IHI Corp

TSE:7013

Earnings Call Transcript 2021-Q3

[Seiji Maruyama, executive]

This is Maruyama, in charge of finance and accounting of IHI Group. I will explain the financial results for the third quarter of the fiscal 2020, followed by the full year forecast based on the PowerPoint presentation material disclosed at 3 p.m. today.

Please turn to Page 4. This slide shows the consolidated results, including the orders received and the income statement. The accounting standard for revenue recognition is applied from this fiscal year, and the effect of applying the standard is indicated at the top left corner of the relevant items.

Orders received were JPY 684.4 billion, down JPY 192.2 billion year-on-year. As shown at the top right, the average exchange rate for sales during the period under review was JPY 106.36 to the U.S. dollar. There was JPY 2.59 appreciation from JPY 108.95 of the previous corresponding period.

Net sales stood at JPY 766.8 billion, down JPY 155.1 billion or 16.8% year-on-year, mainly due to the impact from the spread of COVID-19 and also as a result of applying the accounting standard for revenue recognition.

Operating profit was negative JPY 2.5 billion, down JPY 29.7 billion year-on-year, mainly due to lower sales despite our company-wide effort, including fixed cost reduction.

Ordinary profit deteriorated to negative JPY 10.4 billion due to factors such as increase in foreign exchange losses.

Profit attributable to owners of the parent was a loss of JPY 11.5 billion.

Please turn to Page 5, orders received and order backlog by segment. Orders received decreased in all the reportable segments. The decrease in Resources, Energy and Environment mainly came from the boilers business, which had large projects in the same period last year. The decrease in Industrial System and General-Purpose Machinery was due to the lapping of large-scale projects in the transport machineries business in the same period last year and impact from the spread of COVID-19 on the vehicular turbochargers business as well as the thermal and surface treatment business.

Aero Engine, Space and Defense reported a significant fall in the civil aero engines business.

Overseas orders received amounted to JPY 258.2 billion or 38% of the total orders.

Overseas ratio fell by 7 points year-on-year, affected by the lapping of large-scale projects in the boilers business in the same period last year and the decrease in the civil aero engines business.

Order backlog stood at JPY 1,103.7 billion, down JPY 358.2 billion from the end of the fiscal 2019. Order backlog decreased significantly in Aero Engine, Space and Defense since we have changed the calculation method of orders received and order backlog in the civil aero engines business, as we explained in the previous earnings call for the second quarter.

Please turn to Page 6, net sales and operating profit by segment. This slide also shows the effect of applying the accounting standard for revenue recognition at the top left corner of the relevant items.

Resources, Energy and Environment increased net sales year-on-year with the increase in the boilers business. Operating profit made a turnaround from loss due to the increase in net sales of the boilers life cycle business and mostly stabilized decline in profitability previously experienced by the power systems and boilers businesses.

Social Infrastructure and Offshore Facility increased both net sales and operating profit in the urban development business and others.

Industrial Systems and General-Purpose Machinery decreased net sales due to the lower sales in the vehicular turbochargers business and the thermal and surface treatment business despite the higher sales in the transport machineries business. Operating profit for the segment increased year-on-year as a result of the increase in the transport machineries business and the decrease in the thermal and surface treatment business due to the changes in their net sales, lower sales in the vehicular turbochargers business and the progress we made in reducing fixed costs.

Aero Engine, Space and Defense reported a significant decrease in sales in the civil aero engines business due to the effect of applying the accounting standard for revenue recognition, in addition to the decline in demand for aero transportation caused by the spread of COVID-19. The segment posted an operating loss, severely affected by the decline in highly profitable spare parts sales in the civil aero engines business, which offset the effect of fixed cost reduction, et cetera.

Overseas sales were JPY 299.4 billion, representing 39% of the total sales. The year-on-year decline in overseas sales ratio is attributable to the lower sales in the civil aero engines business.

Please turn to Page 7. This slide shows the breakdown of the JPY 29.7 billion year-on-year decrease in operating profit by segment. We analyzed that the spread of COVID-19 brought a negative impact of JPY 51 billion to Industrial Systems and General-Purpose Machinery and Aero Engine, Space and Defense. The impact was mainly suffered by the civil aero engines business with a decline in sales of engines and spare parts due to the sluggish aero transportation demand and deteriorated business conditions among airlines. Especially, the slow recovery in spare parts sales led to a greater impact compared to the time we announced the second quarter results. Sales status of the civil aero engines business and the vehicular turbochargers business will be explained later using the slides following this.

Changes in net sales had a positive effect of JPY 1.3 billion. The increase in the boilers life cycle business in Resources, Energy and Environment was among the contributing factors.

Changes in construction profitability brought about JPY 6.3 billion positive effect, which is attributable to mostly stabilized decline in profitability previously experienced in some projects in Resources, Energy and Environment.

Changes in foreign exchange rates had a negative impact of JPY 1.2 billion.

Changes in SG&A added a positive effect of JPY 16 billion in total with our ongoing effort to reduce R&D expenses and fixed costs as part of our countermeasures against the spread of COVID-19.

The negative effect from applying the accounting standard for revenue recognition was JPY 1.1 billion as a result of expanding the scope of percentage of completion method and deducting damages and others from net sales, which used to be recorded as nonoperating expenses.

Please turn to Page 8, quarterly net sales generated by the civil aero engines business. Net sales for the quarter under review were JPY 28.5 billion. But when we exclude the effect of applying the accounting standard for revenue recognition, net sales for the quarter were JPY 54 billion. Aero transportation demand for international flights is still under difficult circumstances due to a series of border controls in place. We observed a slowing trend in the recovery of domestic flights amid the resurgence of COVID-19 since November last year, a negative turn from the previous moderate recovery trend driven by resumption of economic activities in each country.

