Investor Update

Apr 26, 2019

Slides

I am Junichi Arai, Corporate General Manager, Corporate Management Planning Headquarters. I will present to you management plan for the fiscal year 2019. There are 3 management themes we recognize. Firstly, a continued theme, further strengthening of power electronic systems business. Secondly, proactive investment and expansion of power semiconductor business thirdly, Pro 7 activities for work efficiency we've been promoting since 2012 and activities to enhance work quality we've been promoting since 3 years ago. We recognize these three items as key management themes. With that in mind, we made a plan. Net sales are planned to be 930,000,000,000 yen up 15,100,000,000 yen Operating income will be 62,000,000,000 yen up 2,000,000,000 yen Operating margin will be 6.7%, up 0.1 percentage points. Net income attributable to owners of Verint will be 40,400,000,000 yen up 100,000,000 yen As for financial indicators, net DE ratio will be 0.4 times, equity ratio will be 40% ROA will be 4% ROE will be 11%, down 1 percentage point as equity increases. Exchange rate is shown on the bottom. For the fiscal year 2019, we assume 105 yen to the U. S. Dollar, yen 123 to the euro and yen 16 to the renminbi. The assumption is quite conservative judging from the current situation. Year on year exchange rate effect is expected to be about negative 7,000,000,000 yen on net sales and negative 2,700,000,000 yen on operating income. The plan has upside potential due to the difference between the current exchange rate and the assumed rate. We made segment changes in April 2019. Power Electronics Systems consisted of Energy Solutions segment and Industry Solutions segment. So far, we received comprehensive factory equipment orders and expanded from components business to systems operations. We made a significant progress in this initiative. So we reorganized Power Electronics Systems organization into 2 businesses, Power Electronics Systems Energy and Power Electronics Systems Industry. We will further enforce business for each customer and each business strategy. We will continue to pursue synergy facts in the same way. R and D department and field service department will look at both businesses. Power Electronics Systems Industry Solutions included factory automation and process automation. To strengthen the businesses further, we consolidated factory automation and process automation businesses into single automation systems business. For Power and New Energy segment, to strengthen plant engineering further, we changed the name to Power Generation segment. Let me briefly talk about how we view market trends by segment as assumptions for the fiscal year 2019. For Power Electronics Systems Energy and Power Electronics Systems Industry, in Japan, we expect strong demand for upgrading aged facilities centered on material field will continue following 2018. Solid flow of power distribution equipment orders in conjunction with investment related to the 2020 Tokyo Olympics is also expected. In Industrial Machinery, ongoing stagnation in demand is expected. For overseas, we expect gradual recovery in Chinese market, which start in summer or the second half. We also expect infrastructure investment will increase in Asia amid growing power demand. For power generation in Japan, in thermal power field, demand and the number of projects will be reduced and competition will be intensified. Besides, we expect growing demand for wind power projects as well as for in house generation use solar power projects in renewable energy field. For overseas, as is the case with Japan, in thermal power field, we expect reduced demand and intensified competition. Demand is expected to increase in Southeast Asia in solar power field. We look at electronic devices globally, both for Japan and overseas. For automotive products, demand will grow significantly, stemming from the trend toward EVs in China, Europe, America and Japan. In Industrial Machinery Products, we forecast weakness in machine tool and factory automation fields due to stagnant customer demand in the first half in particular. However, due to growing demand for renewable energy anticipated overseas, I think both sales and income will increase in electronic devices. For food and beverage distribution, in Japan, in domestic vending machine market, demand will continue to be strong and flat demand growth is expected. Rise in labor saving investment in convenience store field is also expected. For overseas, although growth rate may decline, demand will expand both in China and Southeast Asia. This page shows plan for the fiscal year 2019 by segment in comparison with results for the fiscal year 2018. Business will expand in power electronic systems industry and electronic devices. As the numbers surrounded by red lines indicate, we will aim at a significant increase both in sales and income in the 2 segments. Now I will talk about priority measures by segment. In Power Electronics Systems Energy, both net sales and operating income will be flat. As shared measures, we will aim to expand system operations in Asia by commencing operations at new factory building of FMT in Thailand. For energy management, we will introduce new global products of transformers, GIS and others to expand sales. For power supply and facility systems, we will expand comprehensive equipment orders continuing from 2018. For ED and C Components, we plan to increase share of products for distribution panel manufacturers to achieve growth. In Power Electronics Systems Industry, both net sales and operating income will increase. For Automation Systems, we will grow system operations in China, Southeast Asia and India. We also intend to strengthen production and engineering systems for SOX scrubbers, which started to grow in the fiscal year 2018. Besides, we aim at expansion