Fuji Electric Co Ltd

TSE:6504

Earnings Call Transcript 2023-Q2

[Junichi Arai, executive]

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 2022 and full year forecast. Firstly, let me explain results for the first half. As Kondo mentioned, despite negative factors such as lockdowns in China, rising resource and energy costs, partly due to the tailwind of the depreciation of the yen. Fortunately, we achieved record high operating income, ordinary income and net income in the first half.

Page 4, please. Net sales were JPY 447.1 billion, at JPY 49.5 billion. Excluding gain on translation of earnings of overseas subsidiaries, net sales increased JPY 31.7 billion due to demand increase. Operating income was JPY 26.7 billion, up JPY 10.4 billion or 64% year-on-year. Ordinary income was JPY 28.9 billion, up JPY 12 billion. As for nonoperating items, foreign exchange income increased to JPY 1.9 billion. Expenses for converting the magnetic disk production lines in Malaysia to semiconductor production lines were JPY 600 million. In total, nonoperating income, net of nonoperating expenses was up JPY 1.6 billion.

Extraordinary income, net of extraordinary loss was down JPY 600 million year-on-year. Gain on sales of investment securities was JPY 8.2 billion due to sales of a large number of shares in the first half of the last fiscal year and was JPY 6.3 billion in the first half of this fiscal year, down JPY 1.9 billion. Expenses for withdrawal from magnetic disks business were JPY 1.2 billion in the first half of the last fiscal year. Absence of this factor was positive in the first half of this fiscal year. In total, extraordinary income net of extraordinary loss was JPY 5.7 billion, down JPY 600 million. Net income attributable to owners of parent was JPY 20.3 billion, up JPY 6.3 billion or 45% year-on-year.

Page 5 shows breakdown of JPY 10.4 billion year-on-year increase of operating income. The biggest factor was the increase in sales and production volumes, in particular, in automotive semiconductor, power supply and facility systems, ED&C components and IT solutions. In total, increase in sales and production volumes pushed up income by JPY 15.6 billion. Fixed cost increased JPY 6.4 billion in total. Depreciation and leases paid increased frontly due to proactive investment in semiconductor.

Other expenses increased JPY 3.4 billion. Controllable expenses in outsourcing expenses increased. The yen depreciated and exchange rate effect pushed up income by JPY 3.4 billion. Others pushed down income by JPY 2.1 billion. Negative JPY 4.7 billion was from impact of rising raw material prices, negative JPY 1.4 billion was from impact of energy prices, especially impacts on semiconductor. JPY 3.4 billion impact of higher product selling prices partially offset the negative effects, but not fully offset the rising raw material prices. JPY 600 million positive effect of cost reduction and others also partially offset the negative effects. However, in total, others pushed down income by JPY 2.1 billion.

Page 6 shows year-on-year comparison and net sales and operating income by segment. Net sales increased in all the segments. Operating income in Power Electronics Industry decreased JPY 1.3 billion year-on-year, partly due to decrease in automation systems. Operating income mainly increased in Power Electronics Energy, semiconductor and Food and Beverage Distribution.

On pages 7 and 8, I will talk about business results by segment. In Power Electronics Energy, net sales were up JPY 16.9 billion and operating income was up JPY 5.4 billion. The number in the box indicates exchange rate effect. In this segment, there are 3 businesses. In Energy Management, net sales decreased and operating results increased slightly. In power supply and facility systems, net sales and operating results increased significantly as a result of substantially higher demand for projects from data centers and semiconductor manufacturers in Japan and overseas. In particular, a subsidiary of switch gears and control gears in Singapore made a significant contribution to orders, sales and operating results. The biggest contributor was ED&C components, net sales and operating results increased in ED&C components, higher demand from domestic manufacturers of finished equipment was a major income driver.

In Power Electronics Industry, net sales were up JPY 10.4 billion, but operating income was down JPY 1.3 billion, unfortunately. There are 4 businesses in this segment. In automation systems, there were impacts of lockdowns in China and operating results decreased due to the high prices for materials and effects on production from difficulties in procuring parts. Net sales increased slightly, partly due to foreign exchange influences.

