Toshiba Corp

TSE:6502

Earnings Call Transcript 2019-Q3

[Operator]

From now on, we're going to start the third quarter consolidated business results of Toshiba Corporation. I would like to introduce to you the participants, Mr. Masayoshi Hirata, the Representative Executive Officer and Corporate Executive Vice President; and Mr. Yasuhiro Matsunaga, Group Manager of Accounting Division; and Kohei -- Mr. Hayashi, who is the Head of Investor Relations team. Mr. Hirata, please.

[Masayoshi Hirata, executive]

Well, thank you very much for gathering despite of your very busy schedule. So I would like to explain the performance of the third quarter of fiscal 2018. And also this time, we are revising the forecast for the full year. So I would like to explain about that item as well.

Please look at Page 5. Now, as I always do, I would like to give you a high-level summary. As for the overall sales, it decreased by approximately JPY 150 billion or 5.5% year-on-year, as Energy Systems declined due to slower Thermal Power Systems business and Transmission & Distribution Systems business, despite an increased sales of -- in Storage & Device Solutions, Infrastructure Systems & Solutions.

Operating income declined by roughly JPY 47 billion year-on-year due to deterioration in the operating results in business segments, except Industrial ICT Solutions, which saw an improvement in performance. As for nonoperating income, it declined despite the gain on the sales of Toshiba General Hospital in April this year, due to the gain on the sale of Landis+Gyr last year.

Profit before tax declined by JPY 77.5 billion year-on-year. Net income rose as the gain on the sale of the Memory business was posted as an income from discontinued operations. As we explained previously, the net income was JPY 1,021,600,000,000.

Page 6. This is free cash flow. This is a positive 1,405,400,000,000 due to an additional cash of JPY 1.46 trillion coming from the sale of Memory business.

Equity attributable shareholders of the company. We carried out the buyback of our own shares. And so there was a decrease of about JPY 290 billion due to the repurchase of our own shares. And yet, the net income grew. So the equity attributable to shareholders of the company was 1,586,400,000,000, and shareholders' equity ratio was 36.7% at the end of December.

Page 7 shows the result for Q3, so I would like to omit the explanation. Page 8, I would like to call attention to the exchange rate. The end of the term exchange rate was JPY 111 a dollar, which means yen depreciated by JPY 5 than JPY 106 a dollar at the beginning of the term.

Now Page 9, this shows the year-on-year comparison of the operating income. You see on the left side, the operating income at the same time -- same period over the last year was JPY 55.5 billion. If you exclude the impact of emergency measures and the impact from the deconsolidation of Landis+Gyr, Visual Products and PC business, we had a surplus of about JPY 45 billion. In comparison, the result through Q3 fiscal year 2018 received a negative impact of JPY 1.5 billion due to exchange rate and negative impact of about JPY 8 billion from lower sales prices, mainly in Storage & Device Solutions and another negative impact of about JPY 24 billion from declined income in Energy Systems & Solutions, with fewer new thermal power plant projects and that in Storage & Device Solutions partly due to stagnation of the Chinese market.

And also there was a one-off negative impact of about JPY 24 billion coming from a cost increase in large domestic projects in Q3 in Transmission & Distribution business, which we needed to account for, and also goodwill impairment related to NuFlare Technology.

Now on the other hand, we carried out structural reform in Industrial ICT Solutions. So we had a positive impact coming from that. And also we divested profitable overseas operations so we could reduce the cost. And also, although the impact may be smaller this year, we will carry out emergency measures. So we will have positive operating income of JPY 8.2 billion. No, I'm sorry, no. We will have -- the result was a positive operating income of JPY 8.2 billion.

Now page 10 shows a breakdown of nonoperating income. As I said earlier, we had the gain from the transfer of Toshiba General Hospital of JPY 23.9 billion. And also, there was equity earnings from Toshiba Memory of JPY 7.5 billion. Up to second quarter, we had impact which was much bigger, which was around JPY 45 billion. But now PPA is now fixed, and also the price impact is occurring. So the equity in earnings from Toshiba Memory is -- has given some impact. Of course, last year, we had Landis+Gyr sales. So in comparison with the same period last year, the number was lower this year by about JPY 30 billion.

