Toshiba Corp

TSE:6502

Earnings Call Transcript 2021-Q1

[Midori Hara, executive]

Ladies and gentlemen, it is now time to start the briefing on the fiscal year 2020 first quarter consolidated business results. As already been informed, the briefing will be held online. Between 2:00 and 2:30, Toshiba will make a presentation. And after that, there will be a 20-minute Q&A session for the media representatives. Questions from the analysts and investors will be taken between 3:00 and 3:30. Thank you very much for your understanding. Your questions will be taken using the teleconferencing system. As being formed beforehand, you need to be registered to use the system.

Now let me introduce today's speaker. Mr. Masaharu Kamo, Executive Officer, Corporate Senior Vice President. And I am Hara of Corporate Communications. Mr. Kamo will present using the slide decks titled FY 2020 First Quarter Consolidated Business Results.

[Masaharu Kamo, executive]

My name is Kamo, in charge of Corporate Planning, allow me to make a presentation. Allow me to be seated while I present. Can you show the slides?

As for the results for the first quarter, unfortunately, there's been a decline in sales as well as decline in profit. We regret the results. But on the other hand, for this fiscal year, there was a major impact from the COVID-19. So therefore, the numbers or the figures are very difficult to understand.

And one of the uniqueness of Toshiba is that overall, the construction terms is concentrated in the second half. So there is a difference of about JPY 100 billion between the first and second half, which makes it even more difficult to understand. And if we exclude those impacts, Next Plan progress, we are progressing quite well against our Next Plan, according to what we judge as the management. So from here, I would like to make a brief explanation.

Please turn to Page 3. These are the key points of my presentation, I listed up 5 items. The first item is core operating income. As we have been -- these are the numbers we showed previously as well. The core operating income against the -- for year-on-year, there's been a significant increase of JPY 28.9 billion in the progress of Next Plan. Core operating income in FY '19 was JPY 160 billion. And against that, we are expecting JPY 220 billion for fiscal year 2020 and JPY 60 billion increase. And thus, for the quarter, increase of JPY 15 billion was expected. And against the target for the first quarter, JPY 28 billion, which was in excess from JPY 15 billion.

And the second point, the COVID-19 impact. There's been no divergence from previous forecast, which was announced previously for the full year and for the quarter. We talked about JPY 46 billion in terms of COVID-19 impact, which has been increased by JPY 3.3 billion to JPY 49.3 billion, but many of which have been delayed. So therefore, the impact -- the total impact of COVID-19 for the full year is JPY 90 billion.

And the third point, operating income. There's been a decline of JPY 20 billion year-on-year. But the -- against the previous forecast, we have seen a significant improvement. When we did earnings announcement for the past previous fiscal year on the 5th of June, Mr. Kurumatani said that there's going to be a loss of JPY 10 billion to JPY 20 billion. In the first quarter, we had the biggest impact for COVID-19, the loss was JPY 12.6 billion, which was much better than we had expected. The COVID-19 impact for the first quarter was JPY 49.3 billion. And against that, the decline was only JPY 20 billion. The difference is JPY 29 billion, which was a recovery that we were able to make.

The core earnings power. As I mentioned earlier, according to the initial budget, we were expecting to strengthen the core earnings by JPY 15 billion. But against that, we have been able to improve by about JPY 10 billion. This includes emergency cost reduction and some of the spending have been postponed. But all of these measures have been successful in a very short period of time.

Fourth point, free cash flow. Year-on-year basis, we have seen significant improvement. Last year was JPY 39.9 billion. This year, JPY 83.3 billion.

And lastly, amount of orders received. Under the COVID-19 pandemic, we had concerns of our orders to be received, but we have been able to build orders quite successfully. At the end of this quarter, we have seen increase of 5% year-on-year.

Page 4, please. Today, as usual, I would like to talk about the overall business results, business results by segment, supplementary information, followed by fiscal year 2020 forecast. I'll be covering 4 points. I'll be brief in my presentation.

