Toshiba Corp

TSE:6502

Earnings Call Transcript 2019-Q1

[Unknown Attendee]

Thank you very much for joining us today despite the heavy rain. It is time, so I would like to now start the announcement of the first quarter consolidated results for fiscal year 2018. First of all, I would like to introduce the participants from Toshiba: Masayoshi Hirata, Representative Executive Officer and Corporate Executive Vice President; Hideya Takashima, Group Manager of Accounting Division; Kohei Hayashi, Head of Investor Relations team. Mr. Hirata will first make a presentation.

[Masayoshi Hirata, executive]

Good afternoon. Now let me start with my presentation. Please refer to the PowerPoint documents. I would like to report on our business results.

Please turn to Page 4. As usual, we're showing the highlights of business results. Despite the higher sales in the Infrastructure Systems & Solutions and Electronic Devices business and Storage Solutions, and due to the impacts of the deconsolidation of Landis+Gyr through IPO and also declining performance of Thermal Power Systems business, according to the decarbonization trends in Energy Systems & Solutions, overall sales decreased by about JPY 66 billion or 7.3% year-on-year to JPY 842.3 billion. As for the ForEx, the Memory business was excluded, so the negative effect of the exchange rate changes year-on-year were about JPY 4 billion. Excluding this impact, the sales would have decreased by about 6.8%.

Now despite improvements in operational results in the Infrastructure Systems & Solutions business and Industrial ICT Solutions business, lower profits in the Storage & Electronic Devices Solution and Energy Systems & Solution businesses led to the decrease of overall operating income by JPY 12.5 billion. There were no effect of the exchange rate. And in the fiscal 2017, we took the emergency measures, including the bonus reductions but we no longer have those measures. And because of this, there was a higher cost of JPY 14 billion in comparison to fiscal 2017.

With the nonoperating items, including the gain from the transfer of Toshiba General Hospital, and also, the equity earnings from Toshiba Memory from June, income before income taxes and noncontrolling interests increased year-on-year.

As for the net income, we booked the gain on sale of the Memory business and the discontinued operations numbers. And because of this, net income grew JPY 966.4 billion year-on-year to JPY 1,016,700,000,000.

Turning to Page 5, shows cash flow. There is a major impact from the sale of the Memory business. The free cash flow improved to JPY 1,573,600,000,000. As for the shareholders' equity, the equity attributable to shareholders of the company was JPY 1,861,900,000,000. Shareholders' equity ratio recovered to 37.9%.

Pages 6 and 7 shows the graphic representation of what I have just explained. So those are for your reference.

Now turning to Page 8. It shows the impact of the sales of Memory business on the business results. First, the profit on the sale of the Memory business was JPY 965.5 billion and in April and May time, it was still 100% subsidiary. So net income before the sale was JPY 72 billion. That was booked as discontinued business operations. And the revenue from the sale of the Memory business was JPY 1,453,600,000,000. That was the cash inflow. If I may explain this further, first of all, the Memory business was sold for about JPY 2 trillion. That was the cash inflow. And we made JPY 350 billion reinvestment. So this JPY 350 billion was negative number for us. And there was also JPY 200 billion cash and deposits of the Toshiba Memory, which were deconsolidated. So in terms of the cash flow, this JPY 200 billion was minus number or negative number. And as a result of those, it would be JPY 1,453,600,000,000. So after the sales, the sales were completed in June, so the equity in earnings from Toshiba Memory in June was recorded under the nonoperating item and it was JPY 12.2 billion.

And we're sorry to say, as you see at the bottom of Page 8. Probably you are interested in the business performance of the Toshiba Memory. However, the Toshiba Memory was already deconsolidated. So the numbers that we rebook can't be disclosed. However, I am not in a position to explain the business performance of the Toshiba Memory. So I hope that you understand.

Now let me turn to the next page showing the year-on-year analysis of the operating income. Q1 operating income in fiscal 2017 was JPY 13.2 billion. This includes JPY 14 billion that was the impact of the emergency measures. And this year, we did not take the emergency measures. So in comparison to that, we need to deduct this emergency measures number. And Landis+Gyr and Visual Products, those were included last year and no longer included this year. So did we need to deduct those 2.

