Earnings Call: Q2 2018

Oct 27, 2017

Good morning, ladies and gentlemen. Thank you very much for coming to the results briefing of Fuji Electric despite your busy schedule. I sincerely appreciate it. I also appreciate your ongoing support. We announced financial results yesterday. Financial results for the first half, full year forecast and interim dividends were decided at the Board of Directors meeting held yesterday. Fortunately, results exceeded our expectations. We also made an upward revision of the full year forecast. Before I came here, I checked our stock price. It was up 11% and exceeded yen 760. The number slightly scared me. So in order not to fall short of such expectations, I will continue to do my best in my work. In today's briefing, firstly, I will give you a general overview. Secondly, Mr. Alai will discuss financial results forecast and others. Mr. Alai is Corporate General Manager, Corporate Management Planning Headquarters. He is basically responsible for financial numbers. In April this year, we established Power Electronics Systems Business Group as a basis for growth for Fuji Electric. Through reorganization, we integrated former industrial infrastructure, power electronics and social engineering systems into 1 business group. Fuji Electric shifted to sales and business operation in which we can propose entire systems, including components. Mr. Tomotaka is the Head of Power Electronics Systems Business Group. I think you have many questions about the business. I hope you will ask questions. With that in mind, Mr. Tomotaka is joining us today. I think 3 of us will be able to answer to your questions. We are happy if we can have your frank questions and opinions later. We announced full year forecast yesterday. Details will be given later. We revised UP net sales forecast by 20,000,000,000 yen from 850,000,000,000 yen to 870,000,000,000 yen We revised UP operating income forecast from 48,000,000,000 yen to 52,000,000,000 yen that means 54,000,000,000 yen of operating income got within reach. The targets for fiscal year 2018, the final year of the current medium term management plan, include net sales of 900,000,000,000 yen operating margin of 6% and operating income of 54,000,000,000 yen Although we didn't announce, based on the current situation, we expect orders will exceed 900,000,000,000 yen Fuji Electric is performing very well for the first time in a long time. Many other companies also made an upward revision. We are following trends and also making steady progress. I talked about power electronics systems a while ago. It has been only 6 months since April, but awareness of our employees changed significantly. In the past, for example, our employees went to sell single items such as transformers or went to attend technical meetings of transformers and came back after meetings. However, they are doing activities to sell related products or proposed systems centering around the product. As a result, we are receiving additional orders from the same customers. At the same time, we are hearing voices of customers who are surprised at the broad scope of activities of Fuji Electric. I don't think personally it was a wrong decision to establish Power Electronics Systems Business Group and to establish current structures for sales or technological development. In the remaining 6 months, we will seriously build foundation once again for 2018 and onwards. I think it is an important point. As for food and beverage distribution, in the vending machine business in China, investment level was not so high as we thought it would be. We said investment level would recover slightly in the second half. Around September, we finally began to see recovery. In particular, new customers became active in investment. We will not be able to achieve initially forecasted figures at all, but we established a foothold for 2018. At the same time, Kuvata will exit from vending machine industry. We decided to acquire Kuvata's Indonesian vending machine company, entirely. Asia is growing at a pace as fast as China, although volume in Asia is lower. We are producing vending machines in our Thai factory. We will discontinue that and consolidate production of vending machines in Indonesia. For vending machine business in Asia, we will manage the business in 3 locations, Thai factory will be 100% dedicated factory for power electronic systems. Besides, power semiconductors business is performing very well currently. Specific numbers will be given later. Frankly speaking, whatever is produced will sell. That is a situation seen in the market. The issue is to what extent wafer or other powers can be procured. That is the biggest point. And the situation is, as I described, we are receiving lots of requests for price increases for direct materials. How we will overcome that situation is a challenge. When direct material cost increase, I often tell our employees to increase our selling prices, but they say it is impossible. So I tell them not to decrease prices. Salespeople for semiconductors are currently taking actions. When we forecast demand in 2018, we cannot possibly expect a drop in demand, including demand for automotive electronics. In particular, in 2019 onwards, demand of power semiconductors for automotive electronics is likely to increase immediately. Activities for specification verification and approval are progressing smoothly. In light of such circumstances, we decided to move up timing of capital investment to this year in anticipation of situation in not only fiscal year 2018, but also fiscal year 2019. Original forecast of capital investment for this fiscal year was 32,000,000,000 yen For the time being, we are looking to accelerate