Toshiba Corp
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Toshiba Corp
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It is now time to start our earnings call for the first quarter of fiscal year 2021. As has been already informed, we would like to hold this meeting in an online manner. From 3:00 until 3:30, we'd like to use this time for a presentation from the company; and that will be followed by about 30 minutes to receive questions from people in the media. And we'd like to entertain questions from analysts and investors during the 30 minutes from 4:00 to 4:30. Any questions are received through telephone conferencing system, and you are required to register yourself in advance for participation.
Let me introduce the presenters today: Representative Executive Officer, President and CEO, Satoshi Tsunakawa; Representative Executive Officer, Corporate Executive Vice President and CFO, Masayoshi Hirata. I am Hara of Corporate Communications Division. I would like to invite our President, Tsunakawa, to explain the slide deck titled Towards the Enhancement of Corporate Value.
This is Satoshi Tsunakawa. Today, I would like to provide an update on the current status of Toshiba's endeavors to enhance corporate value. First, I will talk about the newly structured Board after June 25 and the current activities taken by each committee. But before I start, I would like to mention that we have taken the results of the 182nd Ordinary General Meeting of Shareholders seriously, and that the directors and executives are working closely and rigorously for the benefit of all our stakeholders, and things are steadily moving forward. As Executive Officer, President and CEO, I feel it is important to maintain a stable business environment for all of our stakeholders, including customers and employees.
The results for the first quarter were quite solid. Our CFO, Mr. Hirata, will provide further details after my presentation. The Strategic Review Committee has begun work immediately after its official formation. The SRC, with the support of financial advisers and consultants, has received the presentations from the executive team and been focusing on the full review of Toshiba's business independently. Communications with external stakeholders, strategic and financial investors and market participants are ongoing. The management team is in frequent and open dialogue with the SRC. We firmly believe that the activities of this new committee will help us in developing a midterm plan, which goes beyond our conventional planning process.
The Nomination Committee has recently selected 2 executive search firms, which will assist the process of searching for additional candidates to be nominated to the Board and also to consider internal and external candidates as potential successors for myself, the interim Chairperson and the CEO.
Searching for an external candidate to replace the interim Chairperson is one of the priorities. The immediate focus has been to search for candidates who can join the Audit Committee, which needs strengthening following the outcome of the recent AGM. The Nomination Committee may also identify additional Board candidates that have the expertise required to make meaningful contributions to the Board.
The Audit Committee is comprised of 3 newly appointed members, and it is carrying out its activities smoothly for the time being. Two members of the committee have sufficient experience in accounting, well versed in audit committee work. In addition, the Audit Committee has selected members for the Governance Enhancement Committee. We will explain the Governance Enhancement Committee in more detail in the next slide.
The Compensation Committee is conducting a review of Toshiba's current policies for short-term and long-term compensation. We believe it is important to create a greater ownership culture to better align our performance objectives with shareholders' expectations.
Next, I will explain the establishment of the Governance Enhancement Committee for the root cause analysis. We have taken seriously the investigators' conclusions, as set out in the investigation report issued on June 10, 2021, and have announced that we will take action to identify the root cause to clarify the responsibilities and to develop measures to prevent recurrence, including the participation of third parties. Based on this announcement, we have established a Governance Enhancement Committee. This committee will base its analysis on the findings from the investigation report by the investigators. It will analyze the root cause to clarify the responsibilities and to develop measures to prevent recurrence.
In order to meet this goal, we have decided the best structure will be the one which combines third-party experts and an independent director. There may be some additional investigation, including interviews of relevant persons for the purpose of root cause analysis and clarifying responsibilities. But we emphasize that it is not our intention to reinvestigate the facts already found by the investigators.
Here, I would like to update you on shareholder return. This is an update regarding the status of Toshiba's repurchase of its own shares as approved by the Board of Directors and announced on June 7, 2021. As per the announcement on August 2, 2021, this is the result up until the end of July. And as you can see here, the repurchase has been progressing smoothly.
In addition, as per the announcement made on July 21, 2021, a special dividend was paid on August 6, 2021, based on the record date of June 30, 2021. The dividend per share was JPY 110. We assure you that we will continue to work hard to maintain stable shareholder returns and to enhance TSR.
Next, I will explain the status of our midterm plan. As explained to you on May 14, we are examining various changes in the business environment and revising our strategy, including the review of our business portfolio to maximize corporate value. To assess each business, we are using ROIC as one of the most important metrics and focusing on capital efficiency.
To enhance shareholder value through the maximization of corporate value, we believe it is important to revisit Toshiba's core values, that is, our purpose and core competencies. Using both quantitative and qualitative measures, we will determine what business activities should be Toshiba's focus areas and what is the optimal capital structure to support a specific business from the viewpoint of capital allocation, securing the sources of shareholder return and the growth potential of the subject business.
By the time of the announcement of the medium-term plan in October, the focus areas should be clarified in consistency with Toshiba's strategy. We will seek to maximize corporate value by combining themes such as carbon-neutral and social infrastructure resilience with digital data to solve emerging social issues.
When explaining our strategy, focus and nonfocus areas of business will be identified. In order to maximize corporate value and shareholders value, it is necessary to maintain and develop suitable relationships, obviously, with our shareholders and also with other stakeholders, such as customers, business partners, employees and local communities. The management of Toshiba must be carried out, taking into account the interests of all stakeholders to maximize value in the long term.