And as a result, if you refer to your PowerPoint presentation material, it was minus JPY 0.2 billion if you deduct the emergency measures that happened in fiscal 2017. And from there, the marginal profit of JPY 6.3 billion that was worsening, and because of this, the fixed cost was reduced by JPY 7.2 billion. And this time, we booked JPY 0.7 billion as operating income of Q1 2018.

So the lower selling prices, which amounted to about JPY 4 billion, this is especially in the area of the Storage & Electronic Devices Solution, especially the hard disk for mobile applications, not for the data center. Hard disk prices came lower. And also, JPY 3.2 billion is in relation to the lower sales of the lower thermal -- Thermal Power Systems business. As for the fixed cost, again, the improvement of about JPY 7 billion. There are 2 major items: One is that last year, especially in Industrial ICT Solutions, we have conducted the structural reform, especially in Japan, and we're seeing the benefits of that. And also in Energy Systems, we have shut down some of the unprofitable overseas sites. So if we are in red with only the fixed cost, we have separated them or shut them down. So it would not affect the marginal profit, but only lead to the lower fixed cost and this contributed to the better operating income. So we're gradually seeing that effect.

So as a result, operating income was JPY 0.7 billion. So that was the Q1 operating income, which was JPY 0.7 billion. And you might say that this is a very low operating income number, but after the deconsolidation of the Memory business, we are more focused on the social infrastructure and especially for the government agencies and public sector customers, they tend to increase the orders in the second half of the year.

So in Q2 and Q3 and especially Q3 and Q4, we expect higher sales. That is the current pattern of our business. And so far for the full year, the sales number target, we believe, can be achieved, especially in Q4 sales is likely to be higher. And also about the profit, the second half, especially in Q4, we believe -- we expect higher profit in Q4.

Also, we're currently working on Toshiba Next Plan. And we would like to implement what we can execute as quickly as possible. And of course, that we need to reduce some of the cost and expenses or improvement of the procurement costs. Those efforts will be -- will bear fruits in the second half of this year. And because of these factors, the JPY 70 billion forecast of the operating income for the full year remains the same.

Now turning to Page 10. This shows the breakdown of the nonoperating income and loss and expenses. If you focus on the bottom part, the equity in earnings is improving. This is from the Toshiba Memory. And also there was a gain from the transfer of Toshiba General Hospital, that is also a positive factor. And the financial expenses was high in the previous year, but we no longer have them, so we expect to see those improvements.

The financial expenses at the top, for example, the contract fee for the borrowings, and so forth, we had a quite high number last year and that is no longer the case in this year.

Now turning to next page, which shows the free cash flow. On the right-hand side, you see the JPY 1,573,600,000,000, which is quite high a number, but through the sale of other memory, that cash inflow is included here. So excluding that part, what is shown in red is the cash flow from investing activities. So that is minus JPY 76.7 billion. And the cash flow from operating activity is shown in blue, and it was JPY 196.7 billion. And as you can see that the cash flow in Q1 was positive of JPY 120 billion. So in order to achieve our full year target as a first quarter, we believe that we have generated sufficient level of the cash.

Next, this is the balance sheet. On the asset side for the last 3 months, there was a JPY 450 billion increase over the last 3 months. For one, as you can see in the pink portion, there was a sale of Memory business, which increased the cash dramatically. And at the bottom, you see bottom, there is other assets, the JPY 350 billion reinvestment into the Memory chip business, and that investment is included. That's why, we have JPY 1,027.4 trillion in others.

And in terms of liabilities, we have non -- discontinued operations liability. And this we excluded from the consolidated account this time. So we have a JPY 450 billion increase in the total assets. On the liability side, first of all, at the top, there is the interest-bearing debt because of the repayment of the straight bond and the cash proceeds coming in from the sale of the Memory business, we are repaying the debt that we don't need any more gradually. Therefore, about JPY 100 billion, the interest-bearing debt is down. And the second one from the bottom is liabilities from the discontinued operations. This is already gone this time. So altogether, we have JPY 3.447 trillion in the previous term, but now it's down to JPY 2.820 trillion on the liability side.

Next, I'd like to talk about net sales and operating income by segment. This is the consolidated business results by segment. On Page 15, we have the details for Energy Systems & Solutions business. For the first quarter, net sales were JPY 132.5 billion and operating loss was JPY 4.3 billion. Compared with the previous year, this represents about JPY 85 billion reduction in sales and a JPY 4 billion reduction in operating income.

