Fuji Electric Co Ltd

TSE:6504

Earnings Call Transcript 2021-Q3

[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 third quarter of fiscal year 2020.

As the impact of year-on-year decrease of results for the first half was significant, sales and income were down year-on-year, also for the 9 months. Operating income increased year-on-year in the 3 months of the third quarter, for defects of IGBT, we booked JPY 16.7 billion of cost of collective measures in the third quarter. As the cost is extraordinary, onetime and huge, we discussed with our auditing firm and booked the amount in extraordinary loss.

Page 2 shows year-on-year comparison of consolidated financial results for the 9 months of the fiscal year 2020. Net sales were JPY 561.3 billion, down JPY 50.4 billion. Excluding the impact of foreign exchange, net sales decreased JPY 48.5 billion in real terms. Operating income was JPY 14.1 billion, down JPY 2.8 billion. Operating income was down JPY 5.8 billion in the first half and was down JPY 2.8 billion in the 9 months.

As for nonoperating income and expenses, negative JPY 500 million was from foreign exchange loss. Negative JPY 600 million of others was from an increase in expenses and overseas sites caused by the impacts of COVID-19. Nonoperating income net of nonoperating expenses were negative JPY 1 billion. As a result, ordinary income was JPY 14 billion, down JPY 3.8 billion.

As for extraordinary income and loss, as shown in the table, we booked negative JPY 16.7 billion of cost of corrective measures for product defects. Gain on sales of investment securities decreased JPY 2.1 billion year-on-year. As a result, extraordinary income net of extraordinary loss was negative JPY 16.5 billion, deterioration of JPY 17.3 billion. Consequently, loss before income taxes was JPY 2.6 billion. Net income attributable to owners of parent was negative JPY 4 billion, deterioration of JPY 14.3 billion year-on-year.

Page 3 shows year-on-year changes in operating income. There were positive factors such as decrease in fixed costs and difference of project profitability and others. However, as decrease in sales and production volumes was significant, operating income decreased JPY 2.8 billion year-on-year.

Sales and production volumes increased significantly in semiconductors, but decreased in vending machines, store distribution and ED&C components. In total, decrease in sales and production volumes pushed down operating income by JPY 13.7 billion. Decrease in fixed cost increased, decreasing other expenses of JPY 7 billion. We mainly reduced controllable expenses, such as travel expenses and entertainment expenses. We also reduced advertising and promotion expenses. As a result, decrease in other expenses boosted operating income.

Labor costs and R&D costs decreased as well. On the other hand, depreciation and leases paid increased due to continued active investment in power semiconductors. In total, decreasing fixed cost pushed up operating income by JPY 6.2 billion. Exchange rate effect, slight appreciation of the yen pushed down operating income by JPY 500 million. Others, including difference of project profitability boosted operating income by JPY 5.2 billion.

Page 4 shows net sales and operating income by segment. Sales and income increased substantially in Electronic Devices segment and decreased substantially in Food and Beverage Distribution segment. Except Electronic Devices segment, net sales decreased in all other segments, unfortunately. In total, net sales decreased JPY 50.4 billion.

Operating income of Electronic Devices, Power Electronics Systems Energy, Power Electronics Systems Industry and Power Generation increased year-on-year. However, due to JPY 7.5 billion of significant decrease of Food and Beverage Distribution, operating income decreased JPY 2.8 billion in total.

On Page 5, I will look our business results by segment. In Power Electronics Systems Energy, net sales decreased JPY 9.9 billion and operating income increased JPY 300 million. In some segments of energy management, power supply and facility systems and ED&C components, net sales decreased 6% or 7%, respectively.

In energy management, net sales decreased as a result of a decline in demand for smart meters and the absence of large-scale projects recorded in the previous equivalent period, but operating results increased due to the differences in profitability between projects.

In power supply and facility systems, net sales decreased as a result of the rebound from large-scale projects recorded in switchgear and controlgear operations overseas in the previous equivalent period, but operating results increased due to the benefits of cost reduction activities. In ED&C components, operating results decreased due to the reduced demand from machine manufacturers and switchboard manufacturers. Net sales and operating results decreased.

In power Electronics Systems Industry, net sales decreased JPY 2.8 billion year-on-year, and operating income increased JPY 1.2 billion. In automation systems, net sales and operating results decreased despite the higher demand for low-voltage inverters and factory automation components seen in China as a result of sluggish demand in Japan.

