Earnings Call: Q3 2021

Jan 28, 2021

Good afternoon, everyone. I am Junichi Arai, Corporate General Manager, Corporate Management Planning Headquarters. I will explain consolidated financial results for the Q3 of the fiscal year 2020. As the impact of year on year decrease of results for the first half was significant, sales and income were down year on year, also for the 9 months. Operating income increased year on year in the 3 months of the 3rd quarter. For defects of IGBT, we booked 16,700,000,000 yen of cost of collective measures in the 3rd quarter. As the cost is extraordinary, onetime and huge, we discussed with our auditing firm and booked the amount in extraordinary loss. Page 2 shows year on year comparison of consolidated financial results for the 9 months of the fiscal year 2020. Net sales were 561,300,000,000 yen down 50,400,000,000 yen Excluding the impact of foreign exchange, net sales decreased 48,500,000,000 yen in real terms. Operating income was 14,100,000,000 yen down 2,800,000,000 yen Operating income was down 5,800,000,000 yen in the first half and was down 2,800,000,000 yen in the 9 months. As for non operating income and expenses, negative 500,000,000 yen was from foreign exchange loss. Negative 600,000,000 yen of others was from an increase in expenses at overseas sites caused by the impacts of COVID-nineteen. Non operating income, net of non operating expenses, were negative 1,000,000,000 yen As a result, ordinary income was 14,000,000,000 yen down 3,800,000,000 yen As for extraordinary income and loss, as shown in the table, we booked negative 16,700,000,000 yen of cost of corrective measures for product defects. Gain on sales of investment securities decreased 2,100,000,000 yen year on year. As a result, extraordinary income, net of extraordinary loss, was negative 16,500,000,000 due to a realization of 17,300,000,000. Consequently, loss before income taxes was 2,600,000,000 yen Net income attributable to owners of Fyrend was negative 4,000,000,000 yen Deterioration of 14,300,000,000 yen year on year. Page 3 shows year on year changes in operating income. There were positive factors such as decrease in fixed cost and difference of project profitability and others. However, as decrease in sales and production volumes was significant, operating income decreased 2,800,000,000 yen year on year. Sales and production volumes increased significantly in semiconductors but decreased in vending machines, store distribution and ED and C components. In total, decrease in sales and production volumes pushed down operating income by 13,700,000,000 yen Decrease in fixed cost increase, decreasing other expenses of 7,000,000,000 yen We mainly reduced controllable expenses such as travel expenses and entertainment expenses. We also reduced advertising and promotion expenses. As a result, decreasing other expenses boosted operating income. Labor cost and R and D cost decreased as well. On the other hand, depreciation and leases paid increased due to continued active investment in power semiconductors. In total, decrease in fixed cost pushed up operating income by JPY62000000000. Exchange rate effect, slight appreciation of the yen pushed down operating income by 500,000,000 yen Others, including difference of project profitability, boosted operating income by 5,200,000,000 yen Page 4 shows net sales and operating income by segment. Sales and income increased substantially in electronic devices segment and decreased substantially in food and beverage distribution segment. Except electronic devices segment, net sales decreased in all other segments, unfortunately. In total, net sales decreased JPY 50,400,000,000 Operating income of electronic devices, power electronic systems energy, power electronic systems industry and power generation increased year on year. However, due to 7,500,000,000 yen a significant decrease of food and beverage distribution, operating income decreased 2,800,000,000 yen in total. On Page 5, I will look up business results by segment. In Power Electronics Systems Energy, net sales decreased 9,900,000,000 yen and operating income increased 300,000,000 yen In South segments of Energy Management, Power Supply and Facility Systems and ED and C Components, net sales decreased 6% or 7%, respectively. In Energy Management, net sales decreased as a result of a decline in demand for smart meters and the absence of large scale projects recorded in the previous equivalent period. But operating results increased due to the differences in profitability between projects. In Power Supply and Facility Systems, net sales decreased as a result of the rebound from large scale projects recorded in switchgear and control gear operations overseas in the previous equivalent period, but operating results increased due to the benefits of cost reduction activities. In LE and C Components, operating results decreased due to the reduced demand from machine manufacturers and switchboard manufacturers. Net sales and operating results decreased. In Power Electronics Systems Industry, net sales decreased 2,800,000,000 yen year on year, and