Now starting on Page 6, please. The first is the profit and loss items, the income and loss items. The first was net sales. JPY 813.2 billion was the result for Q1 2019 and Q1 2020 was JPY 599.8 billion, and 26% down equals to JPY 213.4 billion. And in that, at right-hand side shows the impact of COVID-19 was minus JPY 149.4 billion and others are JPY 6.4 billion (sic) [ JPY 64 billion ]. As is mentioned earlier, for the fiscal year, because we had preparations for the Olympic Games and so forth, and therefore, the construction period was scheduled mostly in the second half. And overall, about JPY 100 billion of shifting of the sales will be expected from the first half to the second half. And therefore, JPY 6.4 billion is -- JPY 64 billion is the result of such impact.

And next is core operating income or loss. As is mentioned earlier, JPY 28.9 billion increase year-on-year. And on right-hand side, we have description of the differences. Energy System Solutions alone has the lower numbers decrease. And as I mentioned earlier, construction period was shifted from the first to the second half. The largest impact was observed in Energy Systems & Solutions. For that portion, Energy Systems & Solutions, being the first quarter, we marked the lower income. However, for the other solutions, we have all increased.

COVID-19 impact of JPY 49.3 billion. This is that JPY 46 billion of the initial plan. However, there are some postponement of the installation service was happening. And because of that, we have this higher impact from COVID-19.

Now for operating loss. As is mentioned earlier, being the core operating income was positive at JPY 28.9 billion. However, JPY 49.3 billion was observed as the COVID-19 impact. And therefore, operating income of negative JPY 12.6 billion, and the company deeply apologize for this result.

As is mentioned earlier, core operating income, a positive impact of JPY 28.9 million. JPY 15 billion was the increase of income as is planned in the Next Plan, and the cost reduction and others are included for the other portion.

Moving on to Page 7. Now this is the factor analysis for the operating income for this quarter. Now fourth for the box from the left, JPY 4.1 billion to JPY 2.4 billion, there are 3 numbers from JPY 4.1 billion to JPY 2.4 billion. And JPY 7.4 billion in total is the outcome of all these efforts for us to enhance the earnings capabilities. And on top of that, there are some positive impact of JPY 21.5 billion, right in the middle, and that is classified as others.

And there are the increase and decrease in sales and difference in sales mix and also reduction in fixed costs. In that, the largest impact is coming from the decrease in fixed cost of JPY 16.3 billion. And loss-making contract was reduced. And also, the sales with higher marginal profits were posted ahead of the schedule. That means that during the first half, the total marginal profitability was increased. And therefore, that contributed to JPY 21.5 billion, a positive impact. And JPY 1.2 billion of restructuring cost and JPY 49.3 billion of COVID-19 impact and then results was the loss of JPY 12.6 billion.

Moving on to Page 8. This is the analysis of impact of COVID-19. At the right bottom, you will see blue letters stating minus JPY 49.3 billion, and versus previously forecast, minus JPY 3.3 billion. As is mentioned earlier, because of the delay in installation services, we have some lower profit. And annual impact was JPY 90 billion. And therefore, more than half the impact was consolidated into the first quarter. We expected for -- at the beginning of this fiscal year.

However, there are some differences in the situation compared to other companies and therefore, I will elaborate on major reasons. First of all, now let's look at the business segment Devices & Storage. In that area, there are some delays in installing semiconductor manufacturing equipment for China market. Deterioration in operation level of HDDs factory. These 2 are the key points for the first one. From last year to this year, we have changed some company, NuFlare Technology, into a fully owned subsidiary. And for this company, SPEs in Chinese market were not delivered, and we were not able to install the SPEs. For other SPE manufacturers in the country, some of them are marking positive profits in the first quarter. Unfortunately, for NuFlare Technology, in that particular company, they don't have any team to be able to install the SPEs in the local Chinese market. Mainly we'll be covering the installation services and also coordinating the installation services, dispatching the personnel from Japan to China. And during this period of time, we had difficulties of sending people to China. And therefore, installation work itself was postponed to the later timing.

