Earnings Call: Q2 2019

Oct 26, 2018

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. We announced results for the first half yesterday. Fortunately, we achieved record high income in the first half. We were able to finish the first half with better numerical results than our expectation. We made full year forecast based on the results for the first half. I think full year income will also reach record high. However, as you know, in a so called trade war between the U. S. And China, the 2 countries imposed more tariffs on each other's goods. The biggest point now is when this situation will come to an end. As a direct impact in China, capital investment is slightly slowing down. Besides performance of Japanese and Korean machine tool manufacturers, which sell products to China, is declining significantly. So I think our performance may be impacted both directly and indirectly. We forecast the impact with a certain range. Based on the assumption that momentum in the second half is not as strong as in the first half, we made a full year forecast. The forecast of the fiscal year ending March 2019 we announced this time is a must achieve target. We intend to make a company wide effort to achieve the target. There are only 5 months left before the end of this fiscal year. For the 5 months, we will, of course, make efforts to achieve forecast for this fiscal year. But more than that, what we have to work on is the next 5 year medium term management plan, which will start in the next fiscal year and end in fiscal year 2023. As I said before, Fuji Electric will celebrate 100 anniversary of funding in 2023. As you are aware, we hope to achieve Dream 1, which is our dream. In addition, we would like to achieve operating margin of at least 8%. With that in mind, we are currently making a plan. I think we can talk about the plan in front of you in the spring next year. Over the next 5 months, while making efforts to achieve the target for this fiscal year, we will establish the foundations of Fuji Electric for the future. I will be happy if you could keep a strict but gentle eye on us and bear with us. I hope we will have a long standing relationship with you. I really appreciate your continued support for Fuji Electric. We will do our best. Thank you very much for today. I am Junichi Arai, Corporate General Manager, Corporate Management Planning Headquarters. I will talk about financial results for the first half of fiscal year twenty eighteen and forecast for fiscal year 2018. This page shows year on year comparison of consolidated financial results for the first half. Both sales and income increased largely. As President mentioned, fortunately, we achieved record high income in the first half. Net sales were 419,400,000,000 yen up 24,400,000,000 yen As impact of exchange rate was negative 600,000,000 yen Net sales were up 25,000,000,000 yen in real terms. Operating income was 18,500,000,000 yen up 5,800,000,000 yen Narrowing factors include 1,500,000,000 yen increase in fixed cost such as personnel cost, investment, depreciation and R and D. Exchange rate effect was negative 500,000,000 yen Negative 1,700,000,000 yen was from others, including cost reduction, reduction in selling prices and price fluctuations. Those negative factors were more than offset by 9,500,000,000 yen from increase in sales volume. Due to increase in sales and production, operating income increased 5,800,000,000 yen to 18,500,000,000 yen As for non operating income and expenses, 1,000,000,000 yen was from impact of foreign exchange gains. Improvement in net interest expense was 400,000,000 yen Improvement in equity in losses of affiliates was 400,000,000 yen In total, non operating items improved 1,900,000,000 yen As a result, ordinary income was 19,400,000,000 yen up 7,700,000,000 yen As for extraordinary income and loss on the balance sheet, we booked foreign exchange gain associated with liquidation as a result of consolidation of a subsidiary of semiconductors and magnetic disks in Malaysia. As liquidation was completed in April, we booked 1,300,000,000 yen of gain on reversal of foreign currency translation adjustments. Besides, we sold investment securities and booked 700,000,000 yen of gain on sales of investment securities. As a result, extraordinary income net of extraordinary loss increased 1,900,000,000 yen Net income attributable to owners of Ferent was 12,500,000,000 yen up 6,300,000,000 yen In the first half of fiscal year twenty seventeen, operating income, ordinary income and net income attributable to owners of Ferent reached record highs. In the first half of fiscal year twenty eighteen, operating income increased about 50% year on year. Net income attributable to owners of Fearrent doubled. We were able to mark record highs fortunately. Let me move on to net sales and operating income by segment. Higher sales and income were recorded in 5 principal segments: Power Electronic Systems Energy Solutions Power Electronic Systems Industry Solutions Power and New Energy Electronic Devices and Food and Beverage