Earnings Call: Q1 2019

Jul 27, 2018

I am Junichi Arai, Corporate General Manager, Corporate Management Planning Headquarters. I will comment on financial results for the Q1 of fiscal year 2018 and forecast for fiscal year 2018. In the Q1 of fiscal year 2018, strong results continued from fiscal year 2017. I think we got off to a good start. Now I will discuss profit and loss statements for the Q1 in comparison with the first quarter of fiscal year 2017. Net sales were 195,800,000,000 yen up 22,400,000,000 yen Operating income was 6,400,000,000 yen up 3,500,000,000 yen Operating income was up 3,500,000,000 yen due to increase in production and sales volume and cost reduction efforts, although fixed cost increased 2,500,000,000 yen Ordinary income was up 4.6 1000000000. Extraordinary income, net of extraordinary loss, was up 1,100,000,000 yen to 1,200,000,000 yen We booked foreign exchange income as a result of consolidating an overseas subsidiary. Due to that, 1,300,000,000 yen of extraordinary income was recognized. Net income attributable to owners of Ferent was 5,400,000,000 yen up 4,200,000,000 yen Operating income increased to 2.3 times that of the Q1 of fiscal year 2017. Ordinary income increased to 2.6 times and net income attributable to owners of Verint 4.9 times. Net sales, operating income and ordinary income reached record high first quarter results. For net income, 10,000,000,000 yen was recognized in the Q1 of fiscal year 2010. 10,000,000,000 yen included gain on sales of shares of 10,000,000,000 yen and some 1,000,000,000 yen. So we can say net income reached record high in real terms in the Q1 of this fiscal year. Let me move on to net sales and operating income by segment. Higher sales and income were recorded in all five segments: Power Electronics Systems, Energy Solutions, Power Electronics Systems Industry Solutions, power and new energy, electronic devices and food and beverage distribution. In particular, income in electronic devices increased 2,000,000,000 yen and income in power electronic systems Industry Solutions increased 1,000,000,000 yen which led the entire growth. In total, net sales increased 22,400,000,000 yen and operating income increased 3,500,000,000 yen Now I will look up business results by segment. In Power Electronics Systems Energy Solutions, as I mentioned earlier, net sales were up 4,100,000,000 yen and operating income was up 300,000,000 yen There are 3 businesses in this segment. The points are the Energy Management Business and the ED and C Components Business. In the Energy Management Business, net sales and operating results increased due to solid performance with regard to Energy Management Systems and Industrial Substation Equipment. In the ED and C Components Business, net because of strong demand seen from machinery manufacturers, primarily in Japan continuing from last year. In Power Electronics Systems Industry Solutions, net sales increased 4,300,000,000 yen and operating loss improved 1,000,000,000 yen This segment has 5 businesses, including factory automation, process automation, social solutions, equipment construction and IT solutions. One of the points is significant increase in net sales and operating results in the factory automation business. Low voltage inverters, motors and factory automation systems were very strong. In 4 other businesses, net sales increased slightly year on year. In Power and New Energy, net sales were up 7,500,000,000 yen and operating income was up 200,000,000 yen Thermal Power Systems sales increased due to large scale orders in Japan. New energy and renewable energy system sales increased due to large scale orders for solar power generation systems. Net sales of both thermal power system and new energy and renewable energy system increased. As for electronic devices, one of the growth drivers, net sales increased 4,900,000,000 yen and operating income increased 2,000,000,000 yen For semiconductors, net sales and operating results increased as a result of solid demand from the automotive field coupled with increased demand for power semiconductors from industrial fields, which was a result of automation, labor saving and energy saving needs in China and Japan. In magnetic disks, net sales and operating results increased. In both semiconductors and magnetic disks, profitability was double digit. In food and beverage distribution, net sales increased 2,700,000,000 yen and operating income increased 300 1,000,000 yen In vending machine business, net sales and operating results increased, thanks to increased demand from domestic customers coupled with year on year growth of the Chinese market. In the store distribution business, net sales and operating results decreased because of a decline in demand for store equipment for convenience stores. I'll move on to net sales by Japan and overseas area for the Q1. As for breakdown of 22,400,000,000 yen of increase in net sales, overseas net sales increased 8,800,000,000 yen and net sales in Japan increased 13,600,000,000 yen Overseas sales ratio increased a little more than 1 point to 28.8 percent. Out of 8,800,000,000 yen increase in overseas sales, 4,100,000,000 yen was from electronic devices, Foods and Beverage Distribution and Power Electronic Systems Industry Solutions also drove sales growth. By area, net sales in Asia and others and China increased. In Asia and others, sales of power in new energy and electronic devices increased significantly year on year. In China, sales of electronic devices and foods and fiberless distribution, vending machines increased significantly year on year. Next, I will talk about balance sheet. This slide shows comparison between March 31, 2018 and June 30, 2018, mainly plant related sales accumulated towards the end of March, Notes and account receivables, trade receivables were collected in the Q1. Notes and account payables, trade payables also decreased. On the other hand, inventories, mainly at power electronic systems, increased. Other liabilities decreased 15,300,000,000 yen due to a reversal of income tax payable and accrued bonuses. Cash and time deposit decreased slightly and the decrease was covered by loans payable. I think the balance sheet was healthy. As a result, net interest bearing debt was 100 and 47,200,000,000 yen up 17,000,000,000 yen Net interest bearing debt is calculated by subtracting cash and cash equivalent from lease obligations and interest bearing debts. Net DE ratio was 0.5x. Equity ratio was 36.5%. Next, I will talk about first half and full year forecast. To get straight to the point, we made no change to initial first half or full year forecast. Let me give you my personal opinion. Forecast for power electronic systems are as shown here, but I think there is some upside potential to the forecast mainly in ED and C components and factory automation. For electronic devices, disks will definitely exceed the forecast. I think power and new energy will probably be in line with the forecast. I think food and VIVALEX distribution can also perform in line with the forecast. But as I said earlier, store distribution may be slightly below the forecast. Overall, except store distribution, we are not in a situation where we have to worry. We will carefully scrutinize how a trade war between the U. S. And China will influence China and Asia in the second half. And then we will review the forecast after the first half is over. I think we will probably be able to make an upward revision. For the Q1, net sales were a little more than 10,000,000,000 yen higher than our plan, and operating income was a little more than 2,000,000,000 yen higher than our plan. So we would like to keep at least the upside generated in the Q1 and see how much more upside can be generated. The renminbi has slightly weakened, Assuming exchange rates are maintained at the current level for the remaining 9 months, 9 months total impact of exchange rate fluctuations is expected to be about positive 5,000,000,000 yen on net sales and 1,000,000,000 yen on income. That concludes my presentation.