And on the operating income impact is about JPY 10 billion, as you see on the footnote. And for this JPY 10 billion, it will be recovered before the end of this fiscal year. And therefore, among the JPY 90 billion of impact, NuFlare -- impact from NuFlare company is estimated to be 0.

Second one is deterioration in the operation of HDD factory. In the world, data centers are having a very robust demand across the world. And at the same time, other companies are marking some revenue increase and profit increase. But despite such situation, our main factory was mostly around the Philippines and that is subject to lockdown. In April, May and June, these factories were locked down. And of course, before -- after the end of June, the lockdown was lifted. However, JPY 7 billion of impact was observed from that. So JPY 17 billion, and JPY 7 billion subtracted. And in the JPY 9 billion -- JPY 90 billion of the COVID-19 impact, first quarter has marked a 37% of -- 37% posted on the first quarter. So that is very similar to other companies.

Other unique factors of this company is at the very last line on the slide. Because of the government -- Japanese government's request, we have increased the number of weekends. In order to protect the number of operating days for the full year basis, we've shifted the off date to the first quarter out from the second, third and the fourth quarter. So for Japan, a 10% reduction in workdays was observed. And that is applied to all the sections such as the manufacturing, the service and so forth and affecting our business performance.

And other COVID-19 impact is described here. For example, the decreased demand for semiconductor in automotive devices, decreased demand of MFPs and POS system and decreased demand of automotive products in North America and railway systems products in China and delay in installation works.

Now moving on to Page 9. Page 9 is describing nonoperating income. Now during the first quarter, JPY 9 billion of positive income on nonoperating income was observed. Dispose -- personal computer business in FY 2019, there is the price adjustment in relation to the Toshiba Client Solutions is posted by JPY 7.1 billion. And Kioxia returned to the positive side, profitable side and a total of JPY 9 billion income was observed on the nonoperating item.

Next, Page 10 are the cash flow. This is free cash flow calculation. Lastly, reduction in the working capital, we were able to enjoy much higher free cash flow. And net interest-bearing debt was minus. Right in the middle, you will see net interest-bearing debt of negative JPY 31.6 billion. So which means that we don't have the interest-bearing debt at this point in time.

Next. Next, I would like to further elaborate on free cash flow. Now among the free cash flow items, the personal compute adjustment -- price adjustment factors of the disposal prices is being included in the middle 3 lines, we're describing that. And at the bottom, this is the cash flows, excluding the nonrecurring items or no -- onetime factors. Cash flows from operating activities was JPY 111.7 billion, and cash flows from investment activities was negative yes 33.1 million. Free cash flow of JPY 78.6 billion.

So JPY 78.6 billion of free cash flow is actually an increase in free cash flows. And major factors come from the fact that cash flow of operating income was increased significantly, that -- contributing to very -- to significantly at JPY 111.7 billion. So detail is analyzed on right-hand side from EBITDA to cash flow from operating activities. And EBITDA was JPY 8.5 billion, and there is a payment of loss-making projects of -- a cash out of JPY 4.5 billion and the tax of JPY 25.8 billion and also JPY 133.5 billion of positive numbers being marked. And that is, for example, accounts receivables and inventories, the -- inclusive of all the working capital was reduced. And because of that, we were able to achieve such big positive numbers.

Next is on Page 12. This is the summary of balance sheet. As I mentioned earlier, reduction of working capital is now demonstrated in the balance between assets and liabilities. And second from the top, the accounts receivable, JPY 970.8 billion to JPY 724.2 billion, and this is a -- excuse me, this is the JPY 9 trillion to JPY 7.2 trillion. And if you look at that, there are that reduction of JPY 100 billion for the accounts receivables. And we were able to collect the accounts receivable about JPY 250 billion. And therefore, we were able to reduce the net of JPY 150 billion was improved and inclusive others, we were able to release the working capital by about JPY 100 billion.

Now balance sheet characteristic is that the cash and cash equivalents. At the end of June, JPY 611.8 million of a cash and cash equivalent is monitored. And preparing for the COVID-19 as well as recession, we have secured JPY 200 billion worth of loan beforehand. And that is affecting for both cash and cash equivalents as well as the interest-bearing debt.