In Social Solutions, net sales decreased, but operating results increased slightly. Scrubbers orders decreased, but operating results increased slightly year-on-year due to the benefits of cost reduction activities. In equipment construction, net sales and operating results decreased. In IT Solutions, net sales increased significantly and operating results increased year-on-year due to large-scale academic or school-related and private sector projects.

Page 8, please. In Semiconductor net sales were up JPY 12 billion and operating income was up JPY 3.1 billion. Sales of industrial applications were up JPY 2.7 billion. Sales of magnetic disks were JPY 5.8 billion in the first half of the last fiscal year and the margin was also high. Fortunately, despite that, both sales and income increased. In automotive applications, sales increased substantially by JPY 9.3 billion and income also increased. Despite negative factors such as the rise in depreciation and leases paid for bolstering production capacity and the increases in material and in particular, energy cost operating income increased year-on-year, partially due to high operating ratio close to 100% at factories.

In Power Generation, net sales were up JPY 8.2 billion and operating income was up JPY 600 million. Net sales and operating income increased due to the benefits of various scale renewable energy projects. In Food and Beverage Distribution, net sales were up JPY 500 million, and operating income was up JPY 2.4 billion. In vending machines, net sales and operating results increased. Operating results were negative in the first half of the last fiscal year, but improved significantly in the first half of this fiscal year. Operating margin was slightly higher than 8%. In store distribution, net sales decreased 8%, but operating results were almost flat due to the benefits of cost reduction activities, operating results were not negative.

Page 9 shows year-on-year comparison and net sales by Japan and overseas area. Net sales were up JPY 49.5 billion in total. Overseas sales were up JPY 20.7 billion. Sales in Japan were up JPY 28.8 billion. Increase in overseas sales included JPY 17.7 billion of exchange rate effect. By area, sales in Asia and others were up JPY 12.7 billion, including negative JPY 5.8 billion from magnetic disks. Sales mainly in power supply and facility systems, ED&C components and automation systems increased.

In China, sales of automation systems and Food and Beverage Distribution decreased due to strong impacts of lockdowns. In total, sales in China decreased JPY 600 million. In Europe and Americas, sales increased slightly more than JPY 4 billion, respectively, year-on-year. Components such as factory automation and semiconductor increased.

Page 10 indicates year-on-year comparison as amount of orders received by product. The amount of orders was JPY 565.5 billion, up JPY 80.6 billion year-on-year. In particular, the amount of orders for plant and system projects increased amount of orders for power supply and facility systems, energy management and equipment construction mainly increased substantially. Orders for components were JPY 225.1 billion, up JPY 22 billion. Orders for semiconductor and ED&C components increased significantly by 13%, respectively. Bar graphs indicate quarterly trend of major components orders received from the first quarter of the fiscal year 2021 to the second quarter of the fiscal year 2022. In the first quarter and the second quarter, major components orders received increased more than JPY 10 billion year-on-year.

Page 11 shows year-on-year comparison of amount of sales by product. Sales were JPY 447.1 billion, up JPY 49.5 billion. Sales of plant systems increased, including sales of projects in power supply and facility systems, power generation and IT solutions. Component sales were JPY 197.7 billion, up JPY 23.2 billion. In particular, sales of semiconductor increased 23% and sales of ED&C components increased 17%. Sales and operating results of factory automation decreased due to impacts from China, difficulty in procurement of parts and rising material cost. However, sales of factory automation increased 20% from the first quarter to the second quarter. That means orders are leading to sales. Major components sales increased in the first and second quarter, respectively, by approximately JPY 10 billion year-on-year.