On the right-hand side, you can see the details about the impact, such as FX rate and the emergency measures impact.

JPY 4 billion reduction in operating income is explained here. At the bottom, you can see each business unit results. Nuclear Power Systems, we improved profitability and there is some increase in profit by JPY 2.3 billion. The second one from the bottom is Landis+Gyr deconsolidation, JPY 2.3 billion that was increase, and this is already offset. The problem is the Thermal & Hydro Power System because of the decarbonization, sales are down significantly by about JPY 20 billion and because of this, operating income turned to operating loss.

And within Toshiba Group, there were some changes. For the Transmission & Distribution Systems. There is Industrial Distribution System business. This has been transferred into Infra Solution business and because of the customers' relations, that would be best decision we thought. This means JPY 10 billion in sales and JPY 700 million in profit. This is the size of the business compared with the same period of the previous year, this is already gone from the segment. For the sales, this portion is explained all the decreases. For the operating profit JPY 700 million is already gone, so there is a fixed cost reduction of JPY 1.7 billion improvement in the fixed costs, and so forth.

Next is the Energy Systems order backlog situation. Order backlog, balance as you can see here, it is down about JPY 200 billion from one year ago. Major reasons are Hydro and Thermal Power Systems. Because of the lessons learned in the past for the past 1 year, we were being selective in receiving orders. We focused on profitability as well as customer relationships, and so forth. And we are applying strict criteria for taking orders. As a result, we had this result as you can see here. The gross profit margin in this order backlog, although I cannot mention specific numbers, compared with the previous year, the gross margin has improved. So going forward, from the second half of 2018 towards 2019 and 2020, we will increase the sales going forward. Although the volume is down overall, the profitabilities should start to go up.

Next is Infrastructure Systems & Solutions. We have sales of JPY 270.2 billion and operating income is JPY 0.1 billion. Compared with the previous year, there was an improvement in OP of JPY 1.7 billion. This includes the emergency measures cancellation. This is a JPY 4.1 billion negative impact. So in fact, there will be a more than JPY 6 billion improvement. Especially in the public infrastructure business, we see an increase in sales and orders received. Also, for the Railways and Industrial Systems, there is some offset numbers with ESS. So the sales has gone up by JPY 10 billion and a JPY 700 million improvement was made to the OP.

In terms of the Building and the Facilities, air-conditioner systems, sales have drastically improved. However, because of the increase in raw material prices, during the first quarter, we could not observe this impact. Therefore, the net profit is -- remains flat. However, the profit is down because in overseas, there is a strong competition, especially in China, especially elevator system. That's why we have a decrease in both in sales and profits.

In terms of the Storage Devices and Solutions, we have to JPY 217.7 billion and JPY 4.2 billion in sales and profit, compared with the same period of the last year, there is a decrease in OP of JPY 14.3 billion. The effect of exchange rate and emergency measures are shown on the right-hand side. Excluding these, there is a deterioration of about more than JPY 1 billion or JPY 11 billion. This is attributable to the 2 business units written here. The Semiconductor business unit was down JPY 7.7 billion in operating income year-on-year. And the discrete parts, the sales are increasing; however, the amount of profit remained flat.

Since the end of last year to this year, we have been investing into increased capacity in the production side. Because of the new facility our equipment is not fully recovered, there is some slackness in efficiency, but towards the end of the year, we should be able to improve the operations. Therefore, for the sales to be generated in the second half, we should see more profit coming out of that. For the system LSI, especially for communication systems, we had a delay in growth of the sales compared with expectation. Because of that, year-on-year operating profit deteriorated.

For NFT, NuFlare Technology, new products have been launched starting in April this year, for some of them, because they're new products, between our company and the customers' companies, there was no clear agreement on the maintenance. And then in the second half, we should incur some maintenance. And there are some big profits. It's down JPY 7.7 billion. However, half of this is NuFlare Technology and half of this is attributable to the LSI out of JPY 7.7 billion decrease.

For hard disks and others, net sales are up JPY 12.6 billion and operating income is down JPY 6.6 billion. This seems to be a quite unnatural development, but these results include, at this point in time from the memory company, we are procuring memory products and reselling the products to customers. We still have some remaining business of reselling those products. We still don't know what to do with this in the end. However, for the resale of those products increased by JPY 2.4 billion in profit. So the total profit increased by JPY 12.6 billion. So the remaining half increase came from hard disk products.

