Mitsubishi Heavy Industries, Ltd. (MHVYF) Q3 2023 Earnings Call Transcript

Mitsubishi Heavy Industries, Ltd. (OTCPK:MHVYF) Q3 2023 Earnings Conference Call November 6, 2023 1:30 AM ET

Company Participants

Takashi Inoue – Investor Relations

Hisato Kozawa – Chief Financial Officer

Seiji Izumisawa – President & Chief Executive Officer

Conference Call Participants

Takashi Inoue

[Foreign Language]

The time has come for us to begin that Mitsubishi Heavy Industries Limited First Half Fiscal Year 2023 Financial Results Briefing. My name is Takashi Inoue, Senior General Manager of the Investor Relations and Shareholder Relations Department. I will be your moderator today. Thank you for joining us. First, I would like to introduce today’s speakers; Seiji Izumisawa, Member of the Board, President and CEO; and Hisato Kozawa, Members of the Board, Executive Vice President and CFO. Today CFO, Kozawa will speak about our first half fiscal year 2023 financial results, after which we will hear from CEO, Izumisawa regarding the status of achievement of our 2021 medium-term business plan, as well as the 2024 mid-term business plan. After this, we will hold a question-and-answer session. Today’s briefing session will last until 4:30 p.m. Japan Time. We appreciate your cooperation during today’s event. Our presenters will use the first half fiscal year 2023 financial results slide deck which is available for download in the Investors Section of our website.

Now without further ado, allow me to move on to CFO, Kozawa’s financial results presentation.

Hisato Kozawa

Good afternoon, everyone. Allow me to summarize the first half financial results using the first half FY2023 financial result presentation materials. The materials are organized according to the table of contents. First, I will provide an overview of our financial results. Please see Slide 4. This page shows the key financial indicators. Slide 5 summarizes the highlight, order intake, revenue and profits are all higher year-on-year. The increase in order intake was particularly large and the rate of progress against the initial annual forecast or JPY4.6 trillion was about 68%, and annually unusually high level. We have raised the annual forecast by JPY1 trillion to JPY5.6 trillion partly because of the progress in GTCC and defense, both of them have exceeded the plan. Both, business profit and net income increased significantly year-over-year.

As shown later on Slide 9, although a one-time loss was booked in air [ph] related to an international drug development project the effects of price optimization which began to BC last year, increases in revenue and the impact of the depreciation of the yen contributed similarly to the first quarter. Moreover, free cash flow decreased by approximately JPY80 billion year-on-year but remained at roughly the same level as forecast in the first half of our full year plan indicating progress as planned. We will pay an interim dividend of JPY80 per share as announced at the beginning of the fiscal year. The interim dividend is in record high exceeding the JPY75 paid into 2019.

Slide 6 and a few pages beyond provide a little more detail about our financial results. Slide 7 includes information already provided; so let me skip on explanation. Slide 8 shows balance sheet and cash flows. Total Assets increased by JPY286.3 billion from the end of FY2022 to JPY5.5 trillion JPY761.1 billion [ph]. The majority of this increase is attributable to the impact of currency translation effective related to foreign currency denominated assets due to the depreciation of the yen, this amounted to approximately JPY180 billion. Although inventories have increased slightly we believe this is a normal trend for MHI within the range of normal fluctuations.

As for cash flow, operating cash flow decreased significantly year-on-year. While revenues are expanding, we are in a phase of working through advances received due to changes in our product mix. However, we will continue to carefully manage trade receivables and inventories. Investing cash flow increases slightly year-on-year due to the sale of [Foreign Language] with your changes in business profit. Most of our shows for that fiscal year 2022 business profit was JPY4.8 billion. To the right, the variance in one-time expenses in other businesses, which is a difference in losses incurred during the first half fiscal year 2022 are — we’re going to do an optimization expenses sweep in operations and the one-time loss related to [indiscernible] program which is booked in the current fiscal year.

Regarding price optimization; it includes the effects and other businesses which are down year-over-year with the price optimization or price increases exceeded resulting in an increase of JPY24 billion. Due to other factors shown here, [indiscernible] for 2023 was JPY1.9 billion [ph]. As explained, the summary of order intake revenue and business profits by segment. With the next few pages I will explain the situation in each segment.

Slide 11, is the status of energy system segment. Order intake revenue and profit, both increased year-over-year, particularly based on continued good performance and favorable overall progress, we have revised our full year order intake forecast by JPY200 billion. In terms of profit, although progress has been slow compared to the full year forecasts due to the booking of one-time losses and other factors, we have maintained the current forecast as positive impact when the depreciation of the yen is expected.

