Earnings Call: Q2 2020

Nov 1, 2019

Good morning, ladies and gentlemen. I am Michihiro Kitazawa, President. Thank you very much for coming to our results briefing despite your busy schedule. I truly appreciate it. As you already know, we announced results for the first half. A sense of disappointment hovers around the numbers. It was primarily due to components. Results in power semiconductors, ED and C components and FA components, mainly including inverters, dropped sharply. Results in plant system related businesses partially offset the drop, but not fully. These are all the results. When I look at trends in the first half, for example, power semiconductors clearly hit the bottom. There are still uncertainties in ED and C components. There are also uncertainties in FA components. That is the current situation. In such a trend, we reviewed forecast for the second half. Operating income was down 7,400,000,000 yen year on year in the first half. I don't think decrease in the second half will not be that big. We expect operating income will be down 2.6 1,000,000,000 yen in the second half and down 10,000,000,000 yen in a full year. That's what we announced this time. We think these are minimum requirements to defend at all costs. Net sales of components will decline. However, fortunately, in power electronic systems, orders for plant systems are increasing significantly. Accordingly, net sales will also increase in the second half. As a result, net sales will increase, and operating income will decrease for the full year. This is a situation we have hardly experienced so far. But as I said earlier, orders have been kept flat year on year and will increase year on year for the full year. So how to analyze the current situation in Fuji Electric is the biggest point. As President, I am not pessimistic at all now. Financial crisis was triggered by the collapse of Lehman Brothers in the past. We were heavily damaged at that time. This time, although we are facing these situations, we will still be able to generate operating income of 50,000,000,000 yen we became such a company. I myself think we were able to confirm our growth. In that respect, what should we do from the second half onwards? For plant and equipment investments, we will suspend 1,000,000,000 of yen of investments which are not urgent. However, we will make other plant and equipment investments. For power semiconductors, we will slightly accelerate and increase the amount of investments. I hope you will ask questions about the details later. Judging from the situation of customers related to EVs, we need to accelerate the timing of investments. Otherwise, we cannot meet their demand. So we will make sure to do so. R and D expenditures can be cut if we want. However, we will not do so. For the next year onwards, we will continue with research and development we have to work on. Although the situation is very tough, I intend to manage our business for the next 6 months so that we can be on an upward current from the next fiscal year onwards. Although we have to announce these numbers, environments or situation are not so dismal. I hope you will understand that point at least. As I said earlier, among other things, orders are not declining. When economy recovers in the world, I'm sure Fuji Electric will also recover or move upward. Detailed numbers will be discussed later. I hope you will ask questions about what you have in mind. 3 Corporate General Managers, including those of Electronic Devices Business Group, Power and Electronic Systems Energy Business Group, Power Electronic Systems Industry Business Group are attending today. We expect questions will be asked on many different subjects. We will respond to them. I would appreciate your cooperation today. Thank you very much. Now we will move on to explanation of financial results. Mr. Arai, Managing Executive Officer, will give a presentation. Firstly, I will talk about financial results for the first half of fiscal year twenty nineteen. In the first half of fiscal year twenty eighteen, market conditions were good. Partly due to that, both sales and income were down, unfortunately. Net sales were 406,700,000,000 yen down 12,800,000,000 yen year on year. Out of that, reduction of 5,500,000,000 yen was due to foreign exchange rate. That means net sales were down 7,300,000,000 yen in real terms year on year. Operating income was 11,100,000,000 yen down 7,400,000,000 yen year on year. Negative 3,800,000,000 yen was from decrease in sales volumes. Negative 10,400,000,000 yen was from increase in fixed cost. Negative 1,100,000,000 yen was from exchange rate effect. As a result, operating income was down 7,400,000,000 yen year on year. As for non operating income and expenses, negative 1,600,000,000 yen was from impact of foreign exchange loss. In total, non operating items retaliated by 1,200,000,000 yen Ordinary income was 10,900,000,000 yen As for extraordinary income and loss, in the last fiscal year, we booked foreign exchange gain associated with the merger of semiconductors and magnetic disks businesses into 1 subsidiary in Malaysia. So negative 1,300,000,000 yen was from absence of that factor. Also due to reduction in gain on sales of investment securities and loss on valuation of investment securities, extraordinary income, net of extraordinary loss, decreased 2,600,000,000 yen Income before income taxes was 10,100,000,000 yen Net income attributable to owners of fibrand was 6,000,000,000 yen down 6,600,000,000 yen Let me move on to year