We believe the listing status allows a stable equity structure, suitable for enhancing long-term value creation and is advantageous for corporate value enhancement. However, we will not disregard other avenues, including privatization, et cetera, as alternative options to enhance Toshiba's corporate value.
The benefit of going private, in general, is to allow flexible execution of management strategies without being influenced by short-term considerations and a pressure on performance. Moreover, costs related to maintaining the listing status can be reduced. On the other hand, we believe there are various issues if we were to go private. In particular, if we lose the listing status in Japan and at our company, this will undermine our tangible and intangible credibility, ability to secure talent, appropriate investment into research and development and our brand value. Thus, we believe that careful consideration is necessary to determine whether taking the company private will really be the most value-creating option for all stakeholders. Nonetheless, we remain open to various options to maximize corporate value. And the Board and SRC are examining several possibilities without a predetermined conclusion.
And last but not least, I would like to talk about creation of an ownership culture for the compensation policy for each director and our executive officers. In order to align business operation with the shareholders' perspective, 20% of the base salary is comprised of restricted stocks with transfer restrictions until retirement, and 60% of the performance-linked compensation for executive officers are provided as restricted stocks.
Apart from executive officers and directors, restricted stocks are also provided as an incentive for corporate officers and executive candidates. Also, we provide a stock ownership program that allows many employees to hold the shares of the company. As of April this year, approximately 28,000 employees throughout the Toshiba Group have joined the program. We have been creating the ownership culture by providing incentive scheme to those employees participating in the ownership program. We would like more employees to become owners of Toshiba, and we'll examine ways to improve employee retention and motivation in which this may be done.
Finally, in addition to the creation of ownership culture, I am determined to promote positive reform in order to change the corporate culture of the entire Toshiba Group together with other Board members. Committed to people, committed to the future.
Thank you very much for your kind attention.
Next, fiscal 2021 first quarter consolidated business results will be presented by Masayoshi Hirata, CFO, using PowerPoint presentation.
I would now like to present the results from the first quarter of fiscal 2021. Please turn to Page 3. There are 4 key points with respect to the first quarter of fiscal 2021. In this quarter, thanks mainly to semiconductor and HDD, both net sales and operating income increased year-on-year. As noted here, net sales was JPY 727.9 billion, up JPY 128.1 billion from the same period last year. Operating income was JPY 14.5 billion, which was an improvement of JPY 27.1 billion year-on-year.
In the previous year, in the first quarter fiscal 2020, as you are aware of, due to the spread of COVID-19 infection, state of emergency was declared for the first time, and there was a heavy impact from that. But in the most recent first quarter, the impact from COVID pandemic was significantly reduced. However, currently, infection is once again spreading, as you're aware of. And therefore, we will have to carefully watch a possible impact on our business.
The second point is about free cash flow. EBITDA improvement and working capital improvement due to factors such as receipt of advanced payments led to improvement from the same period previous year. In the first quarter, free cash flow was positive JPY 155.3 billion, an improvement of JPY 72 billion.
The third key point is the amount of orders received. Owing to large-scale projects, the amount of orders received grew substantially by JPY 4.4 billion (sic) [ 44% ].
The last key point is shareholder returns. As Mr. Tsunakawa touched on this earlier, I will skip, but there is not yet any accounting impact in the first quarter.
Please turn to Page 6. In the first quarter, I have already covered the net sales and operating income from the first quarter. By segment, Infrastructure Systems and Others reported slight decline in net sales because of the timing issue of reporting of projects, but all other segments achieved growth of net sales. I will come back for details later.
Income before income tax was JPY 29.2 billion, which was an improvement of JPY 32.8 billion year-on-year. Net income was JPY 18 billion, an improvement of JPY 29.3 billion.
Page 7 shows improvement of operating income in comparison to the first quarter of fiscal 2020. At the very left is the actual from first quarter fiscal 2020. It was an operating loss of JPY 12.6 billion. There were some negative factors, as noted inside the chart, but recovery from COVID-19 impact and increase or decrease in sales and cost under Others of JPY 31.4 billion made positive contribution resulting in JPY 14.5 billion of operating income.
Page 8, please. Page 8 shows the breakdown of nonoperating income, which was JPY 14.7 billion in the black in the first quarter fiscal 2021. This was an improvement of JPY 5.7 billion year-on-year. There were mainly 3 items that rose or fell significantly. The fourth from the top, income on sale of securities. Last year, there was price adjustment from PC business transfer, which was -- but there was no similar transfer this year, and there was a deterioration of JPY 7.7 billion. And due to improvement of Kioxia, equity earnings of affiliates rose JPY 3.9 billion. And U.S. subsidiary was liquidated, and there was recognition of revenue as a result. Due to these various factors, there was an improvement over the same period previous year, and the total was improvement of JPY 7.7 billion.
Please turn to Page 9. The top part, cash flow was mentioned earlier. As for shareholders' equity, at the end of June 2021, partly due to year-end payment of dividend, it declined slightly to JPY 1,150.5 billion, and the shareholder equity ratio is 32.3%. Net interest-bearing debt improved due to improvement of free cash flow. In the last 3 months, it improved -- net interest-bearing debt improved by JPY 121.2 billion.
