Offshore Structures business and in the Shield Systems business.

Operating profit decreased in F-LNG and Offshore Structures business and in the Shield Systems business even though operating profit in Bridges and Water Gates business increased. Net sales in Industrial System and General Purpose Machinery decreased due to the impact of changing fiscal year period in fiscal year 2017. Excluding that impact, sales increased in the Thermal and Surface Treatment business and in the Vehicular Turbochargers business, among others.

Operating profit increased due to net sales increase and profitability improvement in the Thermal and Surface Treatment business and in the Parking business, among others, despite the impact of changing fiscal year period in fiscal year 2017.

Net sales in Aero Engine, Space and Defense increased due to the growth in Civil Aero Engine business.

Operating profit overall decreased mainly due to the increase in sales of the new PW1100G engine even though the cost of handling the defects declined in the Civil Aero Engines business.

Overseas sales totaled JPY 547.6 billion, representing 52% of total sales.

Please turn to Page 7, showing the analysis of the JPY 5.1 billion year-on-year increase in operating profit by segment. Change in net sales had a negative impact overall bringing down the operating profit by JPY 12.8 billion due to higher level sales of the new PW1100G engine, which contributed negatively to profit in Aero Engine, Space and Defense, despite the positive impact in Industrial System and General Purpose Machinery.

Change in construction profitability had a JPY 19.2 billion positive impact. Construction profitability improved mainly in Resources, Energy and Environment where, as explained earlier, last year's profitability decline issue in the Process Plants project underway in North America is being mainly under control. In the Process Plants project underway in North America, additional expenses were recorded in the third quarter.

The next page explains the details. Change in foreign exchange rate had a negative impact of JPY 0.4 billion. Change in SG&A had a negative impact overall of JPY 0.5 billion, excluding the JPY 6 billion decrease coming from the impact of change of fiscal year period change in fiscal year 2017. Change of fiscal year period had a negative impact of JPY 1.4 billion as a relapse of the previous corresponding period.

Let me talk about the status of the projects underway in North America in Process Plants business, which is mentioned in the material disclosed today as well. In terms of construction progress, installation of plant ancillary facilities is almost complete, and IHI E&C is moving forward with the transition to commissioning. In this context, additional expenses have been recorded in relation to the following matters. The first is that in the final phase of installation, the adjustment items on installation did not proceed as expected, and IHI E&C was unable to implement a smooth transition to commissioning.

The second has to do with certain products ordered in from outside that had already been installed. It was discovered on-site that there had been faults at the time of manufacturing and these needed to be corrected. Because of these, additional installation expenses were booked due to delayed delivery. The third is the with commissioning of the #1 train moving forward, it was discovered that the amount of work required for commissioning on a per-train basis was larger than initially expected. Because of this, additional commissioning expenses up to the share for #10 train were factored in for the third quarter earnings results.

IHI E&C, the operating company, remains to cut back on receiving new large-scale orders and concentrating its resources into this project. Working toward making the handover of #1 train and plant ancillary facilities, which is scheduled for the end of fiscal year 2018, IHI and IHI E&C are focusing on a smooth transition from installation to commissioning as well as adjustment items on installation and continue to implement progress management of projects.

Please turn to Page 9 for nonoperating income and expenses. Share of profit in equity method affiliates recorded a profit of JPY 6.7 billion. As for Japan Marine United Corporation, due to the weak yen, profitability of order backlog is improving and secured a profit for the third quarter.

Foreign exchange gains and losses improved by JPY 200 million and booked a gain of JPY 100 million. Others, which is a net of miscellaneous income and expenses, improved JPY 5 billion year-on-year.

Nonoperating expenses described in the note was booked in fiscal year 2017 third quarter and improvement this year comes mainly from the rebound.

Next, please turn to Page 10 for the breakdown of extraordinary income and losses. In this third quarter, extraordinary profit of JPY 1.1 billion is booked as a gain on transfer of our small engine business.

Please turn to Page 11. This is consolidated balance sheet. The third quarter and interest-bearing debt was JPY 439.1 billion, up JPY 116.8 billion from the last fiscal year-end. Owing to the increase in interest-bearing debt, debt-to-equity ratio temporarily became 1.17x, while due to the profit booking of JPY 34.1 billion, equity ratio became 20.2%.

Please turn to Page 12. This is consolidated cash flows. The third quarter cash flows from operating activities declined JPY 101.3 billion year-on-year and was an outflow of JPY 66 billion.