Please turn to Page 9, quarterly numbers of deliveries and net sales by region for the vehicular turbochargers business. Net sales in China have been on a recovery trend since the first quarter. Other regions started to follow China in the second quarter, sustaining the recovery trend in the third quarter as well. All regions recovered to the level of the same period last year.

Please look at Page 10. This is the breakdown of nonoperating income and expenses. Share of loss of entities accounted for using equity method was JPY 800 million, including JPY 8.3 billion of improvement. This is mainly due to the reduction of a loss related to the affiliate company, Japan Marine United.

Please look at Page 11. This is the breakdown of extraordinary income and loss. There is no change about this breakdown. JPY 1.6 billion of extraordinary income includes gains from the sales of fixed assets such as land properties owned by a subsidiary.

Next, please refer to Page 12. This is the consolidated balance sheets. The balance of the interest-bearing debts is just shown here in the middle of the table, JPY 576.2 billion, up by JPY 88 billion from the end of last fiscal year, leading to the debt-equity ratio of 1.57x. Equity ratio is 19.8%, 1.1 points improvement from the end of last fiscal year mainly due to JPY 27.4 billion increase of and surplus at the beginning of this year with the adoption of revenue recognition standard.

Please look at Page 13. An upper table is the cash flows from the operating activities, recognized JPY 78.7 billion of deficit with cash disbursement increased by JPY 11.3 billion from the year earlier.

For cash flows from investing activities, disbursements was JPY 44.6 billion with a JPY 4.4 billion of decline in disbursements year-on-year. Main disbursements of cash was for the construction cost for the buildings of the Tsurugashima Works, which completed in fiscal year 2019, but it was offset by suspending and reducing part of the CapEx.

Consequently, free cash flows, combining operating and investing cash flows, recognized JPY 123.4 billion deficit.

The below the table shows that -- represents actual recognition of R&D expenditure and CapEx as well as depreciation and amortization. R&D expenditure and CapEx have decreased due to the partial suspension and reduction of them.

Please look at Page 14. This is the regional breakdown of the overseas sales presented earlier in Page 6.

Sales in North America have substantially dropped with declining revenue on civil aero engines business mainly.

Next, please let me explain the full year forecast on a consolidated basis for the fiscal year 2020. First, please look at Page 16. This is the full year forecast. The full year forecast is compiled on the IFRS basis because we will adopt IFRS from the reporting of the year ended FY 2020. But we also presented one on a J GAAP basis for the convenience of your apple-to-apple reference.

We have downwardly revised the full year forecast of orders and sales by JPY 40 billion for each from the last one announced on November 10 last year. On the other hand, there is no revision in the forecast of consolidated profit except for some segment-wise revision, which we will explain later.

For your information, the assumed exchange rate for Q4 are JPY 105 to the U.S. dollar and JPY 120 to euro. The currency sensitivity is JPY 200 million to the U.S. dollar.

Please look at Page 17. We initially project a sales decrease by JPY 10 billion and a profit decline of JPY 6 billion year-on-year mainly because of the civil aero engines business, particularly spare parts, was adversely affected by resurgence of COVID-19.

However, we could manage to maintain to the profit, as in the last forecast, with additional SG&A reduction, with accumulated efforts on the total cost and the fixed cost reduction as well as the reversal of part of the risk buffer reserved for business performance fluctuation.

Next, Page 18, the impact of COVID-19 pandemic on the civil aero engines business. Our early expectation that the demand on the domestic short-haul air travel for small and midsized aircraft will slowly recover towards the year-end did not hold true due to struggling tourist demand hampered by resurgence of COVID-19 infections as well as additional traffic restriction imposed in Europe. Therefore, recovery of demand is expected to slow down again in the following months towards the fiscal year-end.

On the other hand, the demand for long-haul flights for large-sized aircraft has not indicated any big change either, and the difficulty is expected to continue for the time being.

Under all those changes in the business environment, we project that highly profitable spare parts sales would further decline from the last forecast.

Next, please turn to Page 19. This is the forecast of orders received by segments.

Orders in Resources, Energy and Environment segment is expected to decrease by JPY 30 billion due to mainly to the delay and the timing of receiving orders for power systems, boilers and plants.

Orders in Aero Engine, Space and Defense segment dropped by JPY 10 billion for civil aero engines businesses.

Please look at Page 20. This is a table listing segment-wise full year forecast on revenue and operating profits. Analysis on the change of operating profit from the previous period will be explained in the next slide, so let me focus on the change of revenue in this page.

Revenue of Resources, Energy and Environment segment is projected to go down by JPY 20 billion for the power systems or plant businesses caused by decreased orders or postponement of the recognition of revenue.

The revenue of Aero Engine, Space and Defense segment also goes down due to the impact of dipping sales of spare parts for civil aero engines business.

Please look at Page 21. This shows the analysis on change of operating profit from the previous period by segment.

In Resources, Energy and Environment segment, negative impact of declined revenue is expected to be offset by increased profit of nuclear life cycle business or reduction of SG&A expenses. And all in all, there is no revision in the forecast of operating profit.

The operating profit of Aero Engine, Space and Defense segment is projected to go down by JPY 6 billion due to the drop of revenue in civil aero engines business.

As for JPY 3 billion recognized as changes in other income and expenses and adjustments reflects that the part of the buffer reserve for business performance fluctuations was withdrawn.

Please allow me to skip pages up to Page 22 representing the overview of each segment because I have already explained the contents in my presentation so far.

And please refer to the appendices in the Page 31 and onward later for your information.

That's all my presentation today. Thank you very much. Thank you.

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