Earnings Call: Q3 2020

Jan 31, 2020

I am Alai, Managing Executive Officer. I will talk about consolidated financial results for the 9 months of fiscal year 2019. This page shows year on year comparison. In the 9 months, sales and income were down. As I discuss later, results were almost flat year on year in the Q3. In the 9 months, net sales were 611,700,000,000 yen down 10,500,000,000 yen Out of that, reduction of 3,300,000,000 yen was due to falling exchange rate. That means net sales were down 7.2 1000000000 yen in real terms year on year. Operating income was 16,800,000,000 yen down 7,600,000,000 yen As for non operating income and expenses, negative 800,000,000 yen was from exchange rate effect, mainly due to that non operating items deteriorated by 1,100,000,000 yen year on year. Income before income taxes was 18,500,000,000 yen. In extraordinary income, we booked gain on sales of investment securities. On the other hand, in the last fiscal year, we booked foreign exchange gain associated with the merger of businesses into 1 subsidiary in Malaysia. As a result, extraordinary income, net of extraordinary loss, was 800,000,000 yen down 900,000,000 yen Net income attributable to owners of ferrand was 10,300,000,000 yen down 6,100,000,000 yen When we look at results by segment, net sales only of Power Electronics Systems Energy increased. Net sales of all other segments decreased. Operating income of Power Electronics Systems Energy, Power Electronics Systems Industry and Electronic Devices decreased significantly year on year. Now I will talk about results by segment in detail. In Power Electronics Systems Energy, net sales increased 2,500,000,000 yen to 146,300,000,000 yen Operating income decreased 3,200,000,000 yen to 4,700,000,000 yen There are 3 businesses in this segment. In the Energy Management business, net sales and operating results were almost flat year on year. In our Power Supply and Facility Systems business, switchgear and control gear operations of a company in Singapore we acquired performed very well. As a result, net sales and operating results increased. The ED and C Components business was a major factor for a drop in operating income for the segment. In the ED and C Components business, net sales and operating results decreased significantly due to reduced demand from machine manufacturers, including those of machine tools. In power electronic systems industry, net sales decreased 8,400,000,000 yen to 204,400,000,000 yen Operating income decreased 3,200,000,000 yen to 1,100,000,000 yen. So there are 4 businesses in this segment. In the Automation Systems business, net sales and operating results decreased following reduced demand for low voltage inverters and factory automation components centered on the domestic and Chinese markets. In our social solutions business, net sales decreased due to the absence of large scale orders for electrical equipment for railcars recorded in the previous equivalent period. In the equipment construction business, net sales decreased following declines in electrical and air conditioning equipment construction projects, but operating results increased due to the benefits of cost reduction efforts. In the ID Solutions business, net sales increased because of a rise in large scale orders in the private sector, and operating results were almost flat. In electronic devices, net sales decreased 1,200,000,000 yen to 100 and 2,600,000,000 yen and operating income decreased 2,800,000,000 yen to 8,900,000,000 yen The numbers in squares indicate exchange rate effect. Excluding exchange rate effect, net sales were almost flat year on year. Operating income decreased 1,600,000,000 yen For semiconductors, automotive per semiconductors were strong and increased sales. However, net sales and operating results for semiconductors decreased due to the impacts of lower demand in the industrial field centered on the Chinese market, the impacts of foreign exchange influences and increased depreciation and leases paid as a result of active investments. For magnetic disks, although demand reduced slightly, operating results increased year on year due to benefits of cost reduction and others. For reference, breakdown of sales between semiconductors and magnetic disks for the 9 months is shown. Distribution of semiconductor sales by field is also indicated here. In the 9 months of fiscal year 2019, industrial modules accounted for 46% industrial discrete devices, 20% and automobiles, 34%. In Food and Beverage Distribution, net sales decreased 4,100,000,000 yen to 77,700,000,000 yen Operating income decreased 100,000,000 yen to 3,100,000,000 yen. There are 2 businesses in this segment. In the vending machines business, net sales and operating results decreased due to reduced demand in the Japanese and Chinese markets. In the store distribution business, net sales and operating results increased as new products for convenience stores started to grow and sold well. In power generation, net sales decreased 1,500,000,000 yen to 69,600,000,000 yen and operating income increased 1,600,000,000 yen to 1,100,000,000 yen Despite an increase in sales of thermal and geothermal power generation system projects, net sales