Page 10 gives the breakdown of what I have just discussed. This is for your information. Results by segment is presented from Page 11. Page 12 is the overall summary of the results by segment for your perusal later.
Page 13 and onward, breakdown of results by segment is given. Page 13 is the breakdown of results for Energy Systems. Net sales was JPY 98.7 billion. Operating loss was JPY 1.8 billion. Regarding net sales, in comparison to the same period previous year, it increased by JPY 22.5 billion. But as shown on this page, all businesses reported increase in net sales. As a result, operating income rose by JPY 5.7 billion year-on-year.
Please turn to Page 14. The top half of the page shows the results of Infrastructure Systems. Net sales was JPY 128.1 billion, with operating loss of JPY 400 million. Net sales declined mainly on account of decrease in sales of Industrial Systems by JPY 3.7 billion for the segment overall. Operating income deteriorated due to a decrease in net sales, and there was also increase in cost of overseas projects and railway business. And therefore, segment overall saw a decline of JPY 2.6 billion in operating income.
The lower half of the page gives the results from Building Solutions with net sales of JPY 142 billion, operating income of JPY 6.4 billion. Led by recovery of Air Conditioning business, net sales grew JPY 19.1 billion. Operating income rose due to increase in sales. However, there was also impact from surge in material and transportation costs, and it reported only JPY 800 million increase.
Page 15 gives the breakdown of Device & Storage. Net sales increased by JPY 75.7 billion, and operating income is about JPY 10 billion, improving by JPY 14.9 billion. Semiconductor and HDDs and Others segment recorded sales and profit growth, both returning to profitability driven by recovery from COVID impact.
The upper part of Page 16 is for Retail and Printing Solutions. Net sales came to JPY 110.5 billion. Operating income returned to positive JPY 3.8 billion. Both the Retail and Printing businesses achieved sales and profit growth, benefiting from recovery from COVID-19 impact as well as from the structural reform carried out during the last fiscal year.
The lower part of the page is for Digital Solutions. Driven mainly by the pickup in system-related projects to the public sector, the segment recorded net sales of JPY 48.5 billion, improving by JPY 3.4 billion year-on-year, and operating income of JPY 2.9 billion, improving by JPY 1.6 billion year-on-year.
Page 17 is showing the 3-year transition in regards to orders received and order backlog. The graph on the left is for orders received. We continue to see positive trend here with the amount of orders received in the first quarter 2021 improving by 44% year-on-year. The reason for this large pickup is from an order that Energy Systems have received for a large-scale project similar to the orders that are received back in the fiscal 2019.
The graph on the right is showing order backlog. We are continuing to see a steady progress here as well, with the order backlog at the end of the quarter improving by 7% year-on-year.
Page 19 describes the equity earnings from Kioxia. The table on the top left is showing quarterly progression in regards to equity earnings, and the amount realized from Kioxia in the first quarter 2021 came to JPY 4.3 billion. We have also included the market trend information on the right for your reference. We have seen a significant improvement in price, and the flash memory business now has turned positive.
Page 20 gives an update regarding the progression of shareholder return based on share buyback program, but I'll not go into details here. From Page 21, I will explain the forecast for fiscal 2021.
Please turn to Page 22, jumping to the conclusion. The forecast we have announced previously on the 14th of May, this has remained unchanged on this occasion. As I have explained before, in several of our businesses, there is a sense of anticipation that we may overshoot the net sales and profit projections. However, we are seeing a number of risk factors such as COVID-19 infection, sharp rise in material and logistic costs and the shortage of semiconductors in regards to some operations. And because we have these risk factors that we need to keep a close watch on, and so we have decided to keep the forecast unchanged on this occasion.
Page 23 gives the analysis of operating income improvement over the year. And if you can look at the second row of the table at the bottom, where we described the numbers for our second quarter to the fourth quarter. In the remaining 3 quarters of this fiscal year, we are planning for operating income to reach JPY 155.5 billion, improving by JPY 38.5 billion from JPY 117 billion we recorded last year.
The impact from COVID-19 last fiscal year was most notable during the first quarter. And as such, the amount of increase or decrease in sales or increase or decrease in fixed cost pressure, including the first quarter of this fiscal year at JPY 31.4 billion.
Please turn to Page 24. And this is forecast for fiscal 2021 for the different segments. And the situation for the first quarter, there were some ups and downs. But for the full year, we have kept the forecast for the segments unchanged from what we have announced on the 14th of May. And for your information, we have also provided a breakdown of the forecast for fiscal 2021 in terms of our main operations, starting from Page 27 in the Appendix section. Please refer back to them if you require later on.
This concludes my explanation regarding the first quarter results. But as I said before, we are seeing the expansion in COVID-19 infection right now, hike in material and logistic costs right now, shortage of semiconductors. We have these uncertainties at this point in time a potential cause for concern. So we need to keep a close watch in this regard. It's true that some of the businesses are performing better than our projections. But all in all, we want to make sure that we will be able to achieve the plan that we have announced at the beginning of fiscal year regarding fiscal 2021.
This completes my explanation. Thank you.
That concludes our presentation. There is one correction. On Page 3, 4 key points were given. The third bullet points. Year-on-year amount of orders received increased by 44% due to large-scale projects. Verbally, Mr. Hirata explained, it increased by JPY 4.4 billion. The increase was by 44%.
