Earnings Call: Q1 2018

Jul 28, 2017

I am Ichiro Matsumoto, General Manager, Corporate Finance Office. Now I will start my presentation on financial results for the Q1 of fiscal year 2017. Net sales were 173,500,000,000 yen up 8,400,000,000 yen year on year. Operating income was 2,800,000,000 yen up 500,000,000 yen year on year. Sales and income were up due to brisk capital investment demand. Operating income of 2,800,000,000 yen is record high. As for factors for change in net sales, 2,800,000,000 yen was from gain on translation of earnings of overseas subsidiaries. Excluding exchange rate effect, net sales were up 5,600,000,000 yen in real terms. Breakdown of 500,000,000 yen increase in operating income is shown on the right. Negative factors such as price decline and increase in fixed cost were more than offset by cost reduction, increase in sales volume and exchange rate effect. As a result, operating income increased. Non operating items improved 2,000,000,000 yen mainly due to improvement in foreign exchange losses. As a result, ordinary income was 2,800,000,000 yen. Extraordinary income net of extraordinary loss was 100,000,000 yen Income before income taxes was 2,900,000,000 yen After subtracting income taxes and net income attributable to non controlling interest, net income attributable to owners of parent was 1,100,000,000 yen Let me move on to net sales and operating income by segment. As you can tell at a glance, electronic devices was a contributor to our year on year increase in operating income and pushed up total operating income. Income of electronic devices increased due to strong performance of semiconductor business. I will now look at details of each segment. In Energy Solutions, net sales were 42,600,000,000 yen down 3,900,000,000 yen year on year. Operating income was 1,500,000,000 yen up 200,000,000 yen In the Energy Management business, net sales decreased and operating results worsened year on year, primarily due to a decline in smart meter sales volumes. In the transmission and distribution systems business, net sales decreased and operating results worsened year on year despite strong performance resulted from a rise in capital investment demand due to the absence of large scale orders from the industrial field that were recorded in the previous equivalent period. In the power supply systems business, net sales decreased year on year, following lower overseas demand in switchgear and control gear operations. However, operating results improved year on year due to the benefits of cost reduction efforts. In Energy Solutions, the ED and C Components business achieved the highest growth. Net sales and operating results improved significantly year on year as a result of strong demand seen overseas and from machine to another machinery manufacturers. In Industry Solutions, net sales were 53,100,000,000 yen up 6,700,000,000 yen year on year. Operating loss was 2,800,000,000 yen deterioration of 300,000,000 yen year on year. In the factory automation business, net sales and operating results improved year on year due to strong conditions in Japan and China centered on markets for inverters, factory automation components and industrial motors. In the environmental and social solutions business, net sales improved year on year as a result of higher demand in radiation related equipment and system and environment related operations. However, operating results worsened following a decrease in overseas sales of electrical equipment for railcars. In the equipment construction business, net sales decreased and operating results worsened year on year as a rebound from large scale orders recorded in the previous equivalent period offset the benefits of strong performance in plant and air conditioning equipment operations. In the IT Solutions business, net sales and operating results improved year on year due to an increase in orders from the public sector and the academic sector. Moving on to Power and New Energy. Net sales were 17,000,000,000 yen up 3,000,000,000 yen year on year. Operating income was 800,000,000 yen down 200,000,000 yen year on year. Net sales were up year on year, thanks to increase in large scale orders for solar power generation systems, but operating results worsened year on year as a result of a less favorable sales mix. In electronic devices, net sales were 30,500,000,000 yen up 2,000,000,000 yen year on year. Operating income was 2,800,000,000 yen up 1,200,000,000 yen year on year. In the semiconductors business, net sales and operating results improved year on year following a rise in demand for semiconductors for the industrial field. In the magnetic disks business, net sales and operating results decreased year on year due to a decline in demand. Sales of magnetic disks decreased 1,600,000,000 yen and sales of semiconductors increased 3,600,000,000 yen That means semiconductors drove the growth of this segment. In Foods and Beverage Distribution, net sales were 25,800,000,000 yen almost flat year on year. Operating income was 1,200,000,000 yen down 600,000,000 yen year on year. In the vending machines business, net sales decreased and operating results worsened year on year as a result of the impacts of a temporary decline in investment stemming from the revision of the expansion plans of customers in the Chinese market, which outweighed the benefits of the brisk demand seen in the domestic market. In store distribution, net sales increased year on year due to a rise in demand for store equipment for convenience stores, but operating results were sent year on year as a result of a less favorable sales mix. Next, I will discuss net sales by Japan and overseas area. Net sales in Japan increased 10,700,000,000 yen but overseas sales decreased 2,300,000,000 yen As for breakdown of 2,300,000,000 yen net sales in Asia decreased 3,200,000,000 yen due to sales decrease in electrical equipment for railcars and thermal power. It was mainly because of absence of large scale orders recorded in the previous equivalent period. In China, net sales decreased 600,000,000 yen year on year. Sales increased considerably in ED and C Components, factory automation and power semiconductors supported by increased investment in automation in China. On the other hand, sales decreased in magnetic disks due to changes in sales channels and sales decreased in vending machines in China. In total, net sales in China decreased 600,000,000 yen However, the impact of changes in sales channels for magnetic disks was slightly less than 3,000,000,000 yen So net sales in China increased slightly less than 3,000,000,000 yen in real terms