Slide 12 shows the situation of the plant and infrastructure system segment. In the segment, revenue and profit increased year-over-year despite the decrease in order intake. As shown in the table, the main cause of the decrease in order intake was metals machinery. However, the report of order intake in the first half at JPY226.9 billion [ph] high and the market continues to be strong.

Slide 13 shows the situation in logistics terminal and drive system segment. Order intake revenue and profit increased year-over-year. Order intake and revenue are showing steady progress at around 50% of the full year forecast. We have raised profit forecast by JPY10 billion based on the progress made in the first half of the impact of the currency exchange rate assumptions.

Slide 14 shows the situation in aircraft defense and space. Order intake revenue and profit increased year-over-year, specifically order intake booked in the segment totaled JPY999.4 billion which is roughly equal on the same level as the initial full year forecast. This was due to continued strong growth in defense of the first quarter based on the progress made thus far, as well as future plans, we have substantially increased the full year order intake forecasts from JPY1 trillion to into JPY1.8 trillion.

Revenue and profit increased year-over-year due to increase in the number of 787 aircraft shipped to Boeing in the special aviation and aviation businesses and the benefits of the depreciation of the yen. [Foreign Language] With this we have increased our full year forecast potentially with JPY10 billion.

On Slide 15 through 18 shows the FY2023 earnings forecasts; a summary of the revisions made is shown on Page 16. Our full quarter explanation as this page outlines information already shared. This concludes my explanation. Thank you very much.

Seiji Izumisawa

Now, please allow me to offer some comments. As CFO mentioned just now, FY2023 second quarter in terms of our order intake revenue and business profit, we were able to surpass the previous fiscal years performance. This is the result of the various initiatives that we have executed in the 2021 MTBP. The current operating environment remains uncertain with the ongoing depreciation of the yen, destabilization of energy supply due to geopolitical risks. But we believe we can still attain the target set up into 2021 MTBP.

Please let me talk briefly about this 2021 MTBP. This was launched amid the drastic changes in the market environment caused by COVID-19 pandemic. We focused on strengthening profitability rather than expanding top line and the study carried out a variety of initiatives to achieve this goal. And we have responded to the market changes and we decided to discontinue the development project before the spacejet [ph]. And in terms of businesses, we have worked to transform the business organizations while also consolidating operations. Specifically, we have structures based of operations providers in thermal power business, and as for the business portfolio, we sold Mitsubishi — we have integrated Mitsubishi Power and Mitsubishi Heavy Industries Engineering into MHI. We sold our machine tools business, made acquisition of naval and our governmental ships, we worked to create a joint ventures for power generator systems business and development of the next-generation.

As for the energy transition, we feel that on top of the region renewable energy, we have focused on the more realistic energy transition. We believe social contribution and profit securing are two important point, and we have transferred the existing facilities — incorporated a few of the existing facilities and we have been pushing these hydrogenic conversion and we are seeing hydrogen ammonia [ph] demonstration projects as well. In terms of the social infrastructure — smart social infrastructure, we are seeing rapid growth of data center market generated by AI and 5G. And we are working on the high-efficiency cooling systems and a carbon-free electricity to those data center industry. And using concentric as a footfall, we aim to provide a one-step access to cutting-edge total energy solutions. Furthermore, height in awareness at both, national and energy security due to intensify geopolitical risk has created new business opportunities in our nuclear power and defense businesses. Towards this, we are going to focus as a leading company.

Next, I would like to talk about the next 2024 MTBP which we are currently formulating, and we’d like to introduce the direction. First off, the amortize mission to integrate cutting-edge technology into expertise built up over many years, to provide solutions to some of the world’s most pressing issues and provide better lives to the people. With this mission in mind, in order to realize our mid to long-term goals or mission net zero in a safe, secure and comfortable society; during the 2024 NTP period, we hope that we will prefer realistic services tailored to each region and customer while aiming to become a hub for traditional ecosystems founded in craftsmanship [ph].

We work on three key priorities to this end; decarbonization, energy saving automation, and contributing to national security. Furthermore, during 2021 MTBP, the focus has been strengthening profitability. But during the 2024 MTBP, the focus will be on achieving both, profitability and growth. We aim to achieve business growth exceeding the global GDP growth or to be able to compete in line with the competition work including profitability and capital efficiency. To this end, we are considering expanding business areas upstream and downstream, enhance the competitiveness through mergers and acquisition, both in shifting resources to growth areas by further optimizing our business portfolio. To realize this we will invest more than JPY200 billion, more than double the total of investments during the 2021 MTBP and grow our businesses.

I will explain about the specific initiatives when the next MTBP is announced in May of next year. Thank you very much.

Next, I would like to move on to the Q&A session.