My apology for that.
Now we will entertain questions up to 4:00. We will first receive questions from the members of the media. Questions can be accepted only from those who have preregistered on Q&A roster. [Operator Instructions] From Kyodo Press, [ Inouye-san ], please.
I'm [ Inouye ]. Can you hear me?
Yes, we can hear you.
I have 2 questions. First, my question is on governance. Mr. Tsunakawa, you gave a press conference after -- you have not given a press conference after resignation of Mr. Kurumatani. So I have a question regarding AGM. On June 24, at AGM, Mr. Nagayama, Chairperson of the Board and other director reappointment were denied. And including this and also on pressure issue, what are the challenges for Toshiba in terms of corporate governance? What is your view?
Second question is about dialogue for the shareholders. As it has been pointed out for some time regarding the dialogue with shareholders, when it comes to share repurchase and shareholder return, it seems that there is a heavy emphasis on dividend. And what is your view on the need for investments for growth?
Thank you for your questions. There were 2 questions. First question was on AGM and governance issue. Unfortunately, Mr. Nagayama's reappointment was voted down, and I truly regret that result.
And so regarding the pressure issue, what was the problem? Basically, it was not in violation of compliance. In our view, there was a right to make a proposal. In such exercise of the right by shareholders and voting rights exercised by shareholders, there were some actions to inhibit the exercise of those rights. We understand the nature of governance issue to be of these issues, and we are reflecting upon this and are implementing improvement measures.
Regarding your second question of dialogue with shareholders, we are engaged in dialogue with shareholders in various ways. There are various -- different types of shareholders. Some are shareholders who long -- who are long-term holders of shares, and there are also different types of shareholders, but we are engaged in dialogue with them. To increase corporate value is pursued by all stakeholders, including shareholders and ourselves.
And your question was that we may be emphasizing too much on dividend as a form of shareholder return, but appropriate capital level, the surplus capital above the appropriate level was promised to be returned to the shareholders. And this time, basically, the capital that exceeds the appropriate level was returned to the shareholders. On this point, we will continue to follow this policy.
And regarding the necessary investment, capital that allows for necessary investment is maintained. And therefore, necessary investment for development. And when there is a need for programmatic M&A, the investment shall be made. Thank you.
Thank you. Next question is from Nihon Keizai Shimbun, [ Kotaira-san ].
I have 2 questions, as well. First is in regards to Governance Enhancement Committee. I have read the press release and the Governance Enhancement Committee, the investigation that it will conduct. And so I understand that you don't intend to reinvestigate the impact of the investigation report. And so are you going to think about countermeasures based on the assumption that the fact will be considered as fact? Or at your suspicion, are you going to engage in your independent investigation? Please explain your view in more detail.
If the conclusion of the Governance Enhancement Committee on this occasion ended up being different, the conclusion ends up being different to the investigator's report, then how should the stakeholders and shareholders accept the conclusion to be reached by Governance Enhancement Committee?
The main objective of the committee, as I've explained, is to analyze the root cause and clarify the responsibilities and to make suggestions for developing measures to prevent recurrence. So these are the focus of the committee's activities. And so that would be the basis. These are the objectives for the committee to engage in its activity.
And I wanted to confirm the investigation based on the shareholders' proposal, that report made was correct, the violation of the corporate governance code. And we have recognized that we have prevented the appropriate exercising of the rights of the shareholders in terms of their voting rights. That is the assumption that we have made.
Next, I'd like to invite [ Shumai-san ] from NHK to ask questions.
This is [ Shumai ] of NHK speaking. Can you hear me?
Yes, we can.
Announcement was made on the identification of executive search firms, which was released the other day, and a Chair -- successors to the Chairperson of the Board as well as CEO will be searched.
And first of all, regarding these executive search companies who may come up with the candidates list to the company, after receiving such list of candidates and by when do you intend to determine a candidate for the CEO and Chairperson and the Board of Directors members? So when will be the timing to disclose them?
And another question is what kind of a profile you have requested the executive search companies to come up with in their search for the candidates? And setting aside that, if you have any specific profile of the candidates in your mind, Tsunakawa-san, could you please share it with us?
Now we have asked the search firms to identify candidates. And as far as I have heard from the Nomination Committee, and actually, this committee is comprised only the independent outside directors, and I have just heard that there is nothing that has been determined for now. Particularly Audit Committee members and Chairperson of the Board, for these candidates, we'd like to determine as soon as possible. If possible, by the end of this year, we would like to hold the EGM, Extraordinary General Meeting, with shareholders so that these candidates can be approved.
And what kind of profile we are expecting to see? And every year at Annual General Meeting with shareholders, we have a clearly set criteria like diversity, international character, experience and experience in businesses like us. And we are talking about candidates for Audit Committee, so somebody who is well versed in accounting area should be identified.
And regarding the successor as the Chairperson of the Board, now this company is engaged in a variety of businesses now. So I myself thinks that somebody who has experience serving as a CEO, who can be a good leader in leading such diversifying businesses. But anyway, details will be come up with by the Nomination Committee. That's all I have. Thank you. Have I answered your question?
Well, for my curiosity, so by the end of this year, EGM shall be held to get approval. So in the dialogue with shareholders, do you think that it is the time frame that you're expecting to get the approval from the shareholders?
Well, we have not obtained any specific comments from shareholders on that regard, matter.
