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Edited Transcript of 6504.T earnings conference call or presentation 1-Nov-19 1:00am GMT

Q2 2020 Fuji Electric Co Ltd Earnings Presentation

Tokyo Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Fuji Electric Co Ltd earnings conference call or presentation Friday, November 1, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Junichi Arai

Fuji Electric Co., Ltd. - Managing Exec. Officer, GM of Corp Mgmt Planning HQ & Export Admin Office and Director

* Michihiro Kitazawa

Fuji Electric Co., Ltd. - President & Chairman of the Board

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Presentation

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Michihiro Kitazawa, Fuji Electric Co., Ltd. - President & Chairman of the Board [1]

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Good morning, ladies and gentlemen. I am Michihiro Kitazawa, President. Thank you very much for coming to our results briefing despite your busy schedule. I truly appreciate it.

As you already know, we announced results for the first half, a sense of disappointment hovers around the numbers. It was primarily due to components. Results in power semiconductors, ED&C components and FA components, mainly including inverters, dropped sharply. Results of planned system-related businesses partially offsets the drop, but not fully. These are all the results.

When I look at trends in the first half, for example, power semiconductors clearly hit the bottom. There are still uncertainties in ED&C components. There are also uncertainties in FA components. That is a current situation. In such a trend, we reviewed forecast for the second half. Operating income was down JPY 7.4 billion year-on-year in the first half. I don't think decrease in the second half will not be that big. We expect operating income will be down JPY 2.6 billion in the second half and down JPY 10 billion in the full year. And that's what we announced this time.

We think these are minimum requirements to defend at all costs. Net sales of components will decline. However, fortunately, in Power Electronics Systems, orders for plant systems are increasing significantly. Accordingly, net sales will also increase in the second half.

As a result, net sales will increase and operating income will decrease for the full year. This is a situation we have hardly experienced so far. But as I said earlier, orders have been kept flat year-on-year and will increase year-on-year for the full year.

So how to analyze the current situation of Fuji Electric is the biggest point. As President, I am not pessimistic at all now. Financial crisis was triggered by the collapse of Lehman Brothers in the past. We were heavily damaged at that time. This time, although we are facing these situations, we will still be able to generate operating income of JPY 50 billion. We became such a company. I myself think, we were able to confirm our growth.

In that respect, what should we do from the second half onwards? For plant and equipment investments, we will suspend billions of yen of investments which are not urgent. However, we will make other plant and equipment investments. For power semiconductors, we will slightly accelerate and increase the amount of investments.

I hope you will ask questions about the details later. Judging from the situation of customers related to EVs, we need to accelerate the timing of investments. Otherwise, we cannot meet their demand. So we will make sure to do so.

R&D expenditures can be cut if we want. However, we will not do so. For the next year onwards, we will continue with research and development we have to work on. Although the situation is very tough, I intend to manage our business for the next 6 months so that we can be on an upward current from the next fiscal year onwards. Although we have to announce these numbers, environment or situation are not so dismal. I hope you will understand that point at least.

As I said earlier, among other things, orders are not declining. When economy recovers in the world, I'm sure Fuji Electric will also recover or move upward. Detailed numbers will be discussed later. I hope you will ask questions about what you have in mind. 3 corporate general managers, including those of Electronic Devices Business Group, Power Electronics Systems Energy business group, Power Electronics Systems Industry business group are attending today. We expect questions will be asked on many different subjects, we will respond to them.

I would appreciate your cooperation today. Thank you very much.

Now we will move on to explanation of financial results. Mr. Arai, Managing Executive Officer, will give a presentation.

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Junichi Arai, Fuji Electric Co., Ltd. - Managing Exec. Officer, GM of Corp Mgmt Planning HQ & Export Admin Office and Director [2]

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Firstly, I will talk about financial results for the first half of fiscal year 2019. In our first half of fiscal year 2018, market conditions were good, partly due to that, both sales and income were down, unfortunately.

Net sales were JPY 406.7 billion, down JPY 12.8 billion year-on-year. Out of that, reduction of JPY 5.5 billion was due to foreign exchange rate. That means net sales were down JPY 7.3 billion in real terms year-on-year.

Operating income was JPY 11.1 billion, down JPY 7.4 billion year-on-year, negative JPY 3.8 billion was from decrease in sales volumes, negative JPY 10.4 billion was from increase in fixed cost, negative JPY 1.1 billion was from exchange rate effect. As a result, operating income was down JPY 7.4 billion year-on-year.

As for nonoperating income and expenses, negative JPY 1.6 billion was from impact of foreign exchange loss. In total, nonoperating items deteriorated by JPY 1.2 billion.

