Mitsubishi Heavy Industries,Ltd. (7011) Q1 2027 Earnings Call Transcript

This is MHI 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 FY2026 financial results and the full year earnings forecast, limiting myself to the main takeaways. I am Julia, MHI Investor Relations AI narrator. First, two items to keep in mind. The former Mitsubishi Logisnext was removed from MHI's consolidated base on May 1, 2026. Regarding the Q1 FY2025 results shown here for comparison and 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 and Drive Systems segment has been renamed Industrial Solutions and the Data Center and Energy Management Department has 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 2,022,4 billion yen driven by a significant increase in energy systems, particularly GTCC. As a result, the order backlog exceeded 14 trillion yen, an increase of more than 860 billion yen from the end of the previous fiscal year. Revenue increased 16% year-on-year to 1,194.2 billion yen. Business profit grew 65% year-on-year to 159.6 billion yen with increases seen in all segments. Net income increased 97% year-on-year to 134.6 billion yen 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 a first quarter. free cash flow was positive 391.5 billion yen and interest bearing debt was 519.8 billion yen i will now provide a more detailed discussion of our financial results please turn to page 7 the four 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 391.5 billion yen. Operating cash flow reached positive 284.5 billion yen, mainly driven by strong profit generation and continued booking of large advances received in GTCC and other businesses. Investing cash flow exceeded positive 100 billion yen, 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 120 billion yen from the end of the previous fiscal year to 8,151,3 billion yen. The main reason for this decrease is that around 550 billion yen of assets held for sale at the end of the previous fiscal year was reduced to zero coinciding with the completed sale of the former Mitsubishi Logisnext. This was partially offset by an approximately 350 billion yen 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 1 trillion 164.2 billion yen. Please turn to page 9 which breaks out year on-year changes in business profit. Business profit rose by 62.9 billion yen from 96.6 billion yen during Q1 FY 2025, excluding the former Mitsubishi Logis Next. Of this increase, 55 billion yen came from higher revenue and improved margins. Business profit increased significantly as we executed our extensive backlog, provided highly profitable after-sale services, and enjoyed better margins at the time of order booking. The positive 9 billion yen and 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 146 yen to the dollar to 157 yen 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 1,359,3 billion yen. GTCC continued to book high order intake in North America and Asia. Revenue grew 27% year-on-year to 536.3 billion yen. Business profit jumped 80% year-on-year to 101.3 billion yen driven mainly by higher revenue and improved margins in GTCC and nuclear power. Please turn to page 12. In the plants and infrastructure systems segment, order intake in metals machinery and commercial ships increased significantly, with total orders rising 54% year-on-year to 368.8 billion yen. 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 193 billion yen. 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 and space decreased significantly due to a high base effect from large orders booked in Q1 FY 2025, although order backlog remained high at around 3,900,000,000,000 yen. Revenue and business profit rose by 10% and 13% year-on-year respectively due to steady execution of the extensive order backlog in defense and 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 7 trillion yen, raising the guidance for GTCC and defense and space by 100 billion yen each. We have also increased the forecast for free cash flow by 300 billion yen to 600 billion yen. Revenue, business profit, and net income remain unchanged from the previous forecast. Note that the business profit guidance of 540 billion yen includes a risk buffer of 20 billion yen for one-time expenses. The foreign exchange rate assumption is 150 yen 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 55 billion yen contribution from changes in revenue and margin improvements appearing on the profit bridge breaking Going down this 55 billion yen, 17 billion yen came from changes in revenue while 38 billion yen was attributable to margin improvements. Of the 38 billion yen and margin improvements, 25 billion yen represented one-time gains recognized in Q1. Of this 25 billion yen, 15 billion yen 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 one-time gain of 15 billion yen in Q1. In addition, we recognized approximately 10 billion yen in aggregate gains from the sale of several power generation projects. The 25 billion yen in one-time 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 83 billion yen, but 55 billion yen 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.