For the reselling business, there is almost neutral effect in terms of the profit. So effect is only on the sales. So the deterioration of the operating income by JPY 6.6 billion is solely attributable to hard disks. Because of the decrease in sales, not for the data center but for mobile devices and PCs, the quantity is shrinking and the sales are shrinking as well. And also, there is a ASP reduction, in our measurement compared with the previous year, there is a 5% ASP reduction year-on-year.

So because of that, sales are down. And for that same amount, there is a decrease in profit and JPY 6.6 billion decrease in operating profit because of the quantity as well as the ASP.

Of course, for the ASP reduction, we're trying to cover for this by the impact of our procurements cost-reduction. So with the procurement of vendors, we have been proceeding with the negotiations as we speak. For the latter half, for longer-term, for hard disks, the data center hard disks, from the third quarter to fourth quarter, sales should go up dramatically. Customers have already accredited, certified. Therefore, we will be starting shipments soon. CapEx is already almost over or for the shipment to be made from now on, we already have the facilities ready. Therefore, for the second half of this fiscal year, we should generate this high-quality sales and gross profit margin is not that bad, so this should push up the profitability.

Next, Retail & Printing Solutions. So far so good in terms of net sales and operating income compared with the previous year. And Industrial ICT Solutions, sales are remaining basically flat, but we saw an increase in profits. Because of the fading effect of emergency measures, there is negative impact of JPY 2.2 billion. Therefore, the net improvement is about JPY 4 billion. You may recall in this segment, last year, we have conducted a dramatic restructuring, and this effect is now proving to be effective. And also, system-related sales gross profit is increasing -- improving as well.

So for the first quarter, for this segment, sales tends to be small. Therefore, operating income is negative so far. But compared with the same period of the previous year, the cost structure has definitely improved.

For others segment, this is for PCs, from last year, there was an improvement of the JPY 500 million, but we still have a negative profit situation. As you are aware, to Sharp, effective on October 1, we are selling this business, and we're proceeding with the necessary paperwork and formalities.

On Page 22 and 23 show the full year forecast. This time, the first quarter results was examined internally. As a result of that, the full year forecast in terms of the net sales JPY 36 trillion (sic) [ JPY 3.6 trillion ] and JPY 70 billion in operating income, and net income of JPY 1.07 trillion, we decided to keep it unchanged. Therefore, the full year forecast numbers are kept unchanged at this time.

As of the closing of the second quarter, we will once again review these numbers and at the same time in the Toshiba Next Plan, there is a possibility that we may incur costs. Therefore, before we see the benefit, therefore, including those, if necessary, as we announce the second quarter results, we may make a revision to the 3-year forecast. But at this point in time, the first quarter result JPY 70 billion operating result and JPY 1.07 billion net income forecast, we believe that the first quarter results were in line with the full year forecast. That is our perception.

Please go to the next section, other. There is a PowerPoint titled Toshiba Next Plan. For Toshiba Next Plan, Mr. Kurumatani has given you some presentations on this. This is a 5-year transformation plan of the company, which is very important for the company. But Mr. Kurumatani said that compared with other companies, we are lagging behind, so we should announce this within the fiscal year -- within this year, but since we should formulate the plan as soon as possible and implement the plan as soon as possible, therefore, in view of the progress status of the plan so far, we have decided to announce the details of Toshiba Next Plan within November.

And based on that, the share buyback of JPY 700 billion possibility has been already communicated to investors. In terms of the timing and the mechanics of share buyback, we have already talked with multiple investment banks, and we're still discussing these. And at this point in time, the most important part is Toshiba Next Plan. So, including Toshiba Next Plan, we have been examining various different measures related to group businesses, involving external experts, such as legal firms. So after consideration with these parties, we may -- these plans may be considered as material information. Therefore, at this point in time, we cannot disclose the details yet. As soon as the Toshiba Next Plan is completed and we clear with the legal restrictions, we would like to carry out the JPY 700 billion share buyback program, and we are making preparations towards that.

This concludes my presentation. Thank you.

[Unknown Attendee]

That concludes the presentation from Toshiba. Now we would to take questions. Please raise your hand if you have any questions and wait for the microphone. And before asking questions, please give us your name and affiliation.