[ Aoki-san ] from Yomiuri Newspaper, please.
I'm [ Aoki ] from Yomiuri. Can you hear me?
Yes, we can hear you. Please go ahead.
Mr. Tsunakawa, I have 2 questions. The first question, it is related to the earlier question, the succession plan. Regarding the selection of successors to the CEO and Board Chairperson, do you expect to nominate the candidates at the same time for both positions? You are also prioritizing the selection of Audit Committee members after selecting the Chairperson of the Board, then will you select a CEO? What is the time line?
We would like to follow the opinions of the Nomination Committee. But if we are to apply common sense, including the Chairperson for the Board, next CEO also should be identified as far as candidate identifications are concerned. I think that will be a common sense approach.
Second question, regarding the new CEO, and currently, there is an ongoing development of MTBP. And what is the relationship between the 2? After developing medium-term business plan, will you identify CEO candidate? I think that this is the current time line, but what will be the relationship between the new CEO and the medium-term plan?
Right now, we are developing the business plan with the Strategic Review Committee. In collaboration with SRC, we are developing medium-term plan. And as announced earlier, before the end of October, we would like to announce medium-term plan. And I wonder if we are able to find a candidate for CEO around that timing. Well, it depends on the decision by the Nomination Committee. But realistically, it may be difficult. So executives on our side, we are intensely working on developing medium-term plan by October. We are dedicated to that effort. Thank you.
Next, [ Yava ] from Nihon Keizai Shimbun Newspaper.
[ Yava ] from Nihon Keizai Shimbun. Can you hear me?
Yes.
And related to the previous conversation. At the EGM, before the end of the year, you will ask for the decision, is in regards to members of the Audit Committee as well as members of the Board -- or sorry, the Chairperson of the Board. Is that the case?
And as we have made announcement before, added to that, some of we can contribute towards our business, if we are able to identify someone like that. And we are searching for such. And I understand the Nomination Committee is working on that basis.
In regards to the CTO -- CEO, what is the likelihood?
I don't have information in that regard.
And another point, dialogue with shareholders. On the 25th of June and the statement, you intended to engage in dialogue over the next several weeks with shareholders, employees and stakeholders? But in July, and to provide anonymous feedback, you have started investigation with the individual shareholders. It may be difficult for you to disclose the detail of the discussion with specific shareholders. But what are the type of dialogues that you're having with shareholders? What are the opinions shared? And what are the points mentioned? Can you elucidate on this, please?
Now on the 25th of June and afterwards, and it's been a year and -- 1.5 months since then. But on the 25th June, as the Board, we have issued a statement. In accordance with the statement issued, the members of the Board and also management side myself, we have been engaged in dialogue with shareholders. And a dozen or so more. And I can't talk about the details, but we have engaged in dialogue with so many shareholders. But not just with the shareholders, too. We have also spoken with investors, the financial investors, strategic investors. The Strategic Review Committee, I understand, is also engaged in dialogue with these people as well.
Next from Toyo Keizai, [ Takai-san ], the floor is yours.
Hello, can you hear me?
Yes, we can.
From myself, I have 2 questions. First, I would like to ask you, Tsunakawa-san. In your presentation, privatization was mentioned earlier, if there is a bona fide or specific proposal comes, but that was not mentioned this time. So after AGM, proposal for privatization and so forth have been received by you? And have there been any changes in the stance of the company as a whole regarding such approaches?
As I said earlier, we have been keeping dialogue with various parties, and specific proposal or suggestions on privatization has never been brought up. But how the company should look like, we have been getting the feedback from relevant parties regarding what company we should be. And therefore, the stance has remained unchanged. And after that, since then, the bona fide, sincere and realizable proposal, if such a proposal comes, that will be considered and thought about by the Board.
So priority is put on the maintenance of this listing status.
There is no predetermined conclusion. So we do not have such predetermined conclusion in our approach. That's how we like to proceed.
My second question is about performance of the business. And earlier in the -- compared to the performance forecast at the beginning of the year, and what has been the upside and downside during the year so far? And regarding the impact of COVID-19, now resurgence in the number of cases -- infection cases. And have there been any impacts on the construction or projects so far?
Well, Hirata is going to respond to your question.
After the end of the first quarter, as I said earlier, ups and downs were recorded. That's the expression I used in my presentation. But in principle, to achieve JPY 170 billion for the full year, and based on the progress made in the first quarter, and in principle, the performance has been exceeding the targets in all the business units, particularly good in the semiconductor business and air conditioning businesses. And these have made a more larger upside than other business units compared to the big forecast at the beginning of the year.
And regarding your question about the COVID-19 impact, last year, about JPY 50 billion was the impact on the profit line last fiscal year and this year. So it is difficult to segregate what is the impact of COVID-19 and what is the impact by others. But on our -- based on our gut feeling, we believe that the impact of the COVID-19 is shrinking significantly. I don't know whether it is due to the COVID-19, but other companies as well are seeing the similar trend. We believe that the material costs are increasing and transportation costs are increasing. These impacts are affecting our business performance also recorded in the first quarter as well, and this is something that we have to continue to closely watch. Thank you very much.
Let me clarify, have there been any delay in the construction overseas?
No, there hasn't been any impact.
Next, Yamazaki-san from Reuters.
Hello. Can you hear me?
