Earnings Call: Q4 2021

Apr 27, 2021

I am Arai, responsible for Corporate Management Planning Headquarters. As President Kitazawa mentioned earlier, we recorded a decline in net sales and operating income in fiscal year 2019 due to trade conflict between the U. S. And China, and we started fiscal year 2020 with uncertainties, unable to draw up a budget. And then we were hit by COVID-nineteen pandemic. We ended up the year with the results you are seeing now, and we are breathing a little easier for now. This is thanks to the PRRS-seven activities led by the President since 2012. It had changed shape over the years but has formed a system for the company, which resulted in each business group gaining strength year on year. Now allow me to explain the profit and loss results compared to the previous year. Net sales were down JPY 24,700,000,000 to JPY 875,900,000,000 year on year. Gain on translation of earnings of overseas subsidiaries was JPY 9,600,000,000 so the actual decline comes to JPY 34 point 3,000,000,000 yen Operating income was up 6,100,000,000 yen to 48,600,000,000 yen year on year with net operating margin of 5.5%. On analysis, factors impacting operating income include power semiconductors and IT related businesses recording increases in sales and income, but vending machines, store distribution, new energy and power generation saw decreased sales and income. Decrease in sales and production volumes came to 7,200,000,000 yen controllable costs were reduced to give decrease in fixed costs of 8,800,000,000 yen exchange rate effect came to 800,000,000 yen and others, including differences of profitability of projects, came to 3,600,000,000 yen resulting in increasing operating income by 6,100,000,000 yen As for non operating income, gain on foreign exchange came to JPY 900,000,000 and others, which is loss recorded in Asia due to COVID-nineteen, coming to JPY 1,200,000,000, giving us non operating loss of 200,000,000 yen Ordinary income came to 50,400,000,000 yen Cost of corrective measures for semiconductor IGBT malfunction, as reported in the 3rd quarter, was increased by JPY 9,000,000,000 in the 4th quarter to come to JPY 25,700,000,000. Provision was recorded so as not to leave impact in fiscal year 2021. The gain on sales of investment securities continuing from the first half came to 40,900,000,000 yen an increase of JPY 38,300,000,000 from the previous year. Extraordinary income was up JPY 13,500,000,000 year on year to JPY 12,900,000,000 in absolute value for fiscal year 2020. Net income attributable to owners of parent was up JPY 13,100,000,000 to JPY 41,900,000,000 yen It includes a special factor of sales of equities or shares, but operating income and ordinary income were recorded with extraordinary income recorded as well, giving us record high net income. Please turn to Page 3. This is an analysis of the JPY 6 point 1,000,000,000 yen increase in the operating income to come to JPY 48,600,000,000. Please refer to this waterfall chart showing breakdown of changes in operating results, as I explained earlier, decrease in sales and production volumes of minus 7,200,000,000 yen increase in fixed costs of 8,800,000,000 yen and gain from foreign exchange rate of 800,000,000 yen and others of 3,600,000,000 yen Please turn to Page 4, net sales and operating income by segment. Food and Beverage distribution recorded a large decline both in sales and income, while power generation saw a big decline in net sales due to absence of sales recorded in the previous year. Electronic Devices and Power Electronics Systems Industry recorded considerable increase in both net sales and operating income. Power Electronics Systems, Energy and Power Generation saw decline in net sales but recorded operating income. Power Electronics Systems Industry and Electronics Devices saw increasing both net sales and operating income. In total, net sales were down JPY 24,700,000,000 with operating income increasing 6,100,000,000 yen From Page 5 onwards, please find business results by SAG segment. Power Electronics Systems Energy saw net sales decreased by 8,800,000,000 yen year on year with operating income up 1,700,000,000 yen Energy Management saw decreasing net sales with declining demand for smart meters and absence of large scale projects for industrial power supply equipment recorded in the previous fiscal year but recorded increase in operating income. Power supply and facility systems saw a decrease in net sales due to rebound from large scale project recorded in switchgear and control gear operations from the acquisitions of a company in Asia from the previous year, but with cost reduction efforts saw increasing operating income. EDMC Components saw weak market conditions in the first half, and efforts were made in the second half for recovery but was, unfortunately, short of offsetting the decline in the first half, resulting in decline in both sales and income. Power Electronics Systems Industry net sales were up JPY 28,400,000,000 and operating income up 5,200,000,000 yen year on year. This was largely due to IT Solutions, which