Fuji Electric Co Ltd

TSE:6504

Earnings Call Transcript 2018-Q3

[Junichi Arai, executive]

Good morning. I'm Junichi Arai, Corporate Management Planning Headquarters. I will explain about consolidated financial results for the 9-month period with the third quarter results of fiscal year 2017.

This table compares 9 months' consolidated financial result of fiscal years 2016 and '17. Net sales were JPY 601.2 billion, up $45.9 billion year-on-year. This is JPY 43.5 billion increase in yield comps considering gain on translation of earnings of overseas subsidiaries of JPY 2.4 billion. Operating income was JPY 22.4 billion, improved by JPY 11.7 billion year-on-year. Ordinary income increased JPY 10.8 billion year-on-year to JPY 21.8 billion. Net income attributable to owners of parent was JPY 13.4 billion, up JPY 8.5 billion year-on-year.

As for operating income or loss, price decline was recognized as minus JPY 11.3 billion. An increase in fixed cost was posted as minus JPY 2 billion. On the other hand, we recognized improvement in increase in sales volumes of JPY 12.9 billion, cost reduction of JPY 11.1 billion and exchange rate effect of JPY 1.1 billion. As a result, we could achieve JPY 11.7 billion.

As for nonoperating income or loss, foreign exchange losses were recognized as JPY 700 million, and this was the main factor to post minus JPY 900 million in this item.

Extraordinary income or loss include gain on sales of investment securities of JPY 1.5 billion. As a result, ordinary income increased by JPY 10.8 billion and net income attributable to owners of parent rose JPY 8.5 billion as I said earlier.

We could achieve record high result for 9-month 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 JPY 11.5 billion in fiscal year 2015, so we could almost double that record this time.

Former records for ordinary income was JPY 13.6 billion, and net income attributable to owners of parent was JPY 11.2 billion, and we could break both of them this time.

In the next slide, we compare fiscal years 2016 and '17 by segment. Industry Solutions and the Power Electronics Systems, Electronic Devices and Food & Beverage Distribution are drivers to increase overall performance significantly. And both net sales and operating income increased.

Now I will explain each segment. Energy Solutions of Power Electronics Systems has 4 business areas. In energy management, both net sales and operating results decreased due to a declined smart meters sales volume.

Transmission and distribution decreased net sales and operating results year-on-year due to the absence of large-scale orders from the 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 controlgear 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 ED&C 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 construction recognized decreased net sales and operating results in the third quarter as a rebound from large-scale orders recorded in the same quarter of the 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 24.3 billion year-on-year, and operating income increased as well by JPY 3.6 billion.

Next is about Power and New Energy. We recognized a slight increase in net sales and a decrease of JPY 1.3 billion 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 the geothermal power generation systems. Less favorable sales mix decreased operating income by JPY 1.3 billion.

Next segment is Electronic Devices. Net sales increased by JPY 7.1 billion and operating income grew by JPY 5.2 billion.

In semiconductors business, net sales and operating results significantly improved year-on-year, owing to increased demand from industrial field for machine tools in Japan and 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 & Beverage Distribution, which is another business driver. It increased net sales by JPY 12.5 billion, and operating income by JPY 2.7 billion year-on-year. There was stable demand for vending machines in Japan, and China market hit the bottom and started 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 & Beverage Distribution increased net sales by JPY 12.5 billion and operating results by JPY 2.7 billion.

Next slide shows net sales for 9 months in Japan and overseas by area. In total, net sales increased JPY 45.9 billion year-on-year, including overseas increase of JPY 12.2 billion and domestic increase of JPY 33.6 billion.

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 JPY 4.5 billion and JPY 5.4 billion, respectively, in businesses such as Energy Solutions, Industry Solutions and semiconductors.

Americas recorded the lowest net sales among these 4 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 third quarter's results from October to December between fiscal years 2016 and '17. Net sales increased by JPY 2.4 billion year-on-year. However, this includes loss on translation of earnings of overseas subsidiaries of JPY 6.5 billion. Therefore, net sales increase in yield terms was JPY 8.9 billion.

Operating income increased JPY 4.8 billion. Ordinary income rose JPY 1.8 billion. And net income attributable to owners of parent grew JPY 2.3 billion to record increase both in net sales and income, same as 9 months accumulated results.

