Fuji Electric Co Ltd

TSE:6504

Earnings Call Analysis

Strong Revenue Growth and Adjusted Profit Forecast Highlight Earnings Call

In the second quarter of fiscal 2024, the company reported record highs in sales and profits, with net sales rising by JPY 5.7 billion to JPY 497.4 billion. Operating profit increased by JPY 5.3 billion to JPY 40.3 billion, reflecting an improved operating profit ratio of 8.1%. For the full year, net sales are projected to reach JPY 1.114 trillion, and operating profit forecast was raised by JPY 2.5 billion to JPY 111.5 billion. Notably, the company anticipates a 10% operating profit ratio and a JPY 86 billion net profit attributable to owners, an increase of JPY 5.5 billion compared to previous estimates.

Overview of Financial Performance

The company reported solid financial performance in the first half of fiscal 2024. Compared to the initial forecast, net sales surpassed expectations by JPY 3.4 billion, with operating profit exceeding forecasts by JPY 4.8 billion. This surge resulted in an improved operating profit ratio, which increased by 0.9 percentage points, illustrating the company's effective management and operational efficiency.

Segment Performance Insights

The financial results varied across different segments. The Energy sector saw a setback with lower sales forecast due to reduced demand for Electrical Distribution & Control (ED&C) components, yet operating profit was better than anticipated, rising by JPY 1.1 billion. Conversely, the Industry segment faced challenges with plant systems compensating for weak low-voltage inverter sales, showing a net profit increase. In Semiconductors, net sales fell JPY 5 billion below forecast, but thanks to cost management strategies, the segment's operating profit improved slightly.

Forecast Adjustments and Guidance

Looking ahead, the company maintained a full-year net sales outlook of JPY 1.114 trillion, sticking to conservative exchange rate assumptions: JPY 140 to USD 1, JPY 150 to EUR 1, and JPY 19.5 to CNY 1. Notably, the operating profit forecast was adjusted upward by JPY 2.5 billion to JPY 111.5 billion, resulting in an operating profit ratio peeking at 10%. Ordinary profit is also expected to rise by JPY 2 billion, totaling JPY 111.5 billion.

Profitability Enhancements

Positive growth in profit attributable to owners of the parent has been forecasted to rise by JPY 5.5 billion, now estimated at JPY 86 billion, indicating a robust profit ratio of 7.7%—a notable increase of 0.5 points. This enhancement predominantly stems from increased cross-holding share sales.

Balance Sheet Strength and Cash Flow Health

As of September, the company reported substantial improvements in its balance sheet. Notably, interest-bearing debt has dropped by JPY 48.5 billion, achieving a record low of JPY 49.7 billion—a net Debt to Equity ratio standing at 0.1x, revealing a healthy financial structure. The company generated a positive cash flow of JPY 87.5 billion, bolstered by JPY 63 billion in retained earnings from operating activities. The free cash flow notably increased by JPY 48.5 billion compared to last year, reflecting enhanced operational capabilities.

Dividend and Shareholder Returns

In terms of shareholder returns, the interim dividend has been set at JPY 75 per share, marking an increase of JPY 15 from the prior year. This move signals management's confidence in sustained future profitability and indicates a potential for higher year-end dividends if current trends in financial performance continue.

Future Outlook and Strategic Goals

The company's management remains optimistic about achieving all-time high sales and operating profits in the upcoming quarters, driving growth via operational excellence and strategic investments, particularly in the semiconductors and food and beverage distribution sectors. Despite certain segments facing headwinds, the focus on refined cost structures and efficient cash management strategies is expected to underpin profitability in the long run.

Earnings Call Transcript 2025-Q2

[Junichi Arai, executive]

Hello, everyone. I am Junichi Arai from Corporate Management Planning Headquarters. I will now explain our financial results for the second quarter for the first half of fiscal 2024.

As President Kondo mentioned, we were able to post record high numbers for sales and profits at all levels. I will go over the results by showing the comparison with the same period of the previous year.

Net sales increased by JPY 5.7 billion to JPY 497.4 billion. This includes a slight loss in foreign exchange, and therefore, we would have achieved a JPY 6.1 billion growth if we exclude this impact. The operating profit increased by JPY 5.3 billion to JPY 40.3 billion, and operating profit ratio increased by 1 percentage point to 8.1%.

In terms of nonoperating profit, the appreciation of the yen pushed down the foreign exchange gain by JPY 2.5 billion, while some of the expenses that we incurred in the previous year reduced in this fiscal year. Those resulted in a total year-on-year decline of JPY 1.0 billion. The ordinary profit increased by JPY 4.3 billion to JPY 38.9 billion, and extraordinary profit increased by JPY 11.5 billion to JPY 16.3 billion, mainly due to the sale of cross-holding shares, which increased significantly compared to last year, and amounted to double-digit billion yen. Profit attributable to owners of the parent reached JPY 35.5 billion, an increase of JPY 11.2 billion.