Page 11 shows the free cash flow. On the right hand, you see the accumulated amount through 9 months. So the total is JPY 1,458,300,000,000. The -- so the orange is cash flow from investing activities, and this includes the cash from Memory business. So if you exclude that, there was the cash out from investing activities of about JPY 120 billion. So in total, you see that the free cash flow, excluding special factors, will be minus JPY 53 billion. And for the -- there are some special factors for operating cash flows and also investment operating -- investment cash flows. Last year, there was special factors like WEC parent company guarantee. So if you exclude those factors, we had the positive JPY 52 billion. And there was a Landis+Gyr sales last year also. So exclude that, the investment cash flow last year was JPY 211 billion. So if you include all those special factors, the total amount last year was minus JPY 160 billion. So this year, the figure is -- shows improvement by more than JPY 100 billion. But there was investment cash flow, JPY 210 billion. That included Memory. And this year, JPY 120 billion does include some of the Memory business. But we don't really have a lot of investment for Memory. So Memory investment is reduced by JPY 100 billion. So overall, the performance hasn't really changed.

If you look at Page 12, there's a balance sheet. On the left side, you see the asset. At the top, you see the cash and cash equivalent. There is a share buyback and also repayment of the borrowings. But then we sold the Memory business. So as a result, the cash and cash equivalent grew drastically. And also, if you see other asset category, as I explained in the second quarter, we had reinvestment of JPY 350 billion. That's included in the dark color portion here. And if you look at the light gray portion, that's the discontinued operation going away because of the divestiture. So the total asset shrunk by about JPY 440 billion.

And also for the liability side on the right side, the top is the borrowings, interest-bearing debt. Again, the reimbursement of the -- repayment of the bonds and also repayment of some of the borrowings have been done. So the interest-bearing liability shrank. For the discontinued operations, that is the liabilities of the Memory business, went away, which was JPY 349 billion. And at the bottom, there was some cash and equivalents from the Memory business. This was included in other liabilities. But because the business went away, this was also eliminated. And also, there was a bonus paid in November. So there was some account, because of the paid bonuses, compensations, but they went away too. So totally, the liability went down by JPY 900 billion.

Now from Page 13, it is business results by segment. For Page 14, it's the overall company results by segment. Now Page 15, Energy Systems Solutions (sic) [Energy Systems & Solutions], net sales in Energy Systems Solutions declined by JPY 156.8 billion year-on-year. In Thermal & Hydro Power Systems, because of decarbonization, JPY 53 billion decline in net sales. And in Transmission & Distribution Systems, there's a transfer of Industrial Distribution Systems business to other divisions within Toshiba, and that has -- the net sales decreased by JPY 56 billion. And last year, we deconsolidated some of the unprofitable business overseas. Because of that restructuring, JPY 56 billion of net sales was decreased. In addition to that, Landis+Gyr was divested, was sold, and that has led to lower sales this year.

Operating income declined year-on-year to minus JPY 14.2 billion, especially the Transmission & Distribution business, JPY 11.5 billion declined year-on-year. In the third quarter, the major projects within Japan, we needed additional provision for those projects towards FY '19. We want to make sure this will never happen again. From the corporate to the Energy Systems, there is an order to make sure they have a rigorous assessment of new projects. And currently, those rigorous measures are being implemented. The corporate is involved in Energy Systems' major projects. Corporate will be involved in the management of the cost of these Energy Systems. And towards the middle of the chart, we have the segment-wise free cash flow, JPY 21.4 billion negative. The Transmission & Distribution running cost deteriorated, that has led to the -- this figure.

Page 16 shows the order backlog in Energy Systems & Solutions. It is the comparison with the previous year. The order backlog for the third quarter decreased by JPY 500 billion or 30% year-on-year. And this is -- one of the reason is that corporate is involved in the rigorous assessment of new projects. Unless we're sure it's profitable, we will not receive that -- accept that order. That is the policy. And that is the reason for the lower order backlog. But on the other hand, the marginal profit rate of those projects is improving steadily.

Page 17 is Infra Systems Solutions (sic) [Infra Systems & Solutions]. Public Infrastructure achieved higher sales due to the expansion of Social Systems business, but profit declined because of the reduced impact of emergency measures and difference in sales mix of the project, so slight decline in profit. Buildings & Facilities saw higher sales, mainly due to air conditioning business. So increased revenue from the air conditioning and also structural reform in elevator business led to higher operating income year-on-year. Railways and industrial systems achieved higher sales, supported by the transfer of Industrial Distribution Systems business from Energy Systems Solutions. So there's an internal transfer of this business within Toshiba. It has battery and railway business within this. So we want to really nurture and foster this as our major business. And so as a result, R&D cost has increased. Thus, the operating results was lower, but we want to make sure we can reap the seeds of this investment in the future in FY '19.