[Hisashi Moriyama, analyst]

Moriyama from JPMorgan Securities. The numbers in Q1 results, the operating income if you look at each business, it seems that energy system is down, while infrastructure business is up and Storage & Electronic Devices have struggled a bit. That is my impression. So if you look at the different businesses, based upon your forecasts, are there -- which one was outperformed and underperformed? And looking at the results, the levels are relatively low, and of course, there is a reversal of the bonus and so forth and if you consider that, the profit is up. But roughly speaking, what was the progress based on your forecast? And if you look at the full year, when you try to recover from Q1, could you tell us how you intend to do that?

[Masayoshi Hirata, executive]

Thank you for questions. First, Storage & Electronic Devices and Solutions, NuFlare Technology, the equipments or facilities, the new type the facility or products delivery, that was a bit delayed or postponed. But that can be offset by the end of this year. In Q1, the exchange rate assumption was JPY 100 to the dollar, but this time, it's JPY 108 to the dollar. So that's an upside and that's about an JPY 2 billion in Q1. If you only look at Q1, NuFlare delay would offset that upside. So if we recover in terms of the NuFlare Technology, of course, that we don't know what would happen to the ForEx, but if the JPY 108 to the dollar level continues, that would push up our profit by about JPY 10 billion or so. So of course there's a lot of uncertainty about the exchange rates. As for Energy, especially the Thermal Power, which had the poor numbers, but in the full year forecast, it is already incorporated. So looking at the Q1 results, we believe that we're in line with our full year forecast.

[Hisashi Moriyama, analyst]

Another question the Next Plan. You gave us a heads up and you said that it will be released in November. So also that you added the comments on the dividend. And you mentioned a stable dividend payment. How you plan to implement the dividend payment? Is it payout ratio? Or yield? Could you comment on the dividend?

[Masayoshi Hirata, executive]

Yes, concerning that, as a part of the Next Plan, we are still discussing this point. My personal view is that until now, the payout ratio of 30% on the consolidated basis was a target for our dividend payment in -- up until fiscal 2015. So basically, based on that concept or way of thinking, currently we continue the no dividend and that inconvenienced our shareholders. So as for the level of the dividend, as we finalize the Next Plan, we would like to make a decision. We would like to pay the dividend in a stable manner. In addition to the share buyback, also we would like to pay dividends, that's our basic idea.

[Unknown Attendee]

Next question, please. The person in the second row, please?

[Kenji Yasui, analyst]

From UBS Securities. My name is Yasui. I have 3 questions. First, regarding the share buyback timing, I want to double-check material information. You mentioned this as Toshiba Next Plan. So did you say that after the announcement of the Toshiba Next Plan, you'd like to carry out the share buyback as soon as possible? You have done the extraordinary financial closing. Therefore, is there any bottleneck for the share buyback? I suppose, there is none.

[Masayoshi Hirata, executive]

Yes, that is correct, there is no bottleneck. Within November, we would like to announce the Toshiba Next Plan. I forgot to say, the extraordinary financial closing. We were going to do this in the second quarter. So that should be ready in the middle of November. Therefore, as soon as we announce the Toshiba Next Plan, there will be no bottleneck.

[Kenji Yasui, analyst]

Second question is about hard disk performance. I did not clearly understand. The sales increased because of the resale business from Memory business, but this has nothing to do with the profits. But the degree of profits decline was quite significant. Did you -- you said that there was a decline in sales, but it is not as big as JPY 6 billion, why did the profit go down as much as JPY 6 billion? Could you explain the details?

[Masayoshi Hirata, executive]

Yes, almost JPY 6 billion reduction in profit was incurred. Mostly, this is attributable to hard disk business. It is partly due to the volume decline as well as the ASP reduction. Straight -- or ASP reduction has a straight and direct impact on the operating income and that part is quite significant. Hard disks for PCs compared with our expectation, the market contraction was more severe than we had expected. As we are hearing for individuals as well as for businesses, the PC sales trends are not as strong as expected. And because of that, hard disks for PCs suffered from a reduction in sales and also, the ASP reduction is accelerating. You may think this is a big reduction in profit, but this is actually the case.

[Kenji Yasui, analyst]

From the second half of this fiscal year, including the ASP, are you expecting an increase in profit because of the launch of new products? So you think you can get nearly JPY 1 billion profit in terms of both sales and profits?

