Mitsubishi Heavy Industries, Ltd. (7011) Earnings Call Transcript & Summary

This is Seiji Izumisawa, President and CEO. Thank you very much for taking your time after your busy schedule. From my side, I would like to give you a briefing about the 2021 Medium-Term Business Plan progress. So on the -- we have the slide on the screen. So this will be the table of contents for today. Next slide, please. This will be the executive summary. First of all, with the 2021 MTBP, basically, [ these initiatives ] are progressing according to plan, and we start to see effects. For the FY '23, we will further enhance this outcome to achieve 7% business profit margin. The second point is about our growth strategy. As I've been saying before, to achieve carbon neutrality from both the energy supply and demand side, we are conducting activities. I would like to explain more in detail about this matter afterwards. The third point is new initiatives. There are geopolitical risks that are surfacing. That is meaning that there is increased concern for national security. So MHI as a leading company in nuclear power and defense, there is a lot of expectations, and we'd like to fulfill the role. Next slide, please. This will be the MTBP targets. This is a recap for 2021 MTBP. We have been [ talking about ] we're going to strengthen profitability and develop growth areas. These were the -- this has been the 2 pillars. Next slide, please. First, talking about strengthening our profitability. Next slide. This is about the progress of our business profit. On the lower left-hand side, we have the normalized profit. So this will be FY '20 profit. We have excluded this impact of special onetime items. So if you -- to achieve the FY '23 target of 7% business profit margin, recovery from COVID pandemic, the existing business growth, services expansion. And on top of that, we want to achieve profitability improvements and organizational transformation. So the darker blue portion is the FY '20 forecast. On the lighter blue portion is the FY '23 forecast. You can see that basically, we are in line with our plan. Going forward, we have to consider ForEx effects and other onetime items like investments. Taking that into account, we would like to achieve the 7% business profit margin. Next slide, please. So by FY '23, these will be the targets, and we have had [indiscernible]. Recovery from the COVID pandemic, existing business growth, services expansion. And we have achievements and the effects on the slide. And from Slide #9 -- [ taking ] Slide 9 and 10, I'd like to talk in details. I'll go into detail in the slide. In terms of the challenges, we have revised the business portfolio like acquiring naval ships business, the Koyagi [ Naga spin-off ] and we have sold the machine tools business. With the various challenges, we've been able to take achievements. Reorganizing the thermal power business, we have consolidated manufacturing facilities and downsized European business unit. For the Metals Machinery operations, we have conducted certain European business. Going forward, we think that this will contribute to our profit. Next slide, please. This is the recovery from the COVID pandemic and existing business growth. Now this is the progress report. In terms of the LT&D business, [ soft update ] FY '21 to FY '22. FY '22, we've been able to go back to the COVID levels in FY '21. In terms of increasing -- we have increased sales prices to compensate for the rising materials and logistics costs, and we have been able to minimize the impact. Going to the Aero Engines business, by FY 2022, we have been able to -- we are forecasting we'll be able to surpass the pre-COVID levels in FY 2022. So based on the increasing global needs for MRO, we have completed expansion work so that we can answer towards these needs. On the existing business, for the GTCC business, there has been a [indiscernible] strong demand for the gas-fired thermal power [ with the replacement ]. And for the steel, there has been a -- Metals Machinery, they have active investments in green steel, leveraging our proprietary technology systems: electric arc furnace and direct reduction iron making. Based on this, we think we'll be able to increase our revenue from this business as well. For the services business expansion, including [ introducing ] DX, and we have been [ predicting ] various initiatives and various products. The growth is in line with the production. Specifically for GTCC, we have expanded a support organization to 5 hubs around the world. For machinery systems, you can see it on the right-hand side, this is an example of the box making machine. This is a remote service utilizing AR [indiscernible] services. And for logistics systems, we have acquired EQD and expanded the direct sales area. That means that we have expanded the service lineup with rentals, used equipment and warehouse equipment. As you can see, in terms of the profitability of the existing business, we have been able to improve our profitability. Let's go to the next slide. This is about developing the growth areas. First of all, we talked about the energy supply situation. [ Through existing business ] infrastructure -- I think -- excuse me. So this is the recent developments in the energy transition. Initially, in terms of the -- this has been -- Europe has been ahead in terms of renewable energy. But due to the implementation of Inflation Reduction Act, we think that this is going to be accelerated mainly in the United States. Specifically, in terms of the investment