Earnings Call: Q1 2022

Jul 29, 2021

Hello. I'm Jumichiarai from Corporate General Planning Headquarters. I will talk about consolidated financial results for the Q1 of fiscal year 2021. We are happy to report to you that it was a great quarter. Net sales rose 21,100,000,000 yen to 190,000,000,000 yen subtracting a gain of 3,700,000,000 yen on translation of earnings of overseas subsidiaries, net sales increased by 17,500,000,000 yen in real terms. Operating income rose by 2,900,000,000 yen to 5,300,000,000 yen That's 2.2x that of the same period the previous year. Ordinary income rose to 5,900,000,000 yen up 3,300,000,000 yen including non operating income of exchange rate gain. We call it an extraordinary income of 2,200,000,000 yen which includes 2,300,000,000 yen in share sales. Income before tax is up 5,500,000,000 yen to 8,100,000,000 yen Net income attributable to owners of the parent grew 3,600,000,000 yen to 5,000,000,000 yen or 3.6x that of the same period previous year. The step chart on Page 3 shows how we pushed up operating income by 2,900,000,000 yen An increase in sales and production volumes was attributable to high demand for components of industrial and automotive semiconductors, EDMC devices and factory automation. These components have high profitability. They together pushed operating income by 3,800,000,000 yen Fixed cost increased 1,800,000,000 yen year on year. That pushed down the operating income. Under our plan, we are anticipating a full year increase of 14,500,000,000 yen in fixed cost. The actual increase was 1 point 8,000,000,000 yen this quarter. The exchange rate gain was 1,300,000,000 yen due to the weaker yen. Other costs, including the unfavorable project and product mix, pushed down operating income by 400,000,000 yen Taken together, operating income rose 2,900,000,000 yen to 5,300,000,000 yen Page 4 shows year on year changes in net sales and operating income by segment. Both net sales and operating income in power generation segment were negative, but all other segments saw increased net sales. Operating income dropped in power generation and energy to a much lesser extent. Power Electronics Systems Industry and Semiconductors led the overall net sales gain of 21,100,000,000 yen and an increase in operating income of 2,900,000,000 yen Food and Beverage distribution has chalked up profit in the absolute term after posting a loss the previous year. Page 56 take a look at business results by segment. Power Electronics Systems Energy saw an increased net sales and a slight decline in operating income. Energy Management and Power Supply and Facility Systems saw an increased net sales, thanks to large scale projects, but a slight drop in operating income due to the unfavorable product mix. Net sales in Energy Management were driven by large scale projects for substation equipment for power distribution and industrial fields. Net sales increase in power supply and facility systems are attributable to a large scale data center and semiconductor related projects. The ED and C component market continues to be buoyant. Both net sales and operating income jumped largely due to expanded demand from domestic and overseas manufacturers of machine tools and other finished equipment. Next, power electronics and energy industry saw a sharp increase in board sales and operating income. Automation systems were driven by higher demand for low voltage inverters and factory automation components in Japan and overseas. In Social Solutions, both net sales and operating income grew, thanks to an increase in demand for electrical equipment for railcars and radiation monitoring systems. In equipment construction, net sales increased by 10%, but operating income declined slightly due to the unfavorable project mix. In IT Solutions, net sales plunged by 30% because unlike the previous period, there were no large scale public sector projects. But operating income is up, thanks to the favorable product mix. Page 6. The semiconductor segment also saw a sharp increase in sales and operating income. Expenses increased due to boosted production capacity of power semiconductors and R and D costs, But expanded demand for chips for electric vehicles and industrial power semiconductors more than offset the increased expenses. The table in the slide shows chip sales by application. Industrial Semiconductors grew by 20% year on year, while Automotive Semiconductors grew by 73%. Next, power generation. Unfortunately, both sales and operating income dropped because unlike a year before, we did not have large scale renewable energy project in the Q1 this year. Hood and beverage distribution saw higher net sales and operating income. Vending machine performance was unchanged from the previous year. Due to the postponement of capital