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

So first of all, we'd like to talk about mission and vision for the society. Our company mission is, as I mentioned in the past several times, in the longer history of our company, we have had an established technology. So we are here to combine cutting edge technology with many years of expertise to provide solutions to the evolving challenges facing the world while enriching people's lives. The society that we aim for is mission net 0 and secure and comfortable world, where social challenges are getting much more complex. We have to provide realistic solutions, talent to local communities and the customers to solve societal issues. In working that through, we'd like to start with manufacturing -- expand manufacturing, expanded scope of work, both up and the downstream within value chains, formal partnerships and become a hub for a cost system to change society. That's what we aim to be. So such activities would like to become a company which wins through the global competition. Let's move on. So first of all, I'd like to talk about the review of 2021 midterm business plan. In the 2021 MTBP, we were looking at the development of the future growth periods and also the recovery and the building up of the margin itself. As you may remember, when we started the plan of the 2021, the business environment was really murky. So instead of only going after the scale expansion, our focus will stay in the profit generation recovery and also the further stronger business establishment. As a result -- in the fiscal 2023 results, as we reported the other day, we achieved a record high profit in the building stronger business foundation and the financial results. And also exploring the business growth through the development of the future growth areas, we have identified commercial opportunities in hydrogen, [indiscernible] and also electrification and the data centers. The diagram down below are showing the revenue, business profit and the net interest-bearing debt. Revenues in the business profits are both dramatically increased. While the net interest-bearing debt has been reduced. What was that? The business foundation has been much stronger with the stronger financial backbone would like to now kick off the midterm plan of 2024. So in noting of that plan, I'd like to briefly talk about the operating environment and the expected role for our company. As you see on the left-hand side, there are some changes in the operating environment, and we are facing several risks and the events such as the energy risks, economic security risks and the geopolitical risks. Against the backdrop, we are going to assume 2 big roles. One is the contribution to carbon neutrality. We are going to talk about that later on but we're going to be tackling with this challenge from both supply side and the demand side and also the contribution to national security. By demonstrating our integrated capability we'd like to achieve those targets. So now let me talk about the strategy and the targets for the midterm plan 2024. I may be repeating myself, but I would like to, first of all, strengthen portfolio management, leveraging business and foundations, which was established during the previous midterm plan period meaning that during the plan 2024, we'd like to strike a good balance between the business growth with the profitability improvement. So for revenue compared to the FY 2023, we saw increase by 20% to hit more than JPY 5.7 trillion, business profit to grow by 60% to go JPY 450 billion or more. As a result of it ROE is expected to target at 12% or more. That will be supported by the stronger technology as well as the human capital we show for the [ head ] with the Mission net 0. Let's move on. Let me talk about the strategy and targets and tackling with that. Well, during the period of the midterm plan of 2021, the order grows dramatically in TTCC nuclear power and the defense. In the midterm plan 2024, based upon such order growth, we are expecting the revenue to expand of approximately JPY 1 trillion. So which shall be strengthening execution capabilities through concentrated allocation and resources for that business. And also for the growth domains, which we have seen the steady progress in the plan 2021, we shall be forging ahead with the commercialization of those growth areas in the business plan 2024 to deliver for the business plan 2020 -- the midterm plan of 2027 or beyond. In addition to those 2 domains, in the area which have worked upon the recovery and the strengthening of the margin from the covered and the raw material cost impact, we should be also working upon the strengthening of the competitiveness and also the business foundation to establish to gain margin. With that, the cash generation will be stronger so that we can divert that for the growth opportunities. And now talking about the capital allocation plan for Midterm plan 2024. During this plan, as I mentioned earlier, with the stronger profit generation capability, the normalized operation cash flow is going to expand, as you see on the right-hand side, that's the total amount that we are expecting to reach for the midterm business plan 2024. And compared to the midterm plan 2021, the debt repayment is going to make the progress. As a result, with the increase in the cash flow. During the time of the midterm plan 2024 investment and shareholder return will increase, especially for the investments, it will increase by 60% to JPY 1.2 trillion will expand the shareholder return. Half of that, JPY 650 billion is allocated for the growing core businesses and the future growth areas. For the industry shareholders' return, we have a plan to largely expand in the mid- to long-term basis, the cumulative dividend is going to be the shareholder return. So rate is going to be conducted for us so that the target is currently at 4%. Let me talk about specifically what we are going to do as a key initiatives. The first one is the [ gas children ] business, GTCC. For this GTCC business. As we have already publicized, there will be some demand growth that we're expecting, for