Mitsubishi Heavy Industries, Ltd. (MHVYF) Q2 FY2026 Earnings Call Transcript & Summary

Thank you very much for attending this meeting. On my side, I would like to explain about the second quarter results and the full year outlook and an update on [indiscernible] management policy that [indiscernible] on May 28. Order intake for the fiscal year 2025 Q2 increased year-over-year to JPY 3.3 trillion. Order backlog was JPY 11.5 trillion. This was because was [indiscernible] North America market, the largest market in the world. Another reason was this result is that we were able to receive orders for a very large [indiscernible] growth businesses such as Energy Systems and Defense with steady growth in the Plants & Infrastructure business, reaching JPY 2.1 trillion. increased [indiscernible] increased slightly year-over-year to JPY 170 billion. Outlook for the fiscal year '25 order intake is JPY 6.1 trillion. We think we'll be able to recover the impact coming from Mitsubishi Logisnext, which we made an announcement on September 30. The major reason behind this is that we anticipate that the Energy business is going to increase by JPY 1 trillion compared to the initial guidance. The outlook for business profit is unchanged at JPY 390 billion. Current business environment is unchanged. We think that robust order intake will continue mainly in growth businesses. As for business profit, our basic [indiscernible] initiatives that we are conducting. Going forward, to link this robust order intake to profit, more than ever, we will deploy resources in a focused manner such as adjusting risk and accelerate initiatives for group-wide optimization. Next, I will explain about a new management policy that we announced this May. Our management objective is to realize a virtuous cycle of high profitability and growth investments. To achieve this objective, we are committed to engage in group-wide optimization and scope expansion with unprecedented speed. I will update about these initiatives. First, about focused resource deployment, which is one aspect of group-wide optimization. Focus deployment experts in a focused manner and respond speedily. For example, in GTCC, to securely answer strong demand, we are going forward to increase production volume by 30%. We are not only talking about CapEx or human resource recruitment. This is an initiative that we are engaged concurrently to improve productivity such as shortening lead time. We are putting priority in deploying internal experts to realize this objective. For Defense business on August 1, the Australian government announced that it has selected our company [indiscernible] for its next-generation general purpose free [ gate ] program. To finalize the contract, various efforts are required, including coordination with the Japanese government and the companies involved in [indiscernible] construction as well as international contract negotiations with the Australian government. Accordingly, we are allocating internal resources to support this project. Regarding domain expansion, since the specific initiatives involve sensitive information closely tied to the mid- to long-term growth strategies of each business unit, we will refrain from providing the detailed explanations today. We will share more when the timing is appropriate for public disclosure. As for comprehensive portfolio management for the entire company, each business unit formulates and execute its own mid- to long-term growth scenario. At the same time, decisions on where to prioritize resource allocation are made based on management judgment. As announced on September 30, we review our capital relationship with Mitsubishi Logisnext. This decision reflects the approach to portfolio management. Based on the last month's Japan-U.S. Summit meeting, I'd like to briefly touch on our business opportunities in the U.S. Our company has long been active in the U.S. market, operating multiple manufacturing and service facilities, including those for GTCC systems and steelmaking machinery. Our sales to the U.S. last year totaled JPY 1.1 trillion, underscoring the importance of the U.S. market to our business. We will continue to prepare thoroughly as a manufacturer to respond to business opportunities in the states. Specifically, we aim to [ compute ] by supplying equipment and providing services, primarily energy to meet the expectations of our U.S. customers. To achieve our targets for FY 2025 and the 2024 midterm business plan, we will steadily advance the initiatives currently underway. As the pace of change in the business environment is expected to accelerate further, we shall strengthen our ability to respond swiftly to emerging [indiscernible] of change. We shall further accelerate our efforts in innovative portal optimization to ensure robust -- allow me to move to CFO, Hiroshi Nishio's presentation on the financial results. Please go ahead.

