Toshiba Corp
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Toshiba Corp
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So we'll now move on to the earnings briefing for the third quarter of fiscal 2019. The participants, Representative Executive Officer and Corporate Executive Vice President, Masayoshi Hirata; and [ Matsonara ] from the accounting department. And [ Chris Hirata ] will give the presentation based on the slides, hard copies of which have been distributed to you.
Thank you for attending our earnings briefing despite your busy schedule. Let me go over the business results for the third quarter of fiscal 2019. During this 9-month period, as was the case in the second quarter, we saw the benefit of the results from the structural reform in fiscal 2018 as well as the procurement reform that started in the second half of fiscal 2018. And in addition, we enhanced the cost control on large projects based on the lessons learned from the past. So as a result, the basic earning power made a steady improvement, and we were able to see the benefit of that reflected in our business results.
And for fiscal 2019, overall, the market conditions in China are becoming sluggish, triggered by the trade frictions between the U.S. and China, and that is lingering. And partly due to that, especially in semiconductor, Toshiba TEC, printing, retail solutions, these segments are currently struggling. And as a result, already, we have been working on the rigorous cost control. And starting in January of this year, we have further enhanced that management of the cost control.
As a result of such efforts, by segment, on a full year basis, there is some downside but we believe that the actual results would be within the risk buffer that we had [ envisioned ]. And therefore, we are not making any revisions to the full year guidance.
Please turn to Page 5. The 9 months results. Net sales, JPY 2,458.6 billion. Year-on-year, down JPY 188.6 billion or 7% by segment, infrastructure systems, building solutions, retail and printing solutions posted higher sales while Energy Systems, Electronic Devices and Storage and Digital Solutions posted lower sales.
As you are aware, PC business was deconsolidated in the second half of fiscal 2018, and that had an impact of JPY 79.4 billion, which was the amount of sales recorded in the third quarter of 2018. And after Kioxia, the resale of memory products were made earlier last year, but Kioxia, as they are establishing their distributor's distribution outlets overseas, we saw a decrease in the resale of memory products by about JPY 80 billion year-on-year. And also, due to the appreciation of the yen, we see the effect of foreign exchange amounting to JPY 28.5 billion. When we exclude those factors, the sales were actually about the same as in the previous year.
Well, the sales were on par with the previous year with the steady improvement in our basic earning power. For the operating income, we saw a year-on-year increase of JPY 54.3 billion at JPY 62.5 billion for the 9-month period. Details will be explained later. And as for income before tax, a loss of JPY 106 billion, which is JPY 116.4 billion worse than the previous year. The net loss amounted to JPY 145.6 billion.
As you're aware, this was partly due to the LNG business, the business transfer, which was recorded in the first half, JPY 89.2 billion. And also, the equity loss from Kioxia. Because of the problem in the first half, we recorded a loss of about JPY 70.9 billion.
As for the free cash flow, net cash outflow of JPY 251.8 billion, as shown at the very bottom of the slide. This is in relation to the payment in relation to the transfer of LNG business. And also, we do have large sales in the fourth quarter. And therefore, in the third quarter, in preparation for that, the payment usually precedes the collection, which is what happens every year. So on a cumulative basis, we do have a negative figure for the free cash flow.
And the TOB is 3 listed companies. The payments for this would be recorded in the fourth quarter or later. And therefore, this is not reflected in our third quarter results.
Page 6. The shareholders' equity as of the end of December, JPY 1 trillion and the -- almost. And the equity ratio was 28%. Compared to 9 months ago, this shareholders' equity is JPY 451.8 billion less. This is due to the net loss as well as the share buyback of about JPY 300 billion.
And so the net loss was JPY 145.6 billion, and the share buyback amounted to about JPY 300 billion. And therefore, our shareholders' equity was reduced somewhat but still at the JPY 1 trillion level.
As for the share buyback. As far as the third quarter is concerned, the amount was approximately JPY 60 billion. Altogether, starting from last fiscal year, JPY 700 billion worth of treasury stock has been repurchased.