I would like to explain the changes in operating profit versus the previous year. In terms of sales and production volume, although factory automation and ED&C components were down from the previous year, this was offset by strong performance in substation systems for plants and store distribution in the Food and Beverage Distribution segment, leading to an increase of JPY 2.9 billion. On the other hand, fixed costs, including labor costs, R&D expenses and depreciation and leases paid increased from the previous year, resulting in a negative impact of JPY 6.2 billion.

Exchange rate effects improved by JPY 1.1 billion, while under others, a JPY 2.5 billion increase in product selling prices and a JPY 2.6 billion in negative impact of rising raw material costs, almost canceled out each other. As for the breakdown of the differences in model mix and the profitability between projects and cost reduction, the difference in model mix was positive in equipment construction, power generation and vending machines while cost reduction improved by JPY 7.7 billion due to an enhanced [ yield ], mainly in semiconductors. All these factors together resulted in a total increase of JPY 7.6 billion in others.

Here, you can see year-on-year comparison of net sales, operating profit and operating profit ratio by segment. Sales went down from the year before in Industry and Semiconductors, with the Industry affected by low-voltage inverters and semiconductors by its automotive business. Operating profit decreased in Semiconductors, but increasing Energy, Industry and Food and Beverage Distribution, resulting in increases in both total sales and profits.

I will now explain the results by segment. In the Energy segment, sales increased by JPY 1.4 billion to JPY 147.6 billion, and operating profit increased by JPY 1.1 billion to JPY 9.8 billion. There are 4 subsegments and the ED&C components suffered negative growth in sales and profit. The key is Energy Management, which saw a significant increase in both sales and profit due to an increase in large scale orders. In Power generation, there was a slight increase in both sales and profit. And overseas, a large-scale geothermal project won by an Indonesia made contribution. In Power supply and facility systems, sales were down slightly despite a strong demand from data center operators, impacted by the absence of large-scale projects posted in the previous year at a subsidiary in Singapore, while operating profit improved slightly due to fixed cost reductions.

As for Industry, net sales fell JPY 2.8 billion to JPY 176.8 billion, while operating profit rose JPY 3.2 billion to JPY 8.4 billion. Automation systems saw sales declined slightly due to inventory adjustments of low-voltage inverters, but operating profit was relatively unchanged due to lower fixed costs and other cost reductions. As for social solutions, sales and profits increased significantly, a good result brought about by receiving large-scale orders for nuclear-related equipment.

In digital transformation solutions, both sales and operating profit increased due to large-scale projects won by IT solutions, one of our subsidiaries. In equipment construction, net sales went down due to the impact of large-scale projects recorded in the previous year, but profit remained barely in the positive territory by some single digit billion yen.

In Semiconductor segment, net sales decreased by JPY 0.5 billion to JPY 108 billion. Operating profit dropped by JPY 1.7 billion to JPY 15.1 billion. The table on the upper right shows year-on-year changes by application. Industrial semiconductors grew by JPY 1.3 billion year-on-year. Automotive semiconductors were down by JPY 1.7 billion due to impact of unfavorable foreign exchange influences and the decline in overseas sales volume of power semiconductors for electric vehicles. Operating results were lower than last fiscal year because of a rise in capital expenses for bolstering power semiconductor production capacity and an increase in material costs.

In Food and Beverage Distribution, net sales was JPY 58.3 billion, up JPY 5.1 billion year-on-year. Operating profit grew by JPY 3.3 billion to JPY 8.7 billion. Both vending machines and store distribution had excellent results. In vending machine business, even though the overseas market suffered recent, strong demand in domestic market and cost reduction efforts contributed to boosting profitability. Store distribution had a special demand stemming from the issuance of newly designed [indiscernible] in Japan. That resulted in a huge jump in sales and an increase in profit.

Page 10 shows overseas and domestic net sales and the year-on-year changes. Overseas net sales dropped by JPY 9.2 billion to JPY 142.8 billion. Domestic net sales increased by JPY 14.9 billion to JPY 354.6 billion. Factors contributing to a JPY 9.2 billion decrease in overseas sales are mainly a JPY 14 billion drop in Asia.

In Asia, power supply and facility systems saw a decline in sales due to a lack of large project at our Singapore company. Sales of automotive semiconductors dropped by JPY 7.3 billion. Europe also saw a drop in sales, mainly due to Semiconductor performance. But China and Americas increased their sales.

Page 11 shows orders received compared with the same period last year. We received orders totaling JPY 571.7 billion, up JPY 23.7 billion year-on-year. Plant systems contributed JPY 17.2 billion. Energy Management contributed significantly due to a good showing in substation business. Power supply and facility systems was as much as JPY 8 billion higher than the previous year. Main components orders totaled JPY 198.2 billion, up JPY 6.5 billion year-on-year. By percentage, orders for Industrial and automotive semiconductors as well as ED&C components grew year-on-year. But orders for components for factory automation were down by 4%.

Bar chart on the right shows quarterly changes in order. Orders in the second quarter decreased by JPY 1.7 billion from the first quarter. Orders for automotive semiconductors and ED&C components were higher, while those for industrial semiconductors and factory automation were slightly lower than in the first quarter.

