IHI Corp

TSE:7013

Earnings Call Transcript 2020-Q3

[Seiji Maruyama, executive]

This is Maruyama in charge of Finance & Accounting of IHI Group. I will explain IHI Group's financial results for the first 9 months of the fiscal year 2019 based on the PowerPoint presentation materials disclosed at 3 p.m. today.

Please turn to Page 4. This slide shows the consolidated results, including orders received and the income statement. Orders received were JPY 876.7 billion, down JPY 57.7 billion year-on-year. As shown at the top right, the average exchange rate for sales in the quarter was JPY 108.95 to the U.S. dollar. There was JPY 2.44 appreciation from JPY 111.39 of the previous corresponding period.

Net sales decreased by JPY 125.1 billion to JPY 922 billion. Operating profit was JPY 27.2 billion, down JPY 29.4 billion year-on-year mainly due to lower sales. Ordinary profit decreased by a bigger degree of JPY 48.9 billion, down to JPY 8.6 billion due to deterioration of share of profit and loss of equity method affiliates. Profit attributable to owners of parent was a loss of JPY 1.7 billion, down JPY 35.9 billion.

Please turn to Page 5 for orders received and order backlog by segment. In Resources, Energy and the Environment, orders increased year-on-year mainly as a result of receiving an order for a boiler plant in Vietnam. In Social Infrastructure and Offshore Facility, orders received increased year-on-year in the shield system and the transport systems businesses. In Industrial System and General-purpose Machinery, orders received declined due to the decrease in the vehicle turbochargers business and the thermal and surface treatment business despite the increase in the transport machineries business.

In Aero Engine, Space and Defense, orders received decreased year-on-year in the aero engine and the rocket systems/space utilization systems businesses. Overseas orders received was JPY 392.7 billion, representing 45% of total orders. The ratio of overseas orders increased due to receiving a large-scale order overseas in the boilers business despite the decrease in the vehicular turbochargers and the civil aero engines businesses. Order backlog totaled JPY 1,424.3 billion, a decrease of JPY 53.9 billion from the end of the previous fiscal year.

Please turn to Page 6 for net sales and operating profit by segment. In Resources, Energy and Environment, net sales decreased due to a delay in project progress in the boilers business and also due to a reverse effect of the progress of a large-scale project in the plants business in FY '18. Operating profit declined due to the decrease in sales in the boilers business.

In Social Infrastructure and Offshore Facility, sales increased in the bridges and the water gates business. Operating profit increased in the bridges/water gates business and the transport systems business.

Sales in Industrial System and General-purpose Machinery decreased due to lower sales in the vehicular turbochargers business mainly in Europe, in addition to the impact from the transfer of the small power systems business. Decline in operating profit was mainly due to lower sales in the vehicular turbochargers business.

Sales in Aero Engine, Space and Defense decreased in the aero engines for Japan Ministry of Defense and the civil aero engines business. Operating profit decreased as a result of temporary decline in operating rate in the maintenance business in the civil aero engines as well as additional program costs. Overseas sales was JPY 459.7 billion, representing 50% of total sales.

Please turn to Page 7. This is a breakdown by segment of the JPY 29.4 billion year-on-year decline in operating profit. Change in net sales had a JPY 23.3 billion negative impact due to decreasing regular inspection and repair work in the Boilers business in Resources, Energy and Environment; decline in sales of the vehicular turbochargers business in Europe in Industrial Systems and General-purpose Machinery; as well as lower operating rate of the maintenance business in the civil aero engines in Aero Engine, Space and Defense. Change in construction profitability had a JPY 6.9 billion negative impact.

In Aero Engine, Space and Defense, operating profit decreased due to additional program costs, among other factors. The negative impact from the change in foreign exchange rate was JPY 1.4 billion. A change in SG&A had a positive impact of JPY 2.2 billion in total as a result of the fixed cost reductions mainly in Resources, Energy and Environment and Industrial Systems and General-purpose Machinery.

Please turn to Page 8 for nonoperating income and expenses. Net interest expenses worsened by JPY 0.9 billion year-on-year. Share of profit and loss in equity method affiliates decreased by JPY 15.9 billion to a loss of JPY 9.2 billion. This is attributable to a downturn in the operating performance of IHI's affiliate, Japan Marine United Corporation, which I will explain separately in the next slide. Foreign exchange gains and losses deteriorated by JPY 1.5 billion. Others, which is a -- net of miscellaneous income and expenses, decreased by JPY 1 billion year-on-year.

Please turn to Page 9. I will explain about the downturn in the operating performance of Japan Marine United. There are a number of factors for the downturn in the operating performance, including disruption in construction process caused by technical troubles such as coating and welding failure; effect of yen's appreciation; decline in operating rate due to deterioration of market conditions; impairment loss due to specializing and restricting Maizuru shipyard to the naval ship repair business; reversal of deferred tax assets, among others.

