Fuji Electric Co Ltd

TSE:6504

Earnings Call Transcript 2022-Q2

[Junichi Arai, executive]

Good afternoon, everyone. I am Junichi Arai, Corporate General Manager, Corporate Management Planning Headquarters. I will explain consolidated financial results for the first half of the fiscal year 2021 and full year forecast. The first half started under the COVID-19 pandemic. However, as market conditions for components were strong, income was higher than our expectation.

Now I will talk about financial results for the first half in year-on-year comparison. Net sales were JPY 397.7 billion, up JPY 40.7 billion. Excluding gain on translation of earnings of overseas subsidiaries, net sales increased by JPY 33.5 billion in real terms. Operating income was JPY 16.3 billion, up JPY 11 billion. Nonoperating income, net of nonoperating expenses was JPY 700 million, mainly due to foreign exchange income. As a result, ordinary income was JPY 16.9 billion. As for extraordinary income and loss, we booked a small amount of gain on sales of investment securities in the first half of the previous year and booked JPY 8.2 billion of gain on sales of investment securities as we reduced cross shareholdings in the first half of this fiscal year. Besides, the negative JPY 1.2 billion of the impact of withdrawal from magnetic disk business was included. Negative JPY 500 million was from others. As a result, extraordinary income net of extraordinary loss was JPY 6.3 billion. Consequently, net income attributable to owners of parent was JPY 14 billion, up JPY 11.9 billion.

Page 3 shows changes in operating income with a step chart. The biggest factor was increase in sales and production volumes. Sales and income of high-margin components such as semiconductors for industrial and automotive applications, ED&C components and factory automation increased. Increase in sales and production volumes pushed up income by JPY 12.3 billion. On the other hand, labor cost, R&D and depreciation and leases paid increased. Increase in fixed cost pushed down income by JPY 3.4 billion. Depreciation of the yen pushed up income by JPY 2.3 billion. Others pushed down income by JPY 200 million. As a result, operating income increased significantly to JPY 16.3 billion.

Page 4 shows net sales and operating income by segment. Unfortunately, sales and income of power generation decreased due to the impact of a large-scale project recorded in the previous equivalent period. However, sales and income were up in all other segments, including Power Electronics Energy, Power Electronics Industry, semiconductor and food and beverage distribution.

In food and beverage distribution, operating income was negative in the previous equivalent period. As a result of structural reform and others, we were able to secure positive income, although the amount was small. Consequently, both sales and income increased.

On Page 5, I will explain business results by segment. In Power Electronics Energy, net sales were JPY 104.1 billion, up JPY 22.3 billion. Operating income was JPY 4.2 billion, up JPY 2.6 billion. In energy management, net sales increased year-on-year as a result of large-scale projects for substation equipment for the power distribution and industrial fields, but operating results decreased because of differences in profitability between projects.

In power supply and facility systems, net sales and operating results increased as we acquired large-scale data center and semiconductor-related projects. The key point in this segment is ED&C components. In ED&C components, net sales and operating results increased due to significantly higher demand from domestic Chinese and other overseas manufacturers of finished equipment.

In Power Electronics Industry, net sales were JPY 134.4 billion, up JPY 6.2 billion. Operating income was JPY 2.4 billion, up JPY 2.2 billion. In this segment, automation systems showed positive trends. Net sales and operating results increased significantly due to the higher demand seen centered on low-voltage inverters and factory automation components in Japan and overseas. In social solutions, net sales and operating results increased, thanks to large-scale projects for electrical equipment construction. In equipment and construction, net sales increased and operating results increased slightly due to higher demand for electrical equipment construction. In IT solutions, net sales decreased sharply, and operating results also decreased due to the absence of the large scale public and academic sector projects recorded in the previous equivalent period.

Please go to Page 6. In semiconductor, although withdrawal from magnetic disk operations negatively impacted sales and income, net sales increased due to substantial growth in demand for power semiconductors for electrified vehicles and for industrial applications. As we bolstered production capacity for power semiconductor, depreciation and leases paid increased. Expenses for research and development increased as we conducted research and development actively. Due to significant increase in net sales, operating income increased significantly.

