Mitsubishi Heavy Industries, Ltd. ($7011)

Hello, I am President Ito. I know you're quite busy. Thank you so much for coming. I would like to begin my explanation. Allow me to outline our progress under the 2024 Medium-Term Business Plan, or 2024 MTBP. First, I will provide an overview of FY 2025. In FY 2025, order intake, business profit, net income and cash inflow attained record highs. In addition, order intake increased primarily in our growing core businesses of Energy Systems and Defense, and the order backlog exceeded JPY 13 trillion. We are working to achieve a highly profitable business structure under our Innovative Total Optimization, ITO, initiative. Through various measures, we achieved our business profit margin and ROE targets 1 year ahead of schedule. Next, I will discuss changes in our business environment. First, global political instability is intensifying. Awareness of security is growing not only in terms of national defense, but also in terms of economic security. In addition, the risk of supply chain disruptions is increasing due to the solidifying of economic blocs. Furthermore, as a result of long-standing globalization in pursuit of economic efficiency, the manufacturing bases are weakening in many countries. Other issues threatening the functioning of society are emerging. These include: intensifying natural disasters, labor shortages, cybersecurity risks and aging infrastructure. In other areas, technological innovation is accelerating. In particular, generative AI has evolved into autonomous operation agents, driving increased adoption of physical AI and automated manufacturing. Carbon neutrality initiatives are transitioning to a pragmatic approach, reflecting concerns over energy security and maintaining industrial competitiveness. As a result of these changes in the business environment, MHI's potential contributions to solving societal issues are expanding. Some potential opportunities are shown in Items 1 through 6, and resilience is the common thread connecting these areas. Regarding initiatives supporting the achievement of the 2024 MTBP. First, we will increase profitability by ensuring steady execution of our order backlog. Specifically, we will enhance our execution capabilities to deliver products and services reliably and on time. We will transform the company into a highly profitable business structure by implementing group-wide optimization. Moreover, we allocate the investment capacity generated through these initiatives to growth investments, accelerating the realization of reach expansion. Finally, I will lay out our vision for long-term growth. We will enhance corporate value by establishing a virtuous cycle of high profitability and growth investments, a key management goal of ours. We will also accelerate business execution to stay ahead of continued revenue expansion. We will also aim to reduce lead times and increase throughput across all businesses by implementing vertical group-wide optimization. To that end, we will strengthen both the quality and scale of our shared infrastructure platform and further increase resource utilization through our horizontal reach expansion initiative. We will enable earlier risk detection and faster issue resolution by sharing specialized technologies and expertise across businesses. Changes in our business environment are expanding MHI's potential contributions to solving societal issues. We will seize these opportunities, achieving reach expansion through synergies which leverage MHI's shared infrastructure platform. This will be a critical factor in the management of our portfolio. In particular, we will deploy growth investments with a long-term outlook. Going forward, we will lay out specific numerical targets and the financial strategy signed with this corporate strategy. This page shows the agenda for today's briefing. First, I will discuss our business environment. External environment is evolving rapidly and dramatically. We are seeing increasing awareness of national security, heightened risk of supply chain disruptions, a weakening of manufacturing bases, increasing cyber incidents, labor shortages and rapid advances in AI. While these changes bring undeniable risks, they also open the door to significant business opportunities. Our strategy is to proactively seize these opportunities especially where we can help solve critical societal challenges, such as providing safety and security and ensuring stable energy supplies. Once again, the guiding principle here, the keyword here is resilience. Next, I will outline our core management objective: achieving a virtuous cycle of a high profit structure coupled with investment for growth. A key enabler of this virtuous cycle is our ITO strategy, which stands for Innovative Total Optimization. To explain what ITO is, we have included a slide from last year's presentation. Overall optimization means boosting productivity and profitability by strengthening collaboration across our organization. Reach expansion is about rapidly delivering new value to more customers and regions. By advancing these two pillars in tandem, we unlock powerful synergies that fuel the virtuous cycle of profitability and growth investment. Let me illustrate the tangible impact of group-wide optimization using this slide. Please refer to the bar chart on the far left representing business A. The total height of the bar represents revenue and the upper segment after cost represents profit. Costs include value chains such as in-house production and purchasing areas with substantial room for improvement. By leveraging digital and AI technologies as well as manufacturing automation, we estimate we can unlock several tens of percent of new profit in this way. This is what we refer to as vertical group-wide optimization, which is shown in the second bar chart. Beyond that, optimizing value chains across multiple businesses offers more opportunities for improvement. By increasing the utilization of resources and in-sourcing, we can produce another several tens of percent of profit upside. This