approximately 17,000,000,000 yen of capital investment in semiconductors. By doing so, we will somehow be able to handle requested volume from customers. We will make a further capital investment next year and prepare for 2019 onwards. When I look at markets, power electronic systems, Industry Solutions, Power Semiconductors Business and ED and C Components Business, which was spun off, are performing very well. I think strong performance will continue for some time. I don't want to take much of your time, and let me close my remarks. For the next 6 months toward March next year, all of our employees will do our best. I would appreciate your continued support. Thank you very much for today. Good morning, ladies and gentlemen. I am Arai from Corporate Management Planning Headquarters. As I am a person in charge of finance, I will give an explanation directly to you from this time. As President mentioned earlier, we achieved very good results in the first half. Operating income, ordinary income and net income attributable to owners of parent reached record highs. Now I will give you a summary of year on year comparison and consolidated financial results for the first half. Net sales were 395,000,000,000 yen up 43,500,000,000 yen year on year. Operating income was 12,700,000,000 yen up 6,900,000,000 yen year on year. Ordinary income was 11,700,000,000 yen up 9,000,000,000 yen year on year. Net income attributable to owners of Fyrend was 6,200,000,000 yen up 6,200,000,000 yen year on year. As for factors for change in net sales, 8,900,000,000 yen was from gain on translation of earnings of overseas subsidiaries. Demand increase, excluding exchange rate effect, pushed up net sales by JPY 34,600,000,000. As for factors for change in operating income, price decline pushed down operating income by 7,800,000,000 yen and the increase in fixed cost by 1,100,000,000 yen However, increase in production and sales volumes pushed up operating income by 7,800,000,000 yen cost reduction by 7,000,000,000 yen and positive exchange rate effect by 900,000,000 yen Positive factors totaled 15,700,000,000 yen As a result, operating income was up 6,900,000,000 yen Non operating items mainly include 2,200,000,000 yen of improvement in foreign exchange losses. As a result, ordinary income increased. Operating income was up about 115% year on year and exceeded record high operating income of 6,900,000,000 yen achieved so far by about 85%. For reference, record high ordinary income were 7,600,000,000 yen and record high net income was 4,200,000,000 yen Both were exceeded this time. Let me move on to year on year comparison of net sales and operating income by segment. Power Electronics Systems Industry Solutions drove the entire performance. Electronic Devices was also a significant contributor. Results of other segments were not poor either. I am under the impression that business in each segment was operated steadily. Net sales were up 43,500,000,000 yen and operating income was up 6,900,000,000 yen in total. Now I will look at results by segment. In Energy Solutions, net sales were down 300,000,000 yen Operating income was up 300,000,000 yen That means both sales and income were almost flat year on year. In this segment, results of ED and C Components were quite strong and offset the drop in 3 other businesses. As a result, both sales and income were almost flat year on year. In the Energy Management business, smart meter sales volumes declined due to volume adjustment by customers. In the transmission and distribution systems business, results were slightly down year on year due to the absence of lower scale orders from the industrial field recorded in the previous equivalent period. In the power supply systems business, net sales decreased following lower overseas demand in switchgear and control gear operations. ED and C components offset the drop in these businesses. In Industry Solutions, both sales and income increased significantly in the first half. Net sales were up 21,800,000,000 yen and operating income was up 3,200,000,000 yen In particular, the factory automation was a driver for growth in this segment, both in net sales and operating results. In the factory automation business, demand mainly for inverters and factory automation components were strong, both in Japan and overseas. The biggest driver in this segment was the process automation business, partly due to better economic conditions with increasing cash, replacement demand from customers in manufacturing industry was accelerated in Japan. Demand was very high. Demand was front loaded from the second half, leading to orders received and sales recognition. And both net sales and operating results increased significantly. In the environmental and social solutions business, net sales increased due to higher overseas demand for electrical equipment for railcars, but operating results decreased slightly due to disparities in the profitability of different projects. In the equipment construction business, both net sales and operating results decreased slightly year on year due to the rebound from large scale orders recorded in the previous equivalent period. In the IT Solutions business, one of our big subsidiaries received big orders from the public sector or public agencies and from the academic sector or universities this time. As a result, both net sales and operating results increased steadily. In Power and New Energy, net sales were up 7,100,000,000 yen but operating income was down 900,000,000 yen As you know, large scale orders in Japan contributed to higher sales of thermal power generation systems as well as solar power generation systems. Consequently, net sales were up JPY 