saw large increases in both net sales and operating income, especially with large scale orders related to the Gigasco concept. Automation saw increases in both net sales and operating income. Demand in Japan was sluggish, but in China, demand for factory automation components was strong. Social solution also saw increase in both sales and operating income. Turning next to Page 6, Electronics Devices. Net sales were up JPY 20,100,000,000 and operating income by JPY 7,900,000,000 Semiconductors saw large increases in both net sales and operating income as demand rose for power semiconductors for automobiles, XEVs and for new energy market and factory automation systems. As for magnetic disks, due to the circumstances surrounding our customer, we saw both declining net sales and operating income. Breakdown of sales of electronic devices for semiconductors and magnetic disks and distribution of semiconductor cell by fields, that is industrial modules, industrial discrete devices and automobiles for fiscal year 2019 and 2020 as shown in the top box. I would like to highlight that automobiles has increased from 30 5% in fiscal year 2019 to 39%, close to 40% in fiscal year 2020. Next, power generation. Net sales were down 29,500,000,000 with operating income of 200,000,000 yen Net sales were down considerably due to absence of large scale thermal power system project and renewable energy projects recorded in the previous fiscal year. But with differences in project profitability and cost reduction efforts, operating income was positive. Foods and beverage distribution saw decreases in both net sales and operating income of 27,900,000,000 yen 9,100,000,000 yen respectively. Sales and income declined for both vending machines and store distribution. Large decrease in sales and income for vending machines were due to lower demand from Japanese beverage manufacturers as well as in China and other Asian markets. And decrease in sales and income for store distribution were due to decline of demand for store equipment for convenience stores and postponement of delivery of equipment. Page 7 shows a breakdown of the year on year changes in the amount of orders received by products. Orders declined in fiscal year 2020 from the previous year to JPY 887,900,000,000 Major components are rising orders by JPY 13,900,000,000 year on year, especially in semiconductors and AT and C components. Orders for vending machines decreased by 36%, and factory automation saw a slight decline in the amount of orders as well. Bar graph on the right hand side of the page show quarterly changes in the amount of orders. And as you can see, it continued to grow from the Q1 to the second, second to the third, third to the 4th. On the far right is a comparison against the previous year and the previous quarter. The trend of the orders show all items except for vending machines, which recorded a decline year on year, saw a rise in orders compared to the previous year as well as to the previous quarter. Please turn to Page 8 for year on year comparison of net sales in Japan and overseas. In total, net sales declined by JPY 24,700,000,000 year on year to JPY 875,900,000,000 in fiscal year 2020. Overseas sales increased by JPY 1,000,000,000 to 654,000,000,000, while for Japan, sales decreased by JPY 25,700,000,000 to JPY 654,000,000,000 China saw increased by JPY 21,200,000,000 led by rise in semiconductors, automation systems and ED and C components. Asian and others were down by JPY 16,400,000,000 led by decline in power supply and facility systems, magnetic disks, power generation, etcetera. Europe and Americas also saw a slight decline. Page 9 shows summary of consolidated financial results for fiscal year 2020 compared to the forecast announced at the end of Q3 on January 28 this year. All items exceeded the forecast, namely net sales by 15,900,000,000 yen operating income by 7,600,000,000 yen ordinary income by JPY 7,900,000,000 net income attributable to owners of parent by JPY 8,900,000,000 This is owing to more than expected increase in ED and C components for power electronic systems energy and ITs for power electronic systems industry. And in addition, there was depreciation of the yen. All these factors resulted in higher operating income by JPY 7,600,000,000 Page 10 shows consolidated balance sheet at the end of fiscal year 2020 compared to the end of March fiscal year 2019. Cash and time deposits increased by 12,500,000,000 yen notes and account receivables, trade receivables increased by 25,100,000,000 yen total long term assets by 21,600,000,000 yen total assets were up JPY 55,100,000,000 to JPY 1,052,000,000,000. Profit in the form of retained earnings increased JPY 30,500,000,000 to JPY 271,800,000,000 post dividend. Net interest bearing debt decreased by 12,700,000,000 yen to 140,900,000,000 yen with net DE ratio of 0.3x, which is a record low for the company. ROA was 4% and ROE 11%. ROE in 2019 declined to a single digit, but this fiscal year recovered to 2 digits, close to the level in fiscal year 2018. Equity ratio was 39.6%, record high for the