Fuji Electric Co Ltd

TSE:6504

Earnings Call Transcript 2023-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 for the fiscal year 2022.

Page 4 shows year-on-year comparison of consolidated financial results for the 9 months. Net sales were JPY 690.8 billion, up JPY 70.8 billion. Excluding gain on translation of earnings of overseas subsidiaries, net sales increased JPY 55.4 billion due to demand increase. JPY 55.4 billion increase, approximately negative JPY 12 billion from China, where we experienced great difficulty.

Operating income was JPY 42.4 billion, up JPY 9.8 billion. Operating margin was 6.1%. Non-operating income, net of non-operating expenses, was down JPY 2.6 billion year-on-year.

Net interest income increased JPY 300 million. Foreign exchange income decreased JPY 1.2 billion, partly due to the stronger yen. Others, including conversion of magnetic disk production lines to semiconductor production lines in Malaysia decreased JPY 1.7 billion. Non-operating income, net of non-operating expenses was JPY 1.2 billion.

Ordinary income was JPY 41.3 billion, up JPY 7.1 billion. Extraordinary income, net of extraordinary loss was JPY 8.3 billion, up JPY 1.1 billion. It is mainly because of gain on sales of investment securities and an absence of loss of withdrawal from magnetic disk business in Malaysia booked in the previous year.

Others included expenses associated with withdrawal from Shinshu Fuji Electric in the previous year. Also due to the outset of that extraordinary income, net of extraordinary loss increased JPY 1.1 billion year-on-year. After deducting income taxes and net income attributable to non-controlling interest, net income attributable to owners of parent was JPY 29 billion, up JPY 3.6 billion.

Page 5 shows breakdown of JPY 9.8 billion increase of operating income. The biggest factor was the increase in sales and the associated production volumes. Sales and production volumes pushed up operating income by JPY 24.6 billion, mainly due to increase in automotive semiconductor, power supply and facility systems, ED&C components and vending machines.

As for fixed costs, partly due to year-on-year improvement of market conditions, labor costs, R&D and depreciation and leases paid increased. In other expenses, controllable expenses and others increased. Besides, other expenses included about JPY 2 billion of allowance for doubtful accounts, mainly due to COVID-19 impacts and slightly less than JPY 1 billion from depreciation of inventories.

Due to those factors, other expenses increased JPY 9.1 billion. As a result, increase in fixed cost pushed down operating income by JPY 15.9 billion.

Exchange rate effect was still positive, partly due to monthly average, pushing up operating income by JPY 4.2 billion. Others pushed down operating income by JPY 3.2 billion. Impacts of rising raw material prices and energy prices, including electricity expenses pushed down operating income by approximately JPY 10 billion. JPY 5.7 billion from higher product selling prices partially offset the negative impacts, but not fully.

Cost reduction also had a positive impact. However, others in total pushed down operating income by slightly more than JPY 3 billion. As a result, operating income increased JPY 9.8 billion in total.

Page 6 shows a summary of year-on-year comparison by segment. Net sales increased in all the segments. In power Electronics Industry, operating income decreased JPY 2.5 billion due to COVID-19 impact in China and reduced production in Japan, because of difficulty in procurement of parts. Operating income in all other segments increased.

From Page 7, I will explain each segment in more detail. In Power Electronics Energy, net sales were up JPY 24.6 billion and operating income was up JPY 6 billion.

In Energy Management, net sales and operating results decreased as a result of the absence of large-scale orders for industrial applications recorded in the previous equivalent period. Operating results include several hundred million yen of allowance for doubtful accounts in Indonesia and Asia.

In Power Supply and Facility Systems, net sales and operating results increased. In particular, sales and operating results of switch gears and control gears at our subsidiary in Singapore increased significantly. It was an important point in this business. Demand for projects from data centers and semiconductor manufacturers increased substantially.

Also in ED&C components, net sales and operating results increased significantly. Although we struggled in China demand mainly from manufacturers and machine tools and semiconductor production equipment in Japan increased.