against renewable energy, that has been the focus up to now. But with the introduction of IRA, the energy transition utilizing hydrogen ammonia and focusing on CCUS, this carbon capture area, we think that more active investment is going to be conducted. So this -- so the -- how are we going to focus on the [ transition to ] carbon neutrality -- with the transition to carbon neutrality, what are the investment initiatives? And I think that with the focus -- going to the next slide. So for the decarbonization road map, we have a road map. So in terms of the coal-fired thermal power, so by -- we're going to reduce CO2 by ammonia/biomass mixed firing. And in terms of the other coal-fired thermal power, we're going to replace that with gas turbines. And on top of that, we will combine CCUS. In the future, there will be a transition to the fuels such as hydrogen. And ultimately, we want to achieve the carbon neutrality, and there has been a road map. And we have been receiving a lot of inquiries going to this road map. Next slide, please. So this is about the GTCC situation. On the left-hand side, this is the regions share, and the bar is the capacity base market size. As you can see, in terms of the growth in each of the [ main ] market, relatively, our market share is high. On the right-hand side, the global market share for MHI comparing 2019 to 2022, we have been able to increase our share. In 2022, we have been able to achieve the #1 global market share in terms of ability to install CO2 capture plants and the ease of hydrogen conversion. We have been leveraging these initiatives to be able to maintain high market share while aiming to increase turnover. Next slide, please. So besides that, other -- due to our carbon neutrality initiatives [indiscernible], we have the ammonia mixed firing boiler. So into 2030s, in the first half of 2030s, we'll be focusing for the commercialization. And we have already been achieved the 50% ammonia mixed firing technology. Going to down, we have the GTCC plus CO2 capture. This is in Alberta, Canada. We have been able to get a FEED study for CO2 capture plant applied to the LNG-fired GTCC power plant. This type of projects are increasing, so there's a lot of interest towards GTCC. That's our understanding. On the right-hand side is the hydrogen gas turbine. In 2025, we want to commercialize this. And in terms of the testing, we have been able to achieve 50% mixed firing, and we have been able to adhere the EU Taxonomy goals. Towards 2030s, in the large-frame gas turbines, we are developing to 100% hydrogen-fired [ power ] plants. Next slide, please. This is realize a CO2 solutions ecosystem. Here, you can see that there are various activities. So the capture -- this carbon capture, how this is transpiring and how are we going to focusing on the diverse emissions sources. So this -- how it will be building a value chain [ is our greater focus ]. Next slide is about the CO2 capture market. As I said at the beginning, through the implementation of IRA, it has been the following, and there's a lot of inquiries. On the left-hand side, this is the global inquiries situation. So the -- on the dark blue is the actual FS, feasibility studies. And when -- from 2022 -- up to December 2022, that is, so the number of studies, [ I would say, has ] doubled. Of the -- 30 million tonnes per year is coming from the United States. And if we look at the scenario on the right-hand side, so this 30 million tonnes per year -- capture, for transportation, for storage, the total cost would be about a JPY 0.3 trillion level. [ In regards to ] tailwinds from IRA, Inflation Reduction Act, we expect [ making it ] to about 400 million tonnes. [indiscernible] CO2 emission is important. And for that, there are really a lot of approaches. For example, we [ have a lot of ] partners we have to conduct demonstrations. And also, as you can see here, standardization is important as well in cement and waste-to-energy and also for gas engines. So [ at each one ], we are doing demonstrations, [ in which we want to reach actual deals ]. Also to establish CO2 value chain, CO2 capturing is not the end process. We have to store it. And also, we have to reuse that CO2. Now on this side is the cooperation with ExxonMobil in terms of CO2-related partnership. This is ExxonMobil partnership, and we reached an agreement last year. And on the right side, this is the value chain businesses in Japan: capture, transportation, storage. And together with partners, we have the national hub project [ for cooperations ]. So we are [ accepting ] partnerships like this. We understand how we can establish more businesses for our operations. This is about hydrogen ecosystem. This is one of the examples. In Utah in the United States, we have this project -- we have the world's largest hydrogen hub. We are developing this project. We are using renewable energy to produce hydrogen. And also, we store that in the underground salt domes. And also, we'll supply hydrogen energy for clean power generation to produce power. During 2022, we received a loan guarantee from the U.S. Department of Energy, and we are aiming for start of commercial operation in 2025. This is on the demand side of what we are doing. Automation, optimization and high reliability are offered to our customers with our solutions. So we use power generation equipment and ITS technology and third-party connected multi-platform called Sigma Synx to meet the needs of a lot of different customers, for example, intelligent logistics and also