Distribution. In particular, net sales of Power and New Energy increased 11,300,000,000 yen and net sales of electronic devices increased 7,100,000,000 yen Net sales of power electronic systems, energy solutions and power electronic systems industry solutions were also strong. In total, net sales increased 24,400,000,000 yen Gross of operating income was driven by electronic systems, energy solutions and electronic devices. In total, operating income increased 5,800,000,000 yen Now I will look at business results by segment in detail. In Power Electronics Systems Energy Solutions, there are 3 businesses, including Energy Management, Power Supply and Facility Systems and ED and C Components. In all of the 3 businesses, both net sales and operating results increased. In the Energy Management business, performance with regard to Energy Management Systems and Industrial Substation Equipment was solid. In the power supply and facility systems business, net sales and operating results increased mainly due to an increase in large scale orders for electrical facilities and other offerings. In the ED and C Components business, net sales and operating results increased because of strong demand continued to be seen from machinery manufacturers. In Power Electronics Systems Industry Solutions, there are 5 businesses. In the Process Automation business, net sales and operating results decreased due to the absence of lower scale orders recorded in the previous equivalent period. However, net sales and operating results increased in 4 businesses, including factory automation, social solutions, equipment construction and IT solutions. In a factory automation business, demand mainly of low voltage inverters, motors and factory automation systems increased. In a social solutions business, orders for radiation equipment and systems increased. In equipment construction business, electrical equipment construction increased. In the IT solution business, orders increased mainly from the public sector. In those four businesses, net sales and operating results increased. In Power and New Energy, net sales increased significantly as a result of higher thermal power system sales and increased renewable energy system sales due to large scale orders for solar power generation systems. Income also increased. In electronic devices, both semiconductors and magnetic disks were very strong. In semiconductors, net sales increased mainly in the industrial field. Demand was also strong from the automotive field. Net sales for magnetic disks increased significantly, thanks to increased demand. For reference, breakdown of electronic devices sales is shown in the table. Sales for semiconductors were 58,100,000,000 yen and sales from magnetic disks were 13,700,000,000 yen Distribution of semiconductor sales by field is also shown. Industrial modules accounted for 50% industrial discrete devices, 23% and automobiles, 27%. As for food and beverage distribution in the vending machines business, demand from domestic customers was solid. The Chinese market recovered year on year. Both in Japan and China, net sales on operating results increased. However, in a store distribution business, net sales and operating results decreased because of a decline in demand for store equipment for convenience stores. This slide shows year on year comparison of net sales by Japan and overseas area for the first half. As for breakdown of 24,400,000,000 yen of increase in net sales, overseas net sales increased 10,900,000,000 yen and net sales in Japan increased 13,500,000,000 yen Overseas sales ratio increased 1 percentage point from 26% to 27% year on year. As for overseas sales by area, net sales in our focus area Asia and others were 57,600,000,000 yen up 7,800,000,000 yen Net sales in China were 41 point 7,000,000,000 yen at 4,600,000,000 yen Major growth drivers were electronic devices, power and new energy and Industry Solutions in Asia and others, in food and beverage distribution and electronic devices in China. This slide shows a summary of consolidated financial results in comparison with previous forecasts. Net sales were 419,400,000,000 yen 19,400,000,000 yen higher than forecast. Operating income was 5,500,000,000 yen higher. Ordinary income was 7,200,000,000 yen higher. And net income attributable to owners of Fyrend was 5,000,000,000 yen higher than forecast. As for net sales, early emergence of second half demand and higher demand from customers pushed up net sales by 15,600,000,000 yen Gain on translation of earnings pushed up net sales by 3,800,000,000 yen In total, net sales were up 19,400,000,000 yen For operating income, increase of 4,800,000,000 yen was from increase in sales volume, reduction in expenses and cost reduction. Positive exchange rate effect was 700,000,000 yen By segment, in Power and New Energy, net sales were 2,000,000,000 yen lower, and operating income was 300,000,000 yen lowers on forecast. The decreases were associated with standards for recording progress of sales for large orders and lower service sales. Also in food and beverage