In Social Solutions, net sales and operating results increased, thanks to increases in demand for electrical equipment for railcars and in demand for ship exhaust gas cleaning systems, or SOx scrubbers. In equipment construction, net sales decreased due to delays in capital investment plans and the rebound from large-scale projects recorded in the previous equivalent period. But operating results increased due to the benefits of cost reduction efforts.

In IT Solutions, net sales decreased due to the rebound from large-scale projects recorded in the previous equivalent period, but operating results increased due to differences in profitability between projects.

Please go to Page 6. In Electronic Devices, net sales and operating results of semiconductors increased substantially. In total, net sales increased JPY 9.7 billion, and operating income increased JPY 2.5 billion. In semiconductors, demand for automobiles increased. In industrial field as well, demand for the new energy market and machine tools manufacturers was quite strong. As a result, net sales and operating results increased substantially year-on-year.

You see the table showing year-on-year comparison, a breakdown of Electronic Devices sales for 9 months. Sales of semiconductors increased JPY 14.7 billion year-on-year. In magnetic disks, sales decreased JPY 5 billion, unfortunately. As for year-on-year comparison of distribution of semiconductors sales by field, the ratio of automobiles increased from 34% to 39% in the 9 months of the fiscal year 2020. For magnetic disks, net sales and operating results decreased year-on-year, partly due to lower demand for PCs. However, billions of yen of operating income was maintained.

In Food and Beverage Distribution, net sales decreased JPY 23.6 billion, and operating results decreased JPY 7.5 billion. This segment was significantly impacted by COVID-19. In vending machine, net sales and operating results decreased substantially due to controls in capital investment by Japanese beverage manufacturers as well as lower demand in the Chinese market. In store distribution, net sales and operating results decreased because of a decline in demand for store equipment for convenience stores. In Power Generation, although net sales decreased JPY 18.7 billion, operating income increased JPY 600 million.

Net sales decreased significantly due to the rebound from a large-scale thermal power system project and from solar power projects recorded in the previous equivalent period. But operating income increased JPY 600 million because of difference in profitability between projects.

Page 7 shows changes in quarterly net sales and operating income for reference. Net sales decreased JPY 7.2 billion in the first quarter and decreased significantly by JPY 42.6 billion in the second quarter. Net sales in the third quarter decreased JPY 800 million, almost flat year-on-year.

Operating income decreased JPY 1.2 billion in the first quarter, decreased JPY 4.6 billion in the second quarter and increased JPY 3.1 billion in the third quarter. The table on the right shows net sales and operating results by segment. Net sales increased in Power Electronics Systems Energy, Power Electronics Systems Industry and Electronic Devices. On the other hand, net sales decreased in Food and Beverage Distribution and Power Generation. In total, net sales decreased slightly.

Operating results decreased in Food and Beverage Distribution. However, in all other segments, operating income increased. In particular, operating income in Power Electronics Systems Energy and Electronic Devices increased. In total, operating income increased JPY 3.1 billion year-on-year. For reference, we forecast both net sales and operating income will increase year-on-year.

On Page 8, I will explain net sales by Japan and overseas area. Overseas sales were down JPY 10.2 billion, and sales in Japan were down JPY 40.3 billion. In total, net sales were down JPY 50.4 billion. Overseas sales were down JPY 10.2 billion. The Chinese market is booming, and sales in China were up JPY 9.5 billion. Sales mainly of semiconductors and automation systems were up. On the other hand, sales in Asia and others were down JPY 16.8 billion. Sales mainly of power supply and facility systems, Power Generation and magnetic disks were down.

Page 9 shows major components orders received trend. Year-on-year comparison of orders received is shown. Orders received were JPY 646.4 billion in the 9 months of the fiscal year 2020, down JPY 34.7 billion year-on-year. Orders received for major components, such as vending machines, semiconductors, factory automation and ED&C components are indicated.

As shown with asterisk, factory automation increase, low-voltage inverters, motors, factory automation components and measuring instruments. Components orders were JPY 236.7 billion, down JPY 4.5 billion year-on-year. Orders of vending machines were down 35% year-on-year. However, orders of semiconductors were strong and up 21%.