As for the net interest-bearing debt, JPY 154.7 billion cash position as of the end of 2019 and JPY 746.1 billion less than the beginning of the fiscal year. And as for the exchange rate, about the same as the beginning of the year at JPY 110 to the dollar. And I'm going to skip Page 7 and move to Page 8. This is the operating income comparison, the usual graph.
The third quarter 2018 operating income, JPY 8.2 billion, and there were the one-time factors and when exclude that, that's JPY 31.3 billion. Compared to that, as a result of the procurement reform and structural reform continuing on from the first half, we had incremental effect contributing to the results. At the same time, there was an impact of the lower selling prices, JPY 10.3 billion. Centering on Electronic Devices & Storage, we felt the impact of lower selling prices.
And with the lingering effect of the U.S.-China trade conflicts, we are seeing the sluggish market conditions in China, especially in the Electronic Devices & Storage, JPY 10.2 billion. Now a year ago, excluding the one-time factor, JPY 31.3 billion, but we saw an increase in operating income by JPY 30 billion, resulting in JPY 62.5 billion for the 9-month period.
Nonoperating income. I'm also going to skip that page and look at the free cash flow statements. As explained at the last earnings briefing, at the very top, you can see the total of the operating and investing cash flows in relation to the memory and long-term factors. At the very end -- at the very bottom, you can see the free cash flow of cash -- net cash out of JPY 56.3 billion. The main reason is, as was mentioned earlier, in preparation for the collection in the fourth quarter, the expenses appreciated. The operating cash flow JPY 89.5 billion -- cash outflow, but this is within the Toshiba Next Plan. We have been controlling the investment because the economic outlook is somewhat uncertain, but about JPY 150 billion minus overall.
Page 11, balance sheet. On the capital side, cash and cash equivalents. If I could repeat myself, in relation to the share buyback, which is the main factor, and the subordinate balance in the first quarter, we made a repayment, which resulted in a reduction in cash and cash equivalents. As for the total assets, no major change.
On the liability side, the interest-bearing debt on the top line, almost no change, but if I could focus on some of the differences, as we repaid the subordinate loans, the amount should have been reduced. But as you know, because of a liability increase resulting from the change of the lease accounting standards, this was canceled out. We are controlling the risk assets based on the lessons learned. We are seriously reviewing that, but we do not find an accumulation of a particular risk asset.
Page 13. The details by business segments. On a 9-month basis, altogether, we are seeing year-on-year improvement.
Let me look at different segments. Energy. Net sales, JPY 408.9 billion, operating income, JPY 10.9 billion. For sales, down JPY 42.2 billion year-on-year. Especially in thermal and hydropower, we saw a decrease in deals. And also in nuclear, we are conducting various safety-related projects, and there is a difference in the progress.
As for the operating income, during the first half, we saw an improvement of JPY 14.5 billion, and we are seeing further improvement, a JPY 32.6 billion increase year-on-year. Structural reform effect, JPY 7.1 billion, approximately. Especially in the transmission and distribution, there was a onetime cost incurred in the previous year. And in the absence of this, this year, we saw improvement in operating income, a JPY 90 billion loss recorded in the previous year. And this time, a JPY 10 billion profit.
Page 15, the Infrastructure System & Solutions continued to enjoy good business. Net sales, JPY 476.5 billion, operating income, JPY 16.2 billion.
In the public infrastructure, with an increase in the size of social systems project, JPY 16.7 billion increase in sales year-on-year. Operating income, JPY 16.4 billion increase year-on-year, partly due to the effect of the structural reform efforts.
And then Building Solutions. Net sales, JPY 423.6 billion; operating income, JPY 19.5 billion. About 5% ROS.
Net sales, we saw a decrease in sales in the lighting equipment, but for elevators and air conditioners, we saw very good business, both at home and abroad. Altogether, increase in sales of JPY 21 billion. As for operating income, we saw a profit increase due to sales increase, and we saw the effect of structural reform of about JPY 3 billion. So our Building Solutions altogether, JPY 4.3 billion increase in profit year-on-year.
Page 16 shows Electronic Devices & Storage Solutions results breakdown. Net sales were JPY 573.4 billion, operating income, JPY 12.7 billion.