Page 18 shows Storage & Electronic Device Solutions. Net sales of semiconductor decreased by JPY 7.3 billion. Discrete semiconductor was flat, but the sales of System LSI declined due to reduced -- reduction of sales of unprofitable products and also slowdown in Chinese market and the data center temporary slowdown. Operating income decreased by JPY 22.6 billion. And goodwill impairment of JPY 9.8 billion for NFT was recorded in Q3 of FY '18. Last year, the price of NFT stock dropped, part of the steep decline in stock prices across the market. And in response, as required by accounting standards, Toshiba conducted goodwill impairment test. And as a result, Toshiba recognized the impairment. And so JPY 9.8 billion of goodwill impairment was recognized.

In addition to that, System LSI had lower operating income resulting from lower sales. And in discrete semiconductor, this is really our focus of emphasis, and this market is really strong. And we're accelerating investment in this area, and depreciation burden is a little heavier now. And as a result, we have a slight decline in discrete semiconductor year-on-year. Now HDD and others, this includes HDD and memory products resale. And net sales increased by JPY 37.2 billion. Despite the increase of enterprise HDD, sales declined due to contraction of PC market. Resale of memory products increased, which resulted in higher sales for the overall HDD business. Operating income declined by JPY 13.7 billion. Memory products didn't have any impact on the operating results. However, declines in sales of HDD, plus the lower selling price, lower ASP, overwhelmed the procurement cost reduction efforts, and it resulted in lower operating income.

Page 19 is Retail & Printing Solutions and Industrial ICT Solutions. Net sales of both retail and printing business declined in the 9-month period. As for the operating income, overseas retail business achieved higher income, but domestic retail and printing business are because of the POS demand increased because of the replacement demand. But this year, it -- we didn't have that kind of demand. And because of the printing profitability declined, JPY 3.2 billion decrease in operating income. Industrial ICT Solutions JPY 4.2 billion increase, this is mainly due to the structural reform of the previous year, and the effect is now being felt. And in other segments, which includes PC business, the sale of the PC business is completed to Sharp Corporation. So the sales has declined, but the profit and loss has improved. That is the overall picture of the segment-wise results.

So starting on Page 21, I would like to talk about the revision of the fiscal year 2018 forecast. So on November 8, we made announcement of the forecast of JPY 60 billion. But as the business conditions have changed, we would like to revise the numbers. If you look at the center of the table, you see the new forecast. As for the sales, this is JPY 3,620,000,000,000, not much difference from the previous forecast. For the income, it is down by JPY 40 billion from the last forecast.

Now on the right side, you see some explanations on the slide. There are main 2 reasons. One is the NuFlare Technology goodwill impairment, which is JPY 17.8 billion; and also T&D business major projects additional cost provision, which is JPY 17 billion. And so because of these 2 reasons, the operating income forecast is lowered.

As for the nonoperating income, again, you see the explanations in the middle. The equity earnings from Toshiba Memory is changed. Previously, it was said to be JPY 50 billion. And up to -- through Q2, it was positive JPY 45 billion. So we -- some question -- there was some question that maybe JPY 50 billion is too small, but we weren't sure about the PPA at the time. So we were feeling some level of the risk at the time. So although we didn't explain about it at the time, but actually, the purchase price agreement risk of JPY 20 billion was included in the previous number. So majority of the minus JPY 20 billion risk -- sorry, the majority of the decline by JPY 35 billion is really caused by the change in the price. So the new forecast for the income before tax is minus JPY 110 billion, which is lower than JPY 70 billion. And the net income is now forecast to be a positive JPY 870 billion after considering an improvement of corporate tax due to lower income before tax.

As for equity attributable to shareholders for the company, new forecast is JPY 980 billion, as net income is expected to be lower.

Now the buyback of our shares will be completed by March. The amount expected is JPY 700 billion. That's the assumption. However, it could be challenging, but that's the backdrop for the numbers. As for the net bearing -- interest-bearing debt and also the free cash flow, they haven't changed.

Page 23 shows the main item in the change in operating income. Previously, the operating income was forecast to be a positive JPY 60 billion. Amount included structural reform expense of JPY 27.3 billion. And so if you exclude that number, the amount was JPY 87.3 billion. And the -- there was some exchange rate change of JPY 3 billion. But the point here is the stagnation of Chinese market and also data center market being softened temporarily, lowering down the system, LSIs and HDDs to go down. So we have to include the impact -- possible impact of these items to the sales of the Storage & Device Solutions. So after that, we came up with a number of JPY 80.5 billion. And also, we consider one-off experiences, namely NuFlare Technology goodwill impairment of JPY 70.8 billion and a provision of additional cost in large-scale projects of JPY 17 billion. Now the impairment of the goodwill, we are accounting for these numbers already for NFT. So this is going to go away next year. And for the existing goodwill, we are not expecting any further impairment. So we do not expect this to be repeated next year.

