Fuji Electric Co Ltd

TSE:6504

Earnings Call Analysis

Steady Financial Performance Amid Challenges and Growth in Key Segments

For the first quarter of FY 2024, total sales increased by JPY 2.2 billion year-on-year to JPY 236.4 billion. Despite challenges in some segments, operating profit rose by JPY 2.6 billion to JPY 17.3 billion, with an operating margin of 7.3%. The Semiconductors and Food and Beverage Distribution segments performed well, recording higher sales and profits. However, the Energy segment saw a drop in sales and profits. Orders surged by JPY 23.9 billion, reflecting strong demand in several businesses. The company maintains its financial forecast for the year, expecting steady profits despite global economic uncertainties.

Introduction

The first quarter of fiscal year 2024 brought mixed results. The company reported an increase in net sales by JPY 2.2 billion to JPY 236.4 billion compared to the previous year, despite a decrease in sales for some segments. The overall increase was largely due to a positive impact from the exchange rate.

Operating Performance

Operating profit improved significantly, rising by JPY 2.6 billion to JPY 17.3 billion, and the operating profit ratio increased from last year to 7.3%. Various segments, such as the Semiconductors and Food and Beverage Distribution, recorded higher sales and profits. However, other segments like the ED&C components business experienced declines.

Segment Analysis

The Energy segment witnessed a notable decline in net sales by JPY 4.5 billion, attributed to decreased results in the Power Generation and power supply and facility systems businesses. Conversely, the Semiconductors segment saw an increase in net sales by JPY 2.8 billion and a slight rise in operating profit by JPY 0.6 billion. The Food and Beverage Distribution segment benefitted from higher demand for vending machines and store distribution, which saw significant improvements in operating profit.

Geographical Performance

Domestically, net sales increased by JPY 0.8 billion to JPY 163.7 billion, while overseas sales rose by JPY 1.5 billion to JPY 72.7 billion. However, excluding the positive impact of foreign exchange rates, the net effect was a decline of JPY 4 billion.

Financial Health

Retained earnings grew by JPY 0.7 billion, even after paying JPY 10.7 billion in dividends. The equity ratio saw an increase of 1.7 percentage points to 49.1%. Net interest-bearing debt decreased by JPY 27.2 billion to JPY 70.2 billion, bringing the debt-to-equity ratio to a low 0.1x.

Cash Flow

Cash flow from operating activities was robust, reaching JPY 66.2 billion, largely due to positive retained earnings and improvements in working capital. Cash flows from investing activities, however, saw a decrease of JPY 27 billion owing to substantial investments in the Semiconductors segment. Nevertheless, free cash flow was positive, at JPY 39.2 billion.

Guidance and Future Outlook

Management maintained its conservative outlook due to global uncertainties, including potential interest rate fluctuations and unpredictable exchange rates. They reiterated their initial forecast for the full year, projecting net sales, operating profit ratio, and ordinary profit to remain stable. .

Earnings Call Transcript 2025-Q1

[Junichi Arai, executive]

Good afternoon. This is Arai, in charge of Corporate Management Planning Headquarters. I would like to present the consolidated financial results for the first quarter of FY 2024 in comparison to the previous year.

Net sales increased by JPY 2.2 billion year-on-year to JPY 236.4 billion. Excluding gain on translation of earnings of overseas subsidiaries of JPY 5.5 billion, net sales were down JPY 3.3 billion. Operating profit increased by JPY 2.6 billion to JPY 17.3 billion, and operating profit ratio was up 1% year-on-year to 7.3%. As for nonoperating profit, foreign exchange losses and negative net interest expenses were recorded, but others were positive, JPY 1.4 billion, mainly a decrease of cost of converting the business of our affiliated company in Malaysia, FY 2023, resulting in nonoperating profit of JPY 0.5 billion or JPY 1 billion in absolute terms.

Ordinary profit increased by JPY 3.1 billion year-on-year to JPY 18.3 billion, a record high. In FY 2023, we recorded sales of investment securities of JPY 4.6 billion, resulting in an extraordinary profit decrease of JPY 4.3 billion year-on-year to JPY 0.3 billion in FY 2024. Profit before income taxes was down JPY 1.2 billion year-on-year to JPY 18.5 billion, with the final profit attributable to owners of the parent, down JPY 0.8 billion to JPY 11.5 billion.