on year comparison of operating income. Operating income was 11,100,000,000 yen down 7,400,000,000 yen year on year from 18,500,000,000 yen As I mentioned earlier, net sales were down 12,800,000,000 yen Net sales were down 7,300,000,000 yen in real terms, excluding exchange rate effect. Decrease in sales volumes pushed down operating income by 3,800,000,000 yen The content changed slightly. Negative 4,800,000,000 yen was from components. Due to drop in sales, production also dropped. As a result, production profit came down. Sales and income mainly of systems increased. Positive 1,000,000,000 yen was from that. After offsetting positive 1,000,000,000 yen net impact of decrease in sales volumes was negative 3,800,000,000 yen Negative 2,400,000,000 yen was from increase in fixed cost. As for the breakdown, negative 1,400,000,000 yen was from personnel expenses. Negative 900,000,000 yen was from R and D expenditures. In the last fiscal year, allowance of retirement benefits was partially reversed. The impact was slightly more than 1,000,000,000 yen Therefore, personnel expenses were up about 200,000,000 yen in real terms. Negative 1,100,000,000 yen was from exchange rate effect. As a result, operating income was down 7,400,000,000 yen excluding exchange rate effect, which is an external factor, a reduction of expenses in the previous fiscal year that I mentioned earlier, operating income was down approximately 5,000,000,000 yen year on year. Reduction in sales and production of components was a major negative factor. This page shows net sales and operating income by segment. Net sales of Power Electronics Systems Energy were up, and operating income of food and beverage distribution was up. Excluding those, sales and income were down in each segment, unfortunately. Now I will look at business results by segment in detail. In Power Electronics Systems Energy, net sales were up 4,300,000,000 yen but operating income was down 1 point 3,000,000,000 yen In this segment, there are 3 businesses. In the Energy Management business, net sales decreased as a result of the rebound from large scale projects undertaken overseas during the previous equivalent period, but operating results increased slightly due to the benefits of cost reduction efforts. In the power supply and facility systems business, switchgear and control gear operations of a company in Singapore we acquired some years ago grew significantly, and large scale orders were received. As a result, net sales and operating results increased despite the absence of a large scale order recorded in a previous equivalent period in Japan. In Energy segment, one important point is ED and C Components. In the ED and C Components business, net sales and operating results decreased, unfortunately, due to reduced demand from machine, tool and other equipment manufacturers. In power electronics systems industry, net sales were down 3,400,000,000 yen and operating results were down 2,600,000,000 yen The point here is Automation Systems. In the Automation Systems business, net sales and operating results decreased following reduced demand for major components such as low voltage inverters and automation components in Japan, China and other parts of Asia. In the Social Solutions business, net sales and operating results decreased year on year due to the absence of large scale projects for railcars in North America recorded in a previous equivalent period. In the equipment and construction business, net sales decreased, but operating results increased slightly due to the benefits of cost reduction efforts and others. In the IT Solutions business, net sales increased significantly because of a rise in large scale orders in the private sector. However, margin of this business is not as high as that of other components. Therefore, contribution to operating results was not so big. In electronic devices, net sales were down 6,000,000,000 yen and operating income was down 2,600,000,000 yen The numbers in squares indicate exchange rate effect. Excluding exchange rate effect, net sales were down 3,000,000,000 yen and operating income was down 1,800,000,000 yen Net sales and operating results for semiconductors decreased as reduced demand in the industrial field centered on the Japanese and Chinese markets as well as the impacts of foreign exchange influences outweighed continued strong demand for automotive power semiconductors. Net sales and operating results for magnetic disks decreased due to reduced demand for products for computer and data center applications. However, the drop in operating results was very small. Operating results held up well. The breakdown of sales between semiconductors and magnetic disks is shown here. Sales for semiconductors were down from 58,100,000,000 yen to 54,500,000,000 yen Sales for magnetic discs were down from 13,700,000,000 yen to 11,300,000,000 yen distribution of semiconductor sales by field distribution between automobile field and industrial field is also shown. Ratio of automobiles to the total increased from 27% to 34%. In food and beverage distribution, net sales were down, but operating income was up. In the vending machines business, net sales and operating results decreased due to reduced demand in the Japanese and Chinese market. In the store distribution business, net sales and operating results increased, thanks to an increase in demand for store equipment for convenience stores, including new model equipment. Net sales of vending machines were down. Operating results of store distribution were up in this segment. In power generation, net sales and operating results decreased year on year due to large scale solar power generation system projects in the previous equivalent period. Net sales were down 12,800,000,000 yen from 419,400,000,000 yen to 406,700,000,000 yen As for net sales by Japan and overseas area, net sales in Japan were down slightly or almost flat. Overseas sales were down 11,400,000,000 yen However, 5,500,000,000 yen of exchange rate effect is included in the number. Overseas sales were down about 6,000,000,000 yen in real terms. As for breakdown of 11,400,000,000 yen of decrease in overseas sales, I think overseas sales were overwhelmingly impacted by U. S.