And also for the additional cost for large projects this year, for T&D, we will strengthen the process of the screening of the profitability of the coming-in projects. So this additional cost provision will go away next year. So that's why we treat them as one-off costs. So if we exclude the impact of JPY 80.5 billion, we will have some impact from the structural reform, so the total of the operating income is revised to be JPY 20 billion.

Next is segment-wise explanation. Please look at the far right. Energy Systems, JPY 21.9 billion deterioration of operating income. Storage & Device Solutions, JPY 21 billion deterioration. In total, JPY 40 billion deterioration incorporated into it.

Page 25. Now the goodwill impairment of NFT really occurred all of a sudden. In December last year, the overall market plunged and NFT stock price fell in accordance with the market trend. And we saw the signs of the impairment. This company is a listed company. So the market price and the book price must be reviewed all together. But the book value and the market price were compared. And because it has the goodwill, we tested whether there is an impairment of the goodwill. And as a result, JPY 9.8 billion goodwill impairment had to be recognized for this quarter. And in total, it had JPY 17.8 billion goodwill. So we have remaining JPY 8 billion goodwill. As is shown in the forecast of the fourth quarter, NFT performance is -- remains good and it remains unchanged from the initial announcement.

The forecast remains unchanged. Single B, multi-B, things are progressing well. So the company is performing well. But we acquired NuFlare and the goodwill exists. So we have to make an assessment on the impairment of the goodwill. And in order to finalize the assessment, we need to take into consideration of the stock price. As of today's stock price, there is no need for additional impairment of NFT. But in case there is another market plunge and if there is a sale of NFT stock price, there is a possibility of additional impairment. And so judging from today's stock price, this may be a very conservative forecast, but this JPY 20 billion includes impairment risk of JPY 8 billion of NFT shares -- NFT goodwill.

Page 26. Because of the goodwill impairment of NFT, you may be wondering whether we have other goodwill risks. It's been calculated last year, but we recalculated it. Toshiba TEC and Toshiba Elevator goodwill, each of these companies, Toshiba TEC, NFT, we have sales companies that sells NFT. And there are sales companies that sell Toshiba Elevator. So those sales companies are listed companies. And those sales companies acquired Toshiba TEC and Toshiba Elevator. So because they are unlisted companies, when we assess that impairment of goodwill, there is no requirement by accounting standards for us to consider the stock price, the -- whether there is the base of judgment of impairment of goodwill is whether it impairs the future cash flow. As of now, Toshiba TEC, Toshiba Elevator, there is no risk that there won't be any future cash flow. So there is no risk of impairment as of now. I added this information for your reference.

As for Toshiba Memory, the figures has been changed considerably. It is no longer our affiliate. So we wondered if we can go so far as to refer to this Toshiba Memory. But we negotiated with them and because of the changes in the figure, we got agreement from them that we can talk about these changes in the equity earnings. On -- the far left chart shows the equity earnings, JPY 12.2 billion for the first quarter, JPY 33 billion in the second quarter, and the third quarter minus JPY 37.7 billion and JPY 12 billion -- JPY 12.5 billion negative for the fourth quarter. These -- and this JPY 37.7 billion, as is shown on the footnote, it consists of 2 factors.

One is plus JPY 18.6 billion of ordinary income from Toshiba Memory and minus JPY 56.3 billion from the impact of PPA. And so it shows how this figure came up in accordance with the PPA process. According to accounting standards, when PPA is finalized, you have to go back to the original date of the acquisition, and then all the charges are going to be recognized. And some of the charges that are not recognized must be recognized at the time PPA is finalized. And that figure is JPY 201 billion minus, tax effects included. So JPY 563 billion minus will be impact of PPA to Toshiba. And the goodwill balance, when being acquired, if -- the goodwill was JPY 7,841,000,000,000. But by PPA, the inventory fixed asset and the -- for DTA -- DT liability, the following figures are allocated. So the final figure is JPY 387 billion. And with this figure, if there is no additional cash flow, we will need to carry out the impairment of goodwill.

The left-hand side is for your reference for the third and fourth quarter. We had the request from the analysts from the past -- in the past, and we try to answer the requests. This is the year-on-year figure, bit growth and ASP transition compared with the previous quarter. So this chart on the left bottom corner shows the trend. I'm sorry to say this, but fourth quarter bit growth and ASP, you need to be considerate to other competitors. So JPY 12.5 billion negative according to one memory company. But according to Toshiba calculation, JPY 7 billion depreciation for tangible and non-tangible assets included. So in substance -- so ordinary loss -- ordinary income or loss will be slight negative figure.