Question-and-Answer Session

A – Takashi Inoue

[Operator Instructions] Sam [ph] from Sam [ph], Nikko Securities. Over to Sam [ph], please.

Unidentified Analyst

Thank you for taking my question. Please go ahead. So my first question is on Page 9, in terms of the minus 10 of the decrease of the one — because of the summer business, but PwC 1000 [ph]. So basically, they have been getting about JPY7 billion based on the sales that they have. So in your case in the actual yen basis, how much cost has been incurred; can you talk about that? And you talked about the European business re-organization, you talked about the difference about that. So if that is the case, about JPY20 billion of cost should be booked. But the IGCC additional costs in the first half — well, it hasn’t come up at all. I think this has been positive year-on-year. So I would like to ask about the breakdown of this JPY10 billion you have? That’s my first question.

Hisato Kozawa

So, Kozawa would like to respond. First of all, in terms of the one of course, with the engine, it’s about a little under JPY20 billion. So basically — so it is pro rata against our share. In terms of how this is treated in terms of accounting terms, I think it’s different company by company. So maybe it’s not exactly 2.3% but basically, the idea is the same; is progress our share. In the previous year — and this one of our cost column in last year at this timing, the one-off cost was European related costs — re-organization costs, that was about little under JPY10 billion. So that is a difference between this times cost. This time it was minus JPY10 billion; this year, it’s minus JPY20 billion [ph]. So again, so this difference will be minus JPY10 billion. In terms of IGCC, for this fiscal year there is some costs but the last fiscal year it was not included in the one-time cost. So basically, we have aligned the way we have stoned [ph] costs.

Unidentified Analyst

Thank you. So IGCC, there is some cost that comes up this year but not that large?

Hisato Kozawa

Yes, that’s the correct understanding.

Unidentified Analyst

My second question is about in terms of the JPY300 billion business profit; you have not revised your outlook. But I could look it breaking down by factor. So the beginning of the year, the Forex impact may be minus JPY11 billion and material cost increase minus JPY15 billion, and price is plus JPY20 billion. I think it may give us a breakdown. So under this new plan, we have this type of breakdown.

Hisato Kozawa

Well, we cannot mark immediately in detail but I think in terms of the direction in terms of the exchange rate it is maybe quite along positive in terms of the material cost. But as you can see against the initial forecast, it has become better. I think these two is a positive factor but in terms of the engine related costs, we have not reflected that as it may be about JPY20 billion — negative JPY20 billion.

Unidentified Analyst

So that will offset each other; so that’s reason why we are maintaining the JPY300 billion outlook overall. So in that sense, what is common is, although it was zero but negative, but maybe we were a bit bullish when we said this over zero?

Hisato Kozawa

Well, in terms of what has decreased, maybe asset related in terms of the growth area, R&D investment is going to increase; so that’s our outlook. So that’s incorporated in the numbers. In any case, this is based on what we have I’ve seen in the first half.

Unidentified Analyst

Thank you very much. So this is my last question. In terms of the defense segment, I would like to talk about the order intake in the first quarter. So for the missile related chunk of orders; so in the second quarter you didn’t have that type of orders but you did receive orders about JPY270 billion, maybe around JPY270 billion — just in the quarter we have been able to get that level orders. So if you can — can you — if your type of orders that came in terms of what your outlook initially, with defense and space JPY850 billion was the plan? But it’s — it had to be JPY1.65 trillion [ph] for defense and space. So in terms of the content, JPY800 billion seems to be quite large in the first place. In which areas is this order intake outlook increased? So next fiscal year, I don’t think this situation will continue. The EU initially said that JPY1 trillion level when next — may be a bit difficult to get to JPY1 trillion level the next fiscal year. I think that was the tone but for the long-term, have you changed your outlook that you’ll be able to maintain the JPY1 trillion level for order intake? So I would like to get your outlook in terms of the order intake situation with the defense business short-term and long-term.

And the second quarter orders, what type of orders that we have taken? Was that…

Seiji Izumisawa

Not as far as the first quarter but what seems to be coming in as good orders would be — it’s called a vertical launch system for the missiles from vessels when there is equipment that vertically launches the missiles. So I think we have been able to get a certain number of orders. I think that has been the biggest contributor. So VLS, about more than JPY100 billion of orders. I think that’s the major ones and others. Another point I want to make is that JPY1.6 trillion plus is that the [indiscernible] year? Yes, yes. You have made an upward revision of JPY800 billion; if that is all coming from defense and space, maybe that will reach that level as well. I mean, it was not all coming from the defensive and space but most of the upward revision is coming from defense and space.