This is a waterfall chart showing the breakdown of year-on-year changes in operating results. We saw a decrease in sales and production volumes. Automotive business in Semiconductor segment, store distribution business, the substation system business were positive. However, ED&C components business, power supply and facility systems business and Power Generation business were negative, resulting in a slight decline of JPY 0.2 billion in total. As for fixed cost, labor costs mainly in Japan increased by JPY 1.8 billion. R&D cost was also up, reflecting proactive investment in the Semiconductors segment. Others decreased, which include reduction in outsourcing costs.

In total, fixed costs increased by JPY 3.4 billion. The exchange rate effect increased by JPY 1 billion. Others increased by JPY 5.2 billion. Impacts of rising raw material costs came to minus JPY 1.1 billion, but raising the selling prices of products resulted in an increase of JPY 1.5 billion, offsetting the negative impact. Differences in model mix and profitability between projects were positive for equipment construction business, industrial business in Semiconductors segment, factory automation business, et cetera, while cost reduction was realized in Semiconductors segment coming to an increase of JPY 4.8 billion. This resulted in an operating profit increase of JPY 2.6 billion year-on-year.

Next page shows net sales and operating profit by segment for the first quarter of FY 2024 and year-on-year changes. In the Energy segment, net sales decreased by JPY 4.5 billion. ED&C components business, power supply and facility systems business recorded lower net sales and operating results. But Industry segment, Semiconductors segment and Food and Beverage Distribution segment all recorded higher sales and profit. The following pages show details of each of the segments. In the Energy segment, net sales decreased by JPY 4.5 billion year-on-year to JPY 68.2 billion, and operating profit decreased by JPY 1.7 billion year-on-year to JPY 3.3 billion.

Energy Management business had higher net sales and operating profit due to a large order for substation equipment for power and industrial applications. However, the remaining 3 businesses saw decreased net sales. Power Generation business recorded lower net sales and operating profit due to the absence of large-scale hydroelectric projects in the same period of the previous year. Net sales and profits decreased year-on-year for power supply and facility systems business, with a rebound of strong results of the subsidiary in Singapore in the previous fiscal year despite strong demand from data center operators in Japan.

The ED&C components business recorded lower net sales and operating results due to a reduction in demand from domestic finished machinery manufacturers. In the Industry segment, net sales increased by JPY 0.5 billion to JPY 80.2 billion, and operating profit increased by JPY 2 billion to JPY 2 billion. There are 4 businesses in this segment. 3 businesses, except digital transformation solutions Business recorded higher net sales and operating profit. Digital transformation solutions businesses net sales and operating profit declined due to the absence of large-scale IT solutions projects recorded in the previous year.

Automation Systems business saw increases in both net sales and operating profit as the benefits of increased demand for drive control systems for process automation applications counteracted the decrease in demand for low-voltage inverters for factory automation applications. Both sales and operating profit increased for social solutions business due to increases in orders for nuclear power-related equipment and differences in profitability between railway system projects. The equipment construction business also saw an increase in net sales and operating profit because of strong construction project trends.

Next, Semiconductors segment. Net sales increased by JPY 2.8 billion to JPY 53.9 billion and operating profit increased slightly by JPY 0.6 billion to JPY 7.7 billion. In the industrial business, demand decline for industrial power semiconductors for factory automation applications, which was offset by favorable foreign exchange impact. Automotive business showed higher net sales with a slight decline in operating profit. Despite the negative factors, including rises in expenses for power semiconductor production and higher material costs, growth in sales, coupled with the benefit of cost reduction activities and favorable foreign exchange impact resulted in both higher net sales and operating profit.

In the Food and Beverage Distribution segment, both the vending machines business and the store distribution business saw higher net sales and operating profit. The vending machines business saw a slight increase in net sales, but operating profit improved by 2 digits due to cost reduction activities. The store distribution business saw significantly higher net sales and operating profit due to special demand stemming from the issuance of newly designed paper currency here in Japan.

The next slide shows net sales for Japan and overseas areas for the first quarter of fiscal year 2024 and year-on-year changes. Net sales increased by JPY 1.5 billion year-on-year to JPY 72.7 billion overseas and by JPY 0.8 billion year-on-year to JPY 163.7 billion domestically. Excluding the foreign exchange impact, it was approximately negative JPY 4 billion in total. By region, sales in Asia were down JPY 4.5 billion, of which JPY 3.3 billion was from the rebound of the strong result recorded by a subsidiary in Singapore with power supply and facility systems business in the previous year and minus JPY 2.3 billion, mainly for automotive business in Semiconductors segment. In China, both industrial and automotive business in the Semiconductors segment saw higher net sales of JPY 4.2 billion, resulting in a strong increase in net sales of JPY 4.9 billion from a weak FY 2023. Europe and the Americas had slightly higher net sales due to favorable FX impact.

