IHI Stock

I am Hiroshi Ide, President and Chief Executive Officer. Thank you very much for joining today's earnings briefing despite your busy schedules. Today, I'd like to explain our medium- to longer-term direction, looking ahead to 2040, and the roadmap toward medium to longer term.

First, let me explain our medium to longer-term direction. In 2020, demand for civil aero engines declined sharply as a result of COVID-19. At that time, we launched a three-year plan under the name Project Change. Through this initiative, we worked to strengthen life cycle business and our cost structure. Since then, under the 3-year Group Management Policies 2023 through fiscal year 2025, we have especially advanced profitability improvements and business portfolio reform and have been preparing for future growth.

Since 2020 -- by the way, I became the president in 2020. We have implemented various initiatives such as portfolio reform, strengthening our financial base and structural reforms. Basically, we've been working on these initiatives on roughly a 3-year time horizon while adjusting the direction in response to changing circumstances while monitoring our progress along the way. It has been a little bit more than 6 years since then.

As we consider future growth, although we have pursued various initiatives based on a 3-year time horizon up to now, as you are all aware, the time horizon for IHI's businesses, whether in business development or technology development, is typically around 10 to 15 years. With this in mind, we believe it is necessary to formulate our vision over a longer time horizon, and accordingly, we have presented this medium to longer-term direction as our vision for the future.

Especially, we would like to present our direction toward 2040. That said, even 2040 is still quite a long way off, some 14 to 15 years from now on, naturally, investors and other stakeholders might be also concerned about what will happen in the near term. We will basically keep providing clear 3-year guidance. At the same time, I would also like to present our roadmap toward 2040 later.

This page describes our overall perspective. Since Commodore Perry's arrival in Japan in 1853, when the Tokugawa shogunate ordered the Mito domain to establish the Ishikawajima Shipyard, IHI's history has begun. In that sense, IHI is a company that has continued to address important industrial and national level challenges through technology. This is IHI's starting point, and we believe this fundamental principle will remain unchanged into the future.

Accordingly, as stated here, we have defined our desired state as for industry and national security, supporting the safety, security, and prosperity of people worldwide at its core. We refer here to 3 domains while we currently have 4 business segments. However, the domains discussed here are by no means intended to represent IHI's organizational structure in 2040. Rather, they are intended to illustrate the fields in which the IHI Group is expected to play an active role as of 2040. For example, the term aerospace may give the impression that we are focused solely on aviation and space.

However, we also possess technologies such as surface engineering technology related to aerospace, which is currently part of our Industrial Machinery segment. In this sense, the fields we envision toward 2040 are areas where IHI's technologies and products will increasingly overlap and cross over, and that is the idea we intended to express in this way.

As noted in small print at the bottom of the page, there were several inappropriate incidents, particularly in fiscal year 2024. We recognize that these incidents seriously undermined the trust of our stakeholders. And all of us at the company strongly believe that we must never betray that trust again. In that sense, while we are looking ahead toward our desired state in 2040, we have deliberately included here the continued strengthening of risk management and governance as a fundamental foundation that must be upheld in the present. I would also like to add that we are committed to continuing these efforts on an ongoing basis.

We took a step back and looked back on the history of IHI's businesses. And through extensive discussions within management, we considered how IHI has created value through its businesses over the more than 170 years of its history. You will find 2 bullet points on this slide. Fundamentally, I believe IHI has built markets with high entry barriers through overwhelmingly strong technology. Of course, these entry barriers are supported by strong technologies themselves, but they are also built through collaborations and relationships with partners and customers.

There are also relationships with the government. While receiving support from the government and cooperating with various institutions, IHI has established high entry barriers through strong technology development, either independently or together with partners. We would like to continue valuing this business model or this way of creating businesses going forward as well.

IHI has been involved in a wide range of businesses over the years, and we have significantly streamlined our portfolio over the past several years. Even so, there is still a lingering perception that we are involved in all kinds of businesses. However, going forward, we intend to ensure that IHI's businesses remain firmly rooted in technology and to focus on how we can leverage our strength in specific businesses to contribute to national industries. Through this, we aim to continue building high-entry barriers, and this is the business model we intend to maintain going forward.