The bar graph on the right show quarterly orders received trend from the first quarter of the fiscal year 2019. Orders received in the third quarter of the fiscal year 2020 were JPY 86.5 billion, up from JPY 83.4 billion in the third quarter of the fiscal year 2019 and up from the second quarter of the fiscal year 2020.

By component orders, vending machines were down year-on-year and quarter-on-quarter. Orders of semiconductors were up 30% year-on-year and up 19% quarter-on-quarter. Orders of factory automation were down 10% year-on-year and up 15% quarter-on-quarter. Orders of ED&C components were sluggish in the first and the second quarters of the fiscal year 2020. However, the market slightly recovered in the third quarter. As a result, orders of ED&C components were up 5% year-on-year and 20% quarter-on-quarter. Orders of semiconductors, ED&C components and factory automation are gradually recovering.

On Page 10, I will talk about consolidated balance sheet. This page shows comparison of balance sheet between March 31, 2020, the end of the last fiscal year and December 31, 2020. Due to continued impacts of COVID-19, we kept 1 month worth of cash and time deposit. Cash and time deposit increased JPY 42 billion from the end of the last fiscal year. Notes and account receivables, trade receivables decreased JPY 45.7 billion due to steady progress of collection.

Inventories increased JPY 39.2 billion as we accumulated inventories for plant-related sales toward the end of March. Investments and other assets in long-term assets include investment securities and increased JPY 37.6 billion, mainly due to a rise in stock prices. Total assets stood at JPY 1.79 trillion, up JPY 82.2 billion.

Liabilities are shown on the right. Notes and account payables, trade payables decreased JPY 24.1 billion, partly due to response to the Subcontract Act. Retained earnings decreased JPY 15.5 billion due to net loss and interim dividend. As a result, net interest-bearing debts were JPY 208.2 billion, up JPY 54.6 billion. Net D/E ratio was 0.5x. Equity ratio was 35.5%.

Page 11 shares consolidated financial results forecast for the fiscal year 2020 in comparison with forecast announced on October 29, 2020. We booked extraordinary loss of IGBT in the third quarter. We plan to sell investment securities and record gain on sales of investment securities in the fourth quarter. We revised down net sales forecast by JPY 10 billion to JPY 860 billion.

In Food and Beverage Distribution, we incorporated aggressive measures in the fourth quarter. However, in light of various circumstances, we revised down forecast for Food and Beverage Distribution. Mainly due to that, we revised down net sales forecast by JPY 10 billion.

We have kept unchanged forecast for operating income of JPY 41 billion and ordinary income of JPY 42.5 billion. Forecast of net income attributable to owners of parent was revised up JPY 5.5 billion to JPY 33 billion due to extraordinary income and loss that I mentioned earlier.

By segment, in Electronic Devices, forecast for net sales and operating income were revised upward. On the other hand, in Food and Beverage Distribution, forecast for net sales and operating income were revised downward in consideration of risks. In elimination and corporate, operating loss forecast was revised up by JPY 1.5 billion based on the forecasted reduction of corporate expenses.

Page 12 shows year-on-year comparison. Net sales will decrease JPY 40.6 billion. Operating income will decrease JPY 1.5 billion. Ordinary income will decrease JPY 2 billion. Net income attributable to owners of parent will increase JPY 4.2 billion. Net sales decreased JPY 49.7 billion, and operating income decreased JPY 5.8 billion.

In the first half, we forecast net sales will increase JPY 9.1 billion, and operating income will increase JPY 4.3 billion in the second half. We plan to increase both sales and income in the second half. However, as a decrease in the first half was significant, both net sales and operating income will decrease in the full year. As a trend, we recognize we are moving toward a good direction.

By segment, in Power Electronics Systems Energy, net sales and operating income will decrease. Net sales and operating results of ED&C components will decrease year-on-year. In Power Electronics Systems Industry, net sales and operating income will increase substantially, driven by IT Solutions and Social Solutions. In Electronic Devices, net sales and operating income will increase due to increase of semiconductors in industrial and automobile fields. In Food and Beverage Distribution, net sales and operating income will decrease mainly due to vending machines.

In Power Generation, net sales will decrease due to the rebound from large-scale projects in the previous fiscal year. Operating income will increase because of differences in profitability between projects. That is for your forecast. We would like to exceed income forecast through further cost reduction efforts.

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