With the commercial Tier-1 business as an outlook it’s going up because the 787 against initial forecast in terms of the — well, maybe it was a bit conservative initially, but it’s overshooting initial outlook and then there is the point of foreign currency impact. The commercial aircrafts is better, but most of the JPY800 billion would be coming from the defense business. So JPY1.5 trillion to JPY1.6 trillion maybe will be the image that maybe you should have with business.

Unidentified Analyst

And the last question is that, is this going to continue going forward in the long-term?

Seiji Izumisawa

As my understanding to be frank, this year is quite high. I think next fiscal year is going to go down a certain level. Much is going to be kind of a normal level; it all depends on how the budget — national budget is going to be. But more or less, maybe — we have been saying that about JPY500 billion on average that we would have got from the business. So maybe going forward JPY1 trillion or maybe bit over that going forward. So at order intake level for the mid to long-term, maybe it will be this level. So I don’t have what’s going to happen year by — fiscal year by fiscal year, it depends on the budget. So I won’t comment about that. For this fiscal year, this missile-related orders — well, because these were the areas that we were good at; so we have been able to get those orders.

Unidentified Analyst

Thank you. That’s all for me.

Takashi Inoue

Thank you very much, Mr. Noguchi [ph]. Next from Nomura Securities and Mr. Michael [ph], please.

Unidentified Analyst

Thank you. I have a couple of questions. Overall, company’s profits JPY300 [ph]? And if I move into the breakdown energy, 30% would be the PAT. However, that’s consumed kind of by [indiscernible] and aircraft and space, I think the price has been increasing, and that’s driving the performance. But then asset management is now gone? The changes from the initial forecast and buffer caused security for IGCC no more necessary. I think that — I mean, if you can explain about ups and downs amongst the breakdown of just a total number that will be appreciated.

Hisato Kozawa

I’m sorry, if I may not be able to answer directly, but our forecast — how we created those numbers. Well, after the potential risks; we didn’t consume such bad rates [ph] in aircraft and space this time. So aircraft and space-related losses are compensated by foreign exchange, price optimization; so that’s how numbers have been offset. And common segments, we have some inter-segment adjustments. And so, no major change in that area. Sorry, I’m not sure if I responded to your question. Well, so in reality, numbers are always shooting.

Unidentified Analyst

Asset and management? Ocean of — positively affected your profit number. And IGCC; are some risk averse [ph] which are yet to be consumed? So what is the outlook of IGCC in the second half? Is that remaining unchanged from the beginning of the year?

Seiji Izumisawa

Well, again, the offer is not only for IGCC, please allow me to mention that. We have various plant based project, so we may face with some unexpected incident, and the buffer is not consumed by aircraft and space, that’s because we were originally looking into the plant related buffers; so we didn’t create this buffer number of for aircraft and space business. So IGCC, the situation is not changed and we are working on the third phase construction. And for the common segment, I don’t want you just to pay too much attention on asset management, but segment based numbers are rather conservative and numbers in common segments are relatively less conservative; that’s how we make the adjustment. Thank you.

Unidentified Analyst

Thank you very much. And my second question; I think details will be presented in May. But can you comment on the next mid-term business plan? Especially for 2021 mid-term business plan, I think the difference will be that you’re going to focus on the growth as well. And more than ever, I think you will be focusing more on the top line growth. And you are seeing new business opportunities in defense, so I guess those will be translated into your next mid-term business plan. So, if you can comment and please give us some directions for the next mid-term business plan?

Seiji Izumisawa

Yes. Next MTBP — so business profit. First of all, we were focusing on the strengthening of our profitability and this will remain unchanged about defense, nuclear power, service-related projects we are seeking for more opportunities in those business segments. So, you know, we would like to grow those business segments. And the business plan is currently under development. So, in terms of the new business opportunity, GSD, and nuclear power or decarbonization, the energy transition, would those be the main one, and also energy saving, I think is another promising area. And in terms of the reshuffle of the business portfolio. I guess energy, aircraft space and the fans, and others, are you planning to review those businesses? We’re going to allocate people in the gross area, so we need to review the business portfolio. And by combining multiple segments, in some cases, we may be able to develop a new business opportunity. So, we are studying into the segmented domains for their potentials right now. Thank you.

Takashi Inoue

Thank you very much, Toshio. Let’s go to the next question. It is [indiscernible] from Muziho Securities.

Unidentified Analyst

It awesome, please. Thank you very much for taking my question. So, my first question is about DTCC. In terms of the order intake, that is my question. The first half, the progress was kind of good. But this time rounded the energy business outlook, you have up but in the second half, compared with the rest of the DTCC energy business, it seems to be a bit weaker. That is my assumption. So, based on this situation to DTCC, somehow are the inquiries coming in? And the second half? Is there a possibility upside for this business? Can you elaborate on this point? That’s my first question.