Yes, we can hear you.
I'm Yamazaki from Reuters. I understand that you are considering partnership, more as alliance. Will there be announcement? I have difficulty listening Strategic Review Committee is going to make recommendation, did you say recommendation.
I understand that SRC is preparing recommendations. Right now, SRC is reviewing our businesses, evaluating our businesses, and we are exchanging views and having a dialogue with SRC regarding businesses. So I think it will be after the current step.
What will be the substance of the recommendation?
There will be dialogue with -- between SRC and the management, and recommendations will be given to the management and as the Board. Ultimately, medium-term plan will be decided. So recommendations is not for the external audience but for the Board.
Next question, this is a hypothetical question. Like, last year, at the General Shareholders Meeting, if a shareholder-sponsored proposal is made, generally speaking, what is your view regarding proposals from the shareholders?
This is a hypothetical question. But regarding the management candidates, Board candidates, new candidates, we would like to conduct a very broad search.
Possible concerns included conflict of interest. But are you concerned about these issues?
If a person can make contribution to the company, in that vein, we would like to engage in dialogue. Thank you very much.
[ Nagai ] from Nikkei QUICK.
My name is [ Nagai ] from Nikkei QUICK. Can you hear me?
Yes.
And I wanted to ask about the investigation report. And in regards to the pressure issue, and you have considered that determination of fact to be true, then Mr. Suga, Chief Cabinet Secretary back then, and he said that it may be possible to use the Foreign Exchange and Foreign Trade Act. Was that a fact?
As for the statement made, I don't know whether it is a fact or not, but not an evaluation although. But what had to happen is that we may have prevented the shareholders to exercise their right in terms of voting rights. And so we want to establish measures to prevent recurrence. That is what I'm saying.
But as to what the audience reported is fact or not, is unknown. And at the AGM, and you may have impacted the exercising of voting rights, if that's the case. And most important issue is whether that was a fact or not. Do you not need to confirm that?
That investigation report, 120-page report, talked about various facts and e-mail data, correspondence, so forth. Now rather than using time to identify whether everything is true or not, something that is related to us internally, there are things that we need to take learnings from, and we need to take that as the basis for us to engage in improvement measures. This is what we are thinking at the point in time.
Next, I would like to call Murakami-san from The Asahi Shimbun.
This is Murakami speaking. I'm from Asahi Shimbun. Can you hear me?
Yes, we can.
And earlier, CEO successor to be appointed or selected. And based on the common sense, you said that the AGM -- EGM shall be held by the end of this year, and you have not determined the timing of the EGM yet. So the timing of selecting the CEO successor, when do you expect to have the successor to take place?
I said earlier the Chairperson of the Board and members of the Audit Committee, such members of the Board, if possible, we would like to hold the EGM by the end of this calendar year to select these people. Regarding the selection of the CEO, we -- I do not know. And that is considered -- being considered by the Nomination Committee now.
Understood. There is another question for you. Regarding directors. There are 8 directors of the company. And going back to the 13 members of the Board, which was the number as of the May this year, and how are you going to consider the ideal Audit Committee?
According to the company's rule, about 11 shall be appointed as Board members. And -- but we are not sticking to the particular number of the members of the Board. We would like to always seek the appropriate number of the Board members and particularly, members of the Audit Committee is 3. So including the permanent members of the Board and the audit and accounting audit as well. We believe that these have to be fulfilled securely.
So if there is a shortage of the members, then 1 or 2 additional members will be necessary in the Audit Committee. So in total, 13. Or -- we do not have any target of the number of the Board members, but rather, we would like to see the sufficient number of members in each committee to fulfill their roles and responsibilities. That's how we are approaching the selection of the Board members.
Hiroi-san from Nikkei Newspaper.
This is Hiroi speaking. Can you hear me?
Yes, we can hear you.
I have one question. In developing medium-term plan, I believe you've mentioned that you're reviewing portfolio, and you will be distinguishing between focus area and nonfocus area. And I believe for nonfocus area, divestiture will be considered. And so the proceeds from the divestiture, how do you plan to use? For example, in case of Hitachi, the joint venture was sold and the proceeds are used to acquire businesses that are related to core businesses. So buying and selling of businesses as a result of reshuffling of the portfolio. How do you plan to use your funds? And what is the ratio between shareholder return and the use of funds?
Between focus area and nonfocus area, at the time of the announcement in October, we will be clarifying focus area and nonfocus area. And as it was pointed out in the question, possibly divestiture may be considered. However, right now, we are reviewing the company-wide businesses. We are reviewing the entire portfolio, and there is nothing that I'm able to comment on right now. So please wait until we make announcement in October.
As for shareholder return, since we made the next plan, initially, there has not been any change in policy. We would like to aim to achieve a 30% payout ratio, including in that point that there has been no change in shareholder return policy.
A follow-up question. So you have not determined the appropriate level of capital yet? It seems that you have not. And so from nonfocus areas, after selling the business, what is the direction in terms of use of the proceeds? What is your view?
Basically, in focus area, in growth area, investments are to be made, but there are no concrete plans yet that we are able to announce. So please wait until October.
[ Suzuki-san ] from Nikkan Kogyo Shimbun, the last person to ask the question, please.
