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

This is MHI's CFO, Hiroshi Nishio. Before we begin today's earnings presentation, I would like to say a few words. Our deepest condolences go to those who lost their lives in the 2026 Kumamoto Earthquake and to their bereaved families. We also extend our heartfelt sympathies to everyone affected by the disaster and sincerely hope for a swift recovery in the affected areas. At present, the direct impact on MHI Group's operations and financial performance remains limited. I will now go over the details of our Q1 FY 2026 financial results and the full-year earnings forecast, limiting myself to the main takeaways.

[AI Agent - Julia] I am Julia, MHI Investor Relations' AI narrator. First, 2 items to keep in mind. The former Mitsubishi Logisnext was removed from MHI's consolidated base on May 1, 2026. Regarding the Q1 FY 2025 results shown here for comparison purposes, all figures related to the former Mitsubishi Logisnext have been reclassified in accordance with our accounting standards. Next, as a result of organizational changes, which came into effect on April 1, 2026, the Logistics, Thermal & Drive Systems segment has been renamed Industrial Solutions and the Data Center & Energy Management department have been moved into this segment. Please note that the figures for Q1 FY 2025 have been adjusted retroactively to reflect these changes. Please turn to Page 4, which provides an overview of the Q1 results. Order intake reached JPY 2,022.4 billion, driven by a significant increase in Energy Systems, particularly GTCC. As a result, the order backlog exceeded JPY 14 trillion, an increase of more than JPY 860 billion from the end of the previous fiscal year. Revenue increased 16% year-on-year to JPY 1,194.2 billion. Business profit grew 65% year-on-year to JPY 159.6 billion with increases seen in all segments. Net income increased 97% year-on-year to JPY 134.6 billion due to an increase in business profit and the impact from continued depreciation of the yen. Order intake, revenue, business profit and net income all reached record highs for our first quarter. Free cash flow was positive JPY 391.5 billion, and interest-bearing debt was JPY 519.8 billion. I will now provide a more detailed discussion of our financial results. Please turn to Page 7. The 4 upper rows on this table show order intake, revenue, business profit and net income, which I just outlined. The lower rows provide a breakdown of free cash flow, which again was positive JPY 391.5 billion. Operating cash flow reached positive JPY 284.5 billion, mainly driven by strong profit generation and continued booking of large advances received in GTCC and other businesses. Investing cash flow exceeded positive JPY 100 billion, primarily due to the sale of the former Mitsubishi Logisnext. Please turn to Page 8, which shows our balance sheet. Total assets decreased by around JPY 120 billion from the end of the previous fiscal year to JPY 8,151.3 billion. The main reason for this decrease is that around JPY 550 billion of assets held for sale at the end of the previous fiscal year was reduced to 0, coinciding with the completed sale of the former Mitsubishi Logisnext. This was partially offset by an approximately JPY 350 billion increase in cash and cash equivalents arising mainly from higher advances received, which appear in the lower half of the table within the contract liabilities line item. Interest-bearing debt remained at roughly the same level as the end of the previous fiscal year and net interest-bearing debt, which is interest-bearing debt minus cash and cash equivalents, was negative JPY 1,164.2 billion. Please turn to Page 9, which breaks out year-on-year changes in business profit. Business profit rose by JPY 62.9 billion from JPY 96.6 billion during Q1 FY 2025, excluding the former Mitsubishi Logisnext. Of this increase, JPY 55 billion came from higher revenue and improved margins. Business profit increased significantly as we executed our extensive backlog, provided highly profitable aftersales services and enjoyed better margins at the time of order booking. The positive JPY 9 billion in foreign exchange impact was due to the significant depreciation of the yen. The average rate used for revenue recognition dropped from last fiscal year's JPY 146 to the dollar to JPY 157 to the dollar. Moving on, I will now discuss developments in order intake, revenue and business profit in each of our segments. Please turn to Page 11. In the Energy Systems segment, order intake rose significantly in GTCC, Steam Power and Nuclear Power with total segment order intake up 56% year-on-year to a total of JPY 1,359.3 billion. GTCC continued to book high order intake in North America and Asia. Revenue grew 27% year-on-year to JPY 536.3 billion. Business profit jumped 80% year-on-year to JPY 101.3 billion, driven mainly by higher revenue and improved margins in GTCC and Nuclear Power. Please turn to Page 12. In the Plants & Infrastructure Systems segment, order intake in Metals Machinery and Commercial ships increased significantly, with total orders rising 54% year-on-year to JPY 368.8 billion. Business profit increased 17% year-on-year due to higher revenue and business profit in Engineering, among other factors, which offset declines in Metals Machinery and Machinery Systems caused by lower revenue in Q1. Please turn to Page 13. In the Industrial Solutions segment, order intake was strong in Engines for Asian markets and large chillers for Japan, resulting in a 19% year-on-year increase to JPY 193 billion. Segment business profit increased 146% year-on-year on the back of higher revenue in Engines and the depreciation of the yen. Please turn to Page 14. Order intake in Aircraft, Defense & Space decreased significantly due to a high base effect from large orders booked in Q1 FY 2025, although order backlog remained high at around JPY 3,900 billion. Revenue and business profit rose by 10% and 13% year-on-year, respectively, due to steady execution of the extensive order backlog in Defense & Space as well as higher unit deliveries in Commercial Aviation. Next, I will discuss the FY 2026 earnings forecast. Note that the situation in the Middle East has not had a significant influence on our financials so far, and our earnings forecast does not include impact from what continues to be an uncertain and evolving situation. Please turn to Page 16. We have increased the full-year order intake forecast to JPY 7 trillion, raising the guidance for GTCC and Defense & Space by JPY 100 billion each. We have also increased the forecast for free cash flow by JPY 300 billion to JPY 600 billion. Revenue, business profit and net income remain unchanged from the previous forecast. Note that the business profit guidance of JPY 540 billion includes a risk buffer of JPY 20 billion for onetime expenses. The foreign exchange rate assumption is JPY 150 to the dollar and FX exposure on a business profit basis is $3.2 billion. Pages 17 through 19 provide breakdowns by segment, but they cover information already provided, so I will omit an explanation here. Please refer to these pages as well as the appendix on Pages 20 through 23 as needed after today's presentation. This concludes my presentation.

