Earnings Call: Q3 2018

Jan 30, 2018

Good morning. I am Juni Jiarai, Corporate Management Planning Headquarters. I will explain about consolidated financial results for the 9th month period with the 3rd quarter results of fiscal year 2017. This table compares 9 months consolidated financial results of fiscal years 20 16 'seventeen. Net sales were 601,200,000,000 yen up 45,900,000,000 yen year on year. This is JPY 43,500,000,000 increase in yield terms considering gain on translation of earnings of overseas subsidiaries of 2,400,000,000 yen Operating income was 22,400,000,000 yen improved by 11,700,000,000 yen year on year. Ordinary income increased 10,800,000,000 yen year on year to 21,800,000,000 yen Net income attributable to owners of parent was 13,400,000,000 yen up 8,500,000,000 yen year on year. As for operating income or loss, price decline was recognized as minus 11,300,000,000 yen and increase in fixed costs was posted as minus 2,000,000,000 yen On the other hand, we recognized improvement in increase in sales volumes of 12,900,000,000 yen cost reduction of 11,100,000,000 yen and exchange rate effect of 1,100,000,000 yen As a result, we could achieve 11,700,000,000 yen As for non operating income or loss, foreign exchange losses were recognized as 700,000,000 yen and this was the main factor to post minus 900,000,000 yen in this item. Extraordinary income or loss include gain on sales of investment securities of 1,500,000,000 yen As a result, ordinary income increased by 2,800,000,000 yen and net income attributable to owners of parent rose 8,500,000,000 yen as I said earlier. We could achieve record high results for 9 months period in operating income, ordinary income and net income attributable to owners of parent. Just for your reference, former record high of operating income was KRW 11,500,000,000 in fiscal year 2015, so we could almost double the record this time. Formal records for ordinary income was JPY 13,600,000,000 and net income attributable to owners of parent was 11,200,000,000 yen and we could break both of them this time. In the next slide, we compare fiscal years 2016 and 2017 by segment. Industry Solutions under power electronics systems, electronic devices and food and beverage distribution are drivers to increase overall performance significantly and both net sales and operating income increased. Now I will explain each segment. Energy Solution of Power Electronics Systems has 4 business areas. In Energy Management, both net sales and operating results decreased due to declined smart meter sales volume. Transmission and distribution decreased net sales and operating results year on year due to the absence of large scale orders from industrial field, which was recognized in the same period of the previous year. Power supply systems were affected by the absence of large scale orders overseas recorded in the previous year for switchgear and control gear business as well as by reduced demand for power conditioning systems used in solar power generation systems. As a result, net sales declined, but we could record slightly positive operating results by our cost reduction efforts. Performance of these 3 system or plant related businesses was well covered by EDMC Business. It recorded increase in both net sales and operating results as a result of strong demand in Japan and overseas from machine tool manufacturers. As a whole, net sales were almost at the same level of the previous year and operating income grew slightly. Industry Solutions of Power Electronics Systems increased both net sales and operating income substantially. Especially factory automation increased its net sales and operating results, thanks to strong demand in Japan and China, mainly for inverters and factory automation components. Process automation could increase net sales and operating results because of the brisk replacement demand seen in the Japan market. Environmental and Social Solutions increased in net sales owing to higher demand for electrical equipment for railcars, but operating results were slightly worsened due to a less favorable sales mix. Equipment previous fiscal year. In IT Solutions, net sales and operating results grew due to increase in orders from the academic sector. As a total for Industry Solutions, net sales were up by JPY 24,300,000,000 year on year and operating income increased as well by JPY 3,600,000,000 Next is about power and new energy. We recognized a slight increase in net sales and a decrease of 1,300,000,000 yen for operating loss. In this business, large scale orders in Japan contributed to higher sales of thermal power generation systems, while sales decreased in the renewable energy field due to declines in large scale orders for hydro and geothermal power generation systems. Less favorable sales mix decreased operating income by 1,300,000,000 yen. Next segment is Electronic Devices. Net sales increased by 7,100,000,000 yen and operating income grew by 5,200,000,000 yen In Semiconductor's business, net sales and operating results China, coupled with solid demand from the automotive field. Net sales were down for magnetic disks as a result of declined demand year on year, but operating results were improved by promoting cost reduction efforts to achieve 2 digit profit margin. Last segment is Food and Beverage Distribution, which is another business driver. It increased net sales by JPY 12,500,000,000 and operating income by JPY 2,700,000,000 year on year. There was stable demand for vending machines in Japan, and China market hit the bottom and started to make recovery after continuously decreased sales forecast quarter on quarter. As a result, this business recorded increased net sales and operating results. Store distribution business also recorded increase in both net sales and operating results owing to higher demand for store equipment for convenience stores. As a result, food and beverage distribution increased net sales by 12,500,000,000 yen and operating results by 2,700,000,000 yen Next slide shows net sales for 9 months in Japan and overseas by area. In total, net sales increased JPY 45,900,000,000 year on year, including overseas increase of JPY 12 200,000,000 yen and domestic increase of 33,600,000,000 yen The breakdown of overseas net sales is indicated for Asia and others, China, Europe and Americas. Asia and others accounts for about 50% of our overseas business. China is 35% and remaining Europe and Americas are at 7% to 8%, respectively. A major increase came from Asia and China as they generated year on year increase