Hisato Kozawa

Yes. Thank you. In the first half, there has been some big projects that we have been able to get and there has been an impact. But comparing to the — compared to the second half of last year to this year, the second half, how is the situation? Basically, with the gas turbine business market condition is not worsening? I think it’s quite robust. The situation is continuing. That is our impression. So, this energy domain or different terms of the segment. So, you’re here and for the whole year as well. The steam power that is going to go down, but I think all the other businesses are offsetting the decline in steam power. That’s my answer to your question. So, my other question is about business profit, guidance and the Water world chart. And I would like to confirm one point. So, Mitsubishi allottee. Next, the closure of the Swedish plant. There has been some point about that. So, I think this has been a one off. Was that the one of impact in your guidance, meaning that the next fiscal year this will have no impact? Is that the correct understanding? Please let me confirm about that.

Unidentified Analyst

So, this one loss. This is a full year, it is included in the poll, your outlook was the largest next I don’t think that was included in the first step. For the full year guidance that’s improving too. So, I look at how the numbers are moving. I think that’s what this is the reasons so. I think that maybe this will be one reason within your guidance that we have to consider. In that sense as this whole year out look at LT&D segment and terms of the numbers that we have disclosed. We have considered this situation and we have come up with the outlook. But so, this next day SEC send us the you know, the strength of the company is different?

Was the cube ultimately when we will actually put in the numbers and that I can elaborate right now, but in your understanding maybe a single digit level giving, yeah, level will be the impact well, and since my questions about an XMTBT. So as the CEO has said in the beginning the snow, so, energy a one stop seamless response, I think you have referred to that. And I think maybe that is one idea that you’d have. So, for your next XMTBT, what is lacking or what we want to expand to growth didn’t have any, hence they can give me at the same time. So let me elaborate further. So, the U.S. hydrogen, because you have been able to select it circa two, two projects, but the overall U.S. hydrogen project size is quite large. I didn’t know how much your proportion is. But it’s this kind of a promising level in terms of the size of the business.

Hisato Kozawa

Thank you for your question. So, in terms of the including this one stop initiative in the next term, XMTBT, so the energy transition related business. There’s a lot of projects that are coming up, so carbon capture and hydrogen pot circuit included. Fs to feed I think is going to that phase, but during the next XMTBT period, how much chemical to fit and actual call to commercialization? We don’t know yet. We have a lot of expectations, but it’s still not visit visible, if actuality things go forward. I think in terms of the contribution to our business, I think we can expect some level of contribution. So, what’s lacking is that in terms of this energy transition, we are the upstream and downstream or the users or producers, we have to connect these two oils to want to be able to be implemented. And of course, whether the price is actually a feasible you consider all the subsidies etc. That’s coming as a project. So, I think you have to keep all this in mind. But I collaborate with Exxon Mobil. I think there’s a lot of potential in this business.

Unidentified Analyst

Thank you very much. That’s all for me.

Takashi Inoue

Thank you very much. Next is [indiscernible] from Morgan Stanley – Securities [ph].

Unidentified Analyst

Hello, this is Ibra [ph] speaking. Can you hear me?

Takashi Inoue

Yes.

Unidentified Analyst

Hello. My first question is related to gas turbine. I noticed business is progressing well. Can you enlighten me on the background? Pay the DACA kind of protect is that girl come up to you dusted I still don’t know car suspended project are now resuming or just like last year, maybe you’re gaining market share. So, I think we you are gaining more of the long term and service contract than before. So can you know what is the reason behind the good performance of gas turbine business this year and last year in terms of the share?

Hisato Kozawa

Yes, we are gaining share it and that’s boosting people once and when I do get the first half member is not really visible but globally, cumulatively up to June we have actual numbers and we are maintaining top share. That’s what after reason. Now why are we keeping top share our under Standing by is that we have Jack typed turbine. And this most advanced turbine is gaining a lot of trust and reliability in operation as well as, so we are seeing good feedback. Hydrogen Brady, other companies are also saying that, you know, their top lines are hydrogen ready, but in our case, we have Hyde Park in taka cycle.

And you know, we can initiate the demonstration project. So, in terms of the hydrogen readiness, we are very much trusted by our customers. And trips are of the inquiries in lead, like a backup and so on. We are responding to the alternative solution is for renewable energy, we have big turbine turbines, which is seeing good demand and the sick person cycle which doesn’t require any combustion. So, a simple cycle is receiving and seeing more inquiries, but that’s because of the successful archetype.

Unidentified Analyst

Thank you. My second question. Now, first half, you have gained a lot of orders in defense area since a rather sensitive question to ask in front of everyone, but how do you see the profitability of defense space as we received comments by Minister of Defense?