As for sales numbers, due to the slower market conditions in China and others and lower memory products resale, which has not had as much impact, but it pushes down the sales number. The decline of the sales expanded in Q3. Despite the lower profit due to the lower sales, and as you might remember, there was a NuFlare Technology impairment loss booked in Q3 last year, that was JPY 9.8 billion for the restructuring costs, which incurred also last year. And combining all of those, yes, this year, again, about JPY 5 billion restructuring cost spent in the first half. So combining all of those, the operating income was about the same as the year before. That was the end of 9 months.
Page 17 is the Retail & Printing Solutions. Net sales, JPY 371.1 billion; operating income, JPY 14.3 billion. Toshiba TEC, there was an announcement from them. The retail business in Japan has been strong with the higher consumption tax, but the printing business, especially towards the end of the Q3, there was an impact of U.S.-China trade friction restrained purchasing and led to lower sales. Overall, sales grew about JPY 9.5 billion, but we are struggling in printing.
As for the operating income, especially printing, we have lower sales. POS in Japan increased its profit, but compared to the first 3 quarters of last year, the operating income decreased slightly. The bottom half of this page shows that Digital Solutions net sales were JPY 175.1 billion, operating income JPY 7.6 billion.
Now let me explain the impact of TSE's fictitious round-trip transactions on consolidated financial statements. As it was mentioned, we revised the Q3 sales down by JPY 21.5 billion and operating income by JPY 1.8 billion. Now JPY 21.5 billion in sales represents the elimination of Q1 and Q2 sales of fiscal 2019. JPY 1.8 billion in operating income represents JPY 0.9 billion elimination of Q1 and Q2 profit because it was already booked, and we eliminated that.
And in addition, as for the past, there was a JPY 0.9 billion profit. So in Q3, we eliminated JPY 0.9 billion for -- before fiscal 2018. We do not restate the past financial statements. There might be some questions on this, but, as it was mentioned earlier, our consolidated numbers, we believe that there is a low materiality concerning this restatement and [ WWC ], our auditor, also approved this treatment. So as for sales, for this fiscal year, and as for the profit, the cumulative profit from the past are eliminated at one time. And that's how we accounted for the impact.
So Q3, the JPY 21.5 billion elimination -- sorry, the JPY 21.5 billion in sales, and JPY 23.32 billion was the Digital Solutions sales increase until first half. So that one was an offset. And for the 9-month period, the operating income was about the same as the year before. Rather, the sales were about the same as the year before.
As for the profit numbers, JPY 7.6 billion, and JPY 0.9 billion was eliminated for the past. So in reality, including JPY 0.9 billion, the overall operating income increase was by about JPY 6 billion year-on-year. So we have started the restructuring efforts for some years, and we see the improvements of the profitability happening.
Page 18 shows the amount of orders received and order backlog. There are no major changes from the first half trend. The Q1 to Q3 orders of the fiscal 2019 increased 19% year-on-year. And also the order backlog also stays about the same. Although it is not written on this page, but the gross profit of the order backlog is improving compared with the previous year. So we have been selective in taking orders. So the order backlog itself is not increasing, but the profitability is improving.
Next, I'd like to turn to Page 20. This shows the equity earnings from Kioxia. Top left shows the quarterly equity earnings actual. Q3 actual was equity loss of JPY 9.6 billion. In terms of trend comparison to Q1, the deficit is much smaller. And excluding the impact of the PPA, equity losses of JPY 1.5 billion. So it's almost breakeven. Top right shows the bit growth as well as ASP decline actuals. The bit growth is in higher single digit, but it's on the right, ASP started to increase. So gradually, we believe that we have bottomed out. And how can we recover and when is something that we are watching closely.
Now from Page 21, we are showing the full year forecast. As for net sales forecast, JPY 3.43 trillion, revised down by about JPY 10 billion. There are different factors, but the major one is the TSC-related revisions. Also, operating income of JPY 140 billion remains unchanged. And pretax loss forecast remains the same as before.
