Earnings Call: Q4 2020

May 29, 2020

Good afternoon, ladies and gentlemen. I am Michihiro Kitazawa, President. I would also like to take this opportunity to thank you once again for your help in the last fiscal year, the fiscal year 2019. The fiscal year 2019 was a year we had never experienced before. The U. S.-China trade war started in early spring and the Chinese economy became stagnant. When we saw a situation subsided slightly, the COVID-nineteen outbreak occurred. I never even dreamt that the situation will be so serious. In our business structure, as you know, sales and income tend to increase in February March, in particular in March. COVID-nineteen caused postponement or cancellation of capital investments. What surprised me most was that sales of vending machines almost stopped. It is true there aren't many people outside. There are few people who buy beverages from vending machines. In this way, the issues of the U. S.-China trade war and COVID-nineteen slowly but surely impacted us more than we thought in the fiscal year 2019. We submitted financial reports to Tokyo Stock Exchange at 3 o'clock. In financial results for the fiscal year 2019, net sales were 900,600,000,000 yen Operating income was 42,500,000,000 yen and net income attributable to owners of Ferent was 28,800,000,000 yen Both operating income and net income attributable to owners of Ferent were down approximately 30% year on year. To judge these results as present is very difficult. I have mixed feelings. On the one hand, I have a mind to tell our employees you worked hard in such a tough situation. On the other hand, I think we should have managed the situation slightly better. In 2,008, when the clubs and Lehman Brothers occurred, Fuji Electric plunged into big losses. Compared to that time, I think earning structure of Fuji Electric became much stronger during the past 10 years. In a spring wage negotiations this year, we knew our business performance would decline. However, we didn't cut annual income of our employees. We will not cut income for senior staff either, although we treat executives differently. I would like to make sure to protect lives of our employees and their family members even when business performance fluctuates somewhat. That is still my vision of our company. Under these circumstances, the fiscal year 2020 already started. We already have results for April. Fortunately, there was almost no year on year drop in sales in April on a single month basis. Whether income follows the same trend or not is the biggest issue. We are making lots of capital investments. So we think to secure income will be the biggest point. Although results for the fiscal year 2019 were, as I mentioned, we have no intention at all to change plans based on the original 5 year medium term management plan starting in the fiscal year 2019 and concluding in the fiscal year 2023. We are currently accelerating capital investments centering around semiconductors. I'm sure IGBT for automobiles will grow. Besides both sales and income on power electronic systems related businesses increased in April year on year. We still have no intention to change our policy to grow significantly power electronics systems and power semiconductors. As for dividends, although business results declined, we will keep a year end dividend of 40 yen per share, which is the same amount as the interim dividend. Annual dividend will be per share. I talked about compensation for employees earlier. Also for dividends, we will like to pay dividends to shareholders whenever possible even if business results fluctuate somewhat. As income dropped, dividend payout ratio resulted in close to 40% all over sudden. We kept saying we would like to secure payout ratio of 30%. It is now more than 39%. I think it is just temporary. We don't want to cause inconvenience to shareholders due to slight change of income whenever possible. As I mentioned earlier, we are accelerating capital investments. There are uncertainties about the current business performance. When we look at results for April, results in Japan dropped and results overseas increased. The big reason is that the economy in China clearly started to recover. The drop in Japan was offset by the increase overseas. Consequently, results were almost flat year on year. Frankly speaking, we cannot forecast how the trend will be towards June or September. We normally announce forecast at this time when we announce results of the previous fiscal year. However, we have not yet determined the forecast for the fiscal year 2020. As far as I can tell, we will be able to announce a forecast for this fiscal year around the end of October after looking at business results for the first half and market conditions around September and in consideration of plans for the second half. As for COVID-nineteen, the state of emergency was lifted tentatively. It is that the second or the third waves will come. When that happens, there may be another lockdown. To that extent, visibility for what will happen is low. Having said that, I intend to announce business forecast for this fiscal year with responsibility in October. I hope you could give us a little more time. Today, 7 people, including myself, are here. Mr. Alai, Senior Managing Executive Officer, will report on business results. And all of 5 corporate general managers are also present. As there are lots of uncertainties in this era and in this current situation, I suppose you have many questions to ask. As all corporate general managers are ready, please feel free to ask whatever questions you have. We will answer all the questions to the extent we can. The fiscal year 2020 will be another long year. I think many things will happen. I would appreciate your continued support for this fiscal year. That concludes my opening remark. I am Junichi Arai, Senior Managing Executive Officer. I will explain consolidated financial results for the fiscal year 2019. As President mentioned in the beginning, in the fiscal year 2019, market conditions were very challenging, partly due to the U. S.