Hisato Kozawa

And also, I think it has some R&D type of aspects included. So, from management perspective, how do you see the order? And what is your view into the future profitability used to be a media talks a different perspective into the profitability of the business. It really depends on whichever we look about. But at one point of time, people talked about 15 — net practices, net profit [ph]. That includes cost escalation and entry. Thank you. So realistic profitability we’ll see 10 That as the maximum, can we get to 10? It really depends on customer’s feedback. But I would say that we are very close to this 10. And in a few years, we can, you know, get this 10% or so margin level.

Unidentified Analyst

That’s all. For me. Thank you very much. My last question is related to the next MTBP enhancement of turbidity and the growth of top line both will be pursued. As I understand that to simply put from CEOs perspective, that 10% of business profit, how important is it? 10% is not you know, I guess it’s significant on its own, but I think it is a you know a meaningful number. So, are you committed to this or like would you say that you need to yellow force them to blanker. So, you are not really obsessed with this 10%. Of course, these numbers will be subjective to change due to effects and so on. However, I would like to understand how significant this 10% is to you.

Hisato Kozawa

It’s very difficult for me to offer you a clear-cut answer. I am sticking to this 10% for Mitsubishi Heavy Industries to continuously sustainably to grow, we need to make investments. And we need to generate certain in our profit that enable us to win against competitors.

Unidentified Analyst

But is it Misawa? Are you able to be committed this 10%. That number?

Hisato Kozawa

Well, to that question, I would say. In order to make target as realistic as possible, we are trying very hard to come up with the, you know, initiatives and a pathway to get there. Thank you.

Takashi Inoue

Thank you very much. Let’s go to the next question. It is from [indiscernible]. Sam, please go ahead.

Unidentified Analyst

Sam from Jeffries. Can you hear me?

Takashi Inoue

Yes, we can hear you.

Unidentified Analyst

Thank you for taking my question. I have two questions. One is about the price optimization. And the first set of JPY24 billion. And you talked about a four-year JPY20 billion targets. So, it has exceeded expectations. So, in terms of if you look at the poll, we get a profit outlook for the businesses, they say upper vision of JPY10 billion. So, it’s about JPY5 billion if you take into consideration are the weaker again. And then you talked about a single digit plug in costs for the plant. So, in terms of the price optimization, upward vision, I think means it about JPY10 billion, if that is the case. If it? What is the reason why have been able to increase the price, it’s more than expected. And what next fiscal year? Can we expect more price increases? That’s my first question.

Hisato Kozawa

So, in terms of price; well, we have been able to do more than we expect, it’s not the case that we have been able to increase the press booth and we have planned. It’s more the costs increase as more or less compound. There is inflation but it has been more moderate than we have expected. I think that is one factor. In terms of the full year outlook, as we have been saved from before, initially last year or the second half of last year, and the third quarter to the fourth quarter last year. So, we have been able to get the effect of the price optimizations. So, on the year-on-year comparison — compared to the fourth quarter of last years, and compared to right now have been able to increase the prices even more, depending on the product. Yes. But we have been able to do a lot of price increases. So even if we had been able to get this type of effect the first half and the second half, we don’t think that we’ll be able to get this level of benefit.

Unidentified Analyst

So, you talked about [indiscernible] initial outlook, and how much more than being able to get guests that and next fiscal year, and be able to get more positive impact for price optimization for next fiscal year?

Hisato Kozawa

Well, we’d have to look at how the inflation is trending. And then we have to decide how much price optimization that we can conduct. But going forward, well, to talk about why we have been able to press the price optimizations, but it was we had a little profitability, but we have been able to normal life situation. But going at some going forward, whenever there is a currency quiz, I think our initiative is how to factor that into the price. So going forward, unfortunately, we can’t expect to see a high number going forward. Maybe what we want to do is that the price increase should not lag behind the cost increase for next fiscal year that will be our initiatives. With this fiscal year in total, of course, we can’t say exactly. But I think we’ll be tempted again, at least more than our initial outlook in terms of the benefit of price optimization. So, we think we hope that we’ll be able to exceed JPY30 billion.

Unidentified Analyst

Thank you very much. My second question is, or this is a bit more in details a bit instead of another turbo charger. So, the first step sales progress if I look at that, so I guess you’re doing a plan this weaker. So how much can you achieve that guess who you’re planning to support credibility. I think it’ll be tougher this year. But when next fiscal year, the turbocharger business profitability, is it going to be covered?

Hisato Kozawa

In terms of the situation that turbochargers unfortunately, it is not improving, and this situation is continuing. So, it is tough. That’s true. But that said, what the whole year I guess a four-year assumption, we not really that behind the default here are some since. But I think basically what role in this business for this fiscal year, next fiscal year and onwards, that’s actually what we are trying to be very sensitive. So, we want to realize this initiative so that we can improve this business next fiscal year.