Page 12 shows results for the first half in comparison with forecast announced on July 28. Net sales were JPY 23.1 billion higher than forecast. Excluding gain on translation and earnings of overseas subsidiaries, net sales increased JPY 10.5 billion due to demand increase. Operating income was JPY 4.7 billion higher than forecast. JPY 3.2 billion was from increase in sales and production volumes, mainly in ED&C components and industrial semiconductor. Decrease in fixed costs, including labor cost and depreciation and leases paid pushed up income by JPY 1.8 billion. Exchange rate effect was positive JPY 2 billion. Unfortunately, others were negative, although we raised prices to offset rise in raw material and energy costs. Operating income was JPY 4.7 billion higher than forecast in total. Ordinary income were JPY 6.9 billion higher and net income attributable to owners of parent was JPY 4.8 billion higher.

By segment, in Power Electronics Energy, net sales were JPY 6.6 billion higher and operating income was JPY 2.4 billion higher. Sales and income were higher mainly due to demand increase of ED&C components. In Power Electronics Industry, net sales were JPY 6.2 billion higher and operating income was JPY 600 million lower. Sales were higher due to increased automation systems business sales and beneficial foreign exchange influences, but income was lower because of higher raw material prices.

In semiconductor, net sales were almost in line with forecast when excluding foreign exchange influences. Sales and income were higher in industrial semiconductor. Sales and income was slightly lower in automotive semiconductor. In Power Generation, net sales were JPY 2.8 billion higher and income was JPY 500 million lower. Income was lower because of differences in profitability between projects.

In Food and Beverage Distribution, situation and vending machines was very challenging in China. However, sales and income were higher due to increased demand for vending machines in Japan, and for store distribution equipment, reduced fixed cost and increased production. In total, net sales were JPY 23.1 billion higher and operating income was JPY 4.7 billion higher than forecast.

Let me move on to consolidated balance sheet. Comparison is made between March 31, 2022 and September 30, 2022. Collection progress for notes and account receivables, trade receivables, mainly and plant-related sales accumulated after March. As a result, notes and account receivables, trade receivables decreased JPY 50.1 billion. Inventories increased JPY 30.6 billion due to increase in components and plant-related inventories. Notes and account payables, trade payables increased JPY 3.5 billion. Tangible fixed assets increased JPY 12.5 billion, mainly due to semiconductor. Investments and other assets decreased JPY 18.1 billion, mainly due to sales of cost shareholdings.

Consequently, total assets stood at JPY 1,125.7 billion, up JPY 8.6 billion. Interest-bearing debt decreased JPY 11.2 billion. Cash on time deposit increased JPY 18.5 billion. As a result, net interest-bearing debt was JPY 86.2 billion, down JPY 30.8 billion. Net D/E ratio was 0.2x. Equity ratio was 43.5%, up 1.1% from the end of the last fiscal year.

Page 16 shares year-on-year comparison have consolidated cash flow for the first half in comparison with the fiscal year 2021. Net cash provided by operating activities was JPY 59.9 billion. JPY 40 billion was from internal reserve and JPY 20 billion was from higher efficiency in working capital. Net cash used in investing activities was JPY 10.7 billion, mainly due to increased investment in semiconductor. Free cash flow was JPY 49.2 billion. In terms of year-on-year comparison, net cash provided by operating activities increased JPY 20.1 billion, JPY 20 billion net increase was from internal reserve and account payables. Net cash used in investing activities was JPY 10.7 billion due to increased investment in semiconductor. Free cash flow increased JPY 9.2 billion year-on-year. In the first half of the fiscal year 2022, we repaid long-term borrowings of JPY 35.7 billion. Even after that, we kept cash and cash equivalent of JPY 110 billion level.

Page 18 shows full year forecast for the fiscal year 2022. Net sales forecast was revised up by JPY 25 billion to JPY 985 billion, operating income up JPY 5 billion to JPY 87 billion ordinary income, up JPY 5 billion to JPY 88 billion. Net income attributable to owners of parent up JPY 500 million to JPY 59.5 billion. Net income attributable to owners of parent will be much lower than ordinary income. It is due to extraordinary losses such as restoration expenses and loss on operation associated with flat damage at the subsidiary in Asia, an increase in noncontrolling interest. Let me look at net sales and operating income by segment.