The next slide shows major component orders in the 3 months period that ended June 30, 2024. Orders received were up JPY 23.9 billion year-on-year to JPY 296.1 billion. Orders increased significantly in plant systems, mainly in Energy Management business, power supply and facility systems business and social solutions business. Major components were up JPY 1.7 billion year-on-year to JPY 99.9 billion. Compared to the same period of the previous year, Semiconductors, automotive were up 10%; Semiconductors, industrial, up 7%; factory automation was down by 12%; and ED&C components were up only slightly by 3%. The right half of the slide shows quarterly trends of a number of orders and net sales. On the right is a quarter-on-quarter changes, which are down slightly in total. Semiconductors segment, both industrial and automotive businesses were down 5% and 3%, respectively. While factory automation business and ED&C components business were both up by 5%. Low voltage inverters for factory automation business was down 31%.

Next, I would like to explain FY 2024 forecast in comparison to the forecast announced on April 25, 2024. There are no changes in FX assumptions for both the first half and the second half. The forecast of net sales, operating profit loss, operating profit ratio and ordinary profit remain unchanged. However, as extraordinary gains on sale of investment securities were recorded in the first half, net profit is expected to increase by JPY 9.5 billion and a net profit ratio by 2 points in the second quarter.

By segment in Semiconductors, reflecting the lower EV demand from certain overseas automotive manufacturers, net sales and operating profit loss are expected to decline by JPY 4 billion and JPY 2 billion, respectively. Food and Beverage Distribution segment, on the other hand, is expected to increase net sales and operating profit loss by JPY 4 billion and JPY 2 billion, respectively, mainly due to special demand for automatic change dispensers. As a result, total net sales and operating profit loss will remain unchanged.

Next is the consolidated financial results forecast for the full year. Due to continued uncertainty in the second half of the year, net sales, operating profit loss, operating profit ratio and ordinary profit loss remain unchanged. The sales of investment securities were originally planned for the second half of the year, but have been brought forward to the first half, and the volume of sales has also been increased. As a result, the net profit loss for the year is expected to increase by JPY 4 billion to JPY 80.5 billion and a net profit ratio to increase by 0.3 percentage points to 7.2%. By segment, Semiconductors segment is expected to be negative and food and Beverage Distribution segment to be positive as in the first half of the year.

This is a comparison of the consolidated balance sheet at the end of March and end of June. Inventories increased by JPY 22.2 billion and property, plant and equipment, mainly in the Semiconductors segment increased by JPY 25.4 billion. On the other hand, trade receivables, which had built up at the end of March, were collected by June, reducing receivables by JPY 74 billion. Total assets decreased by JPY 18.8 billion to JPY 1,252.4 billion. On the liability side, total liabilities were reduced by JPY 27.5 billion, mainly due to a decrease in interest-bearing debt despite an increase in advances received. Retained earnings increased by JPY 0.7 billion, but this figure was after dividend payments of JPY 10.7 billion. As a result, the equity ratio increased by 1.7 percentage points to 49.1%.

Net interest-bearing debt decreased by JPY 27.2 billion to JPY 70.2 billion, and the debt-to-equity ratio was 0.1x. In the first quarter of FY 2024, cash flow from operating activities was JPY 66.2 billion, mainly due to positive retained earnings of approximately JPY 25 billion, an increase in receivables collection and advances received, which covers a negative impact from inventories and accounts payable and an upturn in working capital of approximately JPY 41 billion. On the other hand, cash flows from investing activities decreased by JPY 27 billion, mainly due to investments in Semiconductors segment. In total, free cash flow was positive by JPY 39.2 billion, an improvement of JPY 32.5 billion compared to the previous year, mainly due to the upturn in working capital.

Looking ahead, the global situation is uncertain, not only in the U.S., but also in China due to policy differences between the candidates in the U.S. presidential election. Interest rate trends and exchange rates are also uncertain as the Fed indicated a cut in interest rates in September, and the [ BOJ ] has indicated that it will raise rates. As of today, we are seeing significant fluctuations in the stock market. The exchange rate assumptions of JPY 140 to the dollar and JPY 150 to the euro and JPY 19.5 to the yuan remain unchanged from the initial forecast.

When we review the plan in October, we will disclose our forecast based on the situation in each segment as well as any changes to the exchange rate assumptions. As I have always said, the foreign exchange impact and cost improvements are expected to boost profits in both the first half and the full year, if the current situation is maintained.

That concludes my explanation. Thank you for your kind attention.