An example involving aero engine is shown at the bottom of that page. By the way, this is not to say that only the aero engine business follows this pattern. But as illustrated here, IHI's aero engine business, which is currently driving the company's growth, originally began with licensed domestic production for defense applications. Its technologies were then recognized, enabling participation in the international joint development of the V2500 civil aero engine. And through involvement in various programs, IHI evolved into an indispensable partner for OEMs.

As a culmination of these efforts, we are now participating in the international joint development of the next-generation fighter aircraft. In this sense, this diagram is intended to illustrate in an easy-to-understand way what we believe to be one of IHI's core business processes, expanding from domestic to global markets and broadening opportunities through dual-use applications.

Next slide, please. There are 3 growth scenarios towards 2040, namely, aerospace, energy and infrastructure, which are outlined on the following 3 pages. Due to time constraints, I will skip the details, but in markets where growth is expected, we aim to achieve growth exceeding market growth rates by leveraging IHI's unique strengths such as propulsion technologies, which are highlighted on this page in the aerospace field.

Next, as for energy business, we believe that manufacturing technology for key components for nuclear power plants, Japan's only back-end technology and the world's only ammonia combustion technology, will serve as key sources of our competitive strength.

Next, on infrastructure. When it comes to infrastructure at IHI, you might imagine bridges and water gates. We are not referring just about bridges and water gates, but also referring infrastructure, including industrial infrastructure. We believe there is no doubt that maintenance and renewal demand will become even more important in infrastructure or industrial infrastructure going forward.

Next page. This is not only in infrastructure business, but we have been focused much on expanding life cycle business. We intend to maintain life cycle business as a stable earnings base.

As I touched upon earlier, we would like to consider doing business in the future, leveraging our overwhelmingly strong technology. Although I cannot mention today, we are narrowing down our focus technology areas. We'd like to prioritize allocating resources to those focused technology areas, which we plan to deploy to field, including aerospace, infrastructure and energy, as explained earlier.

On the human capital side, a substantial number of mid-career employees are joining our aerospace and energy businesses. As diversity is increasing dramatically at IHI, and I believe our challenges are to develop talent very quickly and to foster a culture to take on more new challenges as we expect IHI's business field is to change much looking ahead.

To the right, about DX. We recognize that the use of DX technologies at IHI is still insufficient and will strengthen it and also make investment while at the same time, enhancing our information security capabilities more than anything in our business, including defense and aerospace and nuclear energy.

From here, I will go through the road map toward achieving the medium- to longer-term direction that I have just explained. This is a road map to reach the desired state in 2040, covering up to the mid-2030s. It is divided into easy-to-understand 3-year phases showing the goals for each phase.

During the next 3 years, which is Phase 1, proactive investment will be made to achieve growth in Phase 2 and beyond. At the same time, planned divestment of investment properties will be carried out boldly to solidify the financial foundations. In the following 3 years in Phase 2, driven by civil aero engine with the expansion of the aftermarket business, operating profit will improve and cash flow from operating activities will also increase significantly. In the subsequent Phase 3, the harvesting of upfront investments will begin, leading to substantial growth both in terms of profit and cash flow.

This page shows our investment policy in a diagram. Large demand is visible for growth businesses such as civil aero engines, defense and nuclear energy, and we are receiving high expectations from our customers. On the other hand, at present, there are constraints such as insufficient production capacity and aging equipment. We believe that it's only by carrying out large-scale investments to overcome these constraints that we can reach the next phase of rapid growth.

The significant growth to be achieved in Phase 3 after 9 years' time is not on the extension of the existing trajectory. By executing large-scale investments in the areas you see on the page, we aim for a discontinuous new growth stage on another level. Of course, once we make these investments, we promise to deliver appropriate returns.

This is a forecast for revenue and operating profit margin focused only on civil aero engines, defense and nuclear energy. Up until last fiscal year, we have made bold resource shifts to these businesses. And in addition, by implementing the large-scale investment, as just explained, revenue is expected to grow over 10% on a CAGR basis in the medium term. And operating profit margin is also expected to reach 20% by the completion of Phase 2. These businesses will drive the IHI Group's leap forward over the medium to long term as growth drivers.