Next is regarding the detailed items on Page 13, but I will skip this particular slide.

So Page 14 onwards are explaining the business results by segment. First of all, please refer to Page 15, showing the overall situation on per-segment basis. And the numbers are towards the right, in a blue shaded area, which is the FY 2020 first quarter call basis. Net sales here is JPY 949.2 billion (sic) [ 749.2 billion ]. You can see that total number shown at the bottom of the slide. And towards right, you can see a different sum on year-on-year on a core basis. And this part of the sales has been pushed back into the second half of the year is registered at minus JPY 64 billion.

And if you go towards the top, the main areas where this came from was Energy Systems & Solutions, which is a segment shown at the top. You can see here, the impact is JPY 49.4 billion. So the majority of the project which has been pushed back from the first half of the year to the second half of the year occurred in the Energy Systems & Solutions segment.

And if you could look at the far right, the impact of COVID-19, JPY 3.6 billion in net sales for Energy Systems & Solutions and operating income minus JPY 1.2 billion. Infrastructure Systems & Solutions, JPY 12.9 billion for net sales, and JPY 5 billion for the operating -- the income or loss.

Now the COVID impact that we are expecting for the full year, in comparison, these are larger. Now with regards to these 2 segments, from April to June, there's been delays in construction work. And against the full year forecast or expectations, the impact as of now is larger. But in this respect, we're expecting recovery from July onwards and we are making efforts to enable that.

Now for the Devices & Storage Solutions, which is the fifth segment from the top, here, the impact was that the net income is JPY 75 billion and impact towards the operating income or losses are minus JPY 25.2 billion, quite significant. And this sum is in relation to the delays in installation related to NuFlare Technology as well as the hard disk appliance factory being subject to a lockdown. And the 2 more than JPY 62 billion and about JPY 17 billion of impact at the operating profit loss line. If we exclude these for the Devices & Storage Solutions segment, about JPY 14 billion in terms of net sales. And for the operating income line, impact is about JPY 8 billion. So I will explain in a little more detail about each of the segments.

Please go to Page 16, which is a slide I'm explaining Energy Systems & Solutions. And if you could look towards the right, difference on a core basis. In terms of net sales, the impact is JPY 49.4 billion. That is the difference on a year-on-year basis in terms of core basis. And Nuclear, the Hydro, the Thermal, Transmission & Distribution, here, you can see numbers like minus JPY 10 billion, minus JPY 20 billion, minus JPY 23 billion. So overall, the impact is quite spread out.

Next, I would like to explain the Infrastructure Systems & Solutions on Page 17. Here, and where you can see us being a core base, the blue shaded area and on the right. If you could look at the numbers shown here, if you could look at the numbers here, for net sales, public infrastructure project or the railways and the industrial systems, the situation has not really changed from the previous year.

In the original budget, we were not expecting too much weighting towards the second half of the year. But if you look at the operating profit, on core basis, JPY 7.4 billion, this is an improvement of JPY 5.1 billion. Net sales fell by JPY 1 billion, but operating income improved by JPY 5 billion, and it was largely due to reduction in fixed cost.

And the Building Solutions is shown towards the bottom part of the slide. Here, the key point is in the net sales, towards the right, you can see the contributing factor, a comment. And you can see elevators and escalators and lighting are showing an arrow pointing downwards. Here, we are seeing some decrease in the net sales. But if you can look at the profit line and the elevators and escalator overseas and lighting have contributed positively to the profit line. And in this respect, because of the sale structure being reclassified and the fixed cost reduction, and these have contributed to pushing our profit.

Next on Page 18, the Electronic Devices & Storage Solutions. Towards the middle, semiconductor is described. And NuFlare, here, JPY 14 billion and JPY 10 billion of impact at the profit line, JPY 14 billion at the -- and the other semiconductor, about 20% of their net sales was impacted.