Considering the JPY 56.6 billion operating profit for the third quarter, desirable level of cash flow from operating activities should be an inflow of around JPY 60 billion and there is a gap of JPY 120 billion.

Let me briefly explain how we look at this gap. From the beginning, we expected this year's cash flow to be very tough. Last fiscal year, provisions for losses from North American plant was booked and the cash outflows on this year. Also we do not expect much receipt of money this year mainly for the Boilers business. To be specific, cash out related to North American Process Plant is around JPY 30 billion. And from large-scale project, which we received advances last fiscal year, we expect net payment of around JPY 30 billion.

While recovering from the JPY 60 billion negative impact from these 2 factors is difficult, the remaining JPY 60 billion are due to the expenses related to public sector projects, which we expect to book sales and collect the money at this fiscal year-end and also to the increased working capital related to production increase in Civil Aero Engine. Therefore, we believe the cash flow situation from operating activities in the third quarter is adjusted temporarily and most will be collected towards the end of this fiscal year.

By the way, for this fiscal year, we expect the cash flow to be positive and will be in the range of JPY 20 billion to JPY 30 billion.

From investing activities, outflow increased JPY 37.3 billion compared to the same period of the previous year when proceeds from the sales of shares in Westinghouse was booked and there was an outflow of JPY 61.6 billion. As a result, free cash flow, which is a sum of cash flow from operating and investing activities, was an outflow of JPY 127.7 billion. In any case, we will continue to try to conduct such activities as shortening cash conversion cycle in order to strengthen our cash-generating capability.

Please turn to Page 13 for R&D, CapEx and depreciation. CapEx has increased year-on-year due to Civil Aero Engine related investments.

Please turn to Page 14. This shows the geographical breakdown of overseas sales explained earlier. Now I'd like to move on to the forecast for fiscal year 2018.

Please turn to Page 16. Until the previous earnings report, we maintained the initial forecast. However, since only 2 months are left in the fiscal year, as announced separately today, this time, we are revising the guidance. The new forecast for orders received is JPY 1,450 billion, net sales is JPY 1,510 billion. Operating profit is JPY 87 billion, ordinary profit is JPY 71 billion and profit attributable to owners of parent is JPY 42 billion. Compared to the previous forecast, both the sales and profits are expected to increase.

ForEx assumption for the fourth quarter has not changed from the previous announcement and they are JPY 105 to the U.S. dollar and JPY 130 to the Euro. ForEx sensitivity is calculated at JPY 200 million for every JPY 1 movement against the U.S. dollar.

Please turn to Page 17 for our forecast of orders received by segment. Of the JPY 50 billion total orders decline forecast, JPY 70 billion decline is expected in Resources, Energy and Environment where situations are becoming tough to receive orders and all business in the segment, excluding nuclear power, are forecast to see orders decline.

Please turn to Page 18. This page shows the full year forecast for sales and operating profit by segment. Net sales of Resources, Energy and Environment is forecast to decrease by JPY 20 billion due to orders decline in Environmental Response Systems business and in Power Systems Plants business. Net sales of Industrial System and General Purpose Machinery is expected to increase by JPY 10 billion from Parking business, Thermal and Surface Treatment business, among others.

Net sales of Aero Engine, Space and Defense is expected to increase by JPY 10 billion due to the positive turn in foreign exchange rate in the Civil Aero Engine business. I will explain the changes to operating profit in the next slide.

Please turn to Page 19. This page shows the analysis of change in full year operating profit forecast compared to the forecast in May by segment. In Resources, Energy and Environment, impact from reduced sales as well as additional cost of JPY 6 billion for North American Process Plant business are factored in. Therefore, JPY 11 billion profit decline is expected.

Operating profit in Social Infrastructure and Offshore Facility is expected to increase JPY 1 billion. There are no changes to the forecast for Industrial System and General Purpose Machinery.

In Aero Engine, Space and Defense, even though the new PW1100G engine's cost-reduction schedule is delaying, thanks to the positive turn in foreign exchange, JPY 2 billion profit increase is expected. The JPY 11 billion in the bottom section of the adjustment line means the buffer included in the previous forecast to prepare for business fluctuation risk is reversed in full amount.

Financial results by segment from Page 20 has been described already. So please allow me to skip these pages. Also, Page 29 and onwards are for your later references. This concludes my explanation.