In Power Electronics Industry, there are 4 businesses. In Automation Systems, net sales increased, but operating results decreased. Net sales increased as the benefits of foreign exchange influences outweighed the significant impacts of lockdown in China. However, operating results decreased unfortunately due to the high prices for materials and the effects of difficulties in procuring parts on production in Japan as well as lockdowns in China. In addition, several hundred million yen in allowance for doubtful accounts in Thailand is included.

In Equipment Construction, net sales slightly increased and operating results decreased slightly. Net sales increased as a result of higher demand for Electrical Equipment Construction, but operating results decreased slightly due to increase in material and equipment prices.

In IT Solutions, net sales and operating results increased substantially due to higher demand for large-scale school academic and private sector projects.

Please go to Page 8. In Semiconductor, net sales and operating income increased. As shown on the table, sales and operating results for industrial applications increased JPY 6 billion of sales and JPY 1 billion and several hundred million yen of operating income from magnetic disks were included in the fiscal year 2021. In consideration of that, we can say industrial applications were strong in the fiscal year 2022.

In Automotive Applications, in particular, sales and operating results of power semiconductor for electrified vehicles increased significantly year-on-year. Demand for power semiconductor from customers has been quite high as we increased production capacity in a timely manner, depreciation and leases paid increased.

Operating results increased as we maintained operating rate in production at almost 100% at all the factories despite the increases in material and energy costs, in particular, electricity costs.

As a result, net sales and operating results for both Industrial and Automotive Applications increased. Also in Power Generation, net sales and operating income increased due to large-scale renewable energy projects. Despite the negative factor, JPY 1 billion and several hundred million yen of cost increase from overseas projects, we won in the past, JPY 200 million of operating income was secured.

Also in Food and Beverage Distribution, net sales and operating income increased. In Vending Machines, net sales and operating results increased due to growth in Japan, although we struggled in China.

Vending machine customers in China struggled very much partly due to COVID-19 impacts, and we recorded JPY 1 billion and several hundred million yen of allowance for doubtful accounts. Despite that, net sales and operating results increased.

In Store Distribution, net sales and operating results decreased year-on-year due to the absence of large-scale orders for automatic change dispensers recorded in the previous equivalent period.

Page 9 shows net sales by Japan and overseas area. Net sales were up JPY 70.8 billion in total. Overseas sales were up JPY 27.5 billion, including JPY 15.4 billion of exchange rate effect. Sales in Japan were up JPY 43.3 billion. Ratio of overseas sales was 30%.

By area, in China, we had a hard time and sales decreased JPY 7.9 billion year-on-year. In consideration of exchange rate effect, sales decreased JPY 12 billion in real terms. Sales increased slightly more than JPY 20 billion in Asia and others. Sales increased JPY 8 billion in Europe and sales increased JPY 6 billion in Americas. Although there was exchange rate effect, sales of Automation Systems, Semiconductor and others increased.

Page 10 indicates year-on-year comparison of amount of orders received by product. For the 9 months in the fiscal year 2022, the amount of orders received was JPY 831 billion, up JPY 95.1 billion year-on-year from JPY 736 billion.

As for major components, orders for Semiconductor increased 10%. Orders for Factory Automation decreased 4%. Orders for ED&C Components were almost flat. Orders for components increased JPY 9.3 billion. Plant and system orders increased JPY 85.8 billion. Orders in Power Supply and Facility Systems, Energy Management and Equipment Construction increased substantially for the 9 months.

Quarterly trend is shown on the right. As there were advanced orders in and before the second quarter, major components orders received slightly decreased in the third quarter. However, orders are expected to recover to JPY 100 billion level in the fourth quarter.

Orders for Semiconductor and Factory Automation will increase and orders for ED&C Components will decrease slightly in the fourth quarter.

Plant and system orders have been quite strong every quarter. Around JPY 170 billion of orders were booked each quarter. Orders for the fourth quarter are expected to exceed JPY 150 billion.