horizontal group-wide optimization is shown in the third bar chart to the right. Finally, the rightmost graph illustrates how we can scale production to meet demand after these optimizations. Our goal is to apply this approach company-wide, building a robust high-profit business structure. There is about 300 themes that is being proposed by the businesses, and we are promoting this. We will allocate profits generated through group-wide optimization to growth investments, creating a self-sustaining virtuous cycle. Our cash inflows forecast for FY 2026 has surged from approximately JPY 1.5 trillion in FY 2024 to JPY 2.6 trillion, a significant increase. While some of this include advances received so not all can be allocated to investments, it still represents a substantial boost in available cash versus initial assumptions under the 2024 MTBP. We will strategically deploy this cash into existing business areas, primarily our growing core businesses as well as to future business opportunities driven by reach expansion, thereby, achieving long-term growth. The next slide highlights our shared infrastructure platform which will enable us to pursue the strategy. To deliver on group-wide optimization and reach expansion, we will rely on our MHI's unique shared platform. This shared infrastructure platform includes technical design and manufacturing technologies, customer relationships, human capital, supply chains and digital and AI technologies. This platform underpins all of our businesses, creating powerful synergies as they grow together. MHI excels particularly in large complex products and precision control systems operating under extreme conditions, and this slide outlines some examples of these synergies. This slide maps out the areas into which we will expand our reach by leveraging our shared infrastructure platform. So we have the shared infrastructure and we have an open innovation that connects the global COE. In the middle, we have the existing business areas. On the top, we have the growing areas. The blue arrows in the diagram indicate the direction of reach expansion. As I mentioned on the previous slide, our businesses are underpinned by the shared platform. By investing proactively in new business opportunities, we will expand into new business areas by leveraging our shared infrastructure platform. To provide one example from Defense. As shown on the top photo, recently, our R&D center and business unit collaborated to develop a production prototype of a counter drone in just 3 months. This rapid innovation leveraged our core technology alongside mass production design and manufacturing expertise. Our ability to outpace startups in speed and flexibility stems from a unique shared infrastructure platform and we can flexibly respond to market needs. In short, expanding our reach through synergies rooted in a shared infrastructure platform, this is the cornerstone of our portfolio strategy and a major driver of the reach expansion initiative. Many of these new areas directly enhance resilience and align with emerging market needs, positioning us to generate several hundreds of billions of yen in new profits. Now let me update you on the progress we have made towards our 2024 MTBP targets. In our recently announced FY 2025 results, we achieved the 2024 MTBP targets for business profit margin and ROE 1 year ahead of schedule. Looking ahead, for FY 2026, we are aiming even higher, raising our business profit target from JPY 450 billion to JPY 540 billion. Furthermore, our order backlog stands strong at JPY 13 trillion, providing a solid foundation for continued growth. We are committed to delivering on these orders with the products and services in a timely manner. The 2024 MTBP focuses on strengthening portfolio management across three key categories: ensure steady performance and achieve high profitability in growing core businesses, commercialize future growth areas and enhance businesses' competitiveness. While implementing ITO initiatives in all businesses, we are sharpening our focus on building a highly profitable business structure primarily in our growing core businesses. In our future growth areas, we are shifting focus in line with societal needs. Accordingly, we are developing a growth strategy centered on resilience infrastructure, businesses that support the safety, security, energy stability and business continuity management of critical infrastructure. The right side of the slide outlines main actions in each category, which I will detail next. First, I will discuss our efforts in the growing core businesses. With order intake rising, we are scaling production capacity while transforming these businesses into high-profit operations. I would like to explain this in more detail today. To support this, we established a factory innovation center dedicated to boosting production capabilities. This center will pioneer the development of lead time reduction techniques such as optimized production planning, manufacturing automation and rapid adoption of cutting-edge technologies. AI and AM will also be fully utilized. And we will act as a hub disseminating these innovations, first, to the growing core businesses and across all of our businesses. Next, I will introduce our initiatives in the GTCC business. At Takasago Machinery Works, our flagship facility for this business, over 1,000 productivity improvement ideas have been generated by our technical design and manufacturing teams. One notable example is reducing process changeover. Previously, gas turbines were assembled in customer order sequence. But now, by grouping production by model type, we have significantly cut changeover time. This is just one of many initiatives to shorten lead times and boost throughput. With unit orders rising, demand for hot parts will grow. So we are upgrading our precision casting facility, which is critical for producing these components while enhancing productivity. Turning to the Defense business. We are leveraging IT and AI technologies to enhance productivity. Our new factory in the