Next, I will touch on capital allocation. As I have explained so far, over the next 3 years, we will prioritize investments in the growth businesses. These growth investments will serve as a foundation supporting growth from Phase 2 and onwards.

As for shareholder returns, over the next 3 years, we will continue to adapt stable dividends as our basic policy and aim to sustainably increase dividend per share. From Phase 2 onward, when we expect an expansion of cash flow from operating activities, we will aim to further enhance shareholder returns while also considering options other than dividends.

In the Group Management Policies 2023, in addition to executing business structure reform and business portfolio reform, we have been advancing a shift of resource to growth businesses. As a result, in fiscal year 2025, we achieved record-high profits. But personally, I think that this only means the foundation for moving toward a growth stage is finally established, and we have only just reached the starting line.

From this fiscal year, by shifting into a higher gear and accelerating our growth strategy, we aim to achieve the management indicators shown on the right in the medium term. And I'm confident that at the end of these initiatives, we will be able to realize the desired state in 2040, as I explained at the beginning.

Lastly, I'd like to share information about Investor Day, which we are planning now. In order to further deepen understanding of our business strategy, we plan to hold an Investor Day for institutional investors and members of the press. On June 2, along with myself, Vice President and Managing Executive Officers, will explain specific initiatives for key businesses. We would very much like you to attend the Investor Day. Thank you.

I am Hiromi Oshima, Managing Executive Officer in charge of IHI Group Finance and Accounting. I would like to explain our fiscal year 2025 consolidated results and the forecast for fiscal year 2026. First, let me summarize today's key points.

Fiscal year 2025 results were as follows: Orders reached an all-time high due to expanding demand in nuclear energy and other factors. Revenue and operating profit also reached record highs, driven by growth in defense and nuclear energy as well as gains from asset sales, resulting in higher revenue and profit. Profit attributable to owners of the parent for fiscal year 2025 also increased significantly and reached a record high, supported by a more stable management base and improved profitability, which enabled us to benefit from tax effect accounting.

Regarding the fiscal year 2026 forecast, orders are expected to decline due to the rebound from large energy projects recorded in the previous year. Revenue, operating profit and profit attributable to owners of the parent are all expected to increase, driven by growth in the civil aero engine, defense and nuclear energy businesses and the execution of planned asset sales, marking a third consecutive year of record highs. As I will explain later, these profit figures include a certain level of buffer for geopolitical risks and other uncertainties.

Before going into the details of fiscal year 2025 consolidated results, let me briefly summarize Group Management Policies 2023. Over the past 3 years, we have shifted resources toward growth and development-focused businesses and advanced business portfolio reforms. As a result, the management targets set under the Group Management Policies 2023, namely operating margin and ROIC were achieved ahead of schedule last fiscal year and both improved further this year.

Meanwhile, although we had set a cash conversion cycle target of 100 days, fiscal year 2025 cash conversion cycle came in at 109 days, meaning the target was not achieved. While we have established a structure capable of generating over JPY 100 billion in operating cash flow annually on average, we believe there are still challenges in our cash flow generation capability.

Let me now move to the fiscal year 2025 overview of financial results. As mentioned earlier, strong growth centered on the civil aero engine business and planned asset sales contributed to substantial increase in revenue and profit with all metrics reaching record highs. In addition, key KPIs such as EPS, ROIC and ROE all improved.

Let me explain the factors behind changes in group-wide operating profit from left to right on the waterfall chart. First, compared with fiscal year 2024, the yen appreciated. In addition, fiscal year 2025 was a year in which profitability in our overseas energy business deteriorated significantly. In addition to the structural reforms undertaken at the overseas energy subsidiary, we also carried out thorough structural reforms, including the optimization of fixed costs in Industrial Systems segment in Europe to avoid future potential downside risks.

The deterioration in Energy business earnings and these business reformation costs were offset by one-off gains, including gains from the business transfer of Material Handling System business.