[Masayoshi Hirata, executive]

For the PCs, towards the second half of this fiscal year. Raw materials companies, we are negotiating with them on the raw material prices. So by that time, we should have an agreement. So nothing is fixed yet. There still is uncertainty. Starting with the second half of this fiscal year, for the data centers so-called Nearline 1.4 terabytes products for the data centers -- data center companies will be launched. And we are sure that we will get sales for this portion. Therefore, profitability wise, compared with the products for PCs, the profitability is higher for the data centers. So we are trying to make a catch up here.

[Kenji Yasui, analyst]

I have the last question, Toshiba Memory's. Regarding the instruction rights, you have 40% stake, but 33.4% portion, you have the instruction rights for 33.4%. Between INCJ and DBJ, this was assigned to those parties, but this is the instruction rights, so when you receive instructions, what is likely to happen? And you're explaining that the 40% will stay, but as far as there's instruction rights, the nature of these rights is something I don't really clearly understand. In fact, there were questions from investors as well. So as far as you can explain, could you elaborate on the nature of the instruction rights? My concern is that your stake of 40% may be -- may go down. Are you concerned about the 40% ownership by Toshiba?

[Masayoshi Hirata, executive]

With the current shareowners, this is not going to happen at 40.2% equity method earnings should keep coming into Toshiba as far as we -- as long as we have these stakes. You mentioned the instruction rights, which may not be familiar to ordinary people, but the basic concept is as follows: For Toshiba, INCJ and DBJ, they can attend the shareholders meetings of Toshiba Memory. And basically, they will not adopt resolutions that can penalize Toshiba. That is the basic agreement. If there is any disadvantages to Toshiba and then Toshiba can stop the instruction rights, that is the nature of the arrangement.

[Kenji Yasui, analyst]

So is it possible for Toshiba to stop the instruction rights by your own will?

[Masayoshi Hirata, executive]

Stopping may not be the right term, but there is an arrangement that they do not adopt any resolution that can be disadvantageous for Toshiba.

[Kenji Yasui, analyst]

Sorry for asking over and over, what does instruction mean? The word instruction has some connotations. So what could actually happen? What would be the possible scenarios? Could you elaborate on this?

[Masayoshi Hirata, executive]

Well, this is not a familiar term for us either. So we had difficulty in understanding this concept in the beginning. But back in those days, regarding why this development happened was this way. This is Toshiba's interpretation. Suppose that if and when Toshiba, who has 40% ownership as a company, if Toshiba goes bankrupt and then within Japan, the Memory Company, which is an important industry in Japan, may be put into a difficult situation. So we made some safety valve. That's why we believe that this measure was taken. There are different interpretations, but this is the interpretation that we have. So in fact, Toshiba does not have a direct voting rights. However, if I could repeat the same thing by exchanging instruction rights, the arrangement is that they are not -- to be adopt any resolution that can be disadvantageous for Toshiba.

[Unknown Attendee]

Next question.

[Ikuo Matsuhashi, analyst]

Matsuhashi from Goldman Sachs. I also have 3 questions, if I may. First is about the restructuring of the ICT, you mentioned. If my recollection serves me right, I think, the 300 people headcounts reduction was mentioned. So with that, we cannot explain the changes of the profit. So is this correct? Or did something else happen to come to this number, could you elaborate on this? That's my first question.

[Masayoshi Hirata, executive]

As you said, the size of the restructuring is 300 to 400 people. And the personnel cost reduction and with the reduction of the headcounts, the fixed cost also can be reduced significantly. And this time, probably I forgot to mention this, but the systems that we delivered to the customers, the gross profit margin is improving year-on-year. That effect is also reflected here.

[Ikuo Matsuhashi, analyst]

I see. Second question is about the profitability in the area of the energy, I had one question. Now what you have shown us the backlog -- order backlog, out of this, nuclear, how much of that is nuclear? That's what I would like to know. And also in the past, the -- you had the reserve for the unprofitable businesses and gross profit are sometimes 0. And how much of this is that type of business, if possible?