And finally, others. Toshiba Next Plan progress is shown. As I said earlier, China slowdown and data center slowdown in demand has caused JPY 10 billion less operating income. And in semiconductor is what I'm talking about, next fiscal year, Chinese market will continue to slow down, that is our assumption. So semiconductor division is now replanning for the next year in order to make up for this JPY 10 billion operating loss. That is the order from the top management.

Having said that, from this fiscal year to next fiscal year, now it's JPY 20 billion. And temporary costs and -- the basis is JPY 80 billion, and it should be increased to JPY 140 billion. And procurement reform of JPY 25 billion and restructuring of JPY 43 billion should be carried out by all means. And for restructuring, we had agreement from the trade union, and we are working on optimizing the number of personnels. And we do not know what the final size of the manpower is, but we are now working on the restructuring. And next year's recruitment will be really rigorously assessed. Usually, we hire 2,000 yen -- 2,000 people, but it will be reduced to 1,000.

And the restructuring -- reconsolidation of production sites, our plan is well underway for that. And for LNG, we are now waiting for the result of the assessment of the authority. And we will also cut down on the cost of the direct material -- direct cost and indirect cost. For direct cost, it's well underway. And for indirect cost, the procurement department of the head office is now negotiating the price.

And for the sales reform, although it's not incorporated for the mass production items, in each business units, with the advice from consulting, they will come up with new ideas to improve the sales force. And the final point, our infra business weight is higher now. Just like the Transmission & Distribution business, we had a major loss in the new order. So we want to make sure it will never happen. So the corporate will intervene in the assessment of new order and new projects. And it's already being carried out. And process restructuring in the future, IT will be improved, so that the fixed cost can be reduced. Mr. [indiscernible] has been hired. And Mr. Yumita has been hired. And we have set up new department to promote the reform in our company so that IT will -- ITUs will be reinvigorated. Thank you very much.

We would like to welcome questions. We'll bring you a microphone if you raise your hand. Please make sure to identify yourself before you pose a question.

Yes, the gentleman on the end.

[Takeo Miyamoto, analyst]

Yes, my name is Miyamoto. I'm from Mitsubishi Morgan Stanley. First about the order received in the energy, you said that the order received is reduced by 30%, by JPY 500 billion. When you divide that between, say, nuclear power plant and other kinds of power plant like thermal, what would be the breakdown of the decline?

[Masayoshi Hirata, executive]

As a perception, the thermal and nuclear power plant went down. And so -- and T&T declined slightly somewhat slightly, especially for the nuclear. South Texas in United States was suspended, and officially, that was discontinued. So the received order went away, and that was big in terms of the impact. So in the past, we were saying that was part of the backlog. But then with this went away. So that was the element. For the thermal power plants, the number of the projects are going down. And also, the -- we look at -- we do review the possible projects. But of course, because of the situation in the market, competitors are coming up with very, very competitive prices. So sometimes we just give it up because of the lack of the profitability. So that is the situation.

[Takeo Miyamoto, analyst]

Second question is about the nuclear -- NuFlare. NFT impairment of goodwill, you said that it was triggered by the stock price sell-off, 2013 and 2014. I think that stock price was at about the same level. What has changed? And what has led you to the judgment of impairment of the goodwill?

[Masayoshi Hirata, executive]

At that time, NFT has had profits. The net asset has been -- has increased. I think the stock price was as low as that time, but at the time, the book value was a lot smaller. So they did not have to impair the goodwill.

[Unknown Executive]

Next, any other questions? Yes. A gentleman in front row, please.

[Mikio Hirakawa, analyst]

My name is Hirakawa. I'm from Merrill Lynch. I have 2 questions. Now earlier you said that the procurement cost reduction is one thing that you will work on. When I look at Page 18, have this drive business as a negative element. The unachieved target of the procurement cost reduction effort is mentioned. So next year, you have this target of JPY 25 billion to reduce the procurement price. And I understand that is one of the pillars to achieve JPY 140 billion target. So I feel a little bit -- I understand the storage has been quite a negative yet. So why do you think you couldn't achieve the target for HDD procurement cost reduction activities? And what impact it will have on the JPY 25 billion target next year?

[Masayoshi Hirata, executive]

Now in next year, JPY 25 billion target does include some activities in HDD area. And the flow type of cost down, we would like to continue as we currently plan. But the sales price, which should work as a launching pad, is kind of weakening. So we have to offset the negative impact from working on the purchasing price, and that has not been completed. For HDDs, data center market, well, of course, in the future, we do believe there's some room for growth. But at least temporarily, we are seeing the softening of the market. So for this fiscal year, the reason we couldn't achieve the target for the procurement price reduction and how to come up -- how to make it up, that's something we're working on. Mr. Tsunakawa and his team is going to review by the end of February. So we will try to find some solutions there, as you pointed out. Right, we are lower in the Next Plan target for that. So the situation is that we're trying to take JPY 25 billion still, but the starting point is lower.