Ordinary income was JPY 10.9 billion. As for extraordinary income and loss in the last fiscal year, we booked foreign exchange gain associated with our merger of semiconductors and magnetic disks businesses into one subsidiary in Malaysia. So negative JPY 1.3 billion was from absence of that factor. Also due to reduction in gain on sales of investment securities and loss on valuation of investment securities, extraordinary income, net of extraordinary loss, decreased JPY 2.6 billion.

Income before income taxes was JPY 10.1 billion. Net income attributable to owners of parent was JPY 6 billion, down JPY 6.6 billion.

Let me move on to year-on-year comparison of operating income. Operating income was JPY 11.1 billion, down JPY 7.4 billion year-on-year from JPY 18.5 billion.

As I mentioned earlier, net sales were down JPY 12.8 billion. Net sales were down JPY 7.3 billion in real terms, excluding exchange rate effect.

Decrease in sales volumes pushed down operating income by JPY 3.8 billion. The content changed slightly, negative JPY 4.8 billion was from components due to drop in sales, production also dropped. As a result, production profit came down.

Sales and income mainly of systems increased positive JPY 1 billion was from that. After offsetting positive JPY 1 billion, net impact of decrease in sales volumes was negative JPY 3.8 billion. Negative JPY 2.4 billion was from increase in fixed cost as for the breakdown, negative JPY 1.4 billion was from personnel expenses, negative JPY 900 million was from R&D expenditures.

In the last fiscal year, allowance of retirement benefits was partially reversed. The impact was slightly more than JPY 1 billion. Therefore, personnel expenses were up about JPY 200 million in real terms.

Negative JPY 1.1 billion was from exchange rate effect. As a result, operating income was down JPY 7.4 billion. Excluding exchange rate effect, which is an external factor in reduction of expenses in the previous fiscal year that I mentioned earlier, operating income was down approximately JPY 5 billion year-on-year. Reduction in sales and production of components was a major negative factor.

This page shows net sales and operating income by segment. Net sales of Power Electronics Systems Energy were up and operating income of Food and Beverage Distribution was up. Excluding those, sales and income were down in each segment, unfortunately.

Now I will look at business results by segment in detail. In Power Electronics Systems Energy, net sales were up JPY 4.3 billion, but operating income was down JPY 1.3 billion. In this segment, there are 3 businesses. In the energy management business, net sales decreased as a result of the rebound from large-scale projects undertaken overseas during the previous equivalent period, but operating results increased slightly due to the benefits of cost reduction efforts.

In the Power Supply and Facility Systems business, switchgear and control gear operations of a company in Singapore we acquired some years ago, grew significantly, and large-scale orders were received. As a result, net sales and operating results increased despite the absence of a large-scale order recorded in the previous equivalent period in Japan.

In Energy segment, one important point is ED&C components. In the ED&C components business, net sales and operating results decreased, unfortunately, due to reduced demand from machine tool and other equipment manufacturers. In Power Electronics Systems Industry, net sales were down JPY 3.4 billion, and operating results were down JPY 2.6 billion. The point here is automation systems. In the automation systems business, net sales and operating results decreased following reduced demand for major components, such as low-voltage inverters and factory automation components in Japan, China and other parts of Asia.

In our social solutions business, net sales and operating results decreased year-on-year due to the absence of large-scale projects for railcars in North America, recorded in the previous equivalent period.

In the equipment and construction business, net sales decreased, but operating results increased slightly due to the benefits of cost reduction efforts and others.

In the IT solutions business, net sales increased significantly because of a rise in large-scale orders in the private sector. However, margin of this business is not as high as that of other components. Therefore, contribution to operating results was not so big.

In Electronic Devices, net sales were down JPY 6 billion, and operating income was down JPY 2.6 billion. The numbers in squares indicate exchange rate effect. Excluding exchange rate effect, net sales were down JPY 3 billion, and operating income was down JPY 1.8 billion.

Net sales and operating results for semiconductors decreased as reduced demand in the industrial field centered on the Japanese and Chinese markets, as well as the impacts of foreign exchange influences outweighed continued strong demand for automotive power semiconductors.

Net sales and operating results for magnetic disks decreased due to reduced demand for products for computer and data center applications. However, the drop in operating results was very small. Operating results held up well. The breakdown of sales between semiconductors and magnetic disks is shown here. Sales for semiconductors were down from JPY 58.1 billion to JPY 54.5 billion. Sales for magnetic disks were down from JPY 13.7 billion to JPY 11.3 billion.

Distribution of semiconductor sales by field, distribution between automobile field and industrial field is also strong. Ratio of automobiles to the total increased from 27% to 34%. In Food and Beverage Distribution, net sales were down, but operating income was up. In the vending machines business, net sales and operating results decreased due to reduced demand in the Japanese and Chinese market. In the store distribution business, net sales and operating results increased, thanks to an increase in demand for store equipment for convenience stores, including new model equipment.