-China trade war and the impact of COVID-nineteen in the 4th quarter. As a result, sales and income were down year on year, unfortunately. Net sales were 900,600,000,000 yen down 14,300,000,000 yen year on year. Out of that, reduction of 6,400,000,000 yen was due to loss on translation of earnings of overseas subsidiaries due to the appreciation of the yen. That means net sales were down 7,900,000,000 yen in real terms. Operating income was 42,500,000,000 yen down 17,500,000,000 yen year on year. I will give you the details on the next page. Operating margin was 4.7%, down 1.8 percentage points year on year. As for non operating income and expenses, negative 1,400,000,000 yen was due to foreign exchange loss, mainly due to that non operating items deteriorated by 1,500,000,000 yen As a result, ordinary income was 44,500,000,000 yen down 19,000,000,000 yen year on year. As for extraordinary income and loss, there was 1,300,000,000 yen of gain on reversal of foreign currency translation adjustments due to subsidiary liquidation in the fiscal year 2018. In addition, loss on valuation of investment securities increased in the fiscal year 2019. There are such negative factors. On the other hand, impairment loss was 0. Gain on sales of investment securities increased. As a result, extraordinary income, net of extraordinary loss was negative 700,000,000 yen an improvement of 500,000,000 yen year on year. Net income attributable to owners of Fyrend was 28,800,000,000 yen down 11,500,000,000 yen year on year. For reference, net sales were down 2% year on year. Operating income and net income attributable to owners of Purin were down 29%, respectively. This page shows breakdown of reduction in operating income of 17,500,000,000 yen from 60,000,000,000 yen to 42,500,000,000 yen The biggest factor is decrease in sales and production volumes. To say nothing of decrease in net sales, the impact of production volumes of major components were significant, in particular. Decrease in sales and production volumes pushed down operating income by 8,300,000,000 yen As for increasing fixed cost, labor cost increased 1,200,000,000 yen R and D increased 800,000,000 yen Depreciation and leases paid increased 1,800,000,000 yen For labor cost, there was partial cancellation of retirement benefit trust in the fiscal year 2018. That is why labor costs increased year on year. R and D increased 800,000,000 yen Depreciation and leases paid increased as we made active investments in semiconductors. As a result, increasing fixed cost pushed down operating income by 3,800,000,000 yen Exchange rate effect was negative 2,500,000,000 yen due to the appreciation of the yen. Negative 2,900,000,000 yen from others was mainly due to product defect related expenses of semiconductors and ED and C components. In total, operating income was 42,500,000,000 yen down 17,500,000,000 yen year on year. This page shows year on year comparison of net sales and operating income by segment. Net sales of electronic devices increased slightly and net sales of power generation increased. Net sales of all other segments decreased, unfortunately. Operating income of all of the 5 segments decreased year on year. Now I will look at results by segment. In Power Electronics Systems Energy, net sales were 2 18,000,000,000 yen down 6,100,000,000 yen year on year. Operating income was 12,300,000,000 yen down 4,500,000,000 yen year on year. There are 3 businesses in this segment, including energy management, power supply and facility systems and ED and C components. In the Energy Management business, net sales and operating results decreased due to lower demand for smart meters and the rebound on large scale projects undertaken overseas during the previous fiscal year. In the power supply and facility systems business, net sales and operating results increased due to very strong performance of switchgear and control gear operations of FSMBE we acquired some years ago despite the absence of large scale orders recorded in the previous fiscal year in Japan. The ED and C components business were significantly impacted by market conditions. Net sales decreased due to reduced demand from machine manufacturers. Operating results decreased following lower demand and higher expenses incurred as a result of product defects. In Power Electronics Systems Industry, net sales were 317,500,000,000 yen down 5,000,000,000 yen year on year. Operating income was 16,500,000,000 yen down 2,900,000,000 yen year on year. Negative 700,000,000 yen of exchange rate effect is included in negative 2,900,000,000 yen There are 4 businesses in this segment. In the Automation Systems business, due to the trade friction between the United States and China and others, demand was lower for major components such as low voltage inverters and factory automation components. Besides, operations were ceased at bases in China and lower demand were seen by bases in Asia, Europe and the United States due to the global COVID-nineteen pandemic, which started in the 4th quarter. As a result, net sales and operating results decreased significantly in this business. In the social solutions business, net sales decreased due to the absence of large scale orders for