[Mikio Hirakawa, analyst]

Second question is about Landis+Gyr. I understand the impairment of goodwill, but after it was reconsolidated, Toshiba is now concentrating on IoT. Why do you continue to have Landis+Gyr?

[Masayoshi Hirata, executive]

Are you talking about NFT or Landis+Gyr?

[Mikio Hirakawa, analyst]

No, sorry. I'm talking about NuFlare technologies. Why do you continue to have then -- NFT as a subsidiary -- consolidated subsidiary?

[Masayoshi Hirata, executive]

Well, IoT, hardware, AI, we want to link them in an organic manner. For NFT, as you know, semiconductor manufacturing equipment -- manufacturer, they have good technology and they are generating cash well. And globally, they are positioned at a very high -- they have a high status in the global arena. So as of now, I mean, we do not have any intent to sell NFT. It is true that it may deflect a little bit from the direction we're heading for, but it is a cash-generating business, and as a cash-generating business, we want to foster NFT.

[Unknown Executive]

Any other questions? Yes, a person in the third row on the side of the corridor, please.

[Kenji Yasui, analyst]

My name is Yasui. I'm from UBS Securities. I have 3 questions. First, now operating income of JPY 140 billion for the next year and the risk buffer is JPY 30 billion. So the range is between JPY 110 billion to JPY 170 billion. What is the deviation from that possibility? As a possibility, HDD is lower. But anything else that has been deviating from the original idea since November? That's my first question.

[Masayoshi Hirata, executive]

Now as of today, hard disk overall is lower than our expectations. And System LSIs, as I said earlier, is suffering from the condition of the HVAC market in China. So the sales of System LSI is lower. That's another thing. And also, I believe that I showed you in one of the tables -- right, this one. So if you look at the increase and decrease factors, there is a decrease of JPY 9.8 billion. So you see the launching pad lower -- is lowered here. So the risk buffer of JPY 30 billion was accounted for. And including Kurumatani, we don't have any intention to use that JPY 30 billion for -- the JPY 10 billion gap at all. So System LSI is high and hard disk teams for them -- for those -- the launching pad has lower -- has gone down a little bit. We have told them to come up with the measures to improve the launching pad back again. The System LSI and hard disk, we'll make our report to Kurumatani and Tsunakawa in the second half of February.

[Kenji Yasui, analyst]

So in the sense, this range of JPY 140 billion to JPY 170 billion, this range is now changed. Right?

[Masayoshi Hirata, executive]

Right. So combined -- if we combine all the departments, [indiscernible], Kurumatani, Tsunakawa and all the head of their departments, so we're talking with each other all the time to achieve JPY 170 billion in total.

[Kenji Yasui, analyst]

Second question is about the current situation, device -- semiconductor device division, first half actual and second half forecast shows net sales flat. And when we consider NFT, the increase in profit of JPY 5.6 billion and JPY 10 billion in the second half, and profitability seems to be improving. But discrete LSI -- discrete semiconductor LSI, is there anything that has improved?

[Masayoshi Hirata, executive]

I'm sorry, I can't catch up with your question.

[Kenji Yasui, analyst]

In semiconductor department. In the first half, the sales was JPY 176 billion, and second half plan is JPY 176.3 billion. That's the sales plan -- planned sales.

[Masayoshi Hirata, executive]

Yes, you're right, the sales is flat. And the profit is JPY 5.6 billion for the first half and JPY 8.4 billion for the second half. That's the operating income forecast for the second half, JPY 8.4 billion.

[Kenji Yasui, analyst]

How much second half?

[Masayoshi Hirata, executive]

I said minus JPY 8.4 billion for the second half. NFT impairment is JPY 7.8 billion. And if you reincorporated, I think the second half profit will be about JPY 10 billion if you do not account for the impairment of NFT. So if getting rid of NFT result of impairment, it seems as if the profit has increased in this area from JPY 5.6 billion to JPY 10 billion.

[Kenji Yasui, analyst]

So NuFlare is better, but discrete and LSI has not improved, is that what the situation is?

[Masayoshi Hirata, executive]

Discrete semiconductor and System LSI, whether there is any change from the first quarter to second quarter, there's no change. Slight deterioration.

[Kenji Yasui, analyst]

So discrete and LSI profitability has not improved?

[Masayoshi Hirata, executive]

Unfortunately, no. No improvement.