Net sales of vending machines were down. Operating results of store distribution were up in this segment. In Power Generation, net sales and operating results decreased year-on-year due to large-scale solar power generation system projects in the previous equivalent period.

Net sales were down JPY 12.8 billion from JPY 419.4 billion to JPY 406.7 billion. As for net sales by Japan and overseas area, net sales in Japan were down slightly or almost flat. Overseas, sales were down JPY 11.4 billion. However, JPY 5.5 billion of exchange rate effect is included in the number. Overseas, sales were down about JPY 6 billion in real terms. As for breakdown of JPY 11.4 billion of decrease in overseas sales, I think, overseas sales were overwhelmingly impacted by U.S.-China trade friction. Overseas sales were down across the board in components, ED&C components, automation systems, semiconductors and vending machines.

Net sales in China were down JPY 9 billion. That means the majority of the drop was in China. Net sales in Asia and others were also down JPY 1.8 billion.

We added a slide showing year-on-year comparison of orders last time. This slide shows year-on-year comparison of net sales. Net sales were down JPY 12.8 billion. Net sales of major components in vending machines, semiconductors, factory automation components, including inverters, motors and others and ED&C components were down JPY 16.3 billion. Decrease in net sales led to decrease in production profit and had a significant impact on profitability.

Net sales of Power Generation were down due to the offsets of large-scale power plants orders recorded in the previous equivalent period.

On the other hand, net sales of systems and others were up slightly more than JPY 10 billion. Both sales and income for systems and others were up.

We added a slide showing orders received for reference this time as we did last time. Orders were almost flat or slightly up. The trend of orders was similar to that of net sales. Orders received for systems and others were up JPY 23.6 billion. Orders received for major components were down JPY 15.7 billion.

As I mentioned earlier, orders received for Power Generation were down JPY 7.6 billion year-on-year. Orders for systems and others was stronger than sales. Factory Automation include low-voltage inverters, motors, FA components, measuring instruments and others. For major components, the bottom was hit in the first quarter of fiscal year 2019, and the same level continued in the second quarter. We expect slight recovery in the third and the fourth quarters. Also for low-voltage inverters, which are major components, the bottom was hit in the first and second quarters. We expect a pick up in the third and the fourth quarters, although significant growth cannot be expected, we are seeing recovery from the bottom. For ED&C components, we think the bottom was hit. In the first quarter, orders will be flat or slightly increased in the second, the third and the fourth quarters.

For semiconductors, the bottom was hit in the third quarter of fiscal year 2018, but orders are not increasing rapidly. There are a lot of differences between automobile and industrial applications.

Semiconductors for automobiles are steadily increasing every quarter. Semiconductors for industrial applications fluctuate, unfortunately, and are not increasing after the third quarter when the bottom was hit.

Forecast, we announced on July 25, were JPY 405.5 billion in net sales and JPY 4.6 billion in operating income. Net sales were JPY 1.2 billion higher than forecast, and operating income was JPY 1.5 billion lower. There is slight exchange rate effect. Negative exchange rate effect on net sales is JPY 1 billion and JPY 200 million on operating income.

Ordinary income was JPY 900 million lower than forecast. Net income attributable to owners of parent was JPY 6 billion, which was JPY 500 million lower than forecast.

By segment, net sales of Power Electronics Systems Energy was JPY 3.9 billion higher than forecast. Sales were higher, stemming from ahead of schedule recording in power supply and facility systems sales. The major factors were JPY 1.5 billion reduction of operating income include Power Electronics Systems Industry. Sales were higher due to large-scale IT solution orders, but income was lower due to reduced demand for high-margin, low-voltage inverters and factory automation components. Besides, in Electric Devices, income forecast was lower than July forecast due to lower semiconductor demand and losses for new product launch. These 3 components segment are factors for reduction of operating income.

Next, I will talk about balance sheet. Balance sheet looks different between March 31, 2019 and September 30, 2019. Inventories increased mainly for plant-related sales expected for the second half. Intangible fixed assets include intangible fixed assets of power electronics-related companies. Total long-term assets increased JPY 10 billion.

To cover the expenses, we increased interest-bearing debts by JPY 31.9 billion and used JPY 6.2 billion of cash and time deposit. As a result, net interest-bearing debt was JPY 163.2 billion, up JPY 38.4 billion. Net D/E ratio was 0.5x. Equity ratio was 37.1%.