operating income increased 1,200,000,000 yen In Automation Systems, net sales and operating results decreased despite the higher demand for low voltage inverters and factory automation components seen in China as a result of sluggish demand in Japan. In Social Solutions, net sales and operating results increased, thanks to increases in demand for electrical equipment for railcars and in demand for ship exhaust gas cleaning systems, or SOX scrubbers. In equipment construction, net sales decreased due to delays in capital investment plans and the rebound from large scale projects recorded in the previous equivalent period, but operating results increased due to the benefits of cost reduction efforts. In IT Solutions, net sales decreased due to the rebound from large scale projects recorded in the previous equivalent period. But operating results increased due to differences in profitability between projects. Please go to Page 6. In electronic devices, net sales and operating results of semiconductors increased substantially. In total, net sales increased 9,700,000,000 yen and operating income increased 2,500,000,000 yen In semiconductors, demand for automobiles increased. In industrial field as well, demand for the new energy market and machine tools manufacturers was quite strong. As a result, net sales and operating results increased substantially year on year. You see the table showing year on year comparison, a breakdown of electronic devices sales for 9 months. Sales of semiconductors increased JPY 14,700,000,000 year on year. In magnetic disks, sales decreased 5,000,000,000 yen unfortunately. As for year on year comparison of distribution of semiconductors sales by field, the ratio of automobiles increased from 34% to 39% in the 9 months of the fiscal year 2020. For magnetic disks, net sales and operating results decreased year on year, partly due to lower demand for PCs. However, 1,000,000,000 of yen of operating income was maintained. In food and beverage distribution, net sales decreased 23,600,000,000 yen and operating results decreased 7,500,000,000 yen This segment was significantly impacted by COVID-nineteen. In vending machine, net sales and operating results decreased substantially due to controls in capital investment by Japanese beverage manufacturers as well as lower demand in the Chinese market. In store distribution, net sales and operating results decreased because of a decline in demand for store equipment for convenience stores. In power generation, although net sales decreased 18,700,000,000 yen operating income increased 600,000,000 yen Net sales decreased significantly due to the rebound from a large scale thermal power system project and from solar power projects recorded in the previous equivalent period. But operating income increased 600,000,000 because of difference in profitability between projects. Page 7 shows changes in quarterly net sales and operating income for reference. Net sales decreased 7,200,000,000 yen in the 1st quarter and decreased significantly by 42,600,000,000 yen in the 2nd quarter. Net sales in the 3rd quarter decreased 800,000,000 yen almost flat year on year. Operating income decreased 1,200,000,000 yen in the 1st quarter, decreased 4,600,000,000 yen in the 2nd quarter and increased 3,100,000,000 yen in the 3rd quarter. The table on the right shows net sales and operating results by segment. Net sales increased in Power Electronic Systems Energy, Power Electronic Systems Industry and electronic devices. On the other hand, net sales decreased in food and beverage distribution and power generation. In total, net sales decreased slightly. Operating results decreased in food and vivulet distribution. However, in all other segments, operating income increased. In particular, operating income in Power Electronics Systems Energy and Electronic Devices increased. In total, operating income increased 3,100,000,000 yen year on year. For relevance, we forecast both net sales and operating income will increase year on year. On Page 8, I will explain net sales by Japan and overseas area. Overseas sales were down 10,200,000,000 yen and sales in Japan were down 40,300,000,000 yen In total, net sales were down 50,400,000,000 yen Overseas sales were down 10,200,000,000 yen The Chinese market is booming, and sales in China were up 9,500,000,000 yen Sales mainly of semiconductors and automation systems were up. On the other hand, sales in Asia and others were down 16,800,000,000 yen Sales mainly of power supply and facility systems, power generation and magnetic disks were down. Page 9 shows major components orders received trend. Year on year comparison of orders received is shown. Orders received were JPY 646,400,000,000 in the 9 months of the fiscal year 2020, down JPY 34,700,000,000 year on year. Orders received for major components such as vending machines, semiconductors, factory automation and EDMC components are indicated. As shown with asterisk, factory automation includes low voltage inverters, motors, factory automation components and measuring instruments. Components orders were 236,700,000,000 yen down 