[Kenji Yasui, analyst]

So my last [ answer and ] question is about the procurement cost improvement of JPY 200 billion next year -- JPY 25 billion next year. Now if you get the -- I believe that if you are successful in carrying out this kind of activity, you should have felt the impact. So I'm not really convinced if that activity will bear some fruit next year. Give me some confidence, please?

[Masayoshi Hirata, executive]

For the indirect cost, we are harvesting some improvement. The corporate procurement department is negotiating -- is involved in negotiations significantly, and we are feeling some impact already. For the direct material cost by department, for -- there are -- there is a review going on for each item. For those items that we need to negotiate with the suppliers, we have identified them already. So of course, we have -- we can't decide everything on ourselves. We have to negotiate with them. But we sometimes get involved in the discussion heavily with the suppliers to the extent that we recommend and introduce new suppliers for them because we don't want to just pressure them to reduce the price. So making sure that there is a good business case for them by, for example, introducing them their suppliers to reduce the purchasing price on our side. But of course, the impact cannot be felt until there's -- we both sign our contracts. So we are -- we have categorized our activities into 3 steps. And actually many items we have identified already, where we are ready to -- for which we are ready to negotiate -- start negotiating with our suppliers.

[Kota Ezawa, analyst]

Citigroup Securities, Ezawa is my name. Toshiba Memory related question. There is some downward adjustment related to Toshiba Memory. PPA process original plan and the actual PPA led to some adjustment. How much is that? And there's also certain adjustments made based on the actual results of the business. So can you identify them?

[Masayoshi Hirata, executive]

Well, as I talked about it earlier, it is not an official information from Toshiba Memory. But in the second quarter, PPA depreciation amount is likely to increase. And JPY 20 billion was assumed originally in net JPY 35 billion deterioration. But I think it's based on how you look at the selling price.

[Kota Ezawa, analyst]

Selling price, you mean...

[Masayoshi Hirata, executive]

The unit selling price of the product declined. Yes, that's what I mean. So JPY 20 billion, which was the buffer in the first half, it was -- that was your recognition of the cost, but it was actually JPY 52 billion was incurred. Of the JPY 52 billion, JPY 20 billion -- we were not sure, but we did some financial simulation on Toshiba, and we thought about JPY 20 billion had to be incorporated. So we incorporated that additionally. About JPY 40 billion -- about JPY 45 billion additional -- we had additional capital until the second quarter. However, PPA was likely to be negative. So we thought we can't change JPY 50 billion, but in actuality, it was not JPY 50 billion. Our forecast was JPY 30 billion. So JPY 20 billion was the buffer. We told you JPY 50 billion positive. But in Toshiba internally, we had our assumption of JPY 20 billion buffer without telling you. But -- so actually, officially, JPY 30 billion, but it's now minus JPY 5 billion. That is the selling price difference between third quarter and fourth quarter.

[Kota Ezawa, analyst]

So fourth -- minus JPY 12.5 billion for the fourth quarter earnings loss for Toshiba Memory. There's no more PPA impact. But additionally, there is some additional impact that has caused this deficit. May I confirm it? It's mainly based on the performance.

[Masayoshi Hirata, executive]

Well, this is not what I heard from the memory company, but this is our own simulation. As I said earlier, JPY 12.5 billion includes tangible and intangible fixed assets. And in some fiscal year, those fixed assets are being depreciated. And quarter-wise, it's about JPY 6 billion to JPY 7 billion depreciation per quarter. We do not -- we cannot -- I'm not sure if we can categorize that as a special factor or extraordinary factor. And memory site have not gave us any feedback on this. It's our imagination. But in ordinary memory business, profit and loss is minus JPY 6 billion, that's after tax. They have a lot of borrowing with high interest rate, and all those interest rate and tax cost subtracted, that's maybe minus JPY 6 billion. And PPA related quarterly depreciation is about JPY 6 billion to JPY 7 billion.

[Kota Ezawa, analyst]

According to our estimate, this PPA-related depreciation is for first, second, third quarter. Fourth quarter, they all exist, or it exists in fourth quarter?

[Masayoshi Hirata, executive]

PPA depreciation is not included in first and second quarter. First, second, third quarter altogether in the third quarter result. JPY 56 billion negative is included in the third quarter. In the fourth quarter, 3 months' worth of depreciation will be in fourth quarter. And in FY '19, every quarter, 3 months' worth of depreciation will be included in the result. In Page 27, in the fixed asset, JPY 492 billion intangible fixed asset depreciation. In the third quarter, it was the 3-quarter total depreciation. But after fourth quarter, it will go back to the ordinary depreciation pattern, and there will be depreciation for the faxed -- fixed cost. Fixed cost and deferred tax liability net value will be the key in the depreciation. Thank you.