Free cash flows, minus JPY 340 billion, JPY 30 billion improvement from the previous forecast. This is the result of the review of our investment schedule and the amount in each segment in view of the sluggish market conditions in China and others. We are holding some of the investments and the change in the amount. So a JPY 30 billion improvement of the cash flow is expected. And maybe we will be making some of those investments in the following year.
Page 23 shows the operating income improvement comparing fiscal '18 actual and '19 forecast. From the left, fiscal 2018 actual operating income was JPY 35.4 billion. Onetime factors, when you exclude that, it was about JPY 80 billion in the previous year.
Comparing that to this year, if you look at the table below, from Q1 to Q3, those are actuals. And if you look at the Q4 numbers, red boxes are the effect of the procurement reform, sales reform and restructuring.
If you compare the first 9 months with the Q4, you -- we can say that we are likely to make steady progress. Blue box, a JPY 30.6 billion improvement year-on-year. This is especially for the Energy Systems and the Electronic Devices & Storage Solutions. In Energy in Q4, there was a loss control being added. And right now, we don't expect that to happen. So probably, there is no provision for the loss control for this Q4.
As for the semiconductors in the System LSI, low profitable ones are being reduced. So we are starting to see the effect of that. So combining all of those factors, in Q4, operating income is forecast to reach JPY 77.5 billion and full year forecast of JPY 140 billion remains unchanged.
At the very bottom, we are showing the comparison from the previous forecast. Electronic Devices & Storage Solutions, especially the lower sales pushed down the forecast. We see the bigger impact from China. Toshiba TEC and Building Solutions, we are seeing the worsening of the sales mix. So JPY 13.5 billion lower than the previous forecast. And we plan to offset this with the improved fixed costs and also lower restructuring costs. And also, risk buffer that we have will be utilized, and we believe that we are likely to achieve the JPY 140 billion operating income.
So JPY 140 billion, we have 1.5 months to go. So all the employees are working hard to achieve that. So in fiscal '19, semiconductor, about JPY 10 billion, restructuring costs are included, especially in semiconductors. So excluding that, the operating income is expected to be almost JPY 150 billion.
So with your understanding, we spend the major amount for the restructuring and many reform -- the procurement reform and sales reform are being conducted, and we are starting to see the effects of that. So based on them, the business plan for fiscal 2020 is being formulated, and we will respect those factors into that new plan.
Page 24. This is the breakdown by segment. There are some overlaps, especially the operating income comparison vis-à-vis the previous forecast. The lower profit is expected for the retail and printing, but in other segments, we expect the operating income to grow. So JPY 35.4 billion in fiscal '18 and JPY 100 billion improvement. So JPY 140 billion is the operating income that we would like to achieve. And the ROS, about 4% improvement of about 3 percentage point.
So Building Solutions, JPY 4 billion lower than before. So this is due to the lower sales of the lighting business and onetime increase of expenses of the air conditioners.
In Retail & Printing solutions, the printing is struggling and therefore JPY 3 billion lower. And the Electronic Devices & Storage Solutions impacted the China market condition, so JPY 7 billion lower. And Digital Solutions forecast sales is JPY 30 billion lower. And there are some impacts from the TSEs.
Now lastly, I'd like to mention the spread of the new coronavirus. First, I'd like to take this opportunity to express condolences to those people who lost their lives and also express our sympathies to the patients suffering from this virus.
Now as for the impact on our business results, I'm sure that you have seen the comments made by the different companies about their business results and the impact from the virus. And we are exactly the same as other companies. That is to say that what would be the impact in February and March? We are sorry to say that as of now it's not possible for us to make a good forecast. We are getting information from different sources, but we are unable to mention any specific numbers at this moment. The situation is changing every day. My personal impression is that the situation is becoming worse. So we are unable to grasp the impact of this.
As for February, March, planned sales to China is about JPY 100 billion. This number is included in our assumptions as a fact. So that's something that we would like to communicate to you.
So based on the current situation, this JPY 100 billion sales, whether we can book this number in February or March, it's difficult to say or it might be difficult to achieve. We do not think the sales would be 0, but maybe there will be a shift or a delay of booking of the sales to the early 2020 or fiscal 2020, especially semiconductor TDSC weight is high. Maybe close to 60% is the TDSC related and also air conditioner, elevators, infrastructure are also included.