company. Page 11 show consolidated cash flows for fiscal year 2020. With higher operating income and gain on sale of shares and lower investments and loans, free cash flow came to JPY 50,400,000,000 a large increase from the previous year. Commercial papers and bonds were reduced on a financial basis, giving us cash and cash equivalents of 75,300,000,000 yen at the end of the period. Page 12 shows dividend of surplus at the end of the period. From fiscal year 2018, dividend of 40 yen for half a year has been maintained. However, for this fiscal year, with increase in operating income as well as ordinary income and despite countermeasures taken for malfunctioning products, with gain on sales of shares, net income attributable to owners of parent increased as well. So we have just planned to increase the year end dividend to 45 yen up 5 yen The dividend payout ratio is at 29%, close to the target of 30%. Page 13 is a supplementary material showing 4th quarter, quarter on quarter, year on year comparison and annual year on year comparison of about the voltage we semiconductors and vending machines for your reference. I would like to continue and explain the management plan for fiscal year 2021. As the President mentioned earlier, we are aiming to be a 1,000,000,000,000 yen company with income of JPY 80,000,000,000 in 2023, the year in which we will celebrate our centenary. Mindful of this target, we have compiled a management plan for fiscal year 2021 with net sales of JPY 900,000,000,000 an increase of JPY 24,100,000,000 but with ForEx impact, it will be more than 30,000,000,000 yen operating income of 60,000,000,000 yen an increase of JPY 11,400,000,000 and net income attributable to owners of parent of JPY 42,000,000,000, an increase of JPY 1,000,000,000. In 2018, we recorded an operating income of JPY 60,000,000,000, a record high for our company. So the target for fiscal year 2021 will be on par with that of 2018. We will aim for a record high net income attributable to owners of parent with an increase of 1,000,000,000 yen to 42,000,000,000 yen and operating margin of 6.7 percent will be the highest for the company when achieved. Net DE ratio of 0.4x, equity ratio of 41.5 percent, exceeding 40% ROA of 4% and ROE of 10%, maintaining double digits. The exchange rate assumption seen at the bottom of the page is on the conservative side. Page 3 is a waterfall chart to reach the management plan of JPY 60,000,000,000 operating income. Unlike fiscal year 2020, we are looking for an increase in sales and production volumes totaling JPY 19,400,000,000 year on year. We will see JPY 14,500,000,000 in increase in fixed costs, including labor cost, R and D, depreciation and leases paid and other expenses, including controllable expenses. Our assumption is for yen appreciation, resulting in exchange rate effect of minus JPY 1,900,000,000 and others of JPY 8,400,000,000, which will give us the operating income target of JPY 60,000,000,000 for fiscal year 2021, an increase of JPY JPY 60,000,000,000 for fiscal year 2021, an increase of JPY 11,400,000,000 from JPY 48.6 1,000,000,000 yen in fiscal year 2020. Page 4 shows net sales and operating income by segment fiscal year 2021 management plan. For Power Electronics Systems Energy, net sales is to increase JPY 7,800,000,000 and operating income by JPY 1,200,000,000 For Energy Management, we forecast lower sales and income due to decreased demand for railway and industry substation equipment. Power supply in Facility Systems will see higher sales and income. AT and C Components will see higher sales and income following recovery of demand. For Power Electronics Systems Industry, net sales will decline by JPY 16,900,000,000 with operating income increasing by JPY 400,000,000 The large decline in net sales is due to IT Solutions with sales lower by JPY 30,000,000,000 due to disappearance of gigasco concept related demand rush. Automation Systems will see higher sales and income with recovery of the market. Social Solutions as well as equipment construction will see higher sales and income. As of April 1, we changed the name of the segment from Electronic Devices to Semiconductor with 3 segments, namely Industrial Division, Automotive Division and Information Division. Our plan is for net sales to increase by JPY 16,500,000,000 and operating income by JPY 3,900,000,000. We are expecting a large increase in demand for XUV Power Semiconductor to lead to a considerable rise in both sales and income. Please turn to Page 5. For power generation, we plan net sales increase of 3,600,000,000 yen and operating income by 800,000,000 yen due to accelerated trend of decarbonization leading to increased acquisition of projects related to renewable energy such as hydropower and geothermal power. For food and beverage distribution, we plan net sales to increase by 10,900,000,000 yen and operating income to show considerable improvement of 8,000,000,000 yen For vending machines, the market is not expected to grow, but we will aim to increase market share and reduce costs. As for store distribution, we plan to increase