decreased due to a decline in new energy related projects, such as large scale solar power generation system projects. On the other hand, operating results increased as a result of the rebound from the higher cost associated with the large scale power generation project incurred in the previous equivalent period. This page shows net sales by Japan and overseas area. Net sales decreased 10,500,000,000 yen in total. Overseas sales decreased 4,300,000,000 yen and sales in Japan decreased 6,200,000,000 yen The decrease in overseas sales increased 3,300,000,000 yen of negative exchange rate effect. Therefore, overseas sales decreased 1,000,000,000 yen in real terms. By area, in Asia and others, net sales increased 3,500,000,000 yen including exchange rate effect of negative 1,500,000,000 yen. Although net sales of automation systems and ED and C components decreased, net sales of power supply and facility systems, mainly switch gears and control gears that I mentioned earlier, increased significantly. As a result, in Asia and others, net sales increased 3,500,000,000 yen in total year on year. In Europe, net sales increased 3,100,000,000 yen year on year, mainly due to semiconductors. On the other hand, in the Chinese market, one of our main markets, net sales, mainly including component sales, decreased 9,300,000,000 yen year on year. Net sales in Americas decreased 600,000,000 yen This page shows year on year comparison of net sales of major components and plant systems and others. Net sales decreased 10,500,000,000 yen in total. Net sales of measured components decreased from 253,500,000,000 yen to 237,400,000,000 yen Net sales of major components of vending machines, semiconductors, factory automation, including low voltage inverters, motors, factory automation components and measuring instruments and ED and C components decreased 16,100,000,000 yen year on year in the 9 months. Net sales of fans, systems and others increased 5,600,000,000 yen For reference, orders slightly increased by 1,000,000,000 yen As with the case of net sales, orders of major components decreased 13,400,000,000 yen and orders of plants, systems and others increased substantially by 14,400,000,000 yen This page shows year on year comparison of results only for the Q3. Net sales were 205,100,000,000 yen up 2,300,000,000 yen Operating income was 5,700,000,000 yen down 200,000,000 yen Ordinary income was 6,900,000,000 yen down 200,000,000 yen Net income attributable to owners of Furin was 4,300,000,000 yen up 500,000,000 yen as we booked extraordinary gain on sales of investment securities. By segment, in Power Electronics Systems Energy, net sales and operating income decreased. That is mainly because net sales and operating results in the ED and C Components business decreased year on year, unfortunately, also in the Q3. In power electronic systems industry, net sales decreased 5,100,000,000 yen and operating income decreased 600,000,000 yen Exchange rate effect is shown in squares. In this segment, components, including factory automation components and low voltage inverters, were weak. In electronic devices, net sales increased 4,800,000,000 yen and operating income decreased 200,000,000 yen. Excluding exchange rate effect of negative 300,000,000 yen, operating income increased 100,000,000 yen in real terms. Magnetic Discs performed well. However, in semiconductors, depreciation for capital expenditures increased, and there were negative exchange rate effect and startup losses for some new products. As a result, operating income decreased 200,000,000 yen for this segment in total year on year. In food and beverage distribution, both net sales and operating income decreased. That was partly due to a slight drop of store distribution projects in the Q3 in this fiscal year. In power generation, net sales increased 5,800,000,000 yen and operating income increased 2,700,000,000 yen partly due to progress of large scale projects in the 3rd quarter. Let me move on to balance sheet. This page shows comparison of balance sheet between March 31, 2019 and December 31, 2019. Notes and account receivables, trade receivables decreased 52,500,000,000 yen Collection of receivables of large scale projects progressed steadily and cash came in. Inventories increased as we accumulate inventories, mainly for plant related sales expected for March. Total assets stood at 981,700,000,000 yen an increase of 29,100,000,000 yen due to capital expenditures for semiconductors, acquisition of a company in India and others. Interest bearing debts increased partially. As a result, net interest bearing debt amounted to 177,200,000,000 yen, up 52,300,000,000 yen. Net DE ratio was 0.5x. Equity ratio was 36.9%. This page shows comparison between results for fiscal year 2018 and forecast for fiscal year 2019. There is no change to full year forecast announced in October. Net sales are forecasted to be 915,000,000,000 yen Operating income would be 50,000,000,000 yen down 10,000,000,000 yen Ordinary income will be 51,600,000,000 yen down 11,900,000,000 yen Net income attributable to owners of parent will be 33,000,000,000 yen down 7,300,000,000 yen There is no change to forecast by segment either. In Power