-China trade friction. Overseas sales were down across the board in components, ED and C components, automation systems, semiconductors and vending machines. Net sales in China were down 9,000,000,000 yen That means the majority of the drop was in China. Net sales in Asia and others were also down 1,800,000,000 yen We added a slide showing year on year comparison of orders last time. This slide shows year on year comparison of net sales. Net sales were down 12,800,000,000 yen Net sales of major components in vending machines, semiconductors, factory automation components, including inverters, motors and others and EDMC components were down 16,300,000,000 yen Decrease in net sales led to decrease in production profit and had a significant impact on profitability. Net sales of power generation were down due to the absence of large scale power plants orders recorded in a previous equivalent period. On the other hand, net sales of systems and others were up slightly more than 10,000,000,000 yen Both sales and income for systems and others were up. We added a slide showing orders received for reference this time as we did last time. Orders were almost flat or slightly up. The trend of orders was similar to that of net sales. Orders received for systems and others were up 23,600,000,000 yen Orders received for major components were down 15,700,000,000 yen As I mentioned earlier, orders received for power generation were down 7,600,000,000 yen year on year. Orders for such terms and others were stronger than sales. Factory automation include low voltage inverters, motors, FA components, measuring instruments and others. For major components, the bottom was hit in the Q1 of fiscal year 2019, and the same level continued in the Q2. We expect slight recovery in the 3rd and the 4th quarters. Also, for low voltage inverters, which are major components, the bottom was hit in the 1st and second quarters. We expect a pickup in the 3rd and the 4th quarters. Although significant growth cannot be expected, we are seeing recovery from the bottom. For ED and C Components, we think the bottom was hit in the 1st quarter. Orders will be flat or slightly increased in the second, the third and the fourth quarters. For semiconductors, the bottom was hit in the third quarter of fiscal year 2018, but orders are not increasing rapidly. There are differences between automobile and industrial applications. Semiconductors for automobiles are steadily increasing every quarter. Semiconductors for industrial applications fluctuate, unfortunately, and are not increasing after the Q3 when the bottom was hit. Forecast we announced on July 25 were 405,500,000,000 yen in net sales and 12,600,000,000 yen in operating income. Net sales were 1,200,000,000 yen higher than forecast, and operating income was 1,500,000,000 yen lower. There is slight exchange rate effect. Negative exchange rate effect on net sales is 1,000,000,000 yen and 200,000,000 yen on operating income. Ordinary income was 900,000,000 yen lower than forecast. Net income attributable to owners of Fyarend was 6,000,000,000 yen which was 500,000,000 yen lower than forecast. By segment, net sales of power electronics systems energy were 3,900,000,000 yen higher than forecast. Sales were higher, stemming from ahead of schedule recording and power supply and facility system sales. The major factors for 1,500,000,000 yen reduction of operating income include power electronic systems industry. Sales were higher due to large scale IT solution orders, but income was lower due to reduced demand for high margin low voltage inverters and factory automation components. Besides, in electronic devices, income forecast was lower than July forecast due to lower semiconductor demand and losses for new products launch. These 2 components segment are factors for reduction of operating income. Next, I will talk about balance sheet. Balance sheet looks different between March 31, 2019 and September 30, 2019. Inventories increased mainly for plant related sales expected for the second half. Intangible fixed assets include intangible fixed assets of power electronics related companies. Total long term assets increased 10,000,000,000 yen To cover the expenses, we increased interest bearing debts by 31,900,000,000 yen and used 6,200,000,000 yen of cash and time deposit. As a result, net interest bearing debt was 163,200,000,000 yen up 38,400,000,000 yen Net DE ratio was 0.5x. Equity ratio was 37.1%. This page shows cash flow. Net cash provided by operating activities was 1,300,000,000 yen Net cash used in investing activities was 23,800,000,000 yen Free cash flow was negative 22,600,000,000 yen in the first half of fiscal year twenty nineteen. As for factors, there was partial cancellation of retirement benefit trust of approximately 20,000,000,000 yen in a previous