So those are the sales that we plan at our plants. Not all of them are closed, and some of them are operating, but the Chinese employees are not coming back easily. So we are not really operating at the high level. So that is as of today. So based on that, from the end of January, we are watching the situation on a daily basis, and we will continue to do so.
We would like to create the situation so that we can book the sales but there could be some downside risk because of this virus at this moment. So -- especially the Q4, there could be some negative effect from the coronavirus and also the Chinese market condition has been sluggish due to the U.S.-China trade friction. So we continue to see those uncertainties, but we established the Next Plan, and we have been implementing the measures together with all the employees and the direction and targets of the Next Plan are unchanged, and we are making a good progress, we believe. So that is something that we'd like you to understand.
Sorry to make a long presentation, but that concludes my presentation. Thank you.
That concludes the company's presentation, we will take questions from the media. Please raise your hand if you have any questions.
Thank you. Over to you from Nikkei.
Some clarification. JPY 100 billion sales that you mentioned towards the end of your presentation, that's for China, February and March, correct?
Yes. That is correct.
Sales for the Chinese market?
Yes.
Thank you. I have 2 further questions. First, on electronic devices and storage. At the time of developing the Next Plan, the JPY 58 billion operating income, and now that's been reduced to about half. JPY 30 billion risk buffer I think is consumed almost entirely by TDSC. So I do understand the worsening market conditions and restructuring costs, but can you talk about the qualitative factors that are resulting in this? What's happening?
Well, nothing really serious actually. The restructuring, when we put together the Next Plan, when we made the operating income vision, the restructuring cost was not included because of the U.S.-China issue, with sluggish Chinese market. As TDSC flexibly implemented restructuring measures, over JPY 6 billion cost incurred on a full-time -- full year basis, which is pushing down the operating income somewhat. That's one factor.
And also the market conditions overall not good. I think that explains it all. It's not that there's any particular factor.
About the outlook. You have -- without the risk buffer, you said that JPY 140 billion could be achieved, but there is a delta downside risk in relation to the coronavirus outbreak. So how certain is this JPY 140 billion?
Well, as I mentioned, JPY 140 billion does not reflect the outbreak of coronavirus, JPY 140 billion itself. JPY 30 billion risk buffer had been set out initially. We have 1 month remaining. Of course, we can be optimistic, but I think JPY 140 billion is within the reach.
But looking at more recent developments, the impact of this outbreak, we don't expect the entire sales projection to be canceled out, but we don't know to what extent our sales projection would be affected. That is as of today, it's still uncertain.
So JPY 140 billion, how confident are you?
We are very confident. As I briefly mentioned in my presentation, as basis for next year's plan, the restructuring costs, about JPY 10 billion included in JPY 140 billion. So when we exclude that, JPY 150 billion, we believe, is the reflection of our actual earning power. And that is the basis of our budgeting for next fiscal year.
So that outlook, looking at the third quarter results, it's still 40%, 50%. I know that, that's your business model. But by segment, what would be the optimistic factors? What are more concerned areas in achieving JPY 140 billion?
Well, which area? All I can say is that we're going to be very serious in all business segments. But in terms of sales, Infrastructure, Energy Solutions, make up for a large proportion. So systematic manufacturing and a relationship being built with our customers are being done. So deliveries to our customers, I think, would be very important. As for our mass-produced products, we just have to make sure that we sell what we manufacture.
So which particular segment or business?
I can't really say. It's overall.
And coronavirus outbreak?
This is really an emergency. So as a company with chairman and the presidents at the top, we are enhancing the spend management or the expense management and control by setting up the special project. I am in charge of the spend management initiative as well. So the entire company under the management, it's not really reducing the expenses but the efficient use of expenses. That's the perspective with which we are working on this. We have to make sure that we will see results from those efforts.
[ Tomioka ] from Toyo Keizai. A follow-up question. You're working on the budget for the next fiscal year. It may be too early, but what would be your expectation? Which segment would be the driver or also the cost reduction, where would you be focused on, especially -- also the dividend policy, I'd like to know your thoughts on the dividend?