[ Suzuki ]. Can you hear me? I'm from Nikkan Kogyo Shimbun. And I wanted to ask a question about the results. Shortage of semiconductors. Now in the first quarter and for the full year, as to whether that is likely to lead to negative growth. And if that was to occur, which business would that occur in?
This is Hirata. Let me respond to your question. Coming to conclusion, we have had the impact in the first quarter as well. We did have actually impact for some operations. And for the full year as well, we are expecting some impact. We don't -- well, it's quite difficult to read as to what extent the impact is likely to prolong to, but we do have some impact. And in terms of area where this may occur, largest area, and since we are listed company, it's difficult to comment. But Toshiba Tech, for example, they do use a lot of semiconductors as a listed company. So I do understand that they have been impacted to an extent. And they would be the main entity. But semiconductor is used quite frequently in the products of Toshiba. So we will incur some impact. This concludes my response. Thank you.
Thank you very much. With this, I would like to conclude the Q&A session for the people from the media.
Next, we'd like to open the floor for entertaining questions from analysts and institutional -- financial institutions until 4:30. [Operator Instructions]
From SMBC Nikko Securities, Yoshizumi-san, the floor is yours.
Yoshizumi of SMBC Nikko Securities. I have 2 questions. First question is regarding IPO of Kioxia, which has been reported in the media from your company. And this may be the event to the effect that your stake in Kioxia shall be sold. So based upon that, I would like to ask you a question. Earlier based upon the investigation report, you mentioned that you do not regard this as not violating the compliance. And there is the shareholders issue as well as the political issues and there were some complications. And based upon different standing -- standpoints, view may be different.
So in your dialogue with shareholders, and in terms of the maximization of the corporate value of the company, I think the relationship with the government ministries and agencies may have seems to be quite a gray area. So what is your view on this, Tsunakawa-san?
And regarding the divestiture of Kioxia and also consideration of the relationship with the government, have there been any intervention, interference from the government in terms of increasing the corporate value? We believe that appropriate distance with the government needs to be maintained. And from the viewpoint of the value maximization for the shareholders, could you please give us your take on that?
Thank you for your question. Relationship with government. We are engaged in the businesses related to security and also social infrastructure-related business and supervising government agencies, METI, with whom we are reporting. So it is of course that we have to report it to the supervising agency. So in terms of relationship with such agency, we needed to continue to have appropriate relationship with them. But if there have been any excessive engagement, then this is something that we have to reflect on, and we have to take measures to prevent recurrence.
Therefore, as you asked a question regarding the IPO of Kioxia, we, at the company, have been saying that we do not have any intention to get involved in the management of the semiconductor or memory business of Kioxia. So there hasn't been any change to our stance that we are going to towards the selling of our stake.
Understood. Another question is related to the earlier questions. In October, you are going to announce the medium-term management plan. And former Chairperson, Mr. Nagayama resigned. And the structure of the Board has been changed. So with this significant change in the Board structure, that you are still continuing to have the same approach. So what is the top priority for you to reach the conclusion that you are now going to change? And who are going to lead the new management medium-term plan that will be announced in October from the stock market?
And after AGM, and 3 or 4 months will be appropriate time frame to come up with the new medium-term plan. And we are proceeding with that work. Even under the new Board structure, 3 or 4 months will be necessary. So we thought that it would be appropriate to announce the new medium-term plan in October.
Who is leading the formulation of the medium-term plan?
This is led by the management team. Management team, executive team are leading the initiative to prepare the medium-term plan. And SRC, Strategic Review Committee, is closely communicating with the management team and getting the opinions from them to fine-tune or finalize the medium-term plan. That is how they are working.
Are there any other questions? [Operator Instructions] Ishino-san from Tokai Tokyo Research Center.
I'm Ishino from Tokai Tokyo Research Institute. I also have 2 questions, if I may. This time, in the results from the first quarter, semiconductor and air conditioning business performed well according to the presentation. How much upside was realized? And what was the amount achieved combining the 2? And if it wasn't in the negative territory, what was the number? And what is the degree of fluctuation of semiconductor business? There were subsidiaries that were acquired. Inclusive of that, could you comment on the fluctuation in semiconductor business?
Hirata will address that question.
How strong was the performance? I -- we are not able to comment specifically on that semiconductor business and air conditioning business. The expectations for the first quarter is not disclosed, and it's very difficult to communicate since that is not disclosed. But in these 2 businesses, our expectation was exceeded significantly.
And did you have a second question?
The breakdown of the semiconductor. I believe there are also subsidiaries engaged in semiconductor business, discrete and including semiconductor-related subsidiaries performance. To the extent that you can disclose, could you discuss the performance?
In the first quarter, the sales from semiconductor business was around JPY 78 billion. And as you are aware of, this includes general semiconductor business as well as NuFlare Technology. And this time, because of shipment delivery, because of our relationship with the customer -- with our customers, and since NuFlare Technology deals with discrete indent products, it so happens that shipment was lower for NuFlare Technology in the first quarter. And therefore, most of the JPY 78 billion of sales in semiconductor business came from general semiconductor.
Do we have anyone else who wanted to answer a question? [Operator Instructions] Yoshizumi-san from SMBC Nikko.
Yoshizumi from SMBC Nikko. And in regards to the result, 44% pickup in terms of orders received. But if you exclude the large-sized orders, how does this look?