example, for decarbonized fuel convergent stimulated by CO2 emissions regulations and the following power to stabilize grids, emerge expansion of renewable energy and on-site power generation for data centers and so on. Against the that trough and the market environment, the high reliability as well as the development and the validation of the fuel convergent technology that we have worked upon is going to meet the progress. And in the future, together with the combination with the CO2 capturing technology, we shall maintain the top share. And down the road in order to respond to and meet the very strong order intake we shall strengthen the supply capacity by expanding facilities and the personnel. And in order to maintain the competitive edge, we need to make the aggressive investment in R&D to lead the decarbonization -- decarbonization markets. As I mentioned earlier, the [indiscernible] liability and the conversion -- the fuel conversion in the future. And also let's see capturing those are going to be the driver for us to lead the market. Let's move on to the next page. The next is the nuclear power. Well, regarding the nuclear power, against the backdrop of the Japan's policy to utilize nuclear energy, which will steadily pursue initiatives in a variety of areas to expand our businesses. Especially in the plan 2024, we will support the existing plants, the restarts and the support establishment of the nuclear fuel cycle. And so for the plans of restarting of the operation, we start to form maintenance work for the long-term and stable client operation. And also, there is an increase in demand for the nuclear power in a global basis. We shall export equipment for the existing and new plants outside of Japan too. As such, for the nuclear power into the future, are expecting to grow this business as a steady business. And also, we show continued design work on the advanced light water reactor and also develop fast reactor and high-temperature gas cold reactor technologies as a core performer in the market. For this business as we go, we will extend the human capital resources and also work on the uptaking and the sophisticated production facilities. The third is defense. Regarding this difference domain, we will expand the business by responding to the sharp increase in national security needs in Japan, as you know. For our company, we wanted to meet the needs coming from the national -- especially the stand-off defense or the integrated missile defense. We are going to be working upon that? And also the core development of the next-generation fighter aircraft. This is going to be inner point as well. And also for the future, we are estimating the unmanned asset is going to be much more in progress so that the [indiscernible] development in the fundamental technology is in need. So for those 3 domains, together with the growth business domains, we will see the opportunity for the demand to grow at the size of JPY 1 trillion. The next is commercialization of the future growth areas. The first is regarding the future growth areas, as I mentioned earlier, for the carbon neutrality, we have made the effort from the supply center and the demand side on the satellite side. Basically, that's a carbon capture for the hydrogen and ammonia. For the hydrogen and ammonia in the midterm plan 2021, in the Utah of the United States, the products -- hydrogen production storage and the supply project has been done in FID. For R&D, the [indiscernible] and also the development of the hydrogen being done. And before the 2024 business meeting plan, the project in Utah to reach the completion is being expected. So the plant is going to be the springboard to back up the project that is going to be taking place into the future. And also the R&D in the hydrogen and ammonia are going to be continuously done. The project -- driving the project for the hydrogen and ammonia, we alone, it's not going to be done by everything so that the upstream and downstream, the partnering with those others is going to be quite important for us to pave the way. As the working segment, we have established GX segment. So regarding the GX, we're going to be crystallizing the integration of all the capabilities that we have within the group. So let's move on to the next. Next, let's move on to carbon capture. We're talking about talk to [ MTBP ]. We received many inquiries. This was much higher than the initial plan. And we also advanced partnering with Exxonmobile and other partners. So we could capture opportunities for various different business inquiries. And in the '24 MTBP, we aim to advance these opportunities into FID and feed. And we also have a differentiator technology, CO2 capture. And we will also develop this as a next-generation technology to further expand our competitive edge in this area. Domestically, we'll participate in [indiscernible] advances CCS project. We have participated in this project, and we are trying to accelerate this commercialization regarding carbon capture in each region and in each industry, the situation in advancing according to the particular situation. And we will be working on partnering to try to achieve results in each of these respective areas during the '24 MTBP. Next slide, please. Next is electrification and data center area. It used to be called smart social infrastructure electrification of social infrastructure and the '21 MTBP, the data center area was something that greatly advanced. And amid that situation, we have been able to acquire a service company in the United States to prepare for future commercialization. And the '24 midterm business plan position to service business network. We will also utilize our strength in heat and electric engineering and data centers use a lot of power, produce a lot of heat. So we will combine part supply, cooling systems and energy management systems that integrate both together. We will combine all of these to will stop solution to various data center projects. This is a growth area in '21 MTBP. We said we want on billion size business by 2030, and our plan is to continue to try to achieve this