In non-energy business, upfront investments in the Aerospace segment negatively impacted profits, but profitability improved substantially in vehicular turbocharger, bridges and water gate and other businesses. And we also steadily executed planned asset sales. As a result, overall operating profit reached a record high.

This slide shows the changes in operating profit in the Aerospace segment. In fiscal year 2025, Civil Aero Engine was negatively affected by installed engine shipments, but expansion in the aftermarket business contributed positively, resulting in profit growth for entire civil aero engine business.

Defense also achieved profit growth due to higher sales and improved profitability. However, upfront investments for future growth, including R&D expenses weighed on earnings, resulting in an overall decline in profit year-on-year.

This slide shows the balance sheet situation. Due to higher profits in fiscal year 2025 and repayment of interest-bearing debt using proceeds from business transfers, et cetera, the debt-to-equity ratio and equity ratio improved significantly. While total assets increased in line with business expansion, we have implemented strict balance sheet management. As a result, although cash conversion cycle did not reach the target, both cash conversion cycle and ROIC improved.

From here, I will explain forecast for fiscal year 2026. Overall, as you can see on the page, although orders are forecast to be lower than fiscal year 2025, revenue, operating profit and profit attributable to owners of parent are expected to reach record highs. The assumed exchange rate for this forecast is JPY 145 to the dollar. Given the uncertainty of the macroeconomic environment, a conservative rate has been used.

Here, we show factors of change in orders and revenue from the previous fiscal year. Orders are shown in the upper section. Although there is a rebound from large projects in the energy business recorded in the previous fiscal year, orders in the civil aero engines and defense businesses are expected to increase steadily. As shown in the lower section, revenue from civil aero engines and defense is expected to increase significantly and nuclear energy also exceeding the previous fiscal year's level. As a result, revenue is expected to reach a record high.

This page shows factors in operating profit from the previous fiscal year. To the left of the chart, the blue bar with diagonal line shows operating profit on an underlying basis, excluding temporary factors. Compared to this JPY 140.7 billion in fiscal year 2025, operating profit in fiscal year 2026 on an underlying basis is expected to increase by JPY 29.3 billion, reaching JPY 170 billion.

In addition, we have factored in buffers of JPY 20 billion for geopolitical risks and for structural reforms of overseas energy businesses, which remain as issues. Regarding asset disposals, in order to secure funds for future investments and to further improve the financial structure, we plan to execute asset sales on a scale shown on the page. As a result, the total operating profit for fiscal year 2026 is expected to be JPY 240 billion.

This page shows the operating profit forecast for the aero engine, space and the defense segment only. Excluding the effects of foreign exchange, we expect an increase in profit by JPY 23.8 billion in fiscal year 2026. This is mainly due to expansion of the aftermarket business and the defense business as well as improvements in profitability. The increase in the number of installed engines will have a downward pressure on profit in the short term, but it's extremely important for future profit growth. And from a medium- to long-term perspective, we consider it to be a very positive trend.

Next, the status of the business portfolio reform. Newly disclosed information since the last financial results announcement is highlighted within a red frame. As for the overseas energy businesses, which remain as issues, structural reforms are still underway. The top 2 in the red frame are the updates to which decisions have been made. We resolved the business transfer of IHI Power Services Corporation. We also initiated the liquidation process for the subsidiary of our biomass business in Malaysia. In addition, we also announced today to transfer the shares of IHI Logistics and Machinery Corporation.

Finally, here is the capital allocation plan for the next 3 years. First, about the investment plan. Over the next 3 years, as Ide explained earlier, we will make investments mainly in the civil aero engines, defense and nuclear energy businesses, which are expected to deliver significant growth over the medium to long term.

From fiscal year 2029 onwards, we will prioritize allocating resources to growth and development-focused businesses to improve profitability and expand cash flow. The key investment themes are as shown on the page. We will make investments to meet the high demand and expectations from our customers as well as to further strengthen our competitiveness.

Lastly, about shareholder returns. As you can see, since fiscal year 2021, we've been steadily increasing dividends. And for fiscal year 2026, we are planning a dividend increase of JPY 3 to JPY 23. Over the next 3 years, we will prioritize allocating funds to growth and development-focused businesses, but we also plan to achieve sustainable growth in dividends per share. In the medium to long term, we aim to further enhance corporate value and increase returns to our shareholders.