In power generation, unfortunately, net sales and operating results decreased due to the rebound from a large-scale solar power project recorded in the previous equivalent period, as I said earlier. In food and beverage distribution, net sales were JPY 44.3 billion, up JPY 6.6 billion. Operating income was JPY 900 million, up JPY 3.4 billion. In vending machine, net sales increased only slightly, but I think the benefits of cost reduction activities and structural reform were seen in operating results. In store distribution, net sales and operating results increased significantly because of an increase in demand for equipment for convenience stores.

Let me move on to net sales by Japan and overseas area. Overseas sales were up JPY 20.7 billion, and sales in Japan were up JPY 20 billion. In total, net sales were up JPY 40.7 billion. As were JPY 20.7 billion of increase in overseas sales, sales increased in all the areas. In particular, sales for Chinese and Asian market increased dramatically. Sales of components such as ED&C components, automation systems and semiconductor increased.

Page 8 shows year-on-year comparison of sales by product for the first half. Net sales increased by JPY 40.7 billion year-on-year. Out of that, increase of major components was JPY 36.7 billion, accounting for 90%. Net sales of major components were JPY 185.4 billion. Net sales of vending machines were up 1%. Net sales of semiconductors for industrial and automotive applications were up 29%. Factory automation was up 20%, including low voltage inverters and FA components. ED&C components increased significantly by 37%.

On the right, quarterly sales trend of the fiscal year 2020 and the first and the second quarter of the fiscal year 2021 are shown. Quarterly sales have been JPY 90 billion level since the fourth quarter of the fiscal year 2020. Quarter-on-quarter growth rate from the first to the second quarter is described on the right.

In the same way, Page 9 shows year-on-year comparison of amount of orders received by product. Orders for major components were JPY 214.2 billion, up JPY 66.2 billion year-on-year, accounting for 120% of the total increase of JPY 55.8 billion. Vending machines were up 8%. Semiconductors were up 42%. Factory automation was up 55%. ED&C components were up 59%. The trend is similar to that of sales, and orders received have been exceeding JPY 100 billion since the fourth quarter of the fiscal year 2020.

Page 10 shows results in comparison with forecasts on July 29. The forecast were kept unchanged from the forecast we announced in April. Net sales were JPY 397.7 billion, which was JPY 12.3 billion lower than the forecast. Excluding currency translation, demand decrease amounted to JPY 20.3 billion. Net sales were lower as a result of postponement of academic sector projects in IT solutions to the second half onwards and impacts of withdrawal from magnetic disk business. Operating income was JPY 16.3 billion, JPY 4.8 billion higher than the forecast. Ordinary income was JPY 5.9 billion higher, and net income attributable to owners of parent was JPY 6 billion higher than the forecast.

Operating income was higher as production in sales of ED&C components and semiconductor mainly for industrial products increased. Although total sales were lower than the forecast, operating income was JPY 4.8 billion higher than the forecast due to contribution of components. Out of JPY 4.8 billion, JPY 1 billion was from increase in sales and production volumes, JPY 3.5 billion was from decrease in fixed cost, outsourcing expenses and controllable expenses. JPY 2.4 billion was from depreciation of the yen. Others include sales mix changes. Due to these factors, operating income was JPY 4.8 billion higher than the forecast in total.

As shown on the bottom by segment, in Power Electronics Energy, sales and income were higher than forecast. As I mentioned earlier, sales and income were higher mainly due to ED&C components demand increase. In Power Electronics Industry, sales were JPY 13.6 billion lower due to postponement of IT solutions projects. Income was JPY 600 million higher following increased factory automation demand offsetting the negative factor of IT.

In semiconductor, sales and income were higher as a result of increased demand for industrial products despite reductions in sales and income following withdrawal from magnetic disk business. Net sales were JPY 1 billion higher and operating income was JPY 3.1 billion higher.

In power generation, sales and income were almost in line with the forecast. In food and beverage distribution, sales were slightly higher and income was higher. In total, net sales were JPY 12.3 billion lower and operating income was JPY 4.8 billion higher.

I will explain balance sheet at the end of the first half on Page 11. This slide shows comparison of balance sheet between the end of March and the end of September. Cash increased and tangible fixed assets mainly of semiconductor increased. Notes and account receivables, trade receivables decreased by slightly more than JPY 60 billion. We booked significant amount of sales for GIGA School projects. In IT solutions in February and March, in particular, at the end of March, collection for that progressed very much in the first half.