If we exclude the large size orders. And if you could just give me a little time. Now if we exclude large-sized orders, well -- and since we have created an order, and apologies for the orders received for FY '21 not being clear, but less than JPY 500 billion, and of which, the large-scale orders are probably 20%. And I think 20% would be from large-size orders. And I hope that you can obtain an image based on that.
Now if you exclude the large-size orders, what was the growth rate? Do you have kind of image in that regard?
If we exclude the large-size orders, and you're asking about the year-on-year growth, comparing first quarter to first quarter, well, if that is the case, maybe the growth -- or the pickup is around 5%.
Understood. The second question. Now in the first quarter, the fixed costs for growth and the restructuring, and it feels that you have not really spent much money there vis-a-vis the annual budget. Were the levels in line with the plan? Also the full year budget this year, and we have seen the structure change in various areas. Do you intend to use up the entire budget? That's my second question.
In terms of the investment for growth in the first quarter, and frankly speaking, we do actually intend to try to use the investment from the first quarter. And what we normally see every year is that we are not using as much as we have planned for. That is the current situation. But for us, we need to head towards growth going forward. And so we want to certainly enhance the weighting towards research as well. So we intend to use the budget using the remaining 9 months of the year. That is the plan that we have at this point in time.
Next, from UBS Securities, Yasui-san.
This is Yasui speaking. I'm from UBS Securities. Can you hear me?
Yes.
I have 3 questions. First question, your confrontation with shareholders. After 25th of June, after you have had a dialogue with shareholders. And the fact can be done if the company had been proactively done, but I think that there may have been some dissatisfaction among shareholders. So towards the solution of the issues, if there is any gap in perception between the company and the shareholders, if you have felt any, please let us know in terms of governance or enhancement of corporate value. So what is the biggest factor if there is any gap in the perception between the company and shareholders?
And the second question is about a very sensitive issue. If the company goes private, the corporate value can be enhanced based on what reasons? So what are the reasons why you think that there may be potentially increase in the corporate value? And the proposal from CVC has been reported in the media. After that, have there been any proposals from anybody else? We have not heard any of such news. But if there is any new proposal from somebody and then, please share it with us.
The third question is about SG&A for the first quarter. I'm asking about the results for the first quarter. I think the SG&A has been reduced by about JPY 10 billion from a year earlier. Last year, because of the impact of COVID-19, SG&A expenditures were compressed very much, not only at Toshiba, but other many companies. Therefore, SG&A is recovering upwardly compared to what it was a year earlier. So JPY 10 billion has been reduced in the SG&A. If there are any efforts by the management to reduce costs, could you please share them with us as well? These are the 3 questions.
Okay. I would like to respond to the first 2 questions. Regarding your dialogue with shareholders, if there may be some dissatisfaction among the shareholders not successfully going on, on the 25th of June, the new structure of the Board has been in place. And we made a statement that we are going to promote dialogue with shareholders. Well, we are proceeding with the dialogue. There may be some question whether or not we are really proceeding smoothly dialogue with shareholders and maybe because of the arrangement delays.
So -- but recently, we have been proactively listening to the feedback and input from shareholders. And I believe that such a gap or the discrepancies in the perception has been eliminated recently. And what we believe as the benefit of the privatization of the company and the management team and the Board are united as one body. And so I think the speedier and flexible management can be possible, in general.
And have there been any proposal from anybody?
We have not received any concrete proposal so far.
Regarding SG&A expenditures, selling and general and administrative expenditures reduction by about JPY 10 billion. On Page 3 of the disclosure material, I think that you referred to these numbers. Regarding the items of expenses, there have been changes since last year. And what we feel from the management team in terms of fixed costs, I think the expenditure level has stayed almost the same as last year's.
I don't think I am responding to your question in a straightforward manner. But the scale of the expenditure, while we see the increase in the marginal profit as well as sales, but SG&A has been contained.
Fixed costs are actually being reduced rather than staying unchanged. So I wonder whether there have been any particular efforts taken by the management to reduce cost.
So perhaps I would like to explain to you in details later. But compared to what it was in the first quarter last year, there was a cost incurred for restructuring, particularly in semiconductor business. So these costs had been included as an extraordinary factor such as the premium retirement allowance. So these were incurred last year.
Understood. Then in explanation by Tsunakawa-san, there may have been not many opportunities to have dialogue with shareholders. Therefore, there may have been some dissatisfaction. But through the dialogue and do you think that there is any gap on the understanding of the policy of the company and what the shareholders are expecting?
Well, specifically and individually, when it comes to shareholders, which includes a variety of shareholders like general ordinary -- the general investors as well as activists. But regarding the specific comments by the shareholders, I'd like to refrain from mentioning them on this occasion.
And regarding one point for correction for -- in the Q&A for [ Kotaira-san ] of Nikkei earlier, I said that I do not believe this was the violation of the compliance. But in terms of corporate governance, violation may have occurred. But more accurately, that is not correct. Corporate Governance Code -- under the Corporate Governance Code, the AGM was not fairly managed. So that was the finding by the investigators. Therefore, we take this finding by the investigator sincerely. So this is what I wanted to say. So I'd like to make a correction for what I said earlier.
Are there any questions from analysts and investors? [Operator Instructions] It seems that there are no further questions. We -- although it is ahead of schedule, we would like to conclude today's earnings results session. Thank you very much.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]