Thank you very much for your attention.

I am Hiromi Oshima, Executive Officer in charge of Group Finance and Accounting at IHI. We will now present an overview of our financial results for the third quarter of fiscal year 2025. The upper section shows the highlights for the third quarter fiscal year 2025.

Orders achieved JPY 1,364.8 billion, a record high for Q3, driven by expanding demand in the nuclear energy and other areas. Revenue decreased from the previous fiscal year to JPY 1,129.3 billion due to rebounding from the progress of large projects in the previous year and the impact of business divestitures, including material handling system. Operating profit was JPY 102.5 billion, remained at the same level as the previous year. Although revenue declined, we maintained the same level of profit as the previous fiscal year, which had achieved a record high. In addition, due to improvements in equity method investment income, including from Japan Marine United and others, profit attributable to owners of parent for the third quarter reached a record high.

The lower section shows forecast of fiscal year 2025. As demand continues to expand in the nuclear energy and other businesses in Energy business, we are revising our order forecast upward by JPY 90 billion. This fiscal year is the final year of our medium-term management plan. As I will explain later, while accelerating structural reforms, we expect to achieve record highs in orders, revenue, operating profit and profit attributable to owners of parent. We will firmly complete the structural reforms this year to prepare for the next fiscal year and beyond.

This page shows a detailed overview of our third quarter results. Please take a look later. Here, we present year-on-year changes by reporting segment. In the top right, orders. As mentioned earlier, orders continue to grow in Energy business, driven by strong demand for nuclear energy, et cetera. In the Aerospace segment, orders declined mainly due to the reaction to a large-scale project recorded in the previous fiscal year. In the bottom left, revenue. Overall revenue declined due to the rebounding from the large projects in the prior year in the Energy segment and due to the impact of business divestiture in Industrial Systems segment. However, Aerospace segment revenue expanded, mainly driven by the Defense segment. In the bottom right, operating profit. I will explain the overall picture on the next page.

This page provides an analysis of group-wide operating profit. Starting from the left side of the graph, compared to the same period last year, the average FX rate appreciated by approximately JPY 3 against the U.S. dollar, reducing profit by JPY 1.8 billion. To the right, the deterioration in profitability in Energy segment reflects weaker performance in energy overseas businesses, as explained in the previous quarter, which also reduced profit by JPY 8.3 billion. In order to stop losses from these overseas unprofitable businesses, we are accelerating business structural reforms, including restructuring and liquidation of subsidiaries, resulting in JPY 6.6 billion in related expenses as end of the latest quarter.

These downturn in Energy segment and the structural reform costs were offset by JPY 25.7 billion in gains from business divestitures and related items shown by the blue bar to the right. As for Infrastructure, Industrial Systems and Aerospace segments, i.e., business excluding Energy segment, we are seeing a significant improvement in profitability led by vehicular turbocharger and bridge and water gate businesses, which contributed to JPY 6.6 billion increase in profit.

On the other hand, install engine sales and aftermarket segment in Aero Engine business reduced profit by JPY 16.5 billion. As shown in the box note in the upper right, although we saw an increase in sales of spare parts, which indicates demand, higher maintenance costs and increase in install engine units outweighed this, resulting in a net negative impact on profit. However, progress in engine maintenance within the aftermarket business, together with the growing number of installer engines indicates that this business is moving in a positive direction, and we view this favorably.

In summary, the downside in Energy and the structural reform costs were offset by gains from business divestitures and related items. While the Infrastructure segment and Industrial Systems segment performed steadily due to downward pressure on profit from the Civil aero engine aftermarket business, operating profit overall remained at the same level as the previous year. In other words, although revenue declined, we could still maintain the profit level that marked a record high.

Next, Energy segment. As some points have already been explained, I will focus only on the key highlights. Domestic Carbon Solutions, Nuclear Energy and Power System businesses performed steadily. However, Carbon Solutions and other overseas businesses underperformed, significantly reducing the profit. As a result, we are currently implementing decisive structural reforms to stop losses. Specifically, we are accelerating restructuring and liquidation of overseas subsidiaries as well as preparations for business divestitures. We aim to recognize all deterioration within this fiscal year and achieve an early recovery in profitability.