7,100,000,000 There are both high margin projects and low margin projects. The number of low margin projects was relatively high compared to the previous year. As a result, operating income decreased. However, absolute amount of operating income was positive. Electronic devices was also a big contributor to the results for the first half. Beneficial fall in exchange rates were one of the positive factors. Semiconductors were very strong in the Japanese and Chinese markets. Demand for semiconductors for the industrial field was strong in particular, although demand for semiconductors in automotive electronics also increased. In magnetic disks, net sales were down slightly year on year, but operating results increased year on year due to reduction in fixed cost, cost reduction and others. In food and beverage distribution, net sales were up 6,100,000,000 yen year on year. Operating income was up 200,000,000 yen We often receive questions from you about vending machines business in China. Accelerated orders in Japan were higher than drop in vending machines in China, and sales of vending machines increased year on year. Store distribution made a significant contribution. Net sales and operating results increased due to a rise in demand for store equipment for convenience stores such as equipment for Cafe Latte. The next page shows year on year comparison of net sales of Japan and overseas area for the first half. In total, net sales were 395,000,000,000 yen up 43,500,000,000 yen year on year from 351,600,000,000 yen Net sales overseas increased 9,300,000,000 yen and net sales in Japan increased 34,100,000,000 yen Japan was a main driving force for results in the first half. Net sales increased in all the areas, including Asia and others, China, Europe and Americas, partly due to exchange rate effects. In Asia, sales of transmission and distribution systems, ED and C components, semiconductors and magnetic disks increased. In China, sales of ED and C components, factory automation components and semiconductors increased. In Europe, sales of electronic devices increased. In Americas, sales of Energy Solutions and Industry Solutions increased. We are focusing on sales in Asia and China, and net sales in Asia and China account for approximately 85% to total over seas sales. I personally feel that we should increase sales in Americas a little more. This page shows consolidated financial results for the first half in comparison with previous forecast. Net sales were 25,000,000,000 yen higher than forecast. Operating income was 5,700,000,000 yen higher. Alternate income was 7,200,000,000 yen higher and net income attributable to owners of parent was 5,100,000,000 yen higher. In this way, results were significantly higher than forecast. As for breakdown of 25,000,000,000 yen of increase in net sales, 19,000,000,000 yen was from factors excluding exchange rate effects. Out of 5,700,000,000 yen increase in operating income, 5,200,000,000 yen was from increase in sales and production volumes and others. This page shows net sales and operating income by segment in comparison with previous forecast. In Power Electronics System, Energy Solutions, net sales were higher than forecast. As I mentioned earlier, demand in the ED and C Components business was strong. Above all, power electronic systems Industry Solutions was a main driving force for results in the first half as I mentioned in year on year comparison. Results for power and new energy were almost in line with forecast. In electronic devices, both sales and income were higher than forecast, partly due to more beneficial foreign exchange rates and significant market growth. In food and Beverage Distribution, net sales were 3,100,000,000 yen higher and operating income was 5 100,000,000 yen higher than forecast. Results in comparison with previous forecast showed almost the same trend as year on year comparison. Let me move on to consolidated balance sheet. Comparison of balance sheet between March 31, 2017 and September 30, 2017 is shown. Notes and accounts receivables, trade receivables decreased. Notes and accounts payables, trade payables also decreased. Inventories increased. That means collection of receivables for big plant related sales recognized at the end of March progressed. Payment was also made. Stocks were piled up for plant related sales toward the end of this fiscal year. The point deserving special attention is investments. We hold investment securities and valuation gain on investment securities was 14,900,000,000 yen In total net assets, other comprehensive income included positive factors. Cash decreased slightly, so we increased interest bearing debt slightly. Equity ratio increased 1.9 percentage points to 34.7%. Net interest bearing debts increased 19,200,000,000 yen to 128,500,000,000 yen partly because the first half is in the middle of the fiscal period. Net debt equity ratio was 0.4x. Next, I will touch upon consolidated cash flow. This page shows comparison between the first half of fiscal year twenty sixteen and the first half of fiscal year twenty seventeen, free cash flow turned negative. We sold Fujitsu shares and received cash in the last fiscal year. We paid tax associated with that in this fiscal year that was 23,500,000,000 yen When we simply take out the tax payment, free cash flow should be about 17,000,000,000 yen So we can say free cash flow was healthy. Now I will move on to full year consolidated financial results forecast for fiscal year 2017. This page shows comparison between forecast for fiscal year 2017 and results for fiscal year 2016. Net sales will be 870,000,000,000 yen up 32,200,000,000 yen Operating income will be 52,000,000,000 yen up 7,300,000,000 yen Ordinary income will be 51,000,000,000 yen up 4,700,000,000 yen Net income attributable to owners of Fyren will be 31,000,000,000 yen down 10,000,000,000 yen Operating income and ordinary income are expected to reach record highs. 