Unidentified Analyst

So how — it’s about [indiscernible] I think there’s various ideas about that. So the – for the mid to long-term, for the turbo-charger business, what type of scenario that you’re assuming?

Seiji Izumisawa

Excuse me, can you repeat your question?

Unidentified Analyst

For your turbo charger business going forward, because if you’re considering how the EV business is going to transpire going forward? So if you look at the future of the turbocharger, what kind of scenario are you thinking? Are you going to continue or you have other options? What type of scenarios that you have in mind for turbo chargers?

Seiji Izumisawa

For the turbo charger business, currently, as Mr. Kozawa has said, it’s facing a tough situation. But we are taking initiatives currently and the market perspective. We think that this situation will continue to work; the flattish situation will continue to work. Of course, EV will be coming out, but the PHEV or in terms of the engine, different cars, what’s going to happen or those type of conventional cars, it’s quite stable yet. So it is true that we have to take measures for the turbocharger business, but in terms of the market for the turbo chargers, I think that the current situation is going to continue.

Unidentified Analyst

That’s all understood. Thank you very much. That’s all for me.

Takashi Inoue

Thank you very much. Next is JP Morgan Securities, Mr. Sano [ph].

Unidentified Analyst

Yes, this is Sano [ph] speaking. Can you hear me?

Takashi Inoue

Yes.

Unidentified Analyst

How do you see the outlook in the second half? In terms of the outside, you talked about IGCC and additional effect on price optimisation? Other than those upside; is there anything that you’re currently looking into rather conservatively and also the situation in Asia, Europe, China, we are not seeing any improvement in those markets not disclose any downside risk including for MTND?

Hisato Kozawa

It is not for IGCC, the buffer is for the overall project risks. And I do not think the current forecasts are so conservative. So, the risk related to cost; if we can control them well enough then we can seek for some upside a buffer and in terms of effects coming up the ridge was about JPY140 or so. So I don’t think effects will move so dramatically for the second happen and what — and in terms of the risk, Risk Factor. And is there any other element that we are conservative I cannot think of any at this point of time. And in terms of risk for MTND, we are seeing good progress so far.

Unidentified Analyst

On Europe?

Hisato Kozawa

No, we are seeing some slowdown already US. The US was good until now, but looking at the interest rate move probably we will see declines. We need to be prepared for the time to come in your office.

Unidentified Analyst

Again, thank you. I have a couple of questions regarding the next MTBP. But this year — now, our 8% target for this year MTBP.. This year’s target is actually either the percent and when I look at the business profit, it’s just nine but if we look at the asset turnover rate, then it doesn’t Chris said it should I see it as 11% I guess a 12%. Like is — are you sticking to this you know, 12% which is that falls into edit it on MTBP or do you allow for 11%.

Hisato Kozawa

Instead of honestly standards our profit has progressed as per expected, I’m talking about FY 2023, but then that denominator [ph] is growing not because we are shrinking the dividend the share price stock market has boosted so we are seeing some delta in terms of the market and translation body. So, aside from that, you know, if I round the percentage like a decimal point, we’ve achieved 12% already. So I think we are very close to the target.

Unidentified Analyst

And next MTBP, what is the level that we are aiming to achieve? Is it going to be 12% or not?

Hisato Kozawa

I can’t comment at this point of time, but not on a single year basis. We would like to generate a double digit percentage over multiple number of years. Is it going to be 11%, 12%, 15%; not something we still need to contemplate.

Unidentified Analyst

Thank you. Final question goes to the CEO. Originally, at JPY100 billion is revenue target at estimates? And what is it that you’re aiming to achieve JPY1 trillion? And JPY300 billion size investment you mentioned earlier. So in CEOs perspective, the next MTPB based on what you have experienced so far, are you trying to grow your businesses or do you have visibility? How do you see the business growth? I’m talking about — I’m asking this question from a qualitative perspective.

Seiji Izumisawa

For energy transition it will take some time, more time than we initially expected, especially hydrogen ammonia. The supply side, users side or demand side needs to be connected otherwise we cannot materialize the business. We are working on the hydrogen hub projects right now but more than initially expected is taking time. But we aren’t receiving strong inquiries and carbon — for carbon capture we were working with ExxonMobil. So when and how can we grow these business we need to carefully monitor maybe we need to consider moving the main base to the United States. And that’s probably going to be the plan in any key data center. I think we can capture the opportunity for data center earlier than expected 5G generated AI related data center need has been quite strong. Actually in U.S. we can expect the good girls and logistics is something we would like to grow into 2024 [ph]. I mean, we have 2024 issue for logistics, so saving manpower in logistics area is another opportunity and high demand area; so that will be a laid out in next MTBP. Sorry, that was a qualitative answer to your question. Thank you.