This page shows cash flow. Net cash provided by operating activities was JPY 1.3 billion. Net cash used in investing activities was JPY 23.8 billion. Free cash flow was negative JPY 22.6 billion in the first half of fiscal year 2019.

As for factors, there was partial cancellation of retirement benefit trust of approximately JPY 20 billion in the previous equivalent period. Cash flows from operating activities were positive. On the other hand, cash flows from investing activities were negative due to M&A and active investments, as I mentioned earlier. In total, free cash flow was negative JPY 22.6 billion. For the full year, free cash flow is expected to be slightly less than positive JPY 20 billion.

This page shows comparison between results for fiscal year 2018 and forecast for fiscal year 2019. Net sales are forecasted to be JPY 915 billion; operating income, JPY 50 billion; and net income attributable to owners of parent, JPY 33 billion.

Net sales will be up JPY 100 million, and operating income will be down JPY 10 billion. For reference, exchange rate effect is indicated. Exchange rate effect on net sales will be JPY 9.9 billion. That means net sales will increase JPY 10 billion in real terms. Excluding exchange rate effect of negative JPY 3 billion, operating income will decrease JPY 7 billion in real terms.

The yen is assumed to appreciate against the renminbi. Assumed exchange rate of the renminbi was changed from JPY 16 to JPY 15 for the second half. For forecast by segment, exchange rate effect is indicated for reference. In Power Electronics Systems Energy, net sales will be down JPY 7.1 billion, and operating income will be down JPY 3 billion. Lower sales and income are expected due to absence of large-scale power supply and facility system orders recorded in the previous fiscal year. Reduced demand for ED&C components and smart meters and higher R&D expenditures.

In Power Electronics Systems Industry, net sales will be up JPY 14.5 billion, and operating income will be flat. Excluding exchange rate effect, operating income will be up about JPY 500 million. Sales will increase significantly as a result of large-scale IT solutions orders from the public sector.

The benefits of acquiring a newly consolidating [FGN] in India in the automation systems business and scrubber sales, but operating results unchanged year-on-year due to reduced sales of high-margin, low-voltage inverters and factory automation components.

In Electronic Devices, net sales will be down JPY 1.3 billion, and operating income will be down JPY 4 billion. Excluding exchange rate effect, sales will be up and operating income will be down JPY 2 billion. Sales in semiconductor operations will be higher due to increased demand for automotive semiconductors. But as we will continue to make investments actively, depreciation and leases paid will increase slightly more than JPY 2 billion.

Besides, due to a rise in expenses for starting up new production equipment, the impacts of new product launch losses and foreign exchange influences, operating income will be down JPY 4 billion. Excluding exchange rate effect, operating income will be down JPY 2 billion. We forecast an increase in depreciation and leases paid of slightly more than JPY 2 billion. So if we take those factors into consideration, operating income will be almost flat year-on-year.

In Food and Beverage Distribution, net sales will be down, and operating income will be flat. In a vending machine business, sales and income will decrease due to reduced demand in China. In a store distribution business, income will be higher as a result of strong demand for convenience stores. Unfortunately, sales will be slightly down.

In Power Generation, net sales will be up JPY 9 billion. Operating income will be down slightly by JPY 500 million due to a less favorable sales mix.

As for dividend, interim dividend in the previous fiscal year was JPY 40. We plan to pay interim dividend of JPY 40 per share also in this fiscal year. We want to make efforts to maintain annual dividend of fiscal year 2018 at least.

This page shows comparison with previous forecast for reference. Previous forecasts were kept unchanged from forecast announced in April. In previous forecast, we forecasted decrease both of sales and income for the first half. But for the second half, market outlook remains uncertain as of July 25, and we didn't want to make an incomplete revision.

We also thought we would revise forecast after the end of the first half and kept original forecast unchanged. This time, we made a revision as shown on this page. We revised down net sales forecast by JPY 15 billion, operating income by JPY 12 billion and net income attributable to owners of parent by JPY 7.4 billion.

Revised forecast by segment are also shown here. As I mentioned earlier, components, including ED&C components in Power Electronics Systems Energy, automation systems in Power Electronics Systems Industry, and semiconductors in Electronic Devices, are lower than previous plan.

As President said earlier, we cut nonurgent and unnecessary investments and reduced investments by billions of yen from the budget. However, investments mainly for semiconductors will increase year-on-year. Due to volume of components, income decreased. In production, we didn't increase inventories. So when market conditions recover as production, profit and operating margin are the same, I think we are maintaining strong earnings structure. We cannot do anything about external factors, such as exchange rate and market conditions. We intend to further reinforce and enhance earnings structure. We aim at orders of more than JPY 925 billion, net sales of JPY 915 billion and operating income of JPY 50 billion as minimum requirements.

That concludes my presentation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]