electrical equipment for railcars recorded in the previous fiscal year. However, operating results increased slightly as a result of the benefits of cost reductions. In the equipment construction business, net sales decreased due to the absence of large scale orders recorded in the previous fiscal year, but operating results increased because of benefits of cost reduction efforts and others. In the IT Solutions business, net sales and operating results increased because of a rise in large scale orders in the private sector and the academic sector, including schools. In electronic devices, net sales were 130 7,400,000,000 yen up 100,000,000 yen Operating income was 9,700,000,000 yen down 5,900,000,000 yen year on year. The decrease includes exchange rate effect of negative 1,500,000,000 yen For semiconductors, demand and sales for automotive power semiconductors continued to increase. However, demand in the industrial field was lower due to the trade friction between the United States and China in the global COVID-nineteen pandemic. Besides, depreciation and leases paid increased because of investments for bolstering capacity. There was also negative folding exchange influences of 1,000,000,000 and several 100,000,000 yen Also due to increased product repair costs, operating results decreased substantially. For reference, breakdown of sales between semiconductors and magnetic disks is shown. Sales of magnetic disks increased slightly fortunately. For magnetic disks, net sales and operating results increased year on year. Distribution of semiconductor sales by field is indicated. In the fiscal year 2018, industrial field accounted for about 70% and automobiles accounted for about 30%. In the fiscal year 2019, industrial field accounted for about 65% and automobiles accounted for 35%. Sales of semiconductors for automobiles are increasing. In food and beverage distribution, net sales were 104,400,000,000 yen down 9,200,000,000 yen year on year and operating income was 3,800,000,000 yen down 1,900,000,000 yen year on year. This segment was significantly impacted by reduced demand in the Japanese and Chinese markets in the global COVID-nineteen pandemic, which started in the 4th quarter in particular. The vending machines business was also impacted by those. As a result, net sales and operating results decreased. In the store distribution business, net sales decreased following lower demand for store equipment for convenience stores, but operating results increased slightly. Lastly, in power generation, net sales were 109,900,000,000 yen up 2,900,000,000 yen Operating income was 2,300,000,000 yen down 2,500,000,000 yen year on year. Net sales increased due to sales recognition of large scale thermal power generation system projects, which offset the decline in large scale solar power generation system projects. Unfortunately, operating results decreased because of disparities in profitability between projects and increased expenses associated with the large scale overseas project. This page shows net sales by Japan and overseas area. Net sales decreased JPY 14,300,000,000 in total. Overseas sales decreased 11,500,000,000 yen and sales in Japan decreased 2,800,000,000 yen Ratio of overseas sales was flat at 25% to the total. By area, decrease in net sales in China was overwhelming. Sales mainly as components of vending machines, semiconductors and factory automation components decreased significantly. In Asia and others, sales of components decreased. However, as I said earlier, sales of switchgear and control gear operations in power supply and facility systems increased considerably. As a result, net sales in Asia and others increased 2,900,000,000 yen in total year on year. In Europe, net sales increased 2,500,000,000 yen due to strong performance of semiconductors. This page shows year on year comparison of net sales by products. Net sales decreased 14,300,000,000 yen in total. Net sales of major components decreased 22,700,000,000 yen On the other hand, net sales of plant systems and others increased 8,400,000,000 yen Major components include vending machines, semiconductors, factory automation and EDMC components. Factory automation includes low voltage inverters, motors, factory automation components and measuring instruments. Vending machines decreased significantly. Sales of semiconductors decreased 1% year on year. Sales for industrial field decreased. However, sales for automobiles increased. I think we can say net sales decreased only by 1.6% in total. This page shows year on year comparison of amount of orders received. The amount of orders received was 901,100,000,000 yen down 25,600,000,000 yen year on year. Orders and major components decreased 14,300,000,000 yen and orders of plant systems and others decreased JPY 11,300,000,000. As for plant systems, large scale projects were delayed due to the impacts of COVID-nineteen in the 4th quarter. In orders for major components, there are both ups and downs. Decrease of vending machines was 11%. Factory Automation and EDMC components also decreased. On the other hand, orders for semiconductors increased 5% year on year, mainly due to growth of orders for automobiles. This page shows results for the fiscal year 2019 in comparison with forecast announced on January 30. The forecasts are kept unchanged from the forecast announced in October last year. Net sales forecast we announced was 915,000,000,000 yen and operating income forecast was 50,000,000,000 yen In comparison, net sales were 14,400,000,000 yen lowers on forecast. Operating income were JPY 7,500,000,000 lowers on forecast. Net income attributable to owners