Earnings Call: Q4 2019

Apr 26, 2019

Good morning, everyone. I am Kitazawa, President of Fuji Electric. Thank you very much for participating in our financial results briefing despite your busy schedule and such a bad weather. I really appreciate your attendance today. As you know, we announced our consolidated financial results for fiscal year 2018 yesterday, and we could mark a record high for 2 consecutive fiscal years at 60,000,000,000 yen. But what I am more pleased about is something different. Last fiscal year was the final year of our medium term management plan renovation 2018. And we could achieve all goals set in the plan such as sales, profits and other management indicators for the first time in the history of Fuji Electric. As a President, I expect this will develop more confidence of our employees. I'd like to express my appreciation for your support during fiscal year 2018. Now we have come to the end of April, and we are expecting uncertain market in fiscal year 2019. Trade war between U. S. And China has started gradually affecting the business. In our case, business was favorable in the first half of previous fiscal year. But in the second half, especially from January onwards, we started to feel something was going wrong. In that sense, setting goals for fiscal year 2019 is not easy. Mr. Arai is going to explain numbers later, but we expect that first half results of fiscal year 2019 will not improve much and remain flat from the second half of fiscal year twenty eighteen without much improvement. Based on this assumption, we plan decreased revenue and profits year on year for the first half of fiscal year twenty nineteen. However, it is expected that market situation will improve in the second half, as Mr. Nagamori of Nidec Corporation also expressed as his opinion. So we anticipate our second half results will improve year on year, and full year results of fiscal year 2019 will be many challenges in management, but we are determined to manage business properly by closely looking at latest market situations. I suppose I mentioned this before, but in this fiscal year 2019, we are developing a new medium term management plan. For the first time, the plan will be made as a 5 year plan. And the final year of the plan will be fiscal year 2023, which coincides with the 1 hundredth anniversary of Fuji Electric. We plan to make an official announcement of the plan before the shareholders meeting in June. Development of this medium term management plan is our biggest task in the first half. In addition to financial goals, it is crucial to decide the right direction toward 2023. Sales goals are already set in our initiative, Dream 1, and the entire company is striving for achieving at least 1,000,000,000,000 yen for net sales and 8% for operating margin. These are our basic assumption. And we see more important thing is to clarify how we can achieve these goals or which areas we should grow and which areas are less significant. It is not realistic to focus on everything, so we will identify those things in this fiscal year 2019. It is a 5 year plan, but the final year is the year to deliver results. So in reality, preparation should be completed in 4 years. We intend to make progress in the plan as fast as possible. There are various ideas about managing the business at Fuji Electric, but one point we are already clear about is that the core businesses to grow Fuji Electric are power electronics system and power semiconductors. I don't mean other businesses are not important or they are performing poorly. Rather, considering our growth, market demand and requirement, we believe our contribution to the society can be achieved through power electronics system and power semiconductors. They are linked to energy saving and environment and we will make a new Fuji Electric with focus on these areas. In that sense, what we are concerned most is power and new energy for which I expect your questions later. This business has been the central business of Fuji Electric. However, considering recent campaign for total ban on thermal power plants, we can hardly expect new initiatives by government, including METI and Ministry of Environment. Under such a circumstance, to be honest, we can only expect business in Asian countries, if that is possible. In that sense, it is critical to make a right decision on how to lead this power and new energy business. In other words, we will be aggressive in power electronics and power semiconductors and have to restructure power and new energy business. I'd like to explain more about it in a separate occasion, but I stop here for today. Now Mr. Arai will take over for explaining financial results. Thank you very much once again for your participation today. Good morning, everyone. I am Junichi Arai, Corporate Management Planning Headquarters. I'm going to explain about consolidated financial results for fiscal year 2018 and management plan for fiscal year 2019. Let me start with consolidated financial results for fiscal year 2018. As Mr. Kitazawa mentioned, we could increase net sales and operating income in fiscal year 2018 from the previous year. These results were higher than the original plan and the January forecast. This slide shows comparison against fiscal year 2017 results. Net sales were 914,900,000,000 