distribution, net sales were lower than forecast. It was because demand for vending machines in China was slightly lower than forecast. The decrease also resulted from decline in demand in store distribution business. Net sales and operating income of both Power Electronics Systems, Energy Solutions and Industry Solutions exceeded forecast. In Power Electronics Systems Energy Solutions, demand increased, and there was early commencement of projects in the Energy Management business. Besides, demanding IL and C Component business was very strong. In Power Electronics Systems Industry Solutions, affiliate companies are mainly engaged in businesses. Projects in the equipment construction business and projects in the IT Solutions business increased. In electronic devices, demand in the semiconductor business and demand in the magnetic disks business was higher than forecast. In total, net sales exceeded forecast by 19,400,000,000 and operating income by 5,500,000,000 yen Next, I will talk about balance sheet. This slide shows comparison between March 31, 2018, and September 30, 2018. Notes and account receivables, trade receivables were collected in the first half and decreased 16,300,000,000 yen Inventories increased 31,100,000,000 yen mainly for plant related sales for the second half. For investments and other assets in total long term assets, net defined benefit assets decreased 24,600,000,000 yen as we converted partial asset into cash. Interest bearing debt decreased 1,600,000,000 yen On the other hand, cash and time deposit also decreased 4,400,000,000 yen As a result, net interest bearing debt was 133,100,000,000 yen up 3,000,000,000 yen Net DE ratio was 0.4 times. Equity ratio was 37.2%, up 1 percentage point. In this way, the balance sheet was in good shape. I will move on to consolidated cash flow. Free cash flow was negative 6,200,000,000 yen in the first half of fiscal year twenty seventeen and positive 9,200,000,000 yen in the first half of fiscal year twenty eighteen. Net cash provided by operating activities was 18,000,000,000 yen partly due to increase in funds following partial cancellation of retirement benefit trust. However, as we repaid a significant amount of debt, cash and cash equivalents at end of period stood at 28,800,000,000 yen almost flat year on year. This slide shows financial results forecast for fiscal year 2018 in comparison with previous forecast. We revised up net sales forecast by 10,000,000,000 yen to 910,000,000,000 yen operating income by 2,500,000,000 yen to 61,000,000,000 yen ordinary income by 2,500,000,000 yen to 62,500,000,000 yen and net income attributable to owners of ferent by 2,000,000,000 yen to 41,500,000,000 yen By segment, in food and beverage distribution, we revised down net sales forecast by 3,000,000,000 yen and operating income by 300,000,000 yen mainly due to lower demand in the store distribution business. However, in other segments, mainly including electronic devices, net sales forecast were revised up. Operating income of Power and New Energy was revised down by 300,000,000 yen due to partial change in content of orders. In all other segments, both net sales and operating income forecast were revised up. This slide shows year on year comparison of 3 year forecast. Net sales are expected to be up 16,500,000,000 yen operating income up 5,000,000,000 yen ordinary income up 6,500,000,000 yen and net income attributable to owners of Ferent, up 3,700,000,000 yen Operating income and ordinary income reached record highs in fiscal year 2017. Net income reached record high at 41,000,000,000 yen in fiscal year 2016, partly due to gain on sales of shares. We aim at record high operating income, ordinary income and net income, which will exceed the past record. By segment, in food and beverage distribution, net sales are expected to be down 4,800,000,000 yen In all other segments, mainly electronic devices, net sales will increase significantly. Assumed exchange rates for the second half are 105yuan to the U. S. Dollar, to the euro and to the renminbi. If the current exchange rates are maintained, I think sales will increase by slightly more than 5,000,000,000 yen and income will increase by approximately 1,000,000,000 yen If you compare for your forecast and results for the first half, you would notice forecast for the second half are slightly lowered. It is partly due to early commencement of projects. Besides, we closely examined unprofitable projects. Also, by taking into account stagnation of economy caused by U. S.-China trade friction, we made relatively conservative forecast for the second half. In such a situation, we made full year forecast. Lastly, let me touch upon dividends. We will pay interim dividend of 8 yen which is record high interim dividend. Year end dividend is undecided. Suppose year end dividend is 18 as well, annual dividend will be 16 yen which is like a Thai annual dividend. We hope to pay year end dividend of at least 8 yen We will make a final decision by being conscious of 30% payout ratio. That concludes my presentation.