Earnings Call: Q2 2021

Oct 29, 2020

Good afternoon, everyone. I am Junichi Alai, Corporate General Manager, Corporate Management Planning Headquarters. The fiscal year 2020 started in April in a tough market environment due to COVID-nineteen. In particular, food and beverage distribution, including vending machine and store distribution and AD and C components were impacted significantly. On the other hand, semiconductors performed very well due to EVs. We also reduced expenses actively in the first half. Now I will explain financial results for the first half of the fiscal year twenty twenty. This page shows year on year comparison. Net sales decreased 49,730,000,000 yen to 357,000,000,000 yen Excluding gain on translation of earnings of overseas subsidiaries, net sales decreased 50,200,000,000 yen in real terms. Operating income decreased 5,800,000,000 yen to 5,300,000,000 yen I will talk about breakdown of changes on the next page. Non operating income, net of non operating expenses increased 100,000,000 yen. As a result, ordinary income was 5,200,000,000 yen Extraordinary income net of extraordinary loss improved by JPY 800,000,000 to 0 due to reduction of extraordinary loss. Net income attributable to owners of parent decreased 3,900,000,000 yen to 2,100,000,000 yen Next, I will explain changes in operating income with a step chart on the next page. Operating income decreased 5,800,000,000 yen The major factor is a decrease in sales and production volumes. Sales and production volumes increased in semiconductors, but decreased in store distribution, vending machine, ED and C components and others. As a result, a decrease in sales and production volumes pushed down operating income by JPY 11,400,000,000. In fixed cost, we reduced expenses, mainly controllable expenses due to aggressive investment in electronic devices, depreciation and leases paid increased 2,000,000,000 yen labor costs decreased 800,000,000 yen R and D decreased 700,000,000 yen other expenses or controllable expenses decreased 4,300,000,000 yen A decrease in fixed cost pushed up operating income by 3,800,000,000 yen Exchange rate effect was negative 300,000,000 yen Others boosted operating income by 2,000,000,000 yen year on year. Others mainly include difference of plant related project profitability. Difference of project profitability in IT Solutions, E and C Components, Power Supply and Facility Systems and others boosted operating income by 2,000,000,000 yen Due to significant impacts of the decrease in sales and production volumes, operating income decreased 5,800,000,000 yen year on year. Let me move on to net sales and operating income by segment for the first half. Net sales of electronic devices increased. However, unfortunately, net sales of all other segments decreased. Operating income increased in Power Electronics Systems Industry, Electronic Devices and Power Generation year on year. However, in Power Electronics Systems Energy, operating income decreased 2,000,000,000 yen mainly due to loss in ED and C components. In food and beverage distribution, including vending machine and store distribution, operating income decreased significantly. Consequently, net sales were down 49,700,000,000 yen and operating income was down 5,800,000,000 yen Now I will talk about business results by segment. In Power Electronics Systems Energy, net sales were 81,800,000,000 yen down 16,300,000,000 yen Operating income was 1,600,000,000 yen down 2,000,000,000 yen There are 3 businesses in this segment. In Energy Management, net sales and operating results decreased as a result of a decline in demand for smart meters and industrial power supply equipment. For smart meters, the markets decreased. In power supply and facility systems, net sales and operating results decreased as a result of the rebound from large scale projects recorded in electrical facility and switchgear and control gear operations at the company in Singapore we acquired. In ED and C Components, net sales and operating results decreased due to sluggish market conditions and reduced demand from Japanese machine manufacturers and switchboard manufacturers. In power electronic systems industry, net sales were 128,200,000,000 yen down 10,500,000,000 yen Operating income was 200,000,000 yen an improvement of 900,000,000 yen In Automation Systems, net sales and operating results decreased despite the rise in demand for socks, slovers as well as the higher demand for low voltage inverters and factory automation components seen in China as a result of sluggish demand in other fields in Japan. In Social Solutions, net sales and operating results increased, thanks to increases in large scale projects for electrical equipment for railcars. In equipment construction, net sales decreased due to delays in capital investment plans of customers caused by the impacts of COVID-nineteen and the rebound from large scale electrical equipment construction projects recorded in the previous equivalent