As a result, total assets stood at JPY 1,029.8 billion, down JPY 28.8 billion. As we reduced interest-bearing debt by JPY 4.6 billion and increased cash and time deposit by JPY 22.3 billion, net interest-bearing debt was JPY 114.5 billion, down JPY 26.4 billion. Net D/E ratio was 0.3x. Equity ratio exceeded 40% and was 41.8%.

Next, consolidated cash flow. In the first half of the fiscal year 2021, profit was JPY 30 billion. Increase in working capital through collection of account receivables and increasing advances received was around JPY 20 billion. Investment was around JPY 13 billion. As a result, we were able to post JPY 40 billion of free cash flow in the first half, which was increase of JPY 53 billion year-on-year. Slightly more than JPY 10 billion was from internal reserve and profit. Slightly more than JPY 14 billion was from working capital. Around negative JPY 7 billion was from investment. In total, cash flow increased by JPY 53 billion year-on-year.

Page 13 shows consolidated financial forecast for the full year in comparison with forecasts on July 29. Net sales forecast is kept unchanged at JPY 900 billion. A significant negative impact of magnetic disk business will be offset by components, we didn't change net sales forecast. We revised up operating income forecast by JPY 7 billion. Operating margin is expected to be 7.4%. Ordinary income forecast was revised up by JPY 7 billion, and forecast for net income attributable to owners of parent was revised up by JPY 8 billion.

For exchange rate, we changed assumed exchange rates to JPY 107 to the U.S. dollar, JPY 127 to the euro and JPY 16.5 to the Renminbi for the second half. We now assume the yen will be weaker than July 29 forecast.

On the bottom of the page, change of sales and income by segment is indicated. In Power Electronics Energy, we revised up net sales forecast by JPY 8 billion and operating income forecast by JPY 2.8 billion mainly due to increase in ED&C components. In Power Electronics Industry, we revised up net sales by JPY 4 billion and operating income by JPY 2.8 billion, mainly due to increase in factory automation. In semiconductor, although there is negative impact of withdrawal from magnetic disk operations, semiconductors for industrial applications are growing substantially. Therefore, we revised down net sales by JPY 4 billion and revised up operating income by JPY 3.4 billion.

In Power Generation, in food and beverage distribution, we have kept both sales and income unchanged. In total, net sales will be in line with July forecast and operating income will be JPY 7 billion higher than July forecast. The first half is offered.

Dividend of surplus is shown on Page 14. We decided to increase interim dividend by JPY 5 to JPY 45 per share. We want to achieve sales and income forecast shown on the previous page, so that we will be able to increase full year dividend.

Pages 15 and 16 are for reference. Page 15 shows amount of orders received of low-voltage inverters, semiconductors and vending machines in quarter-on-quarter and year-on-year growth rate for the second quarter and year-on-year growth rate for the first half. Page 16 shows the difference between results for the fiscal year 2020 and revised forecast for the fiscal year 2021. Net sales, operating income, ordinary income and net income attributable to owners of parent are expected to increase year-on-year. Operating income, ordinary income and net income attributable to owners of parent will be a record high.

Exchange rate effect is negative on net sales and positive on operating income. It is because exchange rate at end of fiscal year is used for net sales and foreign currency denominated transactions are translated at the rate of transaction dates for operating income. As year-on-year change for each segment is also shown, please refer to that.

For the second half, there are lot factors causing anxiety in markets such as situation in real estate and electric power in China. In nature, procurement of parts is difficult due to the impacts of COVID-19. In the U.S., tabling is being discussed. In IT solutions that I mentioned earlier, we made slightly bullish forecast for the second half. As for upside potential, I think there is upside potential in components, in particular, ED&C components in Power Electronics Energy and others, although it depends on situation of procurement of parts. Besides, we newly established the Power Electronics sales group to reinforce power electronics on September 1. Through reorganization of the sales group and integrated operation with business groups, we plan to increase orders. I recognized JPY 900 billion in net sales and JPY 67 billion in operating income, we announced this time a minimum forecast we need to commit to. Our internal plan is one level higher.

As for exchange rate, the yen is currently weaker than our assumption for the second half. I think there will be gain of more than JPY 1 billion if the exchange rate continues to be at the current level. I also think billions of yen of reduction in expenses will be possible. By considering the forecast we announced this time as minimum targets, we definitely want to exceed the forecast. That concludes my presentation.

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