[Unknown Executive]

Yes. A gentleman in the second row please.

[Hideki Wakabayashi, analyst]

My name is Wakabayashi. Related to the previous questions. Let's say, so you had the negative value in fourth quarter. Let's say, if that is the case, this balance of the goodwill, JPY 387 billion, there will be impairment possibility? Or is it up to Toshiba? What is your sense about this?

[Masayoshi Hirata, executive]

In order to make a judgment, it is not Toshiba, but Toshiba Memory Corporation that will make the decision, because it's in their balance sheet. So they have to test the impairment -- they have to conduct an impairment test. And if they actually have yes as a number, that will have impact on the consolidated sheet. But as you know, as far as we hear from the company, data center demand is temporarily slower. But into the future, the memory demand for data center market -- just we can say the same thing about the hard disk drive. In any case, their business for data center market is going to continue to grow. That's our sense. So we do not believe that the total amount of JPY 387 billion will be -- will go through the impairment test, at least on the side of the Toshiba, we don't believe so. Maybe in fiscal year 2019, there will be some slowdown in the market continuously in the first half. But if you remember, in 2015 -- the beginning of 2016, the memory price went down significantly and it wasn't a great thing for us. But in 2016 through 2017, 2018, again, the price really went up and high RS was experienced. So there is a trend like that. So probably now, as we understand, we are coming to a bottom at least. And so the demand will improve, we believe, at least. I'm sure you know a lot about this without me explaining about this. But data center is going to continue to grow into the future, partly because of the 5G. So at least we don't believe that there is a possibility to reduce the -- to impair the whole JPY 387 billion next year. This is going to be done every year, and at least generally, once a year is a rule. But if there is a drastic change in the marketplace, of course, we have to do it every quarter. I don't personally believe that the demand will go up. But if the company is in deficit, the Toshiba Memory will reduce the net asset. So putting aside the risk of the future growth rate, but if the net asset will go down, then the -- Bain or Toshiba Memory or accounting firm have to make a decision whether or not to conduct the test for impairment. Well, not accounting firm, but the company itself will have to conduct the test, and the accounting firm has to look at it. Of course, the future cash flow is generated and the goodwill can be covered in the future, that's the content of the test, I'm sure you all know this.

[Hideki Wakabayashi, analyst]

This is a question about assumption for Toshiba Memory. If Toshiba says it's reasonable, so Toshiba buy some from the Memory, from the investors' point of view, I think it's a good opportunity, but you're not considering that at all. But Toshiba Memory shareholder, if they're willing to sell the stock to you then within the equity method, you're going to buy some of the shares?

[Masayoshi Hirata, executive]

Well, if you think of various assumptions, there's many scenarios. But 40% of Toshiba Memory at present, it should remain unchanged for now.

Okay. This is the very last question. The next person.

[Unknown Analyst]

I have 2 questions. First question is about Toshiba Memory. The securities -- the investment securities value, is there any risk that it will be impaired?

[Masayoshi Hirata, executive]

Yes, there is a risk that -- if the JPY 350 billion portion, yes, the impairment -- there is a possibility for the impairment. That judgment is going to be made aside from the goodwill impairment judgment. Yes, it's separate. Well, there are some, yes, influence. But if our equity earning is reduced, then we will have to make a judgment of the impairment. In that sense, fourth quarter deficit, I think in that sense, already the value is already reduced. Well, it's a short-term and a slight decline in the value, and that is not going to be judged as an impairment.

[Unknown Analyst]

Another thing is about the hard disk and semiconductor. I understand the review is going to be done by the management in the second half of the February month. But when you consider the changing condition of the business, I believe it's a bit too late, no? Why did you wait so much? Why it takes so much time to carry out the activities? Maybe the -- your company systems is slowing down the communication between the management and the departments, what do you think?

[Masayoshi Hirata, executive]

I don't think it is too late. The condition really start to surface, obviously, in the second half of December and in the middle of the January, we -- the top management really learned about it clearly in the second half of January. And then we carried out the plan to review. And if the cycle or the contingency in the market will continue to see as such, then the problem will be severe. That's the realization. So of course, a lot of the things have been considered already, accounted for already in the Next Plan. So Kurumatani, Tsunakawa needs to get the report after the review. If you consider such activities, we believe that we have been quite agile to carry out all those thinking behind it. And of course, without waiting until the report coming back from that review, already departments are making efforts and activities about the situation.

So with this, we would like to close our reporting -- I mean, announcement.

Thank you very much for your attention.