In the first half of fiscal 2024, we outperformed the forecast released on July 25 by JPY 3.4 billion in net sales, by JPY 4.8 billion in operating profit, by 0.9 percentage points in operating profit ratio, JPY 5.9 billion in ordinary profit, by JPY 6 billion in profit attributable to owners of parent. By segment, Energy sales were lower than forecast due to lower ED&C sales, but operating profit was JPY 1.1 billion more than forecast.

In Industry, plant systems more than made up for poor showing of low-voltage inverters and for increases in both sales and profit. Net sales in Semiconductors was JPY 5 billion lower than forecast, but operating profit was JPY 0.2 billion higher, thanks to cost reduction efforts. Food and Beverage Distribution saw much higher net sales and operating profit than forecast.

Page 15 shows our balance sheet as of the end of September against that as of the end of March. Inventories increased by JPY 18.9 billion. Tangible assets, mainly semiconductors grew by JPY 20 billion. Notes and accountable receivable dropped by JPY 77.9 billion, thanks to rigorous collections since March. Total assets decreased by JPY 38.7 billion to JPY 1.2325 trillion. The equity ratio improved by 3 percentage points to 50.4%, mainly thanks to JPY 24.8 billion increase in retained earnings.

Interest bearing debt fell by JPY 48.5 billion. Net interest-bearing debt fell by JPY 47.7 billion to a record low of JPY 49.7 billion. Net D/E ratio now stood at 0.1x. Cash flow was positive JPY 87.5 billion in the first half of 2024 due to JPY 63 billion in retained earnings from operating activities. Collective of account receivables and advances received has increased by more than JPY 10 billion from the same period last year.

On the other hand, cash flow from investing activities was JPY 25.8 billion negative. This is because over JPY 40 billion in capital investments offset an inflow of about JPY 18 billion from stock sales. As a result, free cash flow was JPY 61.8 billion positive. Compared with the same period last year, operating cash flow increased by JPY 52.7 billion. Investing activities decreased by JPY 4.2 billion and free cash flow increased by JPY 48.5 billion.

Page 18 shows our full year forecast compared against the forecast released on July 25 this year. Net sales forecast is unchanged at JPY 1.114 trillion. Assumed exchange rates are also unchanged from those set at the beginning of the year. They are conservative concern the current rates. JPY 140 to USD 1, JPY 150 to EUR 1 and JPY 19.5 to CNY 1. We increased operating profit forecast by JPY 2.5 billion to JPY 111.5 billion. Operating profit ratio was raised by 0.2 points to 10% with an eye of achieving a double-digit figure. We raised our ordinary profit forecast by JPY 2 billion to JPY 111.5 billion. Forecast for profit attributable to owners of parent has also increased by JPY 5.5 billion to JPY 86 billion. Its profit ratio is now forecast to be 7.7%, up 0.5 points.

By segment, Energy is expected to post a sales decline of JPY 3 billion due to delays in the recovery in demand for ED&C components, but profit forecast of JPY 31 billion is unchanged. In Industry, net sales forecast has been revised downward due to a delayed recovery in demand for factory automation and low-voltage inverters, but profit forecast has been revised upward due to an expected demand increase for plant systems.

In Semiconductors, while sales and profit have been revised downward due to lower demand for industrial semiconductors from China and lower overseas demand for automotive semiconductors, including the different distribution, both sales and operating profit are expected to be higher than the forecast due to strong store distribution and vending machine businesses. We will continue to aim to achieve all-time high sales and operating profit for the year.

Page 19 shows full year forecast compared to the previous year. Net sales are expected to increase by JPY 10.8 billion, operating profit up JPY 5.4 billion. The operating profit ratio up 0.4 points. Ordinary profit, up JPY 3.7 billion, profit attributable to owners of parent up JPY 10.6 billion and its ratio also up by 0.9 points. Sales and profit forecasts are higher than the previous year. Net profit is expected to increase as a result of increased sales of cross-holding shares.

By segment, sales and profits are expected to be higher for Energy business. In the Industry, net sales is expected to fall year-on-year due to a decrease in FA and the impact of a large construction project, but profit is expected to be JPY 4.2 billion higher. In Semiconductors, net sales is expected to be JPY 8 billion higher, but the profit is likely JPY 2.2 billion lower due to higher cost of capital and material costs.

In Food and Beverage Distribution, sales and profits are expected to exceed that of the previous year. The interim dividend is set at JPY 75 per share, an increase of JPY 15 compared to the previous year. If things go as planned, we should be able to pay out a higher year-end dividend than planned. For your reference, we will show you orders received in the second quarter for ED&C components, low-voltage inverters, Semiconductors and vending machines in comparison with the first quarter and the same period last year.

Part of our current plans are a little conservative, so we'll keep our profit target high as we proceed. Given our conservative cost assumptions, it may be possible to improve profit in the order of JPY 1 billion. Our assumptions for ForEx are also conservative. It is therefore conceivable that the sales turned out to be more than JPY 10 billion higher and profit that is around JPY 2 billion higher.

In any case, we will continue to take necessary measures to achieve all-time high net sales and profit. We appreciate your continued support. This concludes my presentation. Thank you.

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