of parent was JPY 4,200,000,000 lower. We estimated the impacts of COVID-nineteen included in the results with first signs in charge of business groups. The negative impact of COVID-nineteen on net sales was slightly higher than 18,000,000,000 yen and slightly higher than 5,000,000,000 yen on operating income. As for sales, Power Electronics Systems Industry, Foods and Beverage Distribution and Semiconductors were impacted by COVID-nineteen. For operating income, Power Electronics Systems Industry, Food and Beverage Distribution and Semiconductors were were impacted significantly by COVID-nineteen. Comments on changes of operating income are described As for decrease in sales and production volumes, decrease in production volumes of components were significant. Decrease in sales and production volumes pushed down operating income by 8,000,000,000 yen Decreasing fixed cost was a positive factor. We reduced cost as much as possible, including labor cost, depreciation and leases paid, R and D and controllable costs. Reduction in fixed costs was 4,900,000,000 yen Negative 4,900,000,000 yen was from others. Product defects related expenses for semiconductors and EDMC components and increased expenses associated with a large scale overseas project are included in negative 4,900,000,000 yen By segment, decrease in sales and income of power electronic systems industry was significant due to decrease of components. In electronics devices, although sales increased, income decreased. Net sales increased as net sales and operating results of magnetic disks increased and semiconductors for automobiles increased. Income was impacted by exchange rate effect and extraordinary loss I mentioned earlier. In food and beverage distribution, sales and income decreased mainly due to factors related to China. In power generation, sales decreased due to delays of large scale projects. Operating income decreased JPY 2,000,000,000 partly due to increase in cost. Let me move on to balance sheet. There are characteristics in the balance sheet this time. In fixed assets, tangible fixed assets increased due to investment in semiconductors. Intangible fixed assets also increased that was due to M and A in India. In current assets, cash and time deposits increased 34,800,000,000 yen or almost doubled year on year. We increased cash and deposit for disaster response purposes in response to COVID-nineteen. As a result, interest bearing debts increased JPY 63,430,000,000. In net assets, we increased retained earnings by 17,400,000,000 yen Consequently, total assets stood at 996,800,000,000 yen up 44,200,000,000 yen ROA was 3%. ROE was 8%, partly due to increase in net assets. Net interest bearing debt amounted to 100 and JPY153,600,000,000 up JPY28,800,000,000 Net DE ratio was 0.4x. Equity ratio was 36.7%. Next, I will talk about cash flows. Net cash provided by operating activities was 46,100,000,000 yen Net cash used in investing activities was 27,600,000,000 yen This was primarily related to increase in production facilities of semiconductors. As a result, free cash flow was JPY 18,500,000,000, down JPY 15,000,000,000 year on year. Cash and cash equivalents amounted to 63,700,000,000 yen which was an increase of 34,600,000,000 yen as I mentioned earlier. Let me move on to dividends. As President, Mr. Kitazawa discussed, we plan to pay year end dividend of per share, which is flat year on year. Year end dividend will be the same amount as interim dividend. We made a decision on dividend in this way. Net income attributable to owners of parent exceeded 28,000,000,000. Distributable amount was kept at 100,000,000,000 yen level. Our financial position became stronger and is steadily improving. Besides, we would like to pay stable and continuous dividends to shareholders from a medium to long term perspective. Therefore, we decided to pay the same amount of dividend per share as the previous year. We have been aiming at dividend payout ratio of 30%. The ratio resulted in 39.7% this time. For reference, we added a table showing cash position. The blue bars show net interest bearing debts. The red bars show cash on cash equivalents. The line graph in green shows net DE ratio. From the end of the fiscal year 2019, we increased cash and cash equivalents by 126,100,000,000 yen Cash and cash equivalents amounted to 189,800,000,000 yen at the end of April 2020. On the other hand, net interest bearing debt decreased to 133,700,000,000 yen Net DE ratio was flat at 0.4x. We don't know how COVID-nineteen will play out going forward. We intend to increase cash and deposits sufficiently to safeguard against the second and the third waves. For financing, we mainly issue commercial paper. We have been able to raise funds at very low interest rates. We recognize the impacts on income statement is very minor. As reference material, year on year comparison of results for the Q4 is shown. Net sales decreased 3,800,000,000 yen Operating income decreased 9,800,000,000 yen Net income attributable to owners of parent decreased 5,400,000,000 yen Results were unfortunate. We recognized that was due to the significant impacts of COVID-nineteen. Negative impacts on net sales of Power Electronics Systems Energy and Food and Beverage Distribution were significant. As for operating income, electronic devices, power electronic systems and food and beverage distribution were impacted by COVID-nineteen. We also added supplementary materials regarding low voltage inverters, amount of orders received and semiconductors, amount of orders received. Quarter on quarter and year on year comparison for the 4th quarter are indicated. That concludes my