In Power Electronics Energy, net sales forecast was revised up by JPY 16 billion and operating income forecast was revised up by JPY 4.5 billion. That was the case with the first half contribution from ED&C components and power supply and facility systems will be significant. In Power Electronics Industry, net sales forecast was revised up by JPY 6 billion, and operating income forecast was revised down by JPY 1.2 billion. Net sales forecast was revised up due to automation systems and IT solutions. However, operating income forecast was revised down due to rise in fixed cost and raw material prices.

In Semiconductor, net sales forecast was revised up by JPY 4 billion and operating income, up by JPY 800 million. Sales and income were revised up due to exchange rate. We also incorporated impacts and rise in energy cost. We plan to achieve sales and operating results in line with the previous forecast in real terms. Industrial semiconductor exceeded the previous forecast and automotive semiconductor was slightly below the previous forecast partly due to situation of customers. In Power Generation, forecasts were kept unchanged both for net sales and operating income.

In Food and Beverage Distribution, net sales forecast was revised up by JPY 1 billion and operating income forecast was revised down by JPY 900 million, but debt risk of a vending machine customer in China enhanced billions of yen of expected bad debt loss were incorporated in the forecast. In total, net sales forecast was revised up by JPY 25 billion and operating income forecast was revised up by JPY 5 billion.

Bar graphs of dividend of surplus are shown on Page 20. Fortunately, upward trend of dividend continued up until the fiscal year 2021. Interim dividend for the fiscal year 2022 will be JPY 55 per share, up JPY 10 year-on-year. If possible, we want to increase year-end dividend by JPY 10 or more by achieving results and being cautious on payout ratio of 30%.

Page 22 and after shows materials for reference. Quarter-on-quarter and year-on-year comparison of amount of orders received for ED&C components, low-voltage inverters, semiconductor and vending machines for the second quarter are indicated. Year-on-year comparison for the first half is also shown.

Page 23 shows results for the fiscal year 2021 and revised forecast for the fiscal year 2022. Net sales will increase JPY 74.8 billion. Operating income will increase JPY 1.2 billion. Ordinary income will increase JPY 8.7 billion. Net income attributable to owners of parent will increase JPY 800 million. Expenses for converting production lines in Malaysia into semiconductor production lines of JPY 2 billion and some hundreds of million yen are included in nonoperating expenses.

As for extraordinary items, gain on sales of investment securities in the last fiscal year was bigger than in this fiscal year. Our subsidiary in Asia suffered from flood damage and controlling interest increased due to those factors, net income attributable to owners of parent will increase JPY 800 million. Net sales and operating income for Power Electronics Energy, Power Electronics Industry, Semiconductor, Power Generation and Food and Beverage Distribution are also shown. Net sales and operating income are expected to increase in all the segments year-on-year. As for risk factors throughout the year, we don't know what will happen in China. There may be lockdowns. There are other geopolitical risks. Resource and energy cost may increase further. Demand may decrease due to customer trends. There are such downward risks.

Upside factors include exchange rate. Exchange rate has been fluctuating dramatically. Based on the average of the past 1 month, we assume net sales are pushed up by slightly less than JPY 16 billion and operating income by slightly less than JPY 2 billion. As for expenses, we factored in bad debt risks in China. We assume energy costs would increase in the second half. In this plan, I think there is room to reduce cost by approximately JPY 1 billion. By segment, I personally expect there is upside potential of power supply and facility systems and ED&C components in Power Electronics Energy.

As Kondo mentioned earlier, under the medium-term management plan, we aim to achieve JPY 1 trillion in net sales and operating margin of 8% or higher in the next fiscal year -- the fiscal year 2023. We already achieved margin target in the last fiscal year. We intend to make efforts so that we will be able to achieve net sales target of JPY 1 trillion in this fiscal year, 1 year ahead of the plan. I would appreciate your support. That concludes my presentation.