both sales and income, targeting the higher demand. The earnings for this segment is to show massive improvement from the first half of the fiscal year owing to structural reform and cost reduction efforts implemented in the second half of fiscal year twenty twenty. Page 6 shows management plan for net sales for Japan and overseas for fiscal year 2021. The plan is for net sales to increase JPY 24,100,000,000 to JPY 900,000,000,000, up JPY 1,500,000,000 to 655,000,000,000 yen for Japan and up 22,600,000,000 yen for overseas to 244,500,000,000 yen Breaking down the changes for overseas, JPY 24,200,000,000 increase for Asia and others, mainly from sales in India, with sales projected to increase for power supply and facility systems, automation systems, semiconductors and power generation. Net sales for China is expected to be lower by 4,200,000,000 yen but if we add a ForEx effect, it will be a slight gain. I would like to add that this is a conservative outlook. Sales in Europe and Americas are expected to increase slightly. Page 7 shows a breakdown of the year over year changes in amount of orders received by products. Orders are projected to increase JPY 27,100,000,000 year on year to JPY 915,000,000,000 in fiscal year 2021, of which major components showing an increase of JPY 20,600,000,000 to JPY 354,600,000,000 The breakdown is up 22% for vending machines, 5% for semiconductors and 8% for factory automation. ET and C is shown to be flat. This is due to large orders received in the Q4 of the previous year, but I believe this is also a conservative outlook. Please turn to Page 8. The plan is for capital investment to increase by JPY 25,800,000,000 year on year to JPY 61,700,000,000 with investments focusing on semiconductors up JPY 21,100,000,000 and power electronics systems industry up 5,900,000,000 yen For semiconductors, major investments will be made into augmentation of front end 8 inches production capacity and augmentation of back end modules for automobile production capacity. For Power Electronics Systems Industry, we will make investments into construction of plant system building at Tokyo factory, expansion of factories and range of products manufactured in India and increased in house production. Page 9 shows the R and D plan. R and D investment needs to increase JPY 2,800,000,000 year on year to JPY 36 400,000,000 in fiscal year 2021. The increase will focus on 3 segments, namely semiconductors, automotive IGBTs, SiC modules, development of 8th generation industrial IGBT Technologies, power electronic systems industry for mobility field products such as railcars and vessels and power electronic systems energy for Global Products Ultra Large Capacity UPS. Please find consolidated balance sheet at the end of fiscal year 2021 on Page 10. With squeezing of cash, cash and deposit will decrease by JPY 30,700,000,000 Investment will be increased by JPY 20 7,200,000,000 yen Total liabilities and net assets will decrease 1,900,000,000 yen to 1,055,800,000,000 yen by the end of March 2022. Retained earnings will be accumulated, increasing by 29,100,000,000 yen to 302,000,000,000 yen With decreased cash, net interest bearing debt will go up by 21,400,000,000 yen to 162,300,000,000 yen Net DE ratio will be 0.4x with equity ratio of 41.5%. Page 11 show consolidated cash flow for fiscal year 2021, with measures taken under the subcontract act amounting to a decrease of more than JPY 20,000,000,000 in fiscal year 2020 and sales of shares and large increased investments in fiscal year 2021, free cash flow will decrease by JPY 30,000,000,000 from JPY 50,400,000,000 to 20,000,000,000 yen in fiscal year 2021. Page 12 is a year on year comparison of the management plan for the first half of fiscal year 2021. Compared to the first half of fiscal year twenty twenty, net sales will increase by 53,000,000,000 yen operating income by 6,200,000,000 yen ordinary income by 5,800,000,000 yen net income attributable to owners of parent by 5,900,000,000 yen We will aim for considerable increases both in sales and income By segment, except for power generation, which will see decline in both sales and income, reflecting the large solar power project from the previous year, the remaining 4 segments will aim to increase both sales and income. In fiscal year 2021, for food and beverage distribution, we will focus efforts into vending machine and store distribution to increase both sales and income. We expect upside in orders for ED and C components, and I personally believe Power Electronics Systems and Semiconductors to grow further in China. Cost is to be increased by JPY 14,500,000,000 year on year, but I think there is room for reduction. And also, we projected an appreciation of the yen. And in consideration of these factors, I think double digits may be achievable. With this management plan, we will make utmost effort in our businesses to achieve net sales of JPY 900,000,000,000 and operating income of JPY 60,000,000,000 in fiscal year 2021. I would like to take this opportunity to ask for your continued support. Thank you for your attention.