About 20% of net sales was impacted and the marginal profit fell by about JPY 7 billion. And here, what I would like for you to turn your attention on is that in the first quarter of 2019 core base and the number for the first quarter 2020 when you make the comparison of the two. In the first quarter last year, net sales was JPY 71.4 billion. But for the first quarter this year, the net sales was JPY 60.5 billion, in other words, the decrease was about JPY 10 billion. But if you look at the operating profit or loss line, we had operating loss of minus JPY 3.1 billion, but the operating loss was about JPY 2.8 billion. So it has remained quite flat.

Now in this area, the marginal profit is in excess of 50%. So when net sales decreased by more than JPY 10 billion, there is a direct reduction in profit of about JPY 5 billion. But the fact that we did not experience such a drop over the year is because we are starting to reap the benefit of the structural reform that we have been implementing from last year.

And if you could look at the right, the contributing factors towards the bottom for hard disks and others. In terms of core, the lower sale is due to changes of sales channels, memory business. Kioxia is a completely separate company, so the resale portion has disappeared according to that change. And the difference between the actual for first quarter and core base is the reduction in sales due to lockdown of our hard disk factory that I've described earlier.

And now turning to Page 19, the Retail & Printing Solutions segment. This -- if you could refer to the Toshiba TEC, the earnings results, and Digital Solutions towards the bottom. Just one point I wanted to mention regarding Digital Solutions. Now in January this year, we made the disclosure, which is that TSC, the circular transaction issue. This, of course, concerns some issues for you. But that -- the net sales have disappeared here. And this has been the factor for reductions in our net sales and profit, as you can read on the right. Now in fiscal 2019, in the third quarter, we have canceled the sales and profit. And so for the full year, the impact will disappear in association with this matter.

And please turn to Page 20, that explains the situation of orders received. I did touch upon this when I talked about COVID before. But for our domestic business, the actual days work has been reduced by about 10% in the first quarter in response to the COVID-19. But we have still maintained a normal level of the orders for the 3 months. And if you could look at the left, which is the amount of orders received, and if you look at the first quarter last year, there was a significant order that we received for the Energy System & Solutions. So if we make comparison against that table, the level this year is 30% lower. But if we look at 2018 on a full year basis, only about 10% -- excuse me, there is increase of about 10% of the JPY 25 billion. So we were still able to secure our orders despite lower days worked. And on the right, you can see the orders and backlog. As for end of June, if we make a year-on-year comparison, the order backlog has increased by 5% and the total being in excess of JPY 2 trillion now.

Now let me move on to cover the supplementary information. This is about Kioxia. This is for your reference. Now from Page 23 onwards covers FY 2020 forecast. For the full year forecast, we haven't revised the numbers. So please refer to the numbers. Page 24, too, please take a look at the numbers. There's no -- there's not been a revision.

For Page 25, I would like to make an additional explanation. Just like I explained earlier, procurement reform and sales reform, structural reform, they're JPY 21 billion, JPY 4 billion, JPY 14 billion. The total of JPY 39 billion is the strengthening of earnings power. This is part of the outcome of the initiative. And JPY 39 billion, we have been able to improve our earnings power against the previous year.

But for others, it says JPY 19.4 billion. As written at the bottom, in the first quarter, fixed cost reduction and also changes in the mix of products, there's been an increase of JPY 21.5 billion. But for the full year, there's going to be a decline by 21 -- JPY 2.1 billion. This is due to product mix change, because there's been a number of projects in the first half for high profitability projects and products. So we have set the forecast for the full year rather conservatively.

And the COVID-19 impact. So we have changed the impact from the previous forecast. First quarter is to be JPY 46 billion, which was the forecast, which we ended with JPY 49.3 billion. And for the second half, JPY 22 billion to JPY 18.7 billion. As I explained earlier, there's been a delay in construction, which we experienced in the first quarter of this fiscal year, and which we'll be able to recover in the second quarter, third quarter and the fourth quarter. So therefore, COVID-19 impact amount has been changed for the first quarter and for the full year.

And by segment information, once again, please refer to the figures on the slide.

With this, I would like to conclude my presentation. Thank you very much.

[Midori Hara, executive]

That concludes the presentation from the company.

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