period. But operating results increased slightly 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 were relatively unchanged. In electronic devices, net sales were 72,400,000,000 yen up 6,700,000,000 yen Operating income was 6,300,000,000 yen up 300,000,000 yen For semiconductors, net sales and operating results increased, thanks to the increased demand for power semiconductors for electrified vehicles and for the new energy market. In magnetic disks, demand for data centers increased. However, unfortunately, demand for PCs decreased due to the impacts of solid state drive, which is a type of semiconductor memory. As a result, net sales decreased and operating results decreased slightly. For LEFLANCE, year on year comparison for the first half, a breakdown of electronic devices sales between semiconductors and magnetic disks is shown. Year on year comparison for the first half of distribution of semiconductor sales by field between industrial field and automobile field is also indicated. The ratio of automobiles was 36%, up 2 percentage points. In food and beverage distribution, net sales were 37,700,000,000 yen down 17,000,000,000 yen Operating income was negative 2,600,000,000 yen down 5,500,000,000 yen In this segment, both vending machine and store distribution were heavily impacted by COVID-nineteen. For vending machine, net sales and operating results decreased due to the self restraint exercised in sales activities and reductions in capital investment by Japanese beverage manufacturers as well as lower demand in the Chinese market. For store distribution, net sales and operating results decreased because of a decline in demand for store equipment, for convenience stores and cancellations of and delays in renovation works. In power generation, net sales were 32,700,000,000 yen down 9,200,000,000 yen Operating income was 1,100,000,000 yen up 300,000,000 yen Net sales decreased due to the rebound from large scale projects, but operating results increased slightly because of differences in profitability between projects. Next, I will explain net sales by Japan and overseas area. Net sales were 357,000,000,000 yen down 49,700,000,000 yen in total. Overseas sales were 97,600,000,000 yen down 5,900,000,000 yen Net sales in Japan were 259,400,000,000 yen down 43,800,000,000 yen When we look at overseas sales, including Asia and others, China, Europe and Americas, Chinese market conditions were partially firm. In China, sales of semiconductors and automation systems increased. Unfortunately, sales of vending machines decreased. In total, in China, sales increased 5,500,000,000 yen On the other hand, in nature and others, accounting for the majority of overseas sales, sales of automation systems increased. However, sales of power supply and facility systems, power generation and energy management decreased. In total, sales in Asia and others decreased 9,900,000,000 yen year on year. Sales in Europe and Americas decreased partly due to COVID-nineteen. Let me move on to breakdown of changes in amount of orders received. In the first half of the fiscal year 2020, orders were JPY 429,100,000,000, down JPY 37,600,000,000 year on year. In orders, major components decreased 7,700,000,000 yen and plant systems, others decreased 29,900,000,000 yen In orders of major components, semiconductors were strong and up 16% year on year. Vending machines were down 32%. Factory automation, including low voltage inverters, motors, factory automation components and measuring instruments, was down 12%. EDMC components were down 7%. Next, I will talk about balance sheet. This page shows comparison of balance sheet of March 31, 2020, the end of the fiscal year 2019 and September 30, 2020, the end of the first half of the fiscal year twenty twenty. Cash and time deposit stood at 155,900,000,000 yen up 91,800,000,000 yen In consideration of the impacts of COVID-nineteen, we decided to keep cash and time deposit equivalent to 2 months of average monthly sales. We increased cash and time deposits intentionally for disaster response measures. Notes and account receivables, trade receivables decreased 68,300,000,000 yen due to significant progress of collection of receivables. Inventories, mainly of plant systems, increased toward the second half. As a result, total assets were 1,000,000,000,000 65,100,000,000 yen up 68,300,000,000 yen Partly due to an increase in cash, interest bearing debts increased 120,600,000,000 yen Total net assets increased 21,600,000,000 yen partly due to gain on revaluation of securities. Consequently, net interest bearing debt was 100 and 83,300,000,000 yen up 29,600,000,000 yen Net DE ratio was 0.5 times. Equity ratio was 36.3%. This pays shares consolidated cash flow for the first half. Net cash used in operating activities was 2,100,000,000 yen Net cash used in investing activities was 10,800,000,000 yen This was principally due to investments mainly in semiconductors. As a result, free cash flow was negative 13,000,000,000 