NEC Corp

TSE:6701

Earnings Call Transcript 2018-Q4

[Takashi Niino, executive]

I am the President and CEO, Takashi Niino. Thank you very much for gathering late in the afternoon.

Let me start the presentation. Today's topics are listed on Page 2. Firstly, I will explain the actuals of FY March 2018, followed by financial forecasts for FY March 2019. Lastly, I will walk you through the progress on Mid-term Management Plan 2020 announced in January this year.

The financial results for FY March 2018. Page 4 shows the summary of our financial results for FY March 2018. Revenue increased by year-on-year due to a rise in Public business and Others, although Telecom Carrier and System Platform businesses decreased. Operating profit was up by JPY 22 billion year-on-year due to an improvement in Public and Others businesses.

Net profit rose by JPY 18.6 billion year-on-year against the backdrop of improvement of income before income taxes. Year-end dividend was finalized as JPY 60 per share to date as stated at the beginning of the term.

Page 5, please. FY March 2018 results were as follows: Revenue JPY 2,844.4 billion; operating profit, JPY 63.9 billion; income before income taxes JPY 86.9 billion; and net profit, JPY 45.9 billion. Free cash flows amounted to JPY 115.8 billion, an increase of JPY 16.8 billion year-on-year. Revenue, operating profit, net profit and free cash flow outperformed the plan announced on January 30.

Page 6 shows the results by segment. Regarding the variance from the previous forecast, although the Public business underachieved by JPY 15.9 billion due to the delay of a satellite launch, thanks to the improvement in Telecom Carrier business, in particular, the total revenue surpassed the forecast by JPY 14.4 billion. Operating profit wise, Telecom Carrier undershot by JPY 11 billion, but due to the improvement in adjustment in Others the total outperformed by JPY 3.9 billion. Let's go through each segment.

Page 7 is on Public business. Despite the negative impact of JPY 25 billion pertaining to the suspension from contract bidding processes, the consolidation of Japan Aviation Electronics Industry contributed to our revenue, which ended at JPY 939.1 billion, up 22.6%. Operating profit improved by JPY 21.3 billion, resulting in JPY 54.4 billion, thanks to the increase in sales, the enhancement of Space business profitability and a decrease in provision for contingent loss recorded in FY March 2017. Consolidation of JAE boosted, on a year-on-year basis, the revenue and operating profit by JPY 200 billion and JPY 16 billion, respectively.

Page 8 is on Enterprise business. Revenue was flat year-on-year, recording JPY 408.7 billion. The financial institution sales increased, but it was offset by a decline in manufacturing, retail and services industries.

Operating profit was down by JPY 4 billion due to an increase in IoT-related investment expenses, resulting in JPY 35.7 billion.

Page 9, Telecom Carrier business. Although overseas comps increased due to a decrease in mobile backhaul and submarine cable systems, revenue fell. Domestic capital investment by Telecom Carriers was sluggish, which also negatively impacted our revenue. All-in-all, therefore, revenue was down by 3.4% recording JPY 579.7 billion.

In addition to our revenue decrease, we incurred business structure improvement expenses for international operations. Thus, the operating profit was down JPY 16 billion, resulting in JPY 2 billion.

Page 10, System Platform business. Due to our decline in maintenance services, revenue dropped by 0.8%, recording JPY 714.3 billion. Although sales dipped due to the cost efficiency measures taken, operating profit was up by JPY 1.8 billion, posting JPY 31.4 billion.

Page 11, Others. International Safety/Energy businesses increased, pushing up revenue by 19.2%, ending at JPY 202.6 billion. Although IoT platform-related investment expenses were up due to the improvement in the International/Energy businesses, operating profit improved by JPY 8.1 billion, recording a loss of JPY 11.9 billion.

Page 12, net profit/loss changes. Financial income/cost and Others deteriorated by JPY 3.1 billion and JPY 0.3 billion, respectively. However, operating profit improved by JPY 22 billion. Thus, net income was up by JPY 18.6 billion year-on-year, landing at JPY 45.9 billion.

Next, forecasts for FY March 2019. Page 14, please.

System Platform and Telecom Carrier businesses are expected to decrease. But due to an increase in Others business, revenue is forecasted to be flat year-on-year at JPY 2,830 billion.

Operating profits outlook is JPY 50 billion. This number incorporates JPY 40 billion onetime business structure improvement expenses and investment for future growth.

Net profit is set at JPY 25 billion. Factoring in the business structure improvement expenses, free cash flow is forecasted to be down by JPY 75.8 billion at JPY 40 billion. Net profit is expected to decline year-on-year. So although it is quite regretful, we plan to decrease our full year dividend and set it at JPY 40 per share.

Page 15 is on special items that either positively or negatively impacted our operating profit year-on-year.

JPY 10 billion business structure improvement cost was posted in FY March 2018, but this is no longer required for March 2019 fiscal year, for the more structural improvement should bring us a positive impact of JPY 10 billion this fiscal year. On top of this, the negative impact from suspension from contract bidding processes should fade away, thus pushing net profit by yet another JPY 6.1 billion. Aggregated, upward impact is, therefore, is deemed to be JPY 26.1 billion. On the other hand, FY March 2019 incorporates the growth investment of JPY 10 billion and onetime structure improvement cost of JPY 40 billion as negative factors. Since we did not transfer the stocks of NEC Energy Devices in FY March 2018, this has also been factored in as one-off item in FY March 2019.

Now let's move on to the explanation by segment.