As for the next fiscal year, we are currently finalizing our plan, so I cannot really mention the specifics, but fiscal '21 target I already shared with you. So we want to be able to achieve that. So that is the -- for fiscal 2020, so we'd like to increase that to a certain level. And currently, we are finalizing that at the corporate level.
As for the dividend, based -- not based on the single year, but we'd like to have a longer-term view, a 30% payout ratio is our basic policy, which we announced already. So we are trying to have a longer view -- a longer-term view. How can I explain this? When we have a lot of equity capital, then we would also consider the shareholder return, aside from the dividend payment.
Next person?
Yamada from NHK. Two questions. First, the U.S.-China trade frictions. The tariff reduction was realized based on the first round of agreement. What impact would that have on your business or on Japanese economy overall? Second, the impact of the coronavirus outbreak said that your plants are not really restarting smoothly. Is it your plants that is being affected or the supply chain that is most seriously affected?
First, about the tariffs, specifically the printing business of Toshiba TEC is affected. But with reduced tariffs, I don't know if printing, which is part -- is on that list or not, I apologize, but I don't -- I haven't looked at it carefully yet. Printing has been affected by the tariff issue so far.
Now the plant operation. At our plants, factories, there are about 20 manufacturing sites that we have. And the 1 quarter, about 5 factories have restarted, but they don't have the entire workforce back at work yet.
As of today, I don't know how best to put it, it's far from seeing the normal operation. And supply chain, we have relationship with our suppliers. And locally, I'm sure there are various arrangements, coordinations being made. But looking at what is being reported by the news media, it looks like other players are, I wouldn't say struggling, but of course, human life protection is the top priority. And I think that is the key point. I hope that answers your question.
Thank you. About the U.S.-China trade friction, do you expect positive impact on the Japanese economy going forward? Your personal view?
Japanese economy overall, I'm afraid, I'm not in a position to make that kind of comment.
Hiroi from Nikkei. Two questions. First, you mentioned the cost reduction, the project spend reduction. To what extent do you plan to reduce the expenses? The second is the impact from coronavirus. Some of the plants have stopped. In your Next Plan, the CapEx plan, any change to the direction of the CapEx?
First, about the spending. We have 9 items that we want to control. So those were not fixed, but rather there is some flexibility in terms of the selection. I cannot mention the percentage numbers, but spend management is being -- from -- we make a proposal. And so we are very -- asking all the companies to review the expenses very closely so that they will inform the result to the corporate side. So that is the kind of routine that we established. So it's very focused on the details of the expenses and spending. We are trying to manage the spending very closely.
About the CapEx direction, well, I'm sure you're referring to the impact from China business. Well -- especially the production plants and also the sales sites. Due to the current situation, any specific measures or positive actions, we have not yet taken those.
Next person?
[ Ozaki ] from Kyodo News agency. I have a question related to coronavirus outbreak. Some of the automakers, not because of what's happening in China but because of the supply chain, they are forced to suspend the operations in Japan as well. Is that what's happening to you as well? And what plans do you have regarding your expats?
The automakers are largely affected is what we are being informed. Especially on semiconductor, we are supplying many different products and components. So based on the request from the automakers, we are thinking of taking necessary actions.
And the workers in China, the expats, Japanese expats, we have a little over 100 of them. It's not all of them, but after the Chinese New Year, the managers did return to China, after returning to Japan during the holidays. But sales, service and manufacturing sites to be reopened, that's the purpose. But the Chinese local workers are not really returning to work and therefore our operations haven't been back to the normal level.
Of course, the top priority is the human life. We don't want to make situations worse. So we are telling them to remain safe and where they are, and business trips to China are currently being banned, prohibited. If there is the need, absolute need, the business trips will be allowed based on the management decision. But as a general rule, the business trips to China are currently being banned.
Maybe one last question? Thank you very much. That concludes the briefing session on the Q3 business results in fiscal 2019. From 3:30, we have Q&A with analysts only. So media people can stay, but you cannot ask any questions. Thank you very much for coming.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]