yen in the first half, an improvement of 9.6 1000000000 year on year. In the last fiscal year, net cash used in investing activities increased partly due to 10,000,000,000 yen level M and A in India, mainly due to that free cash flow improved by approximately JPY 10,000,000,000 year on year. Lastly, I will talk about dividends. We decided to pay interim dividend of 40 yen per share, flat year on year based on our policy of stable and continuous dividend payment. We hope we will also be able to pay year end dividend in the same way. Also in the second half, we intend to create environments in which we can continue dividend payment with emphasis on income in management. That concludes my report on financial results for the first half. Next, I'd like to explain about management plan for FY 2020. In the second half, ED and C components market is not expected to recover and will continue to be weak as in the first half. And magnetic disks demand for PC is estimated to decline further. On the other hand, semiconductors will continue to be strong and orders and sales for IT solutions are significantly increasing due to Gigasco initiative. In food and beverage distribution, we expect market recovery in the 4th quarter, mainly in China and recovery of investment in convenience stores. With such expectations, we will strive for recovery in food and beverage distribution business. 1st, let me overview the comparison between the FY 2020 plan and the FY 2019 results. Full year net sales are estimated to decrease 30,600,000,000 yen to 870,000,000,000 yen Operating income will be down 1,500,000,000 to 41,000,000,000. We set the operating margin target as 4.7% with a strong intention to maintain the same level of the previous year. Net income attributable to owners of parent will be down 1,300,000,000 to 27,500,000,000. Regarding the plan for financial indicators, net DE ratio is 0.5 times. Equity ratio will increase to 38.5 percent. ROA is 2.7% and ROE is decreased from the previous year to 7.1% due to increase of shareholders' equity. Next page is about the management plan for the second half, which is the basis for the full year plan. While impact of COVID-nineteen pandemic will continue, we plan to increase sales and profit year on year by taking in demand recovery and implementing our own measures. Net sales are estimated to grow 19,100,000,000 to 513,000,000,000 yen considering the exchange rate effect of 5,200,000,000 yen reflected in the previous year results, the actual demand increase will be 20 4,300,000,000 yen Operating income will increase 4,300,000,000 yen to 35,700,000,000 yen I'll explain more about the change on the next page. Ordinary income will be 37,300,000,000 yen and net income will be up 2,600,000,000 yen to 25,400,000,000 yen As for foreign exchange rate, we set 102 yen to the U. S. Dollar, 120 yen 40 €15 for the renminbi as we estimate a little stronger yen than the current rate. This page shows the breakdown of the 4 300,000,000 yen increase in operating results. Increase in sales and production volume is 3,100,000,000 yen while ED and C components, power generation and magnetic disks are declining, semiconductors are estimated to increase their sales and production volume to contribute to profits. IT solutions are projected to record significant sales increase to make a large impact on operating results. These factors totaled 3,100,000,000 yen increase. Despite fixed cost reduction in the first half, 800,000,000 yen increase is expected in the second half. We will continue to decrease controllable expenses for other expenses by 2,400,000,000 yen but we plan to increase depreciation and leases paid due to investment in semiconductor business, labor cost increase of JPY 700,000,000 mainly in overseas and JPY 800,000,000 increase in R and D. In total, fixed cost is expected to increase by JPY 800,000,000 to make a negative impact on operating results. Earlier, I mentioned we set our foreign exchange rates based on the assumption of stronger yen, and its effect is minus 1,200,000,000 yen and others are 3,200,000,000 yen higher than the previous fiscal year. And this is due to the difference in project profitability for power generation and power supply and facility systems in plant projects in the previous fiscal year. In total, operating income is planned to be up JPY 4,300,000,000 to JPY 35,700,000,000. Next, I will explain about the plan of net sales and operating income by segment for the second half. In Power Electronics Systems Energy, net sales estimates JPY 300,000,000 increase and operating income will be down JPY 700,000,000. While we had negative factors for net sales, such as rebound from large scale orders received by FSMBE for overseas switchgear and control gear in the previous year and continually weak demand for ED and C components, demand increased mainly for industrial transformers leads to a slight increase for net sales. Operating income is expected to drop significantly affected by lower