I would like to give you some points utilizing our presentation material. Please look at Page 3. So in terms of the numbers that we're going to use in this presentation, I would like to give you some points. On September 30, we announced about a plan to transform Mitsubishi Logisnext, we're going to call ML afterwards. With this, basically, order intake revenue, business profit excludes the numbers of ML A detailed [indiscernible] categorization of the numbers are in Page 29. Please refer to that slide as well. In terms of the balance sheet, for the total numbers, it includes ML, but there is an additional line for both assets and liabilities categorized as assets or liabilities held for sale. Please take notice of this matter. Then I will talk about the numbers. Please turn to Page 6. These are the major financial results. The order intake revenue, business profit, Ito has mentioned already at the beginning. With the net income, it is JPY 114.9 billion year-over-year, it increased by 7%. So this is the highest number for the second quarter results. On the top, [indiscernible] free cash flow, JPY 151 billion. This is in the black. Interest-bearing debt, it is JPY 607.7 billion. Although it is not shown on this page, in terms of order backlog, it is JPY 11.5 trillion. It has increased by JPY 1.2 trillion from the last year-end. Turning to Page 10. This is about the balance sheet. Total assets is JPY 7 trillion -- over JPY 7 trillion. One point I want to make is that on the lower side, on the liability side, the second line, there is a line called contract liabilities. This is advanced payment. This increased by JPY 260 billion substantially from the year-end last year. This is due to the increased order intake of GTCC. This is the reason why the free cash flow is JPY 151 billion on the positive in the second quarter. And going to Page 11. This is the profit base comparing business profit from the previous year. So starting at JPY 188.4 billion last fiscal year, same quarter, deducting ML portion and then going to JPY 168 billion. So this will be the start of apple-to-apple comparison against last year to this fiscal year. So first of all, there's a JPY 76 billion improvement coming from changes in revenue margin improvements, showing that various initiatives improvements have steadily taking results in all segments. On the other hand, if you look to the right, this is a change in onetime expenses. It's minus JPY 30 billion. So in the Steam Power business, about JPY 30 billion provisions were booked for the one-off expenses. Out of this JPY 30 billion, JPY 20 billion is for the South African project. I would like to verbally explain the background about this South African project. This is a project that we have inherited when the thermal business was integrated with Hitachi. Construction has continued for more than 10 years and operation has started by phases over the years. In September 2025, the last unit # 12 unit has started operation. We are still consulting with the customer in terms of how to share the cost that has been incurred due to the construction phase at the customer side. So this provision was made for this second quarter for accounting purposes. So this was an unfortunate one-off cost of JPY 30 billion was provided for. So moving on to Page 19. For all the segmentation [indiscernible] please refer as per your convenience. So talking about the earnings forecast, starting from Slide 19. This is the yearly forecast for the year 2025. The order intake is going to be revised upwards to JPY 6.1 trillion. Revenue remains at JPY 4.8 trillion and profit from business activities is unchanged at JPY 390 billion. The free cash flow remains 0. The assumption of the exchange rate is JPY 145 billion to [indiscernible] and the exchange rate sensitivity is JPY 1.6 billion. For the annual forecast, we have provided -- we have been providing the segment information starting from 21 for the Energy Systems segment. The order intake for the Energy Systems segment has been revised upward because of the stronger performance in GTCC from JPY 2.2 trillion to JPY 3.2 trillion. The business profit remains unchanged at JPY 240 billion. However, last time, we have provided for JPY 20 billion risk buffer for onetime expenses that was included. But this time, in Q2, the one-off expense has already been recognized in JPY 30 billion, so that no buffer is incorporated for in the second half. And down below is the Plants & Infrastructure. The project execution is going quite steadily so that the business profit has been revised upward from JPY 60 billion to JPY 70 billion. And moving to Slide 22, Logistics, Thermal and Drive Systems. To a slowdown in sales of turbochargers and HVAC units, order intake, revenue and business profit have all been revised downward. And down below is for the Aircraft, Defense and Space just remains unchanged and the yearly total, that's all that I mentioned. And just for your information on Slide 23. And here, we show the Defense business [indiscernible]. And this is the track record from 2018. The order intake for the year 2025 seems to be down compared to the year before, and there are a lot of questions coming regarding that so that we are explaining the reason why. Year '23, '24, the level has been quite high. So compared to those 2 fiscal terms, the current fiscal year is JPY 1.2 trillion, which is down. However, compared to the normal level, it's still quite high level. And for your reference as well on Page 26, is the Energy segment on the right below, the aftersales service revenue ratio is shown. And also on Page 28 is the business portfolio optimization history, just for your reference. So now that's all from myself. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]