Earnings call transcript: Mitsubishi Heavy Industries sees Q2 FY2025 net income rise 7%

Mitsubishi Heavy Industries (MHI) reported a strong financial performance in its Q2 FY2025 earnings call, highlighting a year-over-year net income increase of 7%, reaching 114.9 billion yen. The company noted significant growth in the North American market and substantial orders in its energy systems and defense sectors. Despite these positive results, MHI's stock price declined by 3.43%, closing at 2,663.2 yen, as investors reacted to broader market trends and potential sector-specific challenges.

Key Takeaways

• MHI's Q2 FY2025 net income rose by 7% year-over-year.
• Order intake reached 3.3 trillion yen, with a backlog of 11.5 trillion yen.
• Strong performance in North America, particularly in energy systems and defense.
• Stock price fell by 3.43% despite positive earnings results.

Company Performance

Mitsubishi Heavy Industries demonstrated robust performance in Q2 FY2025, with a notable increase in net income and order intake. The company's strategic focus on energy systems and defense has yielded significant returns, particularly in the North American market. MHI's order intake for the quarter was 3.3 trillion yen, while its backlog reached 11.5 trillion yen, underscoring its strong market position.

Financial Highlights

• Net Income: 114.9 billion yen (+7% YoY)
• Order Intake: 3.3 trillion yen (increased YoY)
• Order Backlog: 11.5 trillion yen
• Cash Flow: 151 billion yen (positive)
• Interest-bearing Debt: 607.7 billion yen

Outlook & Guidance

Looking forward, MHI maintains a positive outlook with an order intake forecast of 6.1 trillion yen for FY2025. The company continues to focus on its gas turbine combined cycle (GTCC) and defense sectors, with plans to capitalize on growing opportunities in the U.S. market. Business profit outlook remains unchanged at 390 billion yen.

Executive Commentary

Company executives emphasized the importance of the U.S. market and the company's readiness to seize emerging opportunities. "We will continue to prepare thoroughly as a manufacturer to respond to business opportunities in the States," stated Itō, a company executive. He also highlighted the company's objective to "realize a virtuous cycle of high profitability and growth investments."

Risks and Challenges

• Market volatility affecting stock prices despite strong financial results.
• Potential challenges in the defense sector order intake.
• One-time expenses in the steam power business impacting short-term profitability.
• Provisions for projects in South Africa could pressure margins.
• Broader macroeconomic factors influencing market sentiment.

Q&A

During the earnings call, analysts raised questions about the defense business's order intake and the impact of one-time expenses in the steam power sector. Executives provided clarity on these issues, explaining the strategic measures in place to address them. Additionally, the company discussed provisions related to projects in South Africa, offering context for these financial decisions.

Full transcript - Mitsubishi Heavy Industries Ltd CFD (7011) Q2 2026:

Itō, Company Executive (Likely President or CEO), Mitsubishi Heavy Industries: 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 this management policy that we have on May 28th.

Okay.

The 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 it was able to catch up with the 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 part of our time-building company of 280 watt per year in growth businesses such as energy systems and defense. The state growth in the plant and infrastructure business reaching JPY 2.1 trillion. It increased slightly year over year to JPY 170 billion. Outlook for the fiscal year 2025 order intake is JPY 6.1 trillion. We think we'll be able to recover the impact coming from Mitsubishi Logistics, which we made an announcement on September 30th.

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 capability is improving in core businesses such as GTCC and defense. This is the outcome of productivity improvement 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 addressing risk and accelerate our 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 engaging group-wide optimization and scope expansion with unprecedented speed. I will update about these initiatives. First, about focus resource deployment, which is one aspect of group-wide optimization. Focus deployment of resources means that when facing critical situations that are related to our mid-to-long-term strategy, or if it's necessary to respond quickly to risk, we will deploy internal experts in a focused manner and respond speedily. For example, in GTCC, to securely answer strong demand, we're 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.

As for defense business, on August 5th, the Australian government announced that it has selected our company's Teso for its next-generation general-purpose frigate program. To finalize the contract, various efforts are required, including coordination with the Japanese government and the companies involved in escort ship 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 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 executes its own mid-to-long-term growth scenario. At the same time, decisions on where to prioritize resource allocation are made based on management judgments.

As announced on September 30th, we review our capital relationship with Mitsubishi Logistics. 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 contribute 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 mid-term 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 trends of change. We shall further accelerate our efforts in innovative total optimization to ensure robust and sustainable growth for our corporate group. That's all from myself. Thank you very much for your kind attention. Now, please 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 three. In terms of the numbers that we're going to use in this presentation, I would like to give you some points. On September 30th, we announced about a plan to transfer Mitsubishi Logistics. We're going to call it ML afterwards. With this, basically, order intake, revenue, business profit excludes the numbers of ML. The detailed recategorization of the numbers is on page 29. Please refer to that slide as well. In terms of the balance sheet, with 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. I will talk about the numbers. Please turn to page six. These are the major financial results.

The order intake, revenue, business profit, Itō has mentioned already at the beginning. With the net income, it is JPY 114.9 billion. Year over year, it increased by 7%. This is the highest number for the second quarter results. On the top, we have 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. Turn 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, on the second line, there is a line called contract liabilities. This is advance 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 weakest flow is JPY 151 billion on the positive in the second quarter. Going to page 11, this is the profit-based comparing business profit from the previous year. Starting at JPY 188.4 billion last fiscal year, same quarter, deducting a portion, and then going to JPY 168 billion. This will be the start of the apples to apples comparison, I guess, last year to this fiscal year. First of all, there's a JPY 76 billion improvement coming from changes in revenue margin improvements, showing that various initiatives and improvements have steadily taken results in all segments. On the other hand, if you look to the right, this is a change in one-time expenses. It's minus JPY 30 billion.

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 operations have started by phases over the years. In September 2025, the last unit, number 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's side. This provision was made for this second quarter for accounting purposes.

Also, this was unfortunate, but the one-off cost of JPY 30 billion was provided for. Moving on to page 19. For all the segment information, please refer as per your convenience. 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 at zero. The assumption of the exchange rate is 145 yen to a US dollar, and the exchange rate sensitivity is JPY 1.6 billion. For the annual forecast, 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 upwards 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 the JPY 20 billion in risk buffer for one-time expenses. That was included. This time, in MQ2, the one-off expense has already been recognized in JPY 30 billion, so that no buffer is incorporated for the second half. Down below is a planned infrastructure. The project execution is going quite steadily, so the business profit has been revised upward from JPY 60 billion to JPY 70 billion. Moving to slide 22, logistics, thermal and driver systems. Due to a slowdown in sales of turbochargers and HVAC units, order intake, revenue, and the business profit have all been revised downward. Down below is for the aircraft, defense, and the space. Just remains unchanged in the yearly total. That is all that I mentioned.

Just for your information, on slide 23, here we show the defense business sites. 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 we are explaining the reason why. In year 2023, 2024, the level has been quite high. Compared to those two fiscal terms, the current fiscal year is JPY 1.2 trillion, which is down. However, compared to the normal level, it is still quite a high level. For your reference as well, on page 26 is the energy segment on the right below. The after-sales service revenue ratio is shown. Also, on page 28 is the business portfolio optimization history, just for your reference. That is all from myself. Thank you very much.

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