of JPY4,500,000,000 JPY5,400,000,000 respectively in businesses such as Energy Solutions, Industry Solutions and Semiconductors. Americas recorded the lowest net sales among these four areas and improving this area is one of our overseas business issues as I said in the previous briefing. Next slide shows a table to compare 3rd quarter's results from October to December between fiscal years 2016 'seventeen. Net sales increased by JPY 2,400,000,000 year on year. However, this includes loss on 6,500,000,000 yen Therefore, net sales increase in real terms was 8,900,000,000 yen Operating income increased 4,800,000,000 yen Ordinary income rose 1,800,000,000 yen and net income attributable to owners of parent grew 2,300,000,000 yen to record increase both in net sales and income same as 9 months accumulated results. By segment basis, Industry Solutions on the Power Electronics Systems achieved increased net sales and operating income, Electronic Devices increased operating income, Food and Beverage Distribution achieved increased net sales and operating income. Again, this shows roughly the same situation as 9 months results. This is our consolidated balance sheet to compare the status of March 31, 2017, which is the end of fiscal year 2016 and that of December 31, 2017. Notes and account receivables, trade receivables decreased steadily by 22,900,000,000 yen Inventories increased by 32,500,000,000 yen This is because plant related inventories were accumulated mainly for power electronics to be ready for sales in large volume in March. Other liabilities decreased and this is because of the sale of shares of Fujitsu in the previous year. As tax on that sale is to be paid in the following year and the amount was a little over 20,000,000,000 yen As a result, other liabilities decreased. Decreased cash balance was covered by increased interest bearing debt of 29,500,000,000 yen to make net interest bearing debt increased by 41,100,000,000 yen from the end of March 2017 to 150,000,000,000 yen Net assets rose 25,700,000,000 yen Deducting gain on revaluation of shares we own, retained earnings for 9 months and dividend of JPY 8,600,000,000 retained earnings increased by JPY 4,800,000,000 As a result, net assets were posted as 349,500,000,000 yen and equity ratio was improved by 1.5 points to 34.3%. Net debt equity ratio was increased by 0.1 to 0.5. Free cash flow is estimated to be about 30,000,000,000 yen at the end of this fiscal year. Next slide compares the full year forecast from this time against the one from October. Net sales forecast has been raised from JPY 8 50,000,000,000 yen to 870,000,000,000 yen last time. And in this forecast, it was increased by 5,000,000,000 yen to 8 75,000,000,000 yen Operating income had been increased by 4,000,000,000 yen previously from 48,000,000,000 yen to 50 2,000,000,000 yen and we made it 53,000,000,000 yen with an increase by 1,000,000,000 yen Forecast for ordinary income and net income attributable to owners of parent remain unchanged as 51,000,000,000 and 31,000,000,000 respectively. Assumption of foreign exchange rates are 105 yen to the U. S. Dollar, €115 to the euro and €15.7 to renminbi. Let me turn to the forecast by segment. Considering the results up to the Q3 and outlook for the future, the forecast for Industry Solutions in Power and Electronics Systems increased by 3,000,000,000 yen for net sales and 500,000,000 yen for operating income, respectively. Actronic Devices raised net sales forecast by 2,000,000,000 yen and operating income by 1,500,000,000 yen. Food and beverage distribution forecast increased 2,000,000,000 yen for net sales, but operating income is unchanged, anticipating price competition will get severe. For Power and New Energy, considering some deals are postponed to the next fiscal year, its forecast was decreased by yen 2,000,000,000 for net sales and by yen 500,000,000 for operating income. In total, forecasts were raised for net sales by JPY 5,000,000,000 and for operating income by JPY 1,000,000,000. Just for your reference, if the exchange rate continues the current level at 110 or 109 yen to the U. S. Dollar, we estimate that will improve net sales by slightly over yen10,000,000,000 and operating income by a little below yen1,000,000,000 This slide compares full year forecast for fiscal year 2017 with the previous fiscal year results. Net sales are expected to grow by 37,200,000,000 yen to 875,000,000,000 yen Operating income is estimated to increase by 8,300,000,000 yen to 53,000,000,000 yen Ordinary income improvement is expected to be 4,700,000,000 yen Net income attributable to owners parent was 41,000,000,000 yen in fiscal year 2016 and this includes gain on sale of Fujitsu shares of 13,000,000,000 yen Therefore, the forecast for this fiscal year is reduced by 10,000,000,000 yen to 31,000,000,000 yen By segment basis, Industry Solutions is expected to increase net sales by 22,900,000,000 yen and operating income by 4,600,000,000 yen In electronic devices, both items are forecasted to increase by 3 900,000,000 yen and 4,800,000,000 yen respectively. And food and beverage distribution also estimated increase in the same items by 6,400,000,000 yen 500,000,000 yen each. Power and new energy is estimated to raise net sales. However, operating income is forecasted to decline by 2 point 2,000,000,000 yen because of less favorable sales mix. As a result, the total net sales are estimated to increase by 37,200,000,000 yen year on year and operating income is expected to be improved by 8,300,000,000 yen Since we received many inquiries, we started to disclose year on year comparison of 3rd quarters. On this page, we listed breakdown of electronic devices sales, distribution of semiconductor sales by field, sales breakdown of magnetic disks and order growth rates for power semiconductors and inverters for the Q3 just for your reference. We forecast JPY53 1,000,000,000 for operating income of fiscal year 2017, But currently, we are working on reviewing our business operations as part of our operational transformation initiative. And it generated about 1,000,000,000 yen cost reduction out of the total expenses of 95,000,000,000 yen in the 3rd quarter only. We expect to make further additional savings of several 100,000,000 of yen by such cost reduction efforts in the 4th quarter as well. We can also expect several 100,000,000 yen improvement from foreign exchange gain if that exchange rate continues to be at the current level. Based on these assumptions, we anticipate being able to increase the operating income from