By segment basis, Industry Solutions and the Power Electronics Systems achieved increased net sales and operating income; Electronic Devices increased operating income; Food & Beverage Distribution achieved increased net sales and operating income. Again, this shows roughly the same situation as 9 months results.

This is the 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 JPY 22.9 billion. Inventories increased by JPY 32.5 billion. 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 JPY 20 billion. As a result, other liabilities decreased.

Decreased cash balance was covered by increased interest-bearing debt of JPY 29.5 billion to make net interest-bearing debt increased by JPY 41.1 billion from the end of March 2017 to JPY 150 billion.

Net assets rose JPY 25.7 billion. Deducting gain on revaluation of shares we own, retained earnings for 9 months and dividend of JPY 8.6 billion, retained earnings increased by JPY 4.8 billion. As a result, net assets were posted as JPY 349.5 billion and equity ratio was improved by 1.5 points to 34.3%.

Net debt/equity ratio was increased by 0.1x to 0.5x. Free cash flow is estimated to be about JPY 30 billion 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 had been raised from JPY 850 billion to JPY 870 billion last time. And in this forecast, it was increased by JPY 5 billion to JPY 875 billion.

Operating income had been increased by JPY 4 billion previously from JPY 48 billion to JPY 52 billion. And we made it JPY 53 billion with an increase by JPY 1 billion.

Forecast for ordinary income and net income attributable to owners of parent remain unchanged as JPY 51 billion and JPY 31 billion, respectively.

Assumption of foreign exchange rates are JPY 105 to the U.S. dollar, JPY 115 to the euro and JPY 15.7 to renminbi.

Let me turn to the forecast by segment. Considering the results up to the third quarter and outlook for the future, the forecast for Industry Solutions in Power Electronics Systems increased by JPY 3 billion for net sales and JPY 500 million for operating income, respectively.

Electronic Devices raised net sales forecast by JPY 2 billion and operating income by JPY 1.5 billion. Food and Beverage Distribution forecast increased JPY 2 billion for net sales, but operating income is unchanged, anticipating price competition will get severe-er (sic) [more severe].

For Power and New Energy, considering some deals are postponed to the next fiscal year, its forecast was decreased by JPY 2 billion for net sales and by JPY 500 million for operating income.

In total, forecasts were raised for net sales by JPY 5 billion and for operating income by JPY 1 billion.

Just for your reference, if the exchange rate continues the current level at JPY 110 or JPY 109 to the U.S. dollar, we estimate that we'll improve net sales by slightly over JPY 10 billion and operating income by a little below JPY 1 billion.

This slide compares full year forecast for fiscal year 2017 with the previous fiscal year results. Net sales are expected to grow by JPY 37.2 billion to JPY 875 billion. Operating income is estimated to increase by JPY 8.3 billion to JPY 53 billion. Ordinary income improvement is expected to be JPY 4.7 billion. Net income attributable to owners of parent was JPY 41 billion in fiscal year 2016, and this includes gain on sale of Fujitsu shares of JPY 13 billion. Therefore, the forecast for this fiscal year is reduced by JPY 10 billion to JPY 31 billion.

By segment basis, Industry Solutions is expected to increase net sales by JPY 22.9 billion and operating income by JPY 4.6 billion. In Electronic Devices, both items are forecasted to increase by JPY 3.9 billion and JPY 4.8 billion, respectively. And Food & Beverage Distribution also estimated increase in the same items by JPY 6.4 billion and JPY 500 million each. Power and New Energy is estimated to raise net sales. However, operating income is forecasted to decline by JPY 2.2 billion because of less favorable sales mix.

As a result, the total net sales are estimated to increase by JPY 37.2 billion year-on-year and operating income is expected to be improved by JPY 8.3 billion.

Since we receive many inquiries, we started to disclose year-on-year comparison of third 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 past semiconductors and inverters for the third quarter just for your reference.

We forecast JPY 53 billion for operating income of fiscal year 2017. But currently, we are working on reviewing our business operations as part of an operational transformation initiative. And it generated about JPY 1 billion cost reduction out of the total expenses of JPY 95 billion in the third quarter only.

We expect to make further additional savings of several hundred millions of yen by such cost-reduction efforts in the fourth quarter as well.

We can also expect several hundred million yen improvement from foreign exchange gain if the exchange rate continues to be at the current level.

Based on these assumptions, we anticipate being able to increase the operating income from JPY 53 billion by around JPY 1 billion. That is all for my explanation. Thank you.