sales and production volume of ED and C Components. Power Electronics Systems Industry estimates an increase of 29,000,000,000 yen for net sales and JPY 1,100,000,000 for operating income. As for net sales, while demand for components and automation systems operations is decreased, we are receiving lots of orders in IT solutions for Gigascore initiative mentioned earlier. This will help us to achieve significant sales growth of 29,000,000,000 yen and operating income will also increase due to this sales growth. Next is electronic devices. Net sales will be down 2,000,000,000 yen The number in the box indicates foreign exchange effect compared to the previous year, which is minus 3,300,000,000 yen for net sales. Excluding this factor, net sales are estimated to have 1,300,000,000 yen growth. Operating income will be up 2,900,000,000 yen including the foreign exchange effect of 900,000,000 yen This means its actual growth will be 3,800,000,000 yen While demand for power semiconductors for electric vehicles and industrial modules for China increased, sales decrease of magnetic disks was larger than the growth of semiconductors. With that, the net sales decrease is estimated as 2,000,000,000 yen year on year. Operating results will year on year. Operating results will secure growth significantly affected by increased sales and production volumes of semiconductors. Regarding food and beverage distribution, vending machines are expected to recover in China and Asia, and demand growth for store renovation project is expected to start in the Q4. With these factors, we expect increase in both sales and profit. Regarding power generation, net sales will decline by JPY 13 point 8,000,000,000 and operating income will increase by JPY 1,300,000,000. Net sales will be lower due to rebound from large scale orders recorded in the previous year. Operating results will improve because of differences in profitability between projects. In total, net sales will increase JPY 19,100,000,000 and operating income will grow JPY 4,300,000,000. In summary, ED and C components and magnetic disks are estimated to decline, but positive results are expected in IT Solutions and Semiconductors and vending machines and store distribution where we will make extra efforts for growth. Next, I'd like to explain about the management plan for FY 2020 combining first half results and second half management plan. Net sales are JPY 870,000,000,000 down JPY 30.6 1,000,000,000 from the previous fiscal year. This is due to the decrease of about JPY 50,000,000,000 in the first half despite expected increase in the second half. Operating income is projected to decrease by JPY 1.5 1,000,000,000 to 41,000,000,000 yen with operating margin of 4.7%, which is unchanged from the previous year. Details about the change will be explained in the next page. Ordinary income will be 42,500,000,000 yen and net income will be down 1,300,000,000 yen to 27,500,000,000 yen This is a waterfall chart to explain breakdown of changes in the full year operating results. Minus 8,300,000,000 yen is indicated as the impact of decrease in sales and production volumes, while semiconductors and IT are expected to grow with negative impact from ED and C components, vending machines, store distribution and magnetic disks in both first and second halves, the total decrease in sales and production volumes will be JPY 8,300,000,000. Fixed cost is planned to decrease. Although it will slightly increase in the second half, the reduction made in the first half helped us to estimate 3,000,000,000 yen cost reduction in total, which positively affects the operation results. We will decrease other controllable expenses by 6,600,000,000 yen but we will spend 3,600,000,000 yen more for depreciation and leases paid than the previous year. Exchange rate effect will decrease 1,600,000,000 yen including 1,200,000,000 yen decrease for the exchange rate effect in the second half. Others are about the difference of planned project profitability such as power generation and power supply and facility systems. And this item will be JPY 5,400,000,000 higher than the previous year. In total, the operating results will decline by JPY 1,500,000,000 from the previous fiscal year. Next page is about net sales and operating income by segment for FY 2020. PA Electronics Systems Energy will decrease net sales by 16,000,000,000 yen and also decrease operating income by 2 point 7,000,000,000 yen Net sales of its 3 subsegments will decline, and operating results will decrease by JPY 2,700,000,000 mainly with ED and C components. Power Electronics Systems Industry will maintain increased sales and income for the fiscal year. Net sales will increase in IP Solutions and Social Solutions, and operating income is planned to increase as well. Electronic devices will raise net sales by JPY 4,600,000,000 and operating income will be up 3,200,000,000 yen for the fiscal year. The exchange rate effect is incorporated as minus 3,000,000,000 