Earnings Call: Q3 2019

Feb 1, 2019

I am Junichi Arai, Corporate General Manager, Corporate Management Planning Headquarters. I will talk about financial results for the 9 months of fiscal year 2018. This page shows year on year comparison. Net sales were 622,300,000,000 yen up 21,100,000,000 yen As exchange rate effect was negative 5,700,000,000 yen net sales were up 26,800,000,000 yen in real terms. Operating income was 24,500,000,000 yen up 2,100,000,000 yen Negative factors include 2,700,000,000 yen increase in fixed cost such as personnel cost and depreciation associated with investment. Exchange rate effect was negative 1,100,000,000 yen Negative 3,200,000,000 yen was from others, including slightly more than 2,000,000,000 yen of increased cost associated with the large scale order in the Power and New Energy segment. Those negative factors were more than offset by 9,100,000,000 yen from increase in sales volume. As a result, operating income increased 2,100,000,000 yen in total to 24,500,000,000 yen Non operating items improved 2,500,000,000 yen due to improvement in net interest expense, equity in losses of affiliates, foreign exchange income and loss and others. Ordinary income was 26,500,000,000 yen up 4,600,000,000 yen As for extraordinary income and loss on the balance sheet, we booked foreign exchange gain associated with consolidation of 2 subsidiaries and liquidation of 1 subsidiary in Malaysia. As liquidation was completed, we booked 1,300,000,000 yen of gain on reversal of foreign currency translation adjustments. Gain on sales of investment securities decreased 800,000,000 yen As a result, extraordinary income net of extraordinary loss was almost flat year on year. Net income attributable to owners of Virent was 16,400,000,000 yen up 3,000,000,000 yen Now I will look at net sales and operating income by segment for the 9 months In Power Electronics Systems, Energy Solutions and Power Electronics Systems, Industry Solutions, both net sales and operating income increased. In Power and New Energy, although net sales increased, operating income was down 1,900,000,000 yen As I said earlier, it was due to increased costs associated with the large scale order. In electronic devices, net sales and operating income of both semiconductors and magnetic disks increased. In food and beverage distribution, vending machines grew year on year, mainly in Japan and also in China. However, store distribution was down year on year. In the segment in total, both net sales and operating income decreased. As a result, net sales increased 21,100,000,000 yen and operating income increased 2,100,000,000 yen Next, I will comment on business results by segment. In Power Electronics Systems, Energy Solutions, net sales were 144,300,000,000 yen up 2,000,000,000 yen Operating income was 7,900,000,000 yen up 3,200,000,000 yen The number in the box shows exchange rate effect in year on year comparison. Exchange rate pushed down net sales by 1,000,000,000 yen On a constant currency basis, net sales were up 3,000,000,000 yen In the Energy Management business, net sales decreased primarily as a result of reduced demand for smart meters and industrial power supply equipment. However, operating results increased slightly. In the power supply and facility systems business, net sales and operating results increased due to an increase in large scale orders. In the ED and C Components business, net sales and operating results increased because of higher demand seen from distribution panel manufacturers since last year. In Power Electronics Systems Industry Solutions, net sales were 200 and 12,400,000,000 yen up 6,600,000,000 yen Operating income was 4,300,000,000 yen up 1,500,000,000 yen In this segment, there are 5 businesses. In the factory automation business, net sales and operating results increased due to increased domestic demand centered on low voltage inverters, motors and factory automation systems. The benefits outweighed the impacts of severe strength, which started mainly in China in the second half of the fiscal year. In the Process Automation business, net sales and operating results decreased due to the absence of a large scale order recorded in the previous equivalent period. In the Social Solutions business, net sales decreased slightly, but operating results increased slightly. In the equipment construction business, net sales and operating results increased following an increasing orders for electrical equipment construction. In the IT Solutions business, net sales and operating results increased due to strong performance centered on the public sector. In Power and New Energy, net sales were 71,100,000,000 yen up 15,300,000,000 yen mainly due to large scale orders. Operating income deteriorated by 1,900,000,000 yen to negative 500,000,000 yen unfortunately, due to higher costs associated with the large scale order that I mentioned earlier. In electronic devices, net sales were 103,800,000,000 yen up 5,200,000,000 yen Operating income was 11,700,000,000 yen up 800,000,000 yen In this segment, exchange rate effect was significant. The exchange rate effect on net sales was negative 2,300,000,000 yen and negative 600,000,000 yen on operating income. For semiconductors, net sales for the 9 months were almost flat year on year, thanks to robust demand for automotive applications despite the impacts of the slowdown in the industrial polysemiconductor market that emerged in the second half of the fiscal year. However, net sales for the Q3, the period from October to December, was slightly down. For Magnetic Discs, net sales increased both for the 9 months and for the 3rd quarter. In the segment in total, net sales and operating results increased. Distribution of semiconductor sales by field is shown in the table on the right. Roughly speaking, industrial field accounted for 70% and automobiles, 30%. In Foods and Beverage Distribution, net sales were 81,700,000,000 yen down 4,500,000,000 yen Operating income was 3,200,000,000 yen down 1,300,000,000 yen In the vending machines business, demand from domestic customers were quite robust, and demand in China also increased year on year. In the store distribution business, net sales and operating results decreased partly because of a decline in demand for store equipment for convenience stores. This slide shows sales by Japan and overseas area. Net sales for the 9 months were 622,300,000,000 yen up 21,100,000,000 yen year on year. Overseas net