investment plans by some domestic beverage makers, operating income was slightly lower than the previous year. Store distribution saw good sales and operating income, thanks to expanded demand for equipment for convenience stores. Operating income was up 400,000,000 yen a turnaround from a loss in the previous year. Page 7 takes a look at net sales by product compared against the same period previous year. Net sales this quarter was JPY 109,000,000,000 up JPY 21,100,000,000 year on year. Of that increase, major components for vending machines, semiconductors, factory automation, DMC components contributed 18,700,000,000 or nearly 90% of the total. Semiconductors grew 38 point year on year. Low voltage inverters and other factory automation components grew by 16 percent, and ED and C components grew by 32% over the same period. Page 8 shows overseas and the domestic net sales. Net sales grew 21,100,000,000 yen to 100 and 90,000,000,000 yen Overseas sales increased by 10,200,000,000 yen while Japanese sales rose by 10,900,000,000 yen All geographical regions helped achieve overseas sales of 59,200,000,000 yen China and the rest of Asia contributed around 4,000,000,000 yen each, while contributions by Europe and Americas were 1 digit smaller than Asia. Components for power supply and facility systems, ED and C, Automation Systems and Semiconductors contributed to overseas sales growth. Page 9 shows order received by product compared against the same period last year. We received orders worth 40,200,000,000 yen more or a total of 238,400,000,000 yen Here again, components contributed 33,200,000,000 yen or over 80% of the order increase. Semiconductors for industry and automobile grew by 47% components for factory automation, up 53% and ED and C, up 53%. The chart on the right shows orders received by major components since fiscal 2020. Orders have been trending up for all components. Orders for semiconductor components fell by 4% due to exchange loss, but overall order intake situation remains pretty much unchanged since the Q4 of last fiscal year. The Q4 was exceptionally a good quarter with orders exceeding the actual demand flowing in. Page 10 shows our balance sheet. It shows numbers on June 30 compared against stores as of March 31 this year. Our rigorous collection efforts of receivables resulted in a reduction of 61,000,000,000 yen in receivables. This led to an increase in cash and a reduction of 11,500,000,000 yen in net interest bearing debt to 129,400,000,000. Net asset is shown on the right. We've had other accumulated comprehensive income or gain on stock revaluation. As a result, net asset increased by 7,900,000,000 yen Equity ratio also improved by 2.2% to 41.8%. Net DE ratio stood at 0.3x. So our balance sheet is in good shape. Page 11 shows our earnings forecast for the first half of this year and full year. Our focus is unchanged from the one announced on 27. Our focus for the first half is JPY 410,000,000,000 in sales, JPY 11,500,000,000 in operating income and ordinary income of 11,000,000,000 yen and net income of 8,000,000,000 yen Our full year forecast calls for sales of 900,000,000,000 yen 60,000,000,000 yen in operating income, 61,000,000,000 yen in ordinary income and JPY 42,000,000,000 in net profit. By segment, power generation is expected to see a decline in sales and operating income for the first half. For full year, net sales for Power Electronics system industry and IP solution will fall from the previous year when we had the large scale gigasco project. We earlier said that we will stick to a full year forecast released in April. There are some concerning factors anticipated in the Q2. They are the possible impact of higher material purchasing prices and the possible postponement and increased costs of plant system projects overseas due to the pandemic. In the Q2, we will phase out the magnetic disks business, and this can be a negative factor. Positive factors we are anticipating is strong orders for components, as I have talked about: Components for factory automation, industrial and automotive semiconductors and ED and C have been strong, and their performance can exceed our forecast. Turning to expenses. I said earlier that we expect fixed costs to grow by 14,500,000,000 yen year on year. In the Q1, an increase was 1,800,000,000 yen We also expect cost reduction of 1,000,000,000 of yen more than what we had planned. If the yen stays weak, we can expect 1,000,000,000 of yen in exchange gains. We will weigh these positive and negative factors in detail based on the results of the Q1. When we release the results of the first half of the year, we will review and adjust our full year forecast. I personally have a feeling that we will be upgrading our forecast. This concludes my presentation. Thank you.