Electronics Systems Energy, both net sales and operating income will decrease, mainly due to tough situation of ED and C components compared to the previous year. In power electronic systems industry, net sales will increase and operating income will be flat. As components will remain unchanged from the previous fiscal year, operating income is expected to be flat. Devices, both net sales and operating income are forecasted to decrease. In particular, negative exchange rate effect of 2,300,000,000 yen will have a big impact on operating income. Also due to depreciation for capital expenditures and others, operating income will decrease 4,000,000,000 yen. In electronic devices, as magnetic disks have been strong, there is a possibility that the forecast will be exceeded slightly. In food and beverage distribution, although net sales will decrease 1,600,000,000 yen, operating income will be flat. In total, net sales will be almost flat and operating income will decrease 10,000,000,000 yen year on year. As for 50,000,000,000 yen of disclosed forecast of operating income, we will work harder in each segment and achieve the target as a minimum target. As we mentioned every time, we will further promote reduction of expenses, mainly including fixed cost. We want to achieve this forecast by all means. I think you have high interest in 3 businesses of components, including ED and C Components, Low Voltage Inverters and Semiconductors. Today, corporate General Managers in charge of those businesses will talk about each business. I am Hosen, Corporate General Manager, Electronic Devices Business Group. I will talk about order situation of semiconductors. In the Q3, orders increased 18% year on year in total. Orders for automobiles increased 29% and industrial modules increased 21%. Orders increased 13% in the 3rd quarter from the 2nd quarter. Orders for automobiles increased 8%, industrial discrete devices, 10% and industrial modules, 18%. In briefing our results for the first half announced in October, we said the bottom was hit in semiconductors in the 4th quarter in the last fiscal year. The bottom was hit in the 4th quarter, excluding exchange rate. After that, orders started to increase slightly. The pace of growth of orders is gradually picking up. In the 9 months, orders increased 2% year on year. Automobiles were the major growth driver, and orders for automobiles increased 19%. Orders for automobiles increased due to electrification. Orders for industrial modules increased 18% in the 3rd quarter from the 2nd quarter. Industrial modules are strong for new energy, in particular, for wind power and solar power generation. Besides, adoption by new customers for room air conditioners progressed. As a result, orders for industrial modules increased significantly. That's all for status of semiconductors. Next, I will talk about low voltage inverters. I am in the 9 months in terms of year on year comparison, we struggled both in Japan and overseas. Such a situation hasn't changed significantly from the previous report. However, in the Q3, we started to see a small changing point. Finally, in the Q3, year on year growth became positive overseas. Growth overseas was 3 percentage points. In Japan, as we had big projects in the last fiscal year, orders dropped by 14% year on year. We see that similar market conditions have been continuing since the Q1. On the other hand, gross of orders was 8 percentage points in total quarter on quarter. As we mentioned in a previous meeting here, for the base volume of machine manufacturers, we've been taking measures since last year. We increased project orders and took measures in component businesses, which will lead to system and plant businesses. These efforts started to bear fruit. Quarter on quarter growth was 7% in Japan and 9% overseas. We were able to achieve these results. We think inverters also started to be on a slight recovery track. Although I didn't prepare materials, situation of factory automation components was better. In the 3rd quarter, for factory automation components, year on year growth rate recovered to 0. Quarter on quarter growth was 5%. Factory Automation Components dropped early in the last fiscal year. Factory automation components are on a recovery track from the last fiscal year. Situation of components is still tough. A changing point was seen slightly in the Q3. We want to achieve our commitment somehow in the Q4. That's all. I am Morimoto, Corporate General Manager, Power Electronics Systems Energy Business Group. I will talk about ED and C components, including changes in orders. In the 9 months, orders decreased 7% year on year. As you know, demand from machine manufacturers dropped sharply. In our case, about 50% of VDNC component sales depends on machine manufacturers. Orders in machine tool industry decreased 65% year on year. Considering a drop in total demand, this number is relatively good. From the Q2 to the Q3, slight growth was seen in Japan, in particular. It is a yearly trend. Demand for distribution equipment and facility systems will increase significantly in the second half in Japan. So we will finish up this fiscal year, including the Q4, by capturing the demand. That's all.