sales were 168,300,000,000 yen up 4,900,000,000 yen Net sales in Japan were 454,000,000,000 yen up 16,200,000,000 yen The exchange rate effect on overseas sales was negative 5,700,000,000 yen On a constant currency basis, overseas net sales increased more than 10,000,000,000 yen The ratio of overseas sales was 27%. As for breakdown of 168,300,000,000 yen of overseas net sales by area, net sales in HR and others were 86,000,000,000 yen up 6,200,000,000 yen Net sales in China were 59,800,000,000 yen up 1,200,000,000 yen Net sales in Europe and America were down slightly more than 1,000,000,000 yen respectively. In Asia and others, sales of Industry Solutions, Power in New Energy and Electronic Devices increased. In China, sales of energy solutions, electronic devices in food and beverage distribution increased. This slide shows year on year comparison of financial results for the Q3, the period from October to December. Unfortunately, both sales and income decreased year on year. Net sales were 202,800,000,000 yen down 3,300,000,000 yen Operating income was 6,000,000,000 yen down 3,700,000,000 yen Ordinary income was 7,000,000,000 yen down 3,100,000,000 yen Net income attributable to owners of Ferent was 3,800,000,000 yen down 3,300,000,000 yen Excluding exchange rate effect, net sales increased in real terms. By segment, in Power Electronics Systems Energy Solutions, net sales were down 2,500,000,000 yen and operating income was up slightly. Net sales were down due to the absence of large scale orders recorded in the same period of the previous fiscal year. In Power Electronics Systems Industry Solutions, net sales were up 3,200,000,000 yen and operating income was up 1,500,000,000 yen In Power and New Energy, net sales were up 4,000,000,000 yen However, operating income was down 2,600,000,000 yen unfortunately, due to higher costs associated with a large scale order that I mentioned earlier. In Electronic Devices, both net sales and operating income were down slightly, mainly due to industrial power semiconductors. In food and beverage distribution, in the vending machines business, results in China were down year on year in the Q3. Besides, results in store distribution were also down. As a result, both net sales and operating income decreased in this segment. In total, net sales decreased 3,300,000,000 yen and operating income decreased 3,700,000,000 yen I forgot to mention one thing earlier. For the 9 months, operating income, ordinary income and net income attributable to owners of Verint reached record highs. This slide shows comparison of balance sheet between the end of March 2018 and the end of December 2018. Inventories increased towards February March, mainly for lots of plant related sales to be booked. Inventories stood at 199,100,000,000 yen an increase of 49,400,000,000 yen To fund inventories, we increased interest bearing debts by 36,600,000,000 yen and reduced cash and time deposit by 7,500,000,000 yen The decrease in accumulated other comprehensive income includes valuation loss on available for sale securities of slightly more than 10,000,000,000 yen. Accumulated other comprehensive income decreased 13,000,000,000 yen in total. As a result, net interest bearing debt increased 44,200,000,000 yen to 174,400,000,000 yen Net DE ratio increased 0.1x to 0.5x. Equity ratio was 34.3%. This slide shows financial results forecast for fiscal year 2018 in comparison with previous forecast announced in October. Unfortunately, we revised down forecast both of sales and income. We revised our net sales forecast by 5,000,000,000 yen to 905,000,000,000 yen operating income by 3,000,000,000 yen to 58,000,000,000 yen ordinary income by 2,500,000,000 yen to 60,000,000,000 yen and net income attributable to owners of parent by 3,500,000,000 yen to 38,000,000,000 yen For Power Electronics Systems, Energy Solutions, Power Electronics Systems, Industry Solutions and Food and Beverage Distribution, we kept previous forecast for both net sales and operating income unchanged. For Power and New Energy, we kept net sales forecast unchanged. However, we revised down operating income forecast by 2,000,000,000 yen by incorporating higher cost associated with the large scale order. For Electronic Devices, we revised down net sales forecast by 6,000,000,000 yen and operating income by 900,000,000 yen For Electronic Devices, about half of the downward revision of net sales forecast is from Industrial Power Semiconductors, and the remaining half is from magnetic disks. In total, we revised down net sales forecast by 5,000,000,000 yen and operating income by 3,000,000,000 yen This slide shows year on year comparison with full year forecast revised on January 31. Net sales are expected to be 905,000,000,000 yen up 11,500,000,000 yen Operating income will be 58,000,000,000 yen up 2,000,000,000 yen ordinary income, 60,000,000,000 yen up 4,000,000,000 yen and net income attributable to owners of ferent, 38,000,000,000 yen up JPY 200,000,000 Although we revised our forecast, we expect both sales and income will increase year on year. Operating income, ordinary income and net income will reach record highs if we can achieve forecast in real terms. Net income reached record high of 41,000,000,000 yen in fiscal year 20 16. However, that included slightly more than 10,000,000,000 yen of an extraordinary factor associated with unwinding of Cross Share Holdings. Excluding that factor, net income will also reach record high in real terms. By segment, in Power Electronics Systems, Energy Solutions and Power Electronics Systems Industry Solutions, both net sales and operating income will increase. In Power and New Energy, although net sales will increase, operating income will decrease 1,300,000,000 yen In electronic devices, both net sales and operating income will increase. In food and beverage distribution, net sales will decrease due to store distribution, but operating income will be flat. In total, net sales will increase, and operating income will increase 2,000,000,000 yen So far, I talked about full year forecast. Let me share with you positive information. As for semiconductors for automobiles, actual orders for EVs are increasing significantly. So we would like to accelerate timing of slightly more than 20,000,000,000 yen of CapEx for front end for expansion. In preparation for the next fiscal year, we intend to make further efforts to achieve increase in sales and income. That concludes my presentation.