[Unknown Executive]

Page 16, Public business. Revenue is projected to increase year-on-year due to business expansion for the 2020 Olympic/Paralympic Games, offsetting the decline in sales from consolidated subsidiary. Operating profit is projected to improve due to the business structure improvement in the previous fiscal year and the control of unprofitable projects.

Page 17, Enterprise business. Revenue is projected to increase in retail and services. Operating profit is projected to go down due to an increase in AI and IoT-related investment expenses, while profitability in system construction services is expected to improve.

Page 18, Telecom Carrier business. Revenue is projected to go down due to sluggish capital investment by Telecommunications Carriers in Japan, despite an increase in international software business.

Operating profit is projected to go up due to business structure improvement carried out in the previous fiscal year.

Page 19, System Platform. Revenue is projected to decrease due to a decline in large-scale projects compared to the previous fiscal year. Operating profit is projected to go down due to a decline in sales.

Page 20, Others. Revenue is projected to increase year-on-year due to an increase in the International Safety business. Operating profit is expected to turn positive, thanks to the improvement in the Energy business and the International business, as well as the sale of stocks in NEC Energy Devices.

Page 21 shows changes in net profit. The net profit is projected to go down by JPY 20.9 billion year-on-year to reach JPY 25 billion due to the decline in operating profit, as well as the deterioration in financial income cost by decreasing gain on sale of stocks.

Lastly, I'd like to share with you the progress on Medium-term Management Plan 2020.

Page 23, how we are improving profit structure. To improve profitability from March 2020 onwards, we are promoting several initiatives this year in March 2019. One of them is downsizing by 3,000 people. At the moment, we are making proposals to the labor union in order to realize this within this fiscal year. JPY 30 billion of related expenses is included in the forecast. In addition, we have other business improvement expenses such as for resource shift, floor optimization and end of production at the plants, totaling JPY 40 billion for March 2019.

With this, we will reduce SGA and the secure funds for future investment and achieved 5% margin in this medium-term period, which is the minimum margin for us to compete on a global basis.

Page 24 shows Telecom Carrier business' current status and future directions. As for March 2018 results, as for the Japanese business, the business remained profitable, while margin declined due to sales decline. On the other hand, for the International business, the business remained unprofitable due to the low profitability in hardware, including mobile backhaul, and an investment in software carried out for sales expansion as well as structural improvement expenses. In view of this situation, we have carried out an organizational change effective on April 1 this year.

As for the Japanese business, we will maximize sales in multiple business areas, including service provider, manufacturer, retail and service and the local government businesses.

Optimize the workforce vis-à-vis the size of business under newly launched Network Services business unit. Internationally, we will optimize business portfolio and execute structural reforms under global business units to build profitable structure and realize growth in software and other areas.

Page 25 shows how we are turning around underperforming businesses. In Mobile Backhaul business, which is still running at losses, we will take actions to turn around the business as soon as possible.

At NEC Energy Solutions, which undertakes large energy storage business, we had losses for March 2017 and March 2018. However, we have a plan to increase sales and profit dramatically for this year, and to reach breakeven in profitability, as the large energy storage market is ramping up in the United States and United Kingdom, enhancing the pipeline.

Page 26 shows initiatives for growth. In Japan, for the next 3 years, we have a few promising business opportunities. As you can see on the slide, the first is Tokyo 2020 Olympic/Paralympic Games, where we have some infrastructure-related business opportunities, such as biometrics, image analytics and two-way radio products, where we have competitive advantages.

Second in Japan is digital government business. We will capitalize on our track record and experiences in My Number projects, develop markets and maximize sales and profits. On the global front, we had an organizational change to build a basis to support future growth. We have consolidated all of the international functions under the newly established business -- global business unit, where under the new manager recruited from outside, we have consolidated and centralized all the authorities and responsibilities. And we will enhance speed, concentrating investments into key growth areas and reduce cost to grow the business going forward.

Page 27 shows how we are building foundation and improving execution capability for growth. First and foremost, business incubation area. Yesterday we have announced the establishment of dotData, Inc. This is to monetize the technology where NEC has strength, specifically the technology that automates data science processing.

We will accelerate the speed of commercialization and profit generation. Also, for organization with capability to carry out initiatives, in order to maximize the potential of the individual capabilities, we launched the NEC Group culture transformation division to bring dramatic changes to NEC's corporate culture. We appointed a professional from outside of NEC to execute HR system and culture reform from a new perspective, which did not exist at NEC before.

Page 28 shows the road map for Medium-Term Management Plan 2020, and our plan for improving OP for the next 3 years. March 2019 should be the first year of the positive growth trend towards March 2021. We will spend JPY 40 billion in business improvement expenses to carry out various initiatives.

With this, March 2020, we should be able to make a major turnaround with benefits of business improvement efforts carried out in the previous years, and we expect an OP of JPY 120 billion. This should enhance the likelihood of achieving the previous -- our medium-term business goals, JPY 150 billion in OP and a 5% in operating margin for March 2021.

Lastly, for your information, we are making changes to our business segments starting in Q1 of year ending in March 2019 to support the organizational change carried out to realize 2020 medium-term targets.

Page 28 shows sales and profits guideline based on the new segmentation.

Given the ongoing changes in markets and the customer behaviors, in order to survive as a sustainable company, NEC must carry out a transformation today.

We will embrace the change in order to regain a stronger NEC without being bound by conventional way of thinking.

With this, I will conclude my remarks. Thank you very much for your kind attention.