[Masayoshi Hirata, executive]

Well, we do have data, but it has to do with our customers and other companies. So as for the order backlog, we're very sorry that we're not showing -- we're just showing that trends. So that's as far as we can disclose. As for the individual business and the backlog numbers, we are very sorry, but we cannot disclose them. But it's JPY 200 billion down, that is the Thermal & Hydro Power and especially overseas operation, the closure or shutdown of some of those energy-related projects overseas. And we are not taking new orders.

[Ikuo Matsuhashi, analyst]

And also about the Next Plan, of next medium-term management plan from this spring or before that, 22 businesses, I believe, were reviewed by -- from the different perspectives and you're still continuing with that process. What I'd like to know is that you have been steadily reducing cost and aside from that, for example, further improvement, are there any businesses that you had excess personnel that you can reduce? Some of the excessive processes that you have identified through that process?

[Masayoshi Hirata, executive]

Well, we conducted 2 reviews, and recently, we had another review. So frankly speaking, there are many businesses that we are still considering what to do. Our basic policy is that for the time being, sales growth is not something that we expect. And we will continue to improve the procurement costs. So changing the design, improving the capability of procurement and reducing cost. That's what we are trying to do. And this will take time. So what we're trying to do now is to improve the efficiency of the fixed costs. And to what extent each business unit can do that? Not to damage the operation, to what extent can we minimize the fixed cost? And especially the unprofitable businesses are being reviewed multiple times. And as a result, ROS of at least 5% or 7%, can we target those numbers? Whether we can do that or not, that judgment will be done late August to early September. That is the current situation.

[Unknown Attendee]

Any other questions? The third person in the first row?

[Takeo Miyamoto, analyst]

Mitsubishi UFJ Morgan Stanley Securities. My name is Miyamoto. First question about order backlog. There was a reduction of 12%. But compared with the market shrinkage and your strict scrutiny effect, if you break down, how much is attributable to the contraction of the market? Could you quantify these, that would be the best? In the market you're playing, how do you see the trend at the moment?

[Masayoshi Hirata, executive]

In terms of the market, I don't think the market is contracting as much as this reduction in our order backlog. Fundamentally, the problem we have is that when we have the order received, we have a very difficult cost structure, where it is difficult to generate profit, that is the problem. Therefore, as was mentioned in the previous person, we're fundamentally looking at the design and the procurement and reduce the fixed cost. Even if we receive new orders, we should be able to gain profits. That is how we would like to change our cost competitiveness and cost structure. But we still don't have that kind of cost competitiveness yet. And even for the future, it is not certain whether we can ever do that or not. That is the reason why we have stopped taking orders in some areas. And as a result, order backlog was down 12%. So we suspect that the market has not gone down that much.

[Takeo Miyamoto, analyst]

So the market is shrinking, that's for sure. Okay. The second question regarding order backlog and you said that the gross margin or the order backlog has improved ROS of 5% or 7%. Is the gross profit of the current orders you have already enough to achieve ROS of 5% to 7% or do you still have a gap? How much did you improve?

[Masayoshi Hirata, executive]

As of the end of June, we have a certain backlog and there are 2 kinds of orders included: One is the low-profitability orders, which we took in the past, we could not stop some of the sales. And the other part is the orders that we took over the last 12 months. So there are 2 types of orders included. So for the last 12 months as well as in the future, the minimum ROS of 5% or 7% is something that we would like to realize. And then we are scrutinizing into those new orders from the viewpoint of whether we can achieve it are not. Therefore, the order backlog as of the end of June -- if you are asking if you can achieve 5% ROS for all of the orders, that will be no. But for the orders that we're newly taking, there should be more than 5% ROS. And we are reducing the backlog. Therefore, going forward, we believe that the sales amount should go down. Therefore, even if the operating -- the gross margin will go up, the gross margin amount may go down. In that sense, the fixed cost, we have to reduce further in advance. Otherwise we cannot maintain an appropriate ROS for the entire company, that is how we're looking at Toshiba Next Plan at the moment.

[Takeo Miyamoto, analyst]

My third question is about your -- this year plan equity method gain JPY 12.2 billion for 1 month. So full year results, only 3 months remaining for JPY 50 billion. So is this a serious number or does this number have some explanation that you want to make?

[Masayoshi Hirata, executive]

For the Memory business, as you are aware, we still don't know when there is a significant reduction in ASP for Memory business. Therefore, to be honest, for this JPY 50 billion, we have not changed this forecast since 3 months ago. If you're asking for my personal view, and then I would say that it might increase a little bit more.