target. The third key initiative area is about enhancing business' competitiveness. I am repeating myself in the '21 MTBP, maybe strengthening profitability, and we will further improve this. And in order to do that, we will make efforts in each business unit. Thermal and logistics systems have recovered from COVID. We will further strengthen and enhance our direct sales organization, expand customer touch points to expand our sales. And in terms of metals machinery and commercial ships. We will work on the electric furnaces, hydrogen reduction-based iron making, fuel conversion engineering you will introduce these environmentally friendly products and systems to expand our business. And this is common, we will also drive TX to expand our service businesses in a continuous manner. In terms of facilities, there is high needs towards reducing manpower and promoting automation, and we'll also work on that area. And in the center, explanation at last for commercial aircraft, aircraft engine in addition to Tier 1 business, we also be was our aftermarket business to improve our profitability. Next, please. And further, in terms of environmental friendly products, heat pumps that use natural refrigerants, engines that are clean fuel compatible. We will develop and introduce those products to expand our business. On the other hand, there are areas where our business will shrink. Due to business environment changes, there are some areas where our business will shrink. And it is necessary to optimize our business structure to drive initiatives. And it's important to drive operational efficiency, improve productivity to reallocate resources to our focus areas. And in order to provide this, I will explain how we'll strengthen our technologies and human capital. Over to the left, as you can see in the drawing on the bottom, we have what we have accumulated and refined our core technologies. And we will add AI quantum technologies, cutting-edge technologies and new areas to create new customer value. For example, we can maximize hardware potential with digital technologies. We will work in that manner. And as we try to capture cutting-edge technology, you need to invest in start-ups open innovation needs to be done furthermore from our conventional R&D. And in terms of growth areas, we need to supplement what we like in our business foundation to expand our business. And you also need to achieve monetization at any point in time. And in order to achieve this, we will establish an IP strategy and create a business model to license our IP as we roll out and expand our business. And one key is the digital technology in order to achieve our growth strategy. Our company has many technologies, products, machineries, modules, we also have expertise to develop, operate, maintain complex machinery, and that's what we have as a common technology foundation. And we can add to the latest technology and knowledge to this turn that into a standardized digital innovation tool, so we can be used in all of our products. And we call this Sigma Synx. That's the brand that we have established, and we are rolling out this to all of our product businesses. By utilizing this, we can quickly affordably and safely roll out digital technology. By connecting devices, products in a smart manner, we will be able to create new value. So for digital, this is something that we will be promoting in a very strong manner. Next, please. Lastly, this is about human capital, people. We will strengthen recruitment in development and also reallocate resources and also improve work sales. Those are the things that we work on. There's a lot of details here. They're written on the slide, but especially in terms of recruitment, we will diversified recruitment methods without being tied to our traditional methodologies in terms of training. We want to cultivate many digital proficient personnel by 2030. We want to have more than 20,000 people, and we will be working on training and cultivation. Then in terms of reversing allocation, we will be visualizing the ability that each of our people, talent have and if we will use totalities in an optimized way. And you'll utilize a program that works on this to further reallocate resources to our focus areas. And that leave us as something common to various companies, but we will also work on work style improvement. We will especially promote flexible work styles according to employee life stages that we will be creating the right environment to make that happen. And lastly, I will add some information about our mission net 0 activities. The left side diagram is a little bit busy difficult to see. Currently, in Mihara Machinery Works, we are promoting efforts to achieve a carbon-neutral plant. So in the factory, we produce CO2, we will utilize the net curve techniques to create a carbon neutral concept. And for example, we will turn heat sources, do [ alterfication ], reduce energy demand and we have already installed solar power generation facilities. So for the power that's used inside the plant that can be supplied by solar power. So we are working on things in an integrated comprehensive manner. This is going to be a model factory for us. The expertise we gain here, the new management system we create here, this is going to be also rolled out to other plants. And this is also going to be rolled out to a customer and location so we can contribute to a carbon-neutral world. Lastly, conclusion, as I mentioned in the very beginning, for the '21 MTBP, we have pretty much achieved what was [indiscernible], and we have been able to reduce interest-bearing debt, and we have been able to increase dividend payouts in '24 MTBP, we have strengthened our business foundation. We will utilize the business foundation to move on to the next big movements. As I did mention earlier, we'll be focusing on existing our business portfolio, we will increase our growth potential. You will attempt to grow our business, improve profitability, to grow the Heavy Industries Group. We look forward to your continued support. This ends my explanation. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]