This is CFO, Hiroshi Nishio again. Allow me to provide some additional detail on the JPY 55 billion contribution from changes in revenue and margin improvements appearing on the profit bridge. Breaking down this JPY 55 billion, JPY 17 billion came from changes in revenue, while JPY 38 billion was attributable to margin improvements. Of the JPY 38 billion in margin improvements, JPY 25 billion represented onetime gains recognized in Q1. Of this JPY 25 billion, JPY 15 billion was related to profits recognized following the finalization of the contract price for a large long-term plant construction project. When work is accounted for using the percentage-of-completion method, while the contract price remains unsettled due, for example, to changes in work specifications, we do not recognize the gross profit attributable to the unsettled portion. Once the contract price is finalized, we recognize the related profit, including the amount attributable to progress made in prior periods. As a result, we recorded a onetime gain of JPY 15 billion in Q1. In addition, we recognized approximately JPY 10 billion in aggregate gains from the sale of several power generation projects. The JPY 25 billion in onetime gains was already factored into our full year forecast. At the same time, we had expected the full year positive impact from changes in revenue and margin improvements to be approximately JPY 83 billion, but JPY 55 billion of this has already been recognized in Q1. This represents a very strong start to the year, and we believe the profit improvements we had initially anticipated are materializing earlier than expected. Therefore, I personally believe there is a strong possibility that our full-year results will exceed the current forecast. That said, we are still only at the end of Q1. Going forward, we will review the situation and provide updated full-year guidance when we announce our first half results. [Statements in English on this transcript were spoken by an interpreter present on the live call.]