4,500,000,000 yen year on year. Orders of vending machines were down 35% year on year. However, orders of semiconductors were strong and up 21%. The bar graph on the right show quarterly orders received trend from the Q1 of the fiscal year 2019. Orders received in the Q3 of the fiscal year 2020 were JPY 86,500,000,000, up from JPY 83,400,000,000 in the 3rd quarter of the fiscal year 2019 and up from the Q2 of the fiscal year 2020. By component, orders of vending machines were down year on year and quarter on quarter. Orders of semiconductors were up 30% year on year and up 19% quarter on quarter. Orders of factory automation were down 10% year on year and up 15% quarter on quarter. Orders of ED and C components were sluggish in the 1st and the second quarters of the fiscal year 2020. However, the market slightly recovered in the 3rd quarter. As a result, orders of ED and C components were up 5 percent year on year and 20% quarter on quarter. Orders of semiconductors, ED and C ED and C components and factory automation are gradually recovering. On Page 10, I will talk about consolidated balance sheet. This page shows comparison and balance sheet between March 31, 2020, the end of the last fiscal year and December 31, 2020. Due to continued impacts of COVID-nineteen, we kept 1 month's worth of cash and time deposit. Cash and time deposit increased 42,000,000,000 yen from the end of the last fiscal year. Notes and account receivables, trade receivables decreased 45,700,000,000 yen due to steady progress of collection. Inventories increased 39,200,000,000 yen as we accumulated inventories for plant related sales toward the end of March. Investments in other assets in long term assets include investment securities and increased 37,600,000,000 yen mainly due to rise in stock prices. Total assets stood at 1,079,000,000,000, up 82,200,000,000 yen Liabilities are shown on the right. Notes and account payables. Trade payables decreased 24,100,000,000 yen partly due to response to the subcontract act. Retained earnings decreased 15,500,000,000 yen due to net loss and interim dividend. As a result, net interest bearing debts were 208,200,000,000 yen up 54,600,000,000 yen Net DE ratio was 0.5x. Equity ratio was 35.5%. Page 11 shares consolidated financial results forecast for the fiscal year 2020 in comparison with forecast announced on October 29, 2020. We booked extraordinary loss of IGBT in the 3rd quarter. We plan to sell investment securities and record gain on sales of investment securities in the Q4. We revised down net sales forecast by 10,000,000,000 yen to 860,000,000,000 yen In food and beverage distribution, we incorporated aggressive measures in the 4th quarter. However, in light of various circumstances, we revised down forecast for food and beverage distribution. Mainly due to that, we revised our net sales forecast by 10,000,000,000 yen We have kept unchanged forecast for operating income of 41,000,000,000 yen and ordinary income of 42,500,000,000 yen Forecast of net income attributable to owners of parent was revised up 5,500,000,000 yen to 30 3,000,000,000 yen due to extraordinary income and loss that I mentioned earlier. By segment, in electronic devices, forecast for net sales and operating income were revised upward. On the other hand, in food and beverage distribution, forecast for net sales and operating income were revised downward in consideration of risks. In elimination and corporate, operating loss forecast was revised up by 1,500,000,000 yen based on the forecasted reduction of corporate expenses. Page 12 shows year on year comparison. Net sales will decrease 40,600,000,000 yen Operating income will decrease 1,500,000,000 yen Ordinary income will decrease 2,000,000,000 yen Net income attributable to owners of current will increase 4,200,000,000 yen Net sales decreased 49,700,000,000 yen and operating income decreased 5,800,000,000 yen in the first half. We forecast net sales will increase 9,100,000,000 yen and operating income will increase 4,300,000,000 yen in the second half. We plan to increase both sales and income in the second half. However, as a decrease in the first half was significant, both net sales and operating income will decrease in the full year. As a trend, we recognize we are moving toward a good direction. By segment, in Power Electronics Systems Energy, net sales and operating income will decrease. Net sales and operating results of ED and C components will decrease year on year. In Power Electronics Systems Industry, net sales and operating income will increase substantially, driven by IT solutions and social solutions. In electronic devices, net sales and operating income will increase due to increase in industrial and automobile fields. In food and beverage distribution, net sales and operating income will decrease mainly due to vending machines. In power generation, net sales will decrease due to the rebound from large scale projects in the previous fiscal year. Operating income will increase because of differences in profitability between projects. That is full year forecast. We would like to exceed income