Nagoya area was designed using process optimization simulations, including automated transport robots which reduce changeover time during assembly. We are also deploying AI to improve inspection efficiency for critical parts during the manufacturing process, aiming to reduce lead times by 1/3. In the Nuclear Power business, we are increasing production of spent fuel casks. This is what we will explain on this slide. These spent fuel casks are highly reliable products certified by the Japan Nuclear Regulation Authority, which require meticulous engineering and manufacturing. To boost productivity, we are digitalizing engineering processes. Previously, expert designer engineers manually reviewed massive analysis data in the process of drafting technical drawings. Now advanced automated data linkages have cut this workload by 30%. On the manufacturing side, improvements in automated welding and upgrades to testing equipment, which are previous bottlenecks have increased throughput and have increased annual capacity from 20 to 25 units. Now let me highlight our efforts to expand personnel and deploy training programs in our growing core businesses. We plan to grow personnel to 33,000, a 1.3x increase over FY 2023, to manage recent high order volumes. Key initiatives include, in GTCC, we are expanding facilities and education programs for on-site maintenance personnel at our global training center. These efforts incorporate efficient OJT, supported by remote monitoring technologies. In Nuclear Power, we are enhancing education for new hires through nuclear engineering seminars and VR training. In Defense, we have established a technical skill development center to upskill an increasing number of mid-career hires. So we are also harnessing AI and digital technologies to preserve and transfer skills. VR technologies are supporting technical design work by enabling the efficient review of complex drawings. In manufacturing, tacit knowledge is being codified into formal training materials, accelerating self-driven skills acquisition by younger employees. We are also deploying AR glasses on site to enhance work efficiency and facilitate the transfer of skills. Moving to our future growth areas. We recognize the need to enhance the resilience of critical infrastructure and view this as a prime business opportunity. In the data centers area, we are working to commercialize products for both large cloud systems and distributed data centers offering enhanced security. In each areas, we are developing advanced cooling systems and high-security compliant data centers. So S+3E, we want to aim to achieving this. We continue R&D, conscious of the economics of the solutions we aim to provide in this area. Specific examples of this are cost reductions in CO2 capture system through the application of modular design and offering ORC solutions for next-generation geothermal power projects. Next, I will outline some examples of our efforts to enhance our businesses' competitiveness. In steam power, we have boosted profitability by shifting to an aftersales service-centric business model amid a sharp drop in original equipment volumes through structural reform that we conducted in the past years. We are leveraging steam power's platform to implement horizontal group-wide optimization, deploying human resources throughout the MHI Group. More specifically, plant engineers are supporting large GTCC project execution. Manufacturing experts are handling the processing of large components in nuclear power, and engineers with experience in overseas plant projects are helping manage risk in the Australian frigate program in defense. Leveraging steam power's expertise in steam technologies, we are pioneering new areas in turbochargers and HVAC businesses, including waste heat recovery pumps. Under our competitiveness enhancement initiatives, we are leveraging digital technologies to enhance aftersales services and profitability. Since 2020, service sales have increased by 1.9x. To provide some specific examples, I would like to introduce two. First, the waste-to-energy plants businesses. Our integrated operation system, MaiDAS, has been developed. This combines combustion, AI and control technologies to automate operations. By doing so, the number of operators has been reduced from 12 to 8. Next, our box-making machines business is leveraging AI during the 24/7 on-call support to analyze conversations with customers, provide suggested responses and show technical documents for rapid, accurate response. Finally, I want to highlight our efforts to strengthen human capital across all of our businesses. To flexibly meet evolving societal and customer needs, we are enhancing training programs for manufacturing and digital talent, the backbone of MHI. We are expanding internal training programs for newly hired skilled personnel to transform them into immediate contributors. Additionally, a community of specialists shares knowledge and best practices across divisions. Beyond developing digital talent, we are upgrading our digital and AI infrastructure, which has already resulted in JPY 15 billion of operational efficiency gains. Finally, allow me to summarize today's presentation. We will achieve our 2024 MTBP targets by strengthening our execution capabilities in order to reliably manage a high order backlog. In parallel, we transformed the company into a highly profitable business structure by implementing group-wide optimization. Looking forward to the next midterm business plan, we will achieve a virtuous cycle of high profitability and growth investments, which is a key management goal of ours. In addition to group-wide optimization, we will deploy growth investments aimed at long-term customer value creation beyond existing frameworks as part of our reach expansion initiative. We will aim to achieve the step change growth by cultivating new business opportunities while leveraging a shared infrastructure platform to expand the reach to new areas. This concludes my explanation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]