yen up 21,500,000,000 yen year on year. This number includes exchange rate effect of minus 100,000,000 yen so net sales increase in real terms was 21,600,000,000 yen Operating income improved by 4,000,000,000 yen to 60,000,000,000 yen with foreign exchange effect of 1,300,000,000 yen and the rise in fixed cost was 1,800,000,000 yen such as labor costs and capital costs and others were 800,000,000 yen and the total negative factors was minus 3,800,000,000 yen However, 7,800,000,000 yen was recognized from positive factors like increased sales and production volume. This resulted in operating income growth of JPY 4,000,000,000 Operating margin was up 0.3 point to 6.6%. Ordinary income was 63,500,000,000 yen up 7,400,000,000 yen year on year. Non operating income increased by 3,400,000,000 yen with 2,200,000,000 yen improvement in foreign exchange income or loss, 900,000,000 yen increase in net interest expense such as dividend and 400,000,000 yen increase in others related to Equity Method Affiliates. Extraordinary income or loss decreased 2,000,000,000 yen year on year to minus 1,200,000,000 yen This is mainly due to 2,200,000,000 yen recognized for impairment loss from an old building and structures. As a result, net income attributable to owners of parent grew 2,500,000,000 to 40,300,000,000 yen As Mr. Kitazawa mentioned earlier, we could post record highs for operating income and ordinary income, and net income stood at 40,300,000,000 yen Net income recorded in fiscal year 2016 was 41,000,000,000 yen but this number included gain on sales of securities of JPY 13,000,000,000 So we consider the net income recognized in this fiscal year was also a record high in real terms. We could achieve all goals of medium term management plan for the first time. In the previous medium term management plan ended in fiscal year 2015, we could achieve its goal of operating income, but we couldn't do so for net sales. Therefore, this is the first time we could achieve all goals since we started to develop a medium term management plan. Net sales increased 14,900,000,000. Operating income was up 6,000,000,000 yen and operating margin was improved by 0.6 points. And net income attributable to owners of parent grew 6,300,000,000 yen As such, we could achieve all targets of PL items. In terms of financial indicators, net DE ratio was improved by 0.3 points to 0.4 times. Equity ratio was improved as well by 5 points to 37%. ROA was 4% and ROE was 12%, and both were in line with the plan. Now let me explain the year on year comparison of net sales and operating income by segment. In Par Electronics Systems, both Energy Solutions and Industry Solutions increased both net sales and operating income. And electronic devices improved net sales and operating income as well. Regrettably, food and beverage distribution decreased net sales and operating income year on year. Power and New Energy grew its net sales. However, there was a cost increase of slightly over 2,000,000,000 yen in a large project in fiscal year 2018, and this resulted in an operating income decrease of 800,000,000 yen year on year. Still, Energy Solution and Industry Solutions in Power Electronics Systems and Electronic Devices, which are the segments we focus for growth, ended with higher sales and operating income year on year. Now let me explain more specifics for each segment. In Energy Solutions, net sales grew 7,200,000,000 yen to 224,800,000,000 yen and operating income was up 2,800,000,000 yen to 16,900,000,000 yen It has 3 business areas. In Energy Management, net sales decreased as a repercussion of a large scale project during the previous fiscal year and declined demand for smart meters, but operating results were improved due to the benefits of cost reduction efforts. Power Supply and Facility Systems increased net sales and operating results due to an increase in large scale orders in Japan. ED and C Components increased in net sales and operating results because of strong demand from domestic distribution panel manufacturers. Next segment is Industry Solutions. Net sales were up 1,000,000,000 yen to 321,900,000,000 yen and operating income improved by 500,000,000 yen to 19,400,000,000 yen It has 5 business areas: Factory Automation, a strong driver in our business, increased in net sales and operating results due to increased domestic demand, mainly for low voltage inverters, motors and factory automation systems despite bearish trends in overseas markets during the second half of the fiscal year under review. Process Automation decreased in net sales and operating results year on year due to the absence of a large scale order recorded in the previous fiscal year. Social solutions decreased in net sales and operating results year on year as a result of lower demand electrical equipment for railcars. Equipment constructions increased net sales and operating results following an increase in orders for construction of electrical equipment such as factory power distribution equipment. This applies to IP solutions as well, and this business recorded increase in net sales and operating results due to quite favorable performance in the academic sector and the public sector. Next one is Par and New Energy. Net sales increased by 10,100,000,000 yen to 107,000,000,000 yen Operating income