[Unknown Attendee]

Next question?

[Mikio Hirakawa, analyst]

Hirakawa from Merrill Lynch. Two questions. First, about -- now there JPY 14 billion that is effect of the lack of the emergency measures. And there would be a JPY 14 billion effect in Q2 but nothing in second half. Is that correct?

[Masayoshi Hirata, executive]

Emergency measures, last year, if I may talk about the conclusion for the full year, JPY 26 billion impact. Last year, from Q2, emergency measures became less than before. So after Q2 onwards, roughly speaking, JPY 4 billion per quarter. So JPY 12 billion and JPY 14 billion that makes JPY 26 billion.

[Mikio Hirakawa, analyst]

Second question, which is a follow-up question to the previous person. The equity earnings of the Memory business, JPY 12 billion, that is on your net income, that will be the impact on your net income. And if nothing changes -- so that is after tax and if nothing changes, then the JPY 12.2 billion multiplied by 12 months, JPY 140 billion. Is that the correct understanding? And if that happens, of course, it's difficult to discuss based on the -- sorry, the June number, but your forecast and JPY 50 billion equity in earnings, and also, the JPY 12.2 billion per month, which ones were different from your forecast or expectations? Could you give us some information?

[Masayoshi Hirata, executive]

Well, JPY 12.2 billion, that would be directly impacting. Yes, you're correct. And the rest, now the breakdown of JPY 12.2 billion the improvement of the ForEx is added. For example, the ATM difference is reflected. And we do not have a detailed data, but probably if you only look at June, the selling prices probably was better than the current level, that is my impression. So whether that would continue or not is questionable or uncertain.

[Unknown Attendee]

Now it is close to the ending time, so we would like to entertain one more person.

[Kota Ezawa, analyst]

Citigroup Securities. Ezawa. I have 2 quick questions. Regarding hard disk part suppliers, you said you would negotiate with them. Are you going to negotiate with them about the pricing?

[Masayoshi Hirata, executive]

Yes, that is correct.

[Kota Ezawa, analyst]

Secondly, regarding the NAND distribution business, you said a resale of NAND products. Going forward, is it likely to remain flat? Is that the nature of the business or is it going to shrink in 1 or 2 years, which is the case?

[Masayoshi Hirata, executive]

For the memory, especially in terms of the sales in overseas countries, and today in some of the areas, the semiconductor entities that we still own are being utilized by the Toshiba memory company. Therefore, in the future, the memory company itself if they have their own sites overseas, there'll be no more resale from our company, but nothing has been determined yet.

[Kota Ezawa, analyst]

Last question, regarding the order backlog, I have some concern. Suppose that your cost competitiveness will become competitive on par with other companies. The business always have risks. If the cost conditions are the same in the order taking competition in the market, is it okay to think that your company can win and beat other companies? That means higher risk or difficult earnings. Because of the past history, there are some factors. Because of those, Toshiba's culture of becoming pessimistic or passive, are you taking that into consideration for those businesses?

[Masayoshi Hirata, executive]

It is a very difficult question. But first of all, on our own, until we are sure that we have gained adequate cost competitiveness, we have to take -- we are not taking orders based on certain assumptions. That is our policy at the moment. Especially for the Thermal and hydraulic (sic) [ Hydro ] business. Because of the ongoing contraction of the market. And furthermore, last year, because of our own internal reason, for Thermal and hydraulic (sic) [ Hydro ] business , the number of people has been reduced. So we have limited number of talents, of which we would like to allocate to high-profitability businesses, especially Thermal Power Service and Support business. This is where we were focusing at the moment because on a global basis, we have steam turbine installation business already. So the maintenance contracts for those, we have to secure those maintenance contracts. And also, the modification, construction work contracts for the capacity expansion is something that we would like to receive going forward. So those are the areas that would like to focus for now. And different services, or turbines, which are replacement, this is similar to newly built turbines. Therefore, in those areas, whether we have enough cost competitiveness or not, we would like to make sure and verify that as we try to receive new orders. And when we believe we are sure that we're ready, we can start taking new orders. That is the policy at the moment. Sorry, my answer is not directly addressing your question.

[Unknown Attendee]

Thank you very much. It is time to close the session. Thank you very much for joining us today.