of upgrade and service operations in Japan and overseas. For social solutions to reinforce North American railcar production system, we acquired a company called SEMEC, and we will reinforce this business. In power generation, as demand in thermal power field is slightly weak, we will increase renewable energy orders and expand sales. We will also grow service businesses. We will conduct further progress management through management of factors pushing up cost, further management of orders and progress management of processes to remove negative factors. We also intend to strengthen and expand domestic nuclear power facility decommissioning business. In electronic devices for semiconductors, we will accelerate production capacity increases for 8 inches wafers and continue to strengthen capital investment. In addition, by commencing mass production of new products for automotive applications and increasing sales of the 7th generation industrial IGBTs, we plan to increase both net sales and operating income. As I mentioned earlier, industrial field accounted for 63% and Automobile's 37% to semiconductor sales. We will increase ratio of semiconductors for automobile electronics further. Demand for automotive semiconductors is expected to grow at an annual rate of about 30%. Along with that, we will make aggressive investments and increase capital expenditures from 28 point 1,000,000,000 yen in the fiscal year 2018 to 34,100,000,000 yen in the fiscal year 2019. We focused on industrial field so far, but we'll grow mainly automobile field. We will be able to grow automobile field steadily once we capture demand. I don't think there are major risks. In food and beverage distribution, for vending machines, we will bolster lineup and approach new customers in China. Also in Southeast Asia, we will expand lineup and develop service systems. We plan to boost competitiveness with high value added products. For store distribution, we will develop new convenience store products and enhance solutions for store labor saving investment. We want to target Jero stores and vending machine convenience stores at SEDTLER. Net sales will be flat. Although sales will not grow, we plan to increase operating income through reduction in expenses and others. Let me move on to capital investment. We will increase capital investment centered on electronic devices and power electronic systems. Capital investment will be 53,700,000,000 yen at 10,400,000,000 yen year on year. Capital investment in electronic devices will increase 6,000,000,000 yen to 34,100,000,000 yen which accounts for approximately 65% to the total. Capital investment in power electronics systems industry will increase 1,800,000,000 yen and power electronics systems energy will increase 2,600,000,000 yen Capital investment in Power Electronics Systems in total will account for about 30% to the total. In research and development, we will develop products for boosting global competitiveness. We will allocate R and D expenditures, mainly in power electronic systems and electronic devices. R and D expenditures will be 9,700,000,000 yen in power electronic systems industry and 13,700,000,000 yen in electronic devices, accounting for about 30% to the total. In total, R and D expenditures will be 37,200,000,000 yen up 3,500,000,000 yen year on year. For electronic devices, major development themes include IGBTs for EV, the 7th generation IGBTs of large capacity and SiC devices and modules. Major development themes for power electronic systems industry include SiC equipped power electronic systems, FA systems and servo systems and automotive power electronics. For power electronic systems energy, we will focus on development of global transmission and distribution systems in global UPS. For improvement of work efficiency and quality through Pro 7, we've been promoting improvement of work quality on a full scale since around 3 years ago. We've been working on reform of meetings, materials and work content. We started introduction of RPA, robotic process automation in the fiscal year 2018. We will increase productivity through expanded introduction of RPA in the fiscal year 2019. In the fiscal year 2018, reduction of about 40,000 hours was achieved in 100 departments. In each factory, quality records were made manually and we are promoting digitization of quality records. Through test and inspection automation, we are reducing work time and errors in manual work to improve quality. We are also promoting work style reforms to boost productivity. For those who have children or care for the elderly, we provide location flexible working systems so that they can work close to their home. For those employees, we also provide wildcard adjustment systems on a trial basis. They can start working at 8 o'clock, 7:30, 9 o'clock or 10 o'clock. They can come early and leave early or come late and leave late. We are promoting these systems for work style reforms and effective use of time. In addition, we are preventing excessive work hours and promoting systematic leave acquisition. We will continue to push forward these measures in the fiscal year 2019. As was mentioned earlier, we will drastically review our approach to plant related work, which leads to reduction in profit and reduce a negative impact on profit. Through improvement of work efficiency and others, we reduced expenses by 1,000,000,000 to 2,000,000,000 yen every year from plan. We would like to achieve that again in the fiscal year 2019. If there are no major changes to economic and political situation and exchange rate is in line with our assumption, I think operating income will increase about 2,000,000,000 yen We consider net sales plan of 930,000,000,000 yen and operating income of 62,000,000,000 yen as minimum target. We hope to exceed the plan and increase dividend. That concludes my presentation.