Page 11 shows year-on-year comparison of amount of sales by product. Sales were up JPY 70.8 billion year-on-year. Major component sales increased JPY 30.9 billion in absolute terms. Plant and system sales also continued to be favorable and increased JPY 39.9 billion.

Sales of Power Supply and Facility Systems, Power Generation and IT Solutions increased. Quarterly sales trend of major components is indicated. Orders decreased in the third quarter. However, partly due to high level of order backlog, sales of major components exceeded JPY 100 billion. We expect trend will be the same in the fourth quarter. Due to sufficient order backlog, we don't have major concerns for this fiscal year, the fiscal year 2022.

Page 13 shows consolidated balance sheet. Comparison is made between the end of December and the end of March or the end of the last fiscal year. Collection progressed smoothly for notes and account receivables, trade receivables accumulated at the end of March.

As a result, notes and account receivables, trade receivables decreased JPY 28.5 billion. Inventories increased due to increase in sales of components. Besides, we are building up inventories for plant and system sales towards February and March. As a result, inventories increased approximately JPY 40 billion.

Tangible fixed assets increased JPY 33 billion, mainly due to investment to increase production of Power Semiconductor. Investments and other assets in long-term assets decreased JPY 18.2 billion, mainly due to planned sales of cross-shareholdings.

Consequently, total assets stood at JPY 1,149.2 billion, up JPY 32.1 billion. Interest-bearing debt decreased JPY 3.5 billion. Also due to increase in cash, net interest-bearing debt decreased JPY 8.8 billion to slightly more than JPY 100 billion. Net D/E ratio was 0.2x. Equity ratio was 42.1%.

Page 15 shows full year forecast in comparison with the last fiscal year. We have kept unchanged the previous full year forecast. No changes to forecast of net sales, operating income, ordinary income and net income attributable to owners of parent.

Sales and income will increase year-on-year. We aim at record high income. Forecast by segment is shown on the bottom. Sales and income are expected to increase in all the segments year-on-year. Of course, our internal targets are higher than disclosed forecast. To achieve medium-term management plan of JPY 1 trillion in net sales, if possible, we are making efforts in each department. We want to exceed operating income and net income forecast even if only slightly.

As I mentioned earlier, full year forecast include extraordinary factors due to situation of customers in Indonesia and Thailand, JPY 1 billion and several hundred million yen of allowance for doubtful accounts is included.

Vending Machine customers in China were heavily impacted by COVID-19. We expect doubtful accounts will be JPY 2 billion and several hundred million, and allowance is included in the plan.

As for inventories for the first time in about 10 years, we reduced the value of inventories using lower of cost or market method by several hundred million yen.

For the full year, there are risks and upside potential. I think the biggest risk is falling exchange. For reference, net sales decreased slightly more than JPY 1 billion at yesterday's exchange rate.

Impact on operating income is different depending on currency, U.S. dollar, renminbi or Euro. In total, impact on operating income is 0 and yesterday's exchange rate.

As for forecast by segment, I personally feel forecast for Power Electronics Industry are slightly bullish. As for outside factors, I always mention exchange rate and expenses. However, as the yen is slightly getting stronger this time, exchange rate is a negative factor, as I explained.

As for expenses, I think we can probably reduce expenses by JPY 1 billion and several hundred million yen. If possible, we want to achieve medium-term plan, a JPY 1 trillion in net sales and operating margin of 8% or higher ahead of the plan. We already achieved operating margin target in the previous fiscal year. We also want to aim at 8.5% or higher in operating margin in this fiscal year.

Reference is shown on Page 17. Quarter-on-quarter and year-on-year comparison for the third quarter and year-on-year comparison for the 9-month amount of orders received are indicated for ED&C Components, Low-voltage Inverters, Semiconductor and Vending Machines.

As I mentioned earlier, demand will be positive in the fourth quarter, although I'm not sure about ED&C components.

That concludes my presentation.

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