year on year due to strong performance mainly of semiconductors, stemming from an increase in investment in automation made locally in China. In Europe, net sales were up 300,000,000 yen year on year. In Americas, net sales were up 1,300,000,000 yen year on year due to sales increase in electrical equipment for railcars and geothermal power. Let me move on to consolidated balance sheet next. Total assets stood at 864,700,000,000 yen at the end of the Q1 of fiscal year 2017, down 22,000,000,000 yen quarter on quarter. Total current assets decreased 29,200,000,000 yen It is because progress of collection of notes and account receivables, trade receivables for sales for the last fiscal year counteracted the rise in inventories for future sales. Total long term assets increased 7,100,000,000 yen mainly due to an increase stemming from valuation difference on available for sale securities against the backdrop of high stock prices same in this fiscal year. As for liabilities, other liabilities decreased significantly due to payment of income taxes and bonus. There is a characteristic of this year's trend. That is to say, payment of income taxes and local taxes increased slightly more than 20,000,000,000 yen due to payment of taxes associated with gain on sales of shares in Fujitsu we sold in the last fiscal year. Other liabilities decreased significantly because of an increase in payment of taxes. As a result, interest bearing debt increased. Net interest bearing debt came to 147,000,000,000 yen up 37,700,000,000 yen year on year. Net debt equity ratio was 0.5 times. As for net assets, shareholders' equity or total net assets net of non controlling interest was up mainly due to an increase in valuation difference on available for sale securities stemming from increasing market value of investment securities. As a result, equity ratio was 34.4%, up 1.6 percentage points year on year. So far, I talked about financial results for the Q1. Next, I will discuss consolidated financial results forecast for the first half. We decided to raise forecast for the first half out of consideration for current conditions. In the Q1, both sales and income for semiconductors, ED and C Components and Factory Automation exceeded forecast significantly due to increased demand. On the other hand, results of vending machines in China were slightly below forecast due to delay in the expansion plans of customers. By incorporating these factors, we made an upwards revision for the first half. Net sales forecast was revised up by 1,100,000,000 yen from the previous forecast to 370,000,000,000 yen Operating income forecast was revised up by 900,000,000 yen to 7,000,000,000 yen 7,000,000,000 yen is a record high first half operating income. Assumed exchange rate for the first half is kept unchanged. So exchange rate is not included in the factors for the upward revision. Forecast for each segment is revised as shown on the table at the bottom. In Energy Solutions, both net sales and operating income forecast were revised upward, mainly due to an increased demand for ED and C components, both in Japan and overseas. In Industry Solutions, both net sales and operating loss forecast were revised upward due to an increase in factory automation and process automation against the backdrop of increased demand for capital expenditures, both in Japan and overseas. In Power and New Energy, both net sales and operating income were revised downward, mainly due to sales decrease in service business. In electronic devices, both net sales and operating income were revised significantly upward by factoring in a rise in demand for semiconductors for the industrial field. In food and Ferrous Distribution, we made a downward revision while incorporating the delay in expansion plans of vending machine customers in China. Let me move on to year on year comparison for the first half after upward revision. Net sales are forecasted to be 370,000,000,000 yen up 18,400,000,000 yen year on year. Operating income is forecasted to be up 1,100,000,000 yen In Energy Solutions, net sales are expected to be down year on year due to the absence of large scale orders for transmission and distribution systems that were recorded in the previous equivalent period. However, operating income will be up mainly due to an increase in income of VD and C Components. In Industry Solutions, both sales and income will be up due to strong performance of factory automation and process automation. In Power and New Energy, net sales will be up because of an increase in large scale orders for thermal power generation plants and others. On the other hand, operating income will be down year on year due to downward revision for service business and a change in mix of orders from the previous equivalent period. In electronic devices, both sales and income will be up due to a rise in demand for power semiconductors for the industrial field. In food and beverage distribution, net sales will be up due to year on year growth of store distribution in the first half despite the delay in expansion plans of vending machine customers in China. However, operating income will be down due to a less favorable sales mix. Next, I will discuss full year forecast. We decided to keep consolidated full year forecast unchanged, but revised segment forecast by reflecting revised forecast for the first half. Therefore, there is no change to forecast as a whole. Forecasts for semiconductors were revised upward as we expect current good performance will be maintained in the second half. In food and beverage distribution, we made a downward revision by factoring in revised plans for showcases in store distribution in addition to the delay in expansion plans of vending machine customers in China. In Energy Solutions, Industry Solutions and Power and New Energy, revisions made for the first half were reflected in full year forecast. We would like to closely examine full year forecast in light of market trends after the first half is over. So this time, we decided to keep full year forecast unchanged. Lastly, I will talk about full year forecast for fiscal year 2017 in comparison with results for fiscal year 2016. We didn't revise consolidated forecasts. Year on year change is the same. By segment, in electronic devices, net sales are expected to be down year on year. The decrease includes year on year sales decrease of 5,300,000,000 yen in magnetic disks. That means net sales of semiconductors will increase year on year. In revised forecast, we factored in all possible risks assumed at present, and we recognize these are minimum forecasts. That concludes my