Next, Social Infrastructure segment. In this segment, 2 business divestitures have already been completed to date. Please refer to the operating profit graph in the lower left. By the third quarter, we recorded losses associated with these business divestitures. However, profitability has improved, mainly in bridges and water gate businesses, resulting in higher profit year-on-year overall. As a result of initiatives such as strategic order selection implemented through the previous fiscal year, we are seeing improvements in profitability this year, and we believe the business foundation has become more solid.

Next, the Industrial Systems segment. In this segment, 3 business divestitures have been completed to date. Please look at the operating profit graph in the lower left. Significant improvements in profitability are also evident in this segment. In the Parking business, LCB expansion has contributed. And in the Vehicular turbocharger business, fixed cost reduction and sales price improvement have taken effect, leading to substantial improvements in the earnings structure. We believe this segment is steadily building its earning power.

Next is the Aerospace business. Please look at the sales graph in the upper left. All businesses achieved revenue growth compared to the previous year. Defense business, in particular, expanded significantly. Now operating profit in the lower left. First, the impact of installed Civil aero engines. This period saw increased unit volume as a whole and a decrease in the selling price of the GEnx program selling unit, which pushed down operating profit. Next, aftermarket business, whereas spare parts sales expanded, increased maintenance costs reduced profits. This is due to costs incurred during this period that did not occur last year and accelerated shipments of maintenance engines across the entire program from a customer support perspective.

Next, Defense business. While the profit contribution is smaller relative to the revenue growth, defense business typically performs fixed cost recovery and generates profit in the fourth quarter. Therefore, profits are expected to accumulate in the fourth quarter, resulting in a full year forecast for profit level commensurate in accordance with the revenue growth.

In summary, there were profit decline due to the increased installed engine sales and with higher maintenance costs in the aftermarket business. However, the increase in installed engines and the progress in maintaining PW1100G engines are very positive for the Civil aero engine business in the medium to long term.

Pages 12 and 13 show KPIs related to Civil aero engines, so please refer to them later.

Next, balance sheet status. Steady accumulation of profit had improved the ratio of the equity attributable to owners of the parent, meaning the equity ratio. While working capital has increased, this reflects a seasonal pattern of our business where profits and cash inflows expand in the fourth quarter. We will work to implement working capital compression toward the fiscal year-end to strengthen our financial base.

Next, the cash flow status. Although working capital improved significantly year-on-year, operating cash flow deteriorated due to increased payments related to powder metallurgy issues and higher tax payments. Our annual operating cash flow forecast is JPY 100 billion, so the deviation may seem large. However, as mentioned earlier, this is primarily due to the high proportion of businesses such as public works, including bridges and defense businesses, where profit recognition and cash flow recovery progressed significantly in the fourth quarter. We will work further implement working capital compression, including through the receivables collection toward the fiscal year-end.

This is the FY 2025 earnings forecast. As mentioned in the beginning, we are making an upward revision to our forecast for orders received. Ahead of the new medium-term management plan starting next fiscal year, we are accelerating structural reforms throughout the fourth quarter of this fiscal year. We are intensifying efforts to fully run out any deterioration this fiscal year and thoroughly block downside risks. However, even while implementing these reforms, we expect to achieve record high sales and profits.

Next, this is the outlook by segment. Please look at it later. We have made a downward revision to the Energy segment, reflecting the allocation of company-wide restructuring costs. There are no changes for the company as a whole.

Finally, this is the progress status of the structural reforms during the current midterm plan period, and that is the change occurred from the previous time. Item circled in the red indicates cases where changes have occurred since the previous announcement. As mentioned earlier, we are accelerating the reformation of business structure in our overseas energy business. This time, we are able to announce the liquidation of an overseas subsidiary as shown in the bottom row. We are also accelerating progress in multiple other projects, and we report on them at the appropriate timing. For the current midterm plan, we are tackling these structural reforms with unwavering determination to see them through to completion.

That concludes my explanation.

Thank you for your attention.