refrigerated warehouses [indiscernible]. This is about the platform of Sigma Synx. Up to now, we have had a lot of proprietary digital products in development. For example -- on the left side, you can see the examples. For machinery control, we have DIASYS Netmation. We have installed more than 1,000 units. And also, for remote monitoring and maintenance, we have the system called TOMONI. We have installed more than 100 systems. And recently, additionally, we have cyberattack protection system called InteRSePT. And also, for image monitoring and audio commands, we have Supervision. We have developed all of them, and you can see their functionalities on the right side. By combining those solutions and systems, we can achieve, for example, like intelligent logistics for operation and refrigerated warehouses for optimization and data centers for energy conservation and reliability of the systems. To connect that, we have the platform Sigma Synx. Here is the example of intelligent logistics. We integrate this platform into AGF and warehouse control systems using Sigma Synx system. And you can see the picking systems and also loading/unloading zones systems that they can be optimized, and we can automate those processes in the warehouse. And from November last year, together with Kirin Beer in Yokohama Hardtech Hub, we have joint verification and validation, and we would like to make a success in this validation. To commercialize our business, we are aiming to achieve JPY 50 billion per year of the business in FY '30. Here's the refrigerated warehouses. We are using total engineering and also thermal simulation technologies. By combining those, we can propose optimal facilities and high efficient and also low power consumption refrigerated warehouses we can propose to the customers. And this is the warehouse for Kyoto Salted and Dried Fish Wholesale Cooperative, and [ we, in total ], decreased 1.5 months of the construction time. [ And also ] simulation technology, which we can accumulate for the next -- we can optimize the solutions for the next projects that we can propose to the customers. Going forward, we would like to [ address cold chain system ] on Southeast Asia, and we would like to explore such businesses there. The last one is data centers. [ More density ] and also [indiscernible] the situation of data centers, and we have some challenges as well. Decarbonization, energy conservation [ are required for ] generations and also cooling systems that should be [ out there that we can ] offer such technologies to contribute to energy conservation, and also monitoring systems. And in [indiscernible] one-stop operation, right now, we're having this demonstration. And according to [indiscernible], we're able to reduce the power drastically while we're cooling. And going forward, we would like to expand [ receiving orders ]. And in 2030, our revenue target is JPY 100 billion. Here's the new business opportunities in the changing operating environment. I would like to talk about nuclear power possibilities. This is nuclear power business. Nuclear power is carbon-free and large scale and stable power source. There is much [ need ]. So we have the existing plants. And for the implementation of safe and stable operations, we would like to schedule maintenance work for restarted plants. And also, we are going to continue efforts to establish the nuclear fuel cycle. And also, we would like to contribute achieving stable, carbon-neutral energy supply by accelerating commercialization of advanced light water reactor SRZ-1200. This is SRZ-1200. Japan's 4 PWR electric utilities are in collaboration with us for joint developing, and 80% is completed mostly. And for data capture, we are going to utilize the national projects for demonstration and testing. So we are aiming for commercialization in 2030s -- mid-2030s. Last slide, Japan's national defense security. The government's -- Japan's Defense Buildup Program, so the government is trying to build up its defense capability. MHI is [ the translating ] company. We have a lot of initiatives to contribute for the stable and safe and secure society. The last one is about net -- carbon neutrality. As for Scope 1 and 2, energy conservation is traditionally what we were doing. And we are aiming to achieve minus 50% in 2030, and we think we can achieve it. But to achieve net zero, we have to have different initiatives, different and traditional initiatives. So we are going to establish a model factory in Mihara carbon neutral factory to achieve this plan. And as for Scope 3, we have a lot of development efforts, as I mentioned before. Interim target for 2025, minus 30%; and 2030, minus 50%. And for that, our development efforts are in good progress. This is net zero initiatives. Nationwide, we have a lot of initiatives [ in new high works ]. For example, Mihara Machinery Works; Takasago Machinery Works, hydrogen park; and also, Yokohama Hardtech Hub for picking solutions, [indiscernible]; and Nagasaki ammonia combustion and hydrogen production development; and MHIET Sagamihara Machinery Works. Together with foreign works, we have such projects going on nationwide. Here is the conclusion. At the beginning of this presentation, I talked about the executive summary, and this is almost the same. We are in line with the plan. And [ as with regards to ] strategy, energy transition for carbon neutrality is what we are contributing to and it's expanding. So we would like to safely expand this business. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]