yen in net sales and minus 1,000,000,000 yen in operating income, respectively, and this will positively affect the full year results. Semiconductor is expected to grow significantly and magnetic disks will decrease in sales and profit. We intend to increase sales and profit in food and beverage distribution by executing recovery measures in the second half. However, due to the substantial decrease in sales and profit in the first half, both vending machines and the store distribution will decrease sales and profit for the fiscal year. Power generation will decrease net sales by 22,900,000,000 and increase operating income by 1,600,000,000 yen The sales decrease is due to rebound from large scale projects in the previous year and a slight increase of operating income is due to the difference in the project profitability as JPY 30,600,000,000 and operating income will decrease JPY 1,500,000,000 for FY 2020. This page shows comparison of net sales in Japan and overseas. In the total net sales decrease of JPY 30.6 billion, JPY 11,400,000,000 is for overseas and JPY 19,200,000,000 is for Japan. Regarding overseas sales, China increases its sales by JPY9,100,000,000 with growth in semiconductors, automation systems and power supply and facility systems in both first and second halves. On the other hand, sales in Asia are estimated to decrease by JPY 15,800,000,000. While automation systems will increase, sales of power supply and facility systems, magnetic disks and power generation will decrease. Regrettably, Europe and Americas are also planned to decrease their sales. Next page is about capital investment. We plan to spend JPY 38,000,000,000 in total in FY20 20, and 90% of the investment will be in electronic devices and power electronics systems industry and power electronics systems energy. Although the investment in electronic devices will decrease JPY10 1,000,000,000 from the previous year. Active investment continues in this area as originally planned for augmentation of front end 8 inches and back end production capacity. We will also continue investment in power electronics systems for industry and energy at the same level of the previous fiscal year. Next page describes research and development. Its investment will be JPY 34,400,000,000, almost unchanged from the previous year. Nearly 80% of the total investment will be spent for electronic devices and power electronics systems for industry and energy. We will mainly invest in automotive IGBTs, 8th generation IGBTs and SiC for electronic devices. For power electronics systems industry, we will invest in component platform, system products for vessels, electrical equipment for railcars. And for power electronics systems energy, we will invest in transformers, GISs and UPSs for overseas markets as well as ED and C components. We'll promote development of renewable energy and service offerings for power generation and next generation vending machines, store labor and energy saving products and IoT and AI powered system business products for food and beverage distribution. Next page shows balance sheet. Cash and time deposits are planned to increase by JPY 16,900,000,000 from the end of the previous fiscal year. Even though we expect the impact of COVID-nineteen pandemic will be weakened, we plan to secure cash equivalent to 1 month sales to be ready for unexpected situations. Notes and account receivables, trade receivables will increase JPY 15,400,000,000 with estimated sales increase in the 4th quarter and total assets will increase JPY 54,800,000,000 to JPY 1,51,600,000,000 Interest bearing debts will increase JPY 47,900,000,000 and total net assets will grow JPY 41,300,000,000. Net interest bearing debt will increase 31,700,000,000 yen to 100 and 85,300,000,000 yen as indicated at lower left. Net DE ratio will be 0.5x and equity ratio will be 38 0.5%. Cash flow was negative in the first half. However, we plan to secure positive cash flow of JPY 5,000,000,000 for FY 2020. Free cash flow will decrease JPY 13 500,000,000 yen from the previous fiscal year, and this is due to a large scale collection of account receivables in the previous second half, we In the second half, we expect substantial growth in sales and profit for semiconductors, and we assume there is still room for further growth. For food and beverage distribution, we will make extra efforts for growth. Expenses are planned to slightly increase year on year in the second half, but we assume there is room for reduction in corporate and controllable expenses. Also, if the current foreign exchange situation continues, we can expect about JPY 1,000,000,000 positive foreign exchange rate effect. In the second half, the market situation continues to be unpredictable with the presidential election in the U. S, which will be held in 1 week from now. And impact of COVID-nineteen pandemic, but we will execute every possible measure to achieve the numbers and the plan for FY 2020. That is all for my explanation.