13,000,000,000 yen of gain on sales of shares in Fujitsu was included in extraordinary gains in the last fiscal year. I think it is just a timing issue. If we exclude 13,000,000,000 yen of gain on sales of shares, net income attributable to owners of parent will reach record high. By segment, the trend for the full year will be similar to that of the first half. Power electronic systems industry solutions will grow significantly. Electronic devices will also grow. Negative exchange rate effect is included in net sales of electronic devices. That means net sales will increase more than 5,000,000,000 yen excluding negative exchange rate effect. Year on year increase is also expected for food and beverage distribution. In total, net sales will increase 32,200,000,000 yen and operating income will increase 7,300,000,000 yen This page shows forecast in comparison with forecast as of July 27. Net sales were revised up by 20,000,000,000 yen operating income up 4,000,000,000 yen ordinary income up 4,000,000,000 yen and net income attributable to owners of Ferent up 2,000,000,000 yen In Power Electronics Systems Industry Solutions, there are two factors leading to change in forecast. Electronic devices also includes a positive factor. There are both positive and negative factors in segments. In Industry Solutions, forecast for the second half were slightly lowered due to orders moved up from the second half to the first half and our conservative outlook and we revised up net sales forecast for Industry Solutions by 10,000,000,000 yen operating income by 1,500,000,000 yen. In Electronic Devices, the upside in the first half was reflected in revision for full year forecast. We kept previous forecast unchanged for the second half due to seasonal factors and others. In food and beverage distribution, results for the first half were higher than forecast, but we didn't revise full year forecast. Every time we talk about vending machines in China, we revised down forecast. We revised down annual forecast for unit sales from 48,000 units to 35,000 units and this time we made a downward revision again to a slightly more than 20,000 units. We consider it as a must achieve target. In food and beverage distribution, I suppose there will be upside in store distribution, but we didn't revise full year forecast. In total, net sales were revised up by 20,000,000,000 yen and operating income by 4,000,000,000 yen Before moving on to dividends, let me talk about risk factors associated with the revised forecast. I talked to each corporate general manager. Through discussions, we found out that possible risks would include risks related to vending machines in China. For vending machines in China, we lowered target to the must achieve target. Of course, we wonder what will happen going forward. As we discussed so far, we cannot just sell vending machines. Operator functions are necessary for operation of vending machines. So training of operators in China is the most important point and there has been delay in training from our expectation. We revised down forecast partly due to that. When we look at the world, the number of vending machines installed is 3,500,000 units in Europe, 4,500,000 units in America, 2,500,000 units in Japan, 200,000 units in China and 50,000 in Asia. In China, as per capita GDP increases, I'm sure demand for vending machines will increase. In the same context, demand in Asia will also increase. In consideration of necessity for upfront investment, we decided to acquire Kubera's vending machine manufacturing company in Indonesia. We recognize this investment as investment in anticipation of what will happen 3 years or 5 years down the road. There is another factor which is not incorporated into this forecast. So far, we have been working on improvement of operational quality through Pro 7 activities. In April this year, we started a new initiative with President as a head. That is to say, we started to change work style or content of work. We are now trying to increase efficiency of work through changes made to operation of meetings and materials. We would like to achieve about 1,000,000,000 yen of reduction in expenses through improvement in efficiency. This 1,000,000,000 yen is not included in the forecast. We changed exchange rate assumption for the second half to to the U. S. Dollar. Suppose the current exchange rate is maintained, net sales will probably be about 14,000,000,000 yen higher and operating income will be about 1,500,000,000 yen higher than forecast. Based on all those factors, we set forecast 870,000,000,000 yen in net sales and JPY52,000,000,000 in operating income. Dividends are as shown on this page. We set interim dividends at per share, 1 increase from fiscal year 2016. Year end dividends are to be decided. As I discussed with President, if we achieve forecasted income, we need to consider enhancement of level of dividends. As we mentioned before, with 30% payout ratio in mind, we would like to decide year end dividends. We added supplementary materials to cover questions we always receive breakdown of electronic devices sales between semiconductors semiconductors and magnetic disks and distribution of semiconductor sales by field, including industrial, automotive and others is as you see here. Order growth rates in power semiconductors and inverters are also shown. Comparison with the Q1 year on year comparison is indicated. So please refer to this page. That concludes my presentation.