Takashi Inoue

Thank you. So, we have been receiving a lot of questions and we have reaching the end of our time, but maybe we can ask one more question. And it’s from [indiscernible] please.

Unidentified Analyst

So, what I want to ask is that for the defense related revenue going forward, what will be the case? Roughly speaking, is this going to increase? I would like to get the image as much as possible; can you elaborate? You talked about order intake, this is quite out of — you know, kind of outstanding, but I would like to get more — kind of mid to long-term view in terms of how this business is going to transpire.

Hisato Kozawa

So, this is a rough image, and we haven’t had the exact numbers yet by here; so it used to be the case that about JPY500 billion per year, on average, maybe under JPY550 billion in terms of the revenue for defense. So, by — if we go to 2026 or 2027, I think the defense related revenue will reach JPY1 trillion; so this is a very rough estimate. That’s our view. So next year, the year after that are gradually the revenue will go up. So 2026 and 2027 is when are we going to see an acceleration of the growth in revenue.

Unidentified Analyst

So for the time being, it’s about JPY100 billion per year increase and then going — okay, okay, maybe I shouldn’t go into detail. Well, I think what you’re saying is close to what we are anticipating, well precisely — to be precise, we will be different year-over-year. But so for me — and there has been a lot of questions about MTBP. So, I would like to ask one last question. So in terms of growth, and when for the 2021 MTBP talked about growth, the external environment has changed. And so it seems that things have become more obscured for access change, inflation is in the picture, defense, nuclear power, etcetera. So for the next MTBP, when we look at it — so the previous MTBP, this was the preparation. So that is reason why we have — and can go into this direction. So what are the key points? You talked about logistics?

Hisato Kozawa

To be frank, I have not known well about the logistics, I can’t talk about that to my clients and talk about service. But basically, I am not really fully versed in this area.

Unidentified Analyst

But can you tell me so this is what we have done, so this will you know, bear fruit in the next MTBP? And may be some bullet points will be okay, but can you talk about it.

Seiji Izumisawa

Giving bullet points will be rather difficult for me but or the service related business, so using AR and for the service people and the maintenance people will not have — have not been able to be on site because of COVID and utilize AR to do maintenance or repair. We had this monthly contract to do that; this big service project. But there’s a lot of services that we are offering, we can deploy aggressively to other areas. And actually, I think we can give a number, it’s like — we have passed JPY100 billion but this is the time of accumulation of these type of businesses in terms of logistics. So, when and how much is going to be the incremental but in terms of the factory logistics, our system is used. Again, this is labor saving initiatives, but what we have been doing and prepared is gradually bearing fruit whether it’s going to be massive and how this is going to impact to MTBP. I think that’s what we have to figure out.

Unidentified Analyst

And you refer to the change of the environment. In the previous midterm plan, I think the energy transition is the biggest factor that changed? When we talked about renewable energy, that was the focus on the shift and in terms of energy transition, maybe carbon capture was one of the ideas by looked at the gas turbine impracticality is growing. So in practicality, how are we going to conduct a goal down to decarbonisation road; depending on the region the roadmap is different or the practical roadmap will be different?

Seiji Izumisawa

Including technological development, we should have doing a lot of preparation. And I think these are being connected and linked together. So into 2024 MTBP, whether this is going to bear fruit or we’re going to prepare more during the 2024 MTBP. And then, really go forward to next MTBP. I think that’s what we should be considering. So the there is a possibility. It’s not — it seems not that difficult to achieve. Listening to what you say, well, if I say is difficult, and Mr. Kozawa is glaring at me if I say so. But in that sense into the next up, intermittent [ph] MTBP we will become lean, and the productivity or the mentioned efficiency has been enhanced in the current MTBP. And I think we have been able to be in a position to aim for that level. I think maybe one more or further a push would be necessary but I do not think that this is too high as objective we have to achieve.

Kozawa-san, any comment from you?

Hisato Kozawa

Well, honestly speaking, because — basically, you look at P&L; so he took it the profitability against the revenue. From my point of view, of course, that’s important. And of course, that is the basics but although I see, I will look at that and how we managed to miss this that’s my focus. Of course, at business profit, it’ll be JPY10 billion to JPY15 billion [ph]; for me, it’s happy. But if you look at the various product mix, to be frank, it will not be that easy. But I hope that we will be able to go in that direction.

Unidentified Analyst

Thank you very much for taking my question.

Takashi Inoue

Thank you very much for the questions. We have come to the end of this briefing. I would like to end today’s briefing. Thank you for taking time out of your busy schedule to join us.