declined by 800,000,000 yen to 4,800,000,000 yen Thermal power system sales decreased, and renewable energy system sales increased mainly for solar power generation systems. In total, this segment recognized increased sales and decreased profit. Decrease in operating income was because of cost increase associated with a large project. Still, the segment recorded a surplus in operating income. Regarding electronic devices, net sales increased by 10,500,000,000 yen to 137,300,000,000 yen and operating income grew by 1,900,000,000 yen to 15,600,000,000 yen Sluggish demand was seen in the industrial power semiconductor market in the second half. However, products for automotive applications recorded strong performance. In this segment, both semiconductors and magnetic risks increased net sales and operating income year on year. As shown in the table, full year sales increased from 19,400,000,000 yen to 25,500,000,000 yen as well. Sales increase was recognized also on quarter on quarter basis. The table on the right shows distribution of semiconductor sales by field, which are often asked in questions. In fiscal year 2018, industrial semiconductors accounted for about 70% and automobiles were about 30%, with declining industrial discrete devices and shifting to automobiles. Food and Beverage Distribution recognized decrease in net sales by 4,100,000,000 yen to 113,600,000,000 yen and operating income declined by 500,000,000 yen to 5,800,000,000 yen Vending machines increased its net sales and operating results due to steady demand from domestic customers. Store distribution regrettably decreased net sales and operating results because of a decline in demand for store equipment for convenience stores year on year. Next slide shows domestic and overseas net sales by region for fiscal year 2018. In total, net sales increased 21,500,000,000 yen year on year. Overseas sales grew 13,700,000,000 to 232,400,000,000 yen Domestic sales increased 7,800,000,000 yen Let me explain the breakdown of the overseas sales of 232,400,000,000 yen Sales increased 10,800,000,000 yen in Asia and 3,400,000,000 yen in China. As such, we could make significant growth in Asia and China, which are the markets we focus on. In terms of segments, electronic devices made substantial year on year growth of 11,000,000,000 yen Par and new energy, industry solutions and food and beverage distribution increased year on year as well. On this page, we compare the actual results to the forecast announced in January 31, 2019. Net sales stood at 914,900,000,000 yen higher than the forecast by 9,900,000,000 yen Operating income was 60,000,000,000 yen 2,000,000,000 yen higher. And ordinary income was 63,500,000,000 yen 3,500,000,000 yen higher. And net income attributable to owners of parent was 40,300,000,000 yen which was 2,300,000,000 yen higher than the forecast. Net sales recognized gain on translation of earnings of overseas subsidiaries of 4,000,000,000 yen And excluding this exchange rate effect, actual increase of net sales was about 6,000,000,000 yen Operating income includes exchange rate effect of 400,000,000 yen and actual growth of operating income generated by sales increase, cost reduction and other factors was 1,600,000,000 yen This page shows consolidated financial results by segment. We recognize net sales and profit increase in power and new energy and electronic devices due to following reasons: Solar power generation systems project made progress in percentage of completion in power new energy. And in electronic devices, we had semiconductor related business growth as well as exchange rate effect. This is consolidated balance sheet. Notes and account receivables, trade receivables increased 21,700,000,000 yen year on year with sales volume increase. Inventories increased 27,200,000,000 yen Notes and account payables, trade payables increased 12,700,000,000 yen as well, so working capital increased with business expansion. Investment has progressed to make tangible fixed assets grow 7,500,000,000 yen to 182,100,000,000 yen Net defined benefit asset decreased by 23,700,000,000 yen Retained earnings after dividend payment increased 28,400,000,000 yen year on year, and we repaid 9,500,000,000 yen for interest bearing debts. Total liabilities and net assets were recorded as 952,700,000,000 yen up 37,900,000,000 yen year on year. As a result, net interest bearing debt was reduced by 5,300,000,000 yen to 124,900,000,000 yen Net DE ratio was 0.4x, and equity ratio was 37%. ROA was 4%, and ROE was 12%, and both were unchanged from the end of previous fiscal year. This slide shows consolidated cash flow. Cash flows from operating activities were 54,900,000,000 yen Cash flows from investing activities were minus 21,400,000,000 yen as we increased investment in fiscal year 2018. Our target free cash flow was 30,000,000,000 yen but we could post 33,500,000,000 yen This slide is about dividend of surplus. Dividend figures on this chart are part 5 shares. We plan to pay 40 yen for year end dividend, and full year dividend will be 80 yen in total. We have been able to continue dividend increase after fiscal year 2011. We intend to continue this trend and increase dividend again in fiscal year 2019. That is all for my explanation on consolidated financial results for fiscal year 2018.