Earnings Transcript for 7011.T - Q4 Fiscal Year 2023

Hisato Kozawa: Good afternoon, everybody. Allow me to summarize our fiscal year 2023 fiscal results and FY 2024 earnings forecast using these presentation materials. Then according to the materials, so I'll go through the presentations. The materials are organized according to the Table of Contents shown on Slide 2.

First, I will provide an overview of our financial results. Please refer to Page 4. This slide shows the results for several key financial indicators. In terms of the -- some -- Slide 5 summarizes the highlights. Order intake, revenue and net income all exceeded FY 2022's results and reached record highs. Compared to our latest forecast, business profit fell short of JPY 300 billion target, but we exceeded the guidance for other indices, including order intake, revenue, net income and, of course, free cash flow. :

Notably, enabled by an increase in net income, we will increase our year-end dividend by JPY 40 above the previous forecast to JPY 120 per share, putting the full year dividend at JPY 200 per share. This will be our highest dividend ever. :

Slides 6 through 8 shows some highlights from our FY 2023 financial results. Slide 6 is about our GTCC business. So this is [ basic brand ] -- gas turbines brand growth in the world in terms of order volume on a capacity basis for 2 years running in calendar years 2022 and 2023. Large green gas turbines are a particular strength of ours, and the popularity of the latest JAC series has contributed greatly to our market share. So in terms of the revenue, it has been rising due to the strong order intake in recent years, expected to increase in fiscal 2024 and beyond. :

Slide 7 is about the Power business. More than 90% of revenue of this business is within Japan. But in the past, most of our revenue was from the after-sales service and the restart support of PWR reactors. In the past few years, restart support for PWR reactors and construction work on nuclear fuel cycle facilities has been increasing. Going forward, the development and design of the vast reactors are expected to ramp up. So we believe that we can maintain stable revenue levels for the time being. To this end, we believe that it is essential to ensure the safe and steady execution of various ongoing projects. :

Slide 8 shows orders in revenue in the Defense & Space business. Order intake in FY 2023 was the highest ever for this business. In response to the Japanese government's policy to strengthen defense capabilities, we were able to win orders for a number of large projects, including 4 aircraft and missile systems and specialty for ours. :

Because most of these contracts are for multiple fiscal years, the impact of revenue in FY 2023 was limited. However, there was a certain amount of contribution and revenue also reached a record high. :

Slide 10 and few slides beyond provide a little more detail on our financial results. Slide 11 includes information already provided, so I will forgo on our explanation. Slides 12 and 13 show the balance sheet. Total assets increased significantly and approximately JPY 240 billion of this was due to the currency translation effects related to foreign currency-denominated assets arising from the weaker yen. Interest-bearing debt remained at the same level at the end of FY 2022. :

However, considering the net interest-bearing debt, which is interest-bearing debt lines, cash and cash equivalents increased by approximately JPY 100 billion from the end of FY 2022 to JPY 297.6 billion. This, combined with the improvement of our equity ratio, has served to significantly improve our financial stability. That said, as a large part of the increase in capital came from rising market valuation due to foreign exchange effects and other factors will not allow use to be content with the current situation, and we'll continue to make improvements. :

Slide 14 shows our cash flows. Free cash flow improved by JPY 164.8 billion year-over-year to JPY 200.1 billion. Moreover, this result was an increase of approximately JPY 200 billion over our forecast, which has targeted negative JPY 100 billion. This significant improvement was due to an increase in inflows from advances, which [ leaned ] toward the end of the fiscal year as well as delayed outflows from investments. :

Slide 15 shows factors which caused year-year changes in business profit. The left-most bar shows business profit in FY 2022, which was JPY 193.3 billion. To the right of this is changes in onetime expenses, which is the difference on onetime gains and losses booked in each fiscal year. :

In fiscal 2022, we recognized onetime expenses associated with the remediation of issues at our IGCC project, organizational transformation expenses related to our European thermal power operations as well as onetime losses from several international projects. :

In FY 2023, in addition to the onetime loss related to an Aero Engine program, which was incurred in the second quarter, we also booked expenses related to claims on some international projects and an impairment loss on the international investments. :

Regarding the price optimization. While cost increases in forklifts and HVAC contract year-over-year, price optimization, that is the transfer of the past cost increases to sales prices, contributed to an increase of JPY 35 billion. Due to the factors shown here, business profit in FY 2023 was JPY 282.5 billion. :

Slide 16 shows a summary of order intake, revenue and business profit by segment. Over the next few slides, I will explain the situation in each segment. :

Slide 17 shows the Energy Systems segment. As I mentioned earlier, GTCC and nuclear power, which were the core businesses in this, segment performed strongly. Steam Power continued to contract due to headwinds in coal-fired thermal power. But this business is finding opportunities and performance improvements and the fuel convergence in the service business. :

Slide 18 shows the Plants & Infrastructure Systems segment. Revenue in Metals and Machinery, which is a core business in this segment, grew beyond JPY 350 billion due to strong order intake in recent fiscal years as well as the weak yen. :

Slide 19 shows the Logistics, Thermal & the Drive Systems segment. In this segment, order intake, revenue and the business profit all increased year-over-year. The ratio of revenue recognized outside [ the plan ] is high. So the impact of foreign exchange rates, although weakened, is significant. However, even excluding foreign exchange effects, revenue and the business profit increased. :