equivalent period. Cash flows from operating activities were positive. On the other hand, cash flows from investing activities were negative due to M and A and active investments, as I mentioned earlier. In total, free cash flow was negative 22.6 1000000000. For the full year, free cash flow is expected to be slightly less than positive 20,000,000,000 yen This page shows comparison between results for fiscal year 2018 and forecast for fiscal year 2019. Net sales are forecasted to be 950,000,000,000 yen operating income, 50,000,000,000 yen and net income attributable to owners of Fyren, 33,000,000,000 yen Net sales will be up 100,000,000 yen and operating income will be down 10,000,000,000 yen For reference, exchange rate effect is indicated. Exchange rate effect on net sales will be 9,900,000,000 yen That means net sales will increase 10,000,000,000 yen in real terms. Excluding exchange rate effect of negative 3,000,000,000 yen operating income will decrease 7,000,000,000 yen in real terms. The yen is assumed to appreciate against the renminbi. Assumed exchange rate of the renminbi was changed from 16 yen to 15 yen for the second half. For forecast by segment, exchange rate effect is indicated for reference. In Power Electronics Systems Energy, net sales will be down 7,100,000,000 yen and operating income will be down 3,000,000,000 yen Lower sales and income are expected due to absence of large scale power supply and facility system orders recorded in the previous fiscal year, reduced demand for EDMC components and smart meters and higher R and D expenditures. In Power Electronics Systems Industry, net sales will be up 14,500,000,000 yen and operating income will be flat. Excluding exchange rate effect, operating income will be up about 500,000,000 yen Sales will increase significantly as a result of large scale IT solutions orders from the public sector. The benefits of acquiring a newly consolidating FCN in India in the Automation Systems business and SOX scrubber sales. But operating results unchanged year on year due to reduced sales of high margin low voltage inverters and factory automation components. In electronic devices, net sales will be down 1,300,000,000 yen and operating income will be down 4,000,000,000 yen Excluding exchange rate effect, sales will be up and operating income will be down 2,000,000,000 yen Sales in semiconductor operations will be higher due to increased demand for automotive semiconductors. But as we will continue to make investments actively, depreciation and leases paid will increase slightly more than 2,000,000,000 yen Besides, due to a rise in expenses for starting up new production equipment, the impacts of new product launch losses and foreign exchange influences, operating income will be down 4,000,000,000 yen Excluding exchange rate effect, operating income will be down 2,000,000,000 yen We forecast an increase in depreciation and leases paid of slightly more than 2,000,000,000 yen So if we take those factors into consideration, operating income will be almost flat year on year. In food and beverage distribution, net sales will be down and operating income will be flat. In a vending machine business, sales and income will decrease due to reduced demand in China. In a store distribution business, income will be higher as a result of strong demand with convenience stores. Unfortunately, sales will be slightly down. In power generation, net sales will be up 9,000,000,000 yen Operating income will be down slightly by 500,000,000 yen due to a less favorable sales mix. As for dividend, interim dividend in the previous fiscal year was 40 yen We plan to pay interim dividend of 40 yen per share also in this fiscal year. We want to make efforts to maintain annual dividend of fiscal year 2018 at least. This page shows comparison with previous forecast for reference. Previous forecasts were kept unchanged from forecast announced in April. In previous forecast, we forecasted decrease both of sales and income for the first half. But for the second half, market outlook remained uncertain as of July 25, and we didn't want to make an incomplete revision. We also thought we would revise forecast after the end of the first half and kept original forecast unchanged. This time, we made a revision as shown on this page. We revised down net sales forecast by 15,000,000,000 yen operating income by 12,000,000,000 yen and net income attributable to owners of parent by 7,400,000,000 yen Revised forecasts by segment are also shown here. As I mentioned earlier, components, including ED and C components in Power Electronics Systems Energy, automation systems in power electronic systems industry and semiconductors in electronic devices are lower than previous plan. As President said earlier, we cut non urgent and unnecessary investments and reduced investments by 1,000,000,000 of yen from the budget. However, investments mainly for semiconductors will increase year on year. Due to volume of components, income decreased. In production, we didn't increase inventories. So when market conditions recover as production, profit and operating margin are the same, I think we are maintaining strong earnings earnings structure. We cannot do anything about external factors such as exchange rate and market conditions. We intend to further enforce and enhance earnings structure. We aim at orders of more than 925,000,000,000 yen net sales of 915,000,000,000 yen and operating income of 50,000,000,000 yen as minimum requirements. That concludes my presentation.