The decline in performance is attributable to the business environment, which continues to be tough against the backdrop of global downturn in the shipbuilding market as well as consolidation happening among leading players in China and South Korea. Under such circumstances, IHI as a shareholder will accelerate the execution of drastic structural reforms of JMU in order to create a robust ship construction structure to compete with Chinese and South Korean companies.

As a part of the structural reforms at Maizuru shipyard, JMU will concentrate management resources of the merchant ship business by terminating new merchant ship construction, among others, to reduce the fixed costs and enhance competitiveness. Also, we will consider streamlining future production systems for JMU and the Imabari Shipbuilding that have reached a basic agreement on a capital and business alliance.

Please turn to Page 10, extraordinary income and losses. Extraordinary income was JPY 5.4 billion, which is comprised of JPY 4.3 billion gain on sales of noncurrent assets through a partial sale of the land, building and structure of headquarter representatives office and IT and JPY 1.1 billion gain on insurance claims for last year's typhoon damage. Extraordinary losses was JPY 4.7 billion, including losses on valuation of investment securities.

Please move on to Page 11, consolidated balance sheet. As end of December, interest-bearing liabilities was JPY 474 billion, up JPY 118.9 billion from the end of the previous fiscal year. Debt-to-equity ratio was 1.34x. Equity ratio was 18.8%, down 2.2 points from the end of the previous fiscal year not only because of this year's business performance but also due to the JPY 14.4 billion was repurchase of treasury shares we conducted in November.

Page 12, please, consolidated cash flows. Operating cash flow was negative JPY 67.4 billion, a decrease of JPY 1.3 billion compared to the same period of the previous year. Investment cash flow was negative JPY 49 billion. Investment spending was JPY 12.4 billion (sic) [ JPY 12.5 billion ] less compared to the same period of the previous year. Free cash flow, combining the operating and investment cash flow, was negative JPY 116.4 billion.

Please move on to Page 13, actual results of R&D, capital expenditure and depreciation and amortization. No major change in R&D and CapEx compared to the same period of the previous year.

Page 14, please. This slide shows overseas sales by region, which is the breakdown of the overseas sales figure we had on Page 6. Overseas sales in total declined from the previous year as a result of sales decline in vehicular turbocharger business and civil aero engine business.

Next, let us walk you through the forecasts. Please turn to Page 16. The trend related to the coronavirus, we are currently figuring out the impact, but it is now difficult to come up with the appropriate forecast. So our forecast we are announcing this time is not incorporating any potential impact to be generated by the coronavirus.

Please turn to Page 16. We are revising the forecast from the one we announced in November. No change with orders received and net sales. But now we are expecting the operating profit to be JPY 60 billion, 6-0 billion, which is JPY 5 billion lower than the previous forecast. I will come back to the numbers by segment later.

Ordinary profit, we are now expecting JPY 34 billion, JPY 9 billion lower than the previous forecast due to the decrease in our operating profit and also due to worsening of share of profit and loss in equity method affiliate. Profit attributable to owners of parent will be JPY 16 billion, 1-6 billion, down JPY 4 billion from the previous forecast. Exchange rate assumptions for Q4 are USD 1 - JPY 1-0-5, 105; EUR 1 - JPY 120. Foreign exchange rate sensitivity for U.S. dollar, JPY 1 move will have JPY 200 million impact on our operating profit.

Page 17, please. Orders received forecast by segment. We are not revising the total orders received. But orders received in Resources, Energy and Environment is now expected to be JPY 10 billion higher than the previous forecast. Meanwhile, orders received in others is now expected to be JPY 10 billion lower than the previous forecast.

Page 18, please, net sales and operating profit forecasts for fiscal '19 by segment. No change with the net sales forecast for each segment. Resources, Energy and Environment segment operating profit forecast is now JPY 7 billion lower than the previous forecast partially due to push-outs or delays in sales recognition of multiple projects.

Industrial System and General-purpose Machinery, we are now also expecting the operating profit to be lower than the previous forecast by JPY 1 billion, dragged down by rotating machinery and transport machinery businesses. As adjustment, we are now expecting JPY 3 billion higher profit, but we have reversed JPY 2 billion from the buffer we are provisioning in the previous forecast for potential future business fluctuation.

Page 19, please. The breakdown of the operating profit revisions by segment. Let me skip this page since I have already touched upon the details earlier.

From Page 20 onwards, we have financial results by segment, which I have already covered in my presentation, so let me also skip.

And Page 29 onward are Appendices. Please take a look later.

This concludes my presentation.

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