Slide 20 shows the Aircraft, Defense & Space segments. I explained the business in the Space business earlier. In the Commercial Aviation business, an increase in Aero Structures unit deliveries, combined with significant impact from the weak yen, served to increase business profit in the segment overall. :

The next slides, I'll briefly explain on our earnings forecast for FY 2024. Slide 22 and 23 provide an overview of an earnings forecast. We expect order intake overall could be as high as nearly JPY 6 trillion, although it will decrease versus FY 2023 levels. Revenue and profit are expected to increase year-over-year. We plan to pay a dividend of JPY 22 per share, a year-over-year increase of 10%. :

Slide 24 and beyond explain the year-over-year changes in our earnings forecast. So please allow me to provide 1 point of supplemental information. :

Please refer to the Slide 34, which is the last page of the appendix. On April 1, we established GX Solutions as an organization responsible for new businesses related to the green transformation. Since this organization is primarily based on the former Engineering business, it is included in the Plants & Infrastructure Systems segment. :

This reorganization involves the transfer of some of the businesses and the development activities previously included in the Energy Systems segment as well as Corporate & Eliminations. This slide shows which actively adjusted financial results for FY 2023. Please note that the fiscal 2024 earnings forecast shown on Slide 23 and beyond reflect these adjustments. :

This concludes my presentation on the financial results and the earnings forecast. :

Seiji Izumisawa: This is Izumisawa speaking. Please allow me to provide an overview of our 2024 Medium-Term Business Plan through FY 2023. Looking back on our 2021 MTBP and the time during which [indiscernible] formulated, our operating environment has since become increasingly uncertain due to the emergence of changes between the United States and China as well as the COVID-19 pandemic.

The plan, therefore, aim to strengthen profitability and develop growth areas. We're building our business fundamentals while not pursuing top line growth. Even after the launch of the 2021 MTBP, we faced changes that we had not originally anticipated, such as rising geopolitical risk, including Russia's invasion of Ukraine and rising energy and raw material costs caused by these risks. :

Even so, my assessment is that the various initiatives that we pursued during the 2021 MTBP have achieved results. Moreover, order intake can significantly surpass our initial plan due to rising demand for gas turbines associated with the global move towards energy transition tailored to [ look in addition ] to each region, the growth of our Nuclear Power business and the expansion of our Defense business due to the growing move towards strengthening Japan's national security. Going forward, we will work to reliably grow these businesses. :

Allow me to summarize the 2021 MTBP. I believe that our initiatives to strengthen profitability have produced results, measures to address problem in businesses, including the reorganization of boiler plants in the same Power business and the consolidation of unprofitable basis of operations in the Metals Machinery business. Moreover, we have reassigned personnel to our growth areas, mainly from the coal-fired thermal power to other areas. :

In our existing business, in terms of the service business, we are able to expand services and exited business through the [ sharing capacities ] among businesses and application of AI technologies. We work to optimize the portfolio of businesses through the acquisition of Mitsui E&S's Naval and Governmental Ships business as well as a North American company active in electrification area. :

We also saw the [ MHIENG ] business reintegrate the Mitsubishi Power and Mitsubishi Heavy Industries Engineering into MHI in order to prepare for future business development. Furthermore, we formed the power generators system joint venture with Mitsubishi Electric in order to strengthen this business. :

In our growth areas, we worked to realize the sustainable, safe, secure and comfortable society with efforts in both the energy supply and demand areas. On the energy supply side, MHI worked on hydrogen and ammonia fuel conversions, CO2 capture and nuclear power utilization as countries around the world made progress in energy transition according to their local conditions. :

In order to build the ecosystems to support decarbonization through fuel conversions, we developed and validated technologies at Takasago Hydrogen Park and the Nagasaki Carbon Neutral Park and participated in the first large-scale hydrogen production, storage and power generation project in the United States. :

In light of the situation in hard-to-abate industries, we worked with ExxonMobil and other companies to establish a CO2 solutions ecosystem and participated in CCS projects, including the transportation and the storage of CO2 in cooperation with companies in Japan and around the world. In the field of nuclear power, we worked to research nuclear power plants to establish nuclear fuel cycle and to develop advanced light water reactors. :

On the energy demand point, efforts have been focused on optimization, automation and energy conservation in systems essential for society. We have made progress in automation of logistics as well as initiative for data centers. In order to realize the automation of warehouses, we proposed coordination matters, autonomous equipment and the optimization of picking tasks with an integrated system to stimulate future demand and expand our business. We developed next-generation technologies for data centers, which are rapidly expanding with the spread of generative AI. :

In addition, in order to realize a one-stop solution combining power supply and the cooling systems, which are some of MHI's core strengths, we acquired Concentric LLC in North America, thereby obtaining a strong base of operations, including existing customer relationships. We will further accelerate efforts to launch these businesses during the 2024 MTBP. :

I believe that during the 2021 MTBP, we successfully built a foundation for MHI Group's sustainable future growth. Using this achievement as a jumping off point, the 2024 MTBP will take on the challenges of transforming MHI in order to balance further profitability improvement with business growth. :

The 2024 MTBP will aim to provide realistic solutions, [indiscernible] for each region and customer to extend business areas, both up and down, and to become a hub for ecosystem to realize social changes and provide a detailed explanation during our Midterm Business Plan briefing in 2024 scheduled for May 28.: