Yokogawa Electric Corp

TSE:6841

Earnings Call Transcript 2018-Q3

[Junichi Anabuki, executive]

Good afternoon, ladies and gentlemen. This is Junichi Anabuki, Director at Yokogawa. First of all, I'd like to thank you for your precious time for our performance briefing for the third quarter FY '17. Allow me, first, to explain the outline of the third quarter actuals and our forecast for FY 2017.

Please refer to the materials at your hand. Please turn to Page 3. This shows the performance summary. Orders, JPY 293 billion; sales, JPY 294 billion; operating income, JPY 20.5 billion.

For the FX impact, as shown in the far right column, in terms of year-on-year comparison, we had the following impacts respectively: orders, JPY 11 billion; sales, JPY 11.2 billion; operating income, JPY 2.3 billion. Though we had a cheaper yen effect, even if we excluded this FX impact, still we were able to outgrow vis-à-vis the previous year, both in orders and sales.

We had a rather slow start in Q1 in regard to orders and sales. Even in Q2, orders did not fully recover. But finally, moving into the third quarter, both orders and the sales turned for recovery. With the backlogs built up and sales did not grow for some time, but in the third quarter, our sales started to grow rather well. Accordingly, the operating income grew due to the increase in sales. So that has been the initiation for the third quarter. However, and as has been disclosed today separately, we had the allowance for the doubtful account as much as JPY 2.7 billion.

All in all, our operating income became finally JPY 20.5 billion, up JPY 500 million. As for the [ internet ] income for the period, extraordinary profit became JPY 5.7 billion, extraordinary loss was JPY 9.4 billion, including the impairment loss. With those numbers, our net income for the period became JPY 8.7 billion, down JPY 8.4 billion Y-o-Y.

As for the impairment loss, as has been disclosed separately, we had JPY 2.7 billion for KBC's doubtful debt. With that in mind, we revisited the business plan for KBC's group. As a result, we booked JPY 8.9 billion as the impairment loss or extraordinary loss for 2 companies, namely KBC Advanced Technologies and the Industrial Evolution, Inc.

Next, Page 4, quarterly financial results. We had a record high in sales for the third quarters. As shown on the -- in this graph, we had a rather slow start in Q1, but in contrast, we had a somewhat good performance in the third quarter.

Next, ordinary income analysis on Page 5. It grew from JPY 20 billion to JPY 20.5 billion, up JPY 500 million. As shown in this step chart, far right, the gross margin went up due to the increased revenue. This made the biggest contribution to the improved profit for the period.

With an FX impact and the business withdrawals, it shows JPY 4.1 billion, becoming the driver for the profit for the period. The lower growth margin percent and increased SG&A were the major reasons for the down effect in the profit numbers in the first and the second quarter. However, in the third quarter, these 2 factors actually improved almost to the level of the previous year. Gross margin deterioration actually stopped finally in the third quarter. At the same time, we are making the good progress in terms of the cost-reduction efforts since the first quarter in this current fiscal year.

[indiscernible] go to the SG&A. SG&A went up in the second quarter particularly, but in the third quarter, it became more or less stabilized to the level of previous year. But I have to inform that we still have some way to go in order to improve the SG&A as part of the cost-reduction initiatives. So the progress is yet to come, and we are hoping to make a good recovery in the fourth quarter. Allowance for the KBC's doubtful accounts, JPY 2.7 billion, and we had an impact of JPY 700 million due to the business withdrawal and on other items. Other items include the downward impact coming from the other down -- the control business, mainly from aircraft and other. So we have those factors certainly reflected.

Moving on to the Page 6, on nonoperating and extraordinary income and expense. As for the nonoperating P&L, there were no major changes to mention, but extraordinary now have profit and loss. This segment had major changes in the third quarter. KBC group actually had revised its business plan resulting in the impairment of JPY 8.9 billion. So the total number was JPY 9.4 billion in terms of the extraordinary expense. The ordinary profit was JPY 5.7 billion. We had a gain on sales of investment securities, particularly in the third quarter. All in all, the net income was JPY 8.7 billion.

Next, Page 7 shows the situations by segment. Our main and core business control numbers and are almost the same as the total performance. Orders and sales were up due to the weaker yen as well as the recovering in the overseas demands. The measurement segment has seen a recovery in operating income year-on-year.

Next, Page 8 shows trends in global sales. Ratio of sales outside Japan remains almost unchanged from last year at 69.6% for the entire company and 71.6% for the control business. Overseas business and domestic business grew almost at the same pace, leading to a similar overseas sales ratio year-on-year.

Page 9 shows order backlog trend by segment. As of the end of Q3, order backlog for the entire company was JPY 247.9 billion, an increase of JPY 7.1 billion year-on-year from JPY 240.8 billion. The increase is attributable to JPY 4 billion of the overseas control business and a JPY 3.8 billion of the domestic control business. So that was the results.

Sales grew during the third quarter, and we still have adequate order backlog for the fourth quarter onwards. These figures include the impact of foreign exchange rates. So for your reference, Page 10 shows figures without the impact of foreign exchange using FY '17 Q3 rates. Even without the impact of foreign exchange, order backlog is up JPY 2.6 billion year-on-year.

Page 11 shows the balance sheet. Total assets were down JPY 8.6 billion, due mainly to factors such as the decrease in goodwill arising from recognition of the impairment loss. Total liabilities were down JPY 6.2 billion because of the repayment of loans.

Page 12 shows FY '17 forecast. There are some revisions we're announcing today. Orders and sales are JPY 400 billion, unchanged from the beginning of the year on May 10. Operating income down from JPY 36 billion to JPY 33 billion, ordinary income down from JPY 35.5 billion to JPY 34 billion. Profit attributable to owners of parents down from JPY 27 billion to JPY 20 billion. So operating income, ordinary income and net income have been revised down. We are sorry for not meeting your expectations.

Operating income is revised down mainly due to the impact of allowance for doubtful accounts. Net profit is revised down mainly due to the impact of impairment loss recorded this quarter.

For more details, please refer to Page 13, which shows factors accounting for increase and decrease in FY '17 operating income. The bar chart shows changes from the beginning of the year, May 10. Main changes are the inclusion of minus JPY 2.7 billion in allowance for doubtful accounts at KBC and a decrease in SG&A by JPY 300 million due to slower cost-reduction impact. Although, we cannot book the figures for the third quarter, we are steadily making progress in cost reduction and believe we can make a recovery for the fourth quarter.

Page 14 shows revised forecast by segment. Orders are unchanged, sales are also unchanged at JPY 400 billion for the entire company. By segment however, measurement is down JPY 1.5 billion and aviation and other is up JPY 1.5 billion. There was some change we made in the mix. We made the change in consideration of actual performances and -- to the third quarter and outlook for the fourth quarter.

Operating income is revised down by JPY 3 billion for the entire company, reflecting minus JPY 2 billion for the control segment, minus JPY 0.5 billion for the measurement segment and minus JPY 0.5 billion for the aviation and other segment. That's the revision we made in segment breakdown, excluding the special factor related to KBC.

Page 15 shows R&D expenses, depreciation and CapEx. There is not a major deviation from what we were planning.

Page 16 shows dividends. Full year dividend forecast of JPY 30 per share is unchanged from our announcement at the beginning of the year. As a result, due to the downward revision in net income, dividend payout ratio is around 40%.

Page 17 shows KPIs under midterm business plan. They are as shown in the tree diagram. There are some revisions we have made.

With this, I would like to conclude my remarks on the third quarter financial results and full year forecast. Thank you.

[Takashi Nishijima, executive]

This is Nishijima, President and CEO, and thank you indeed for your precious time despite your busy schedule for attending our earnings brief for the third quarter FY 2017. Anabuki has just covered the details of the numbers, including the downward revision. So I would like to cover the progress of our midterm business plan as well as our observations as for the KBC Group's positioning going forward in light of the impairment caused by the allowance and for the doubtful accounts.

That's -- first, I would like to begin with the summary of the current situations. Certain geopolitical risks have become apparent, including the decline in crude oil prices as well as the KBC's impairment. But observing the overall market situations, looking at orders, I believe that we were hitting the bottom in the third quarter. In Q1 and Q2, yes, there are some delays in orders from overseas customers, but I think we have probably hit the bottom and the markets are now on the way to recovery. I hope I'm right, but of course, I simply cannot say that the market has fully recovered with full confidence.

As for the investment side, particularly the upstream CapEx, though the oil pricing has reached the high 60s in the U.S. dollars, projects are not going to be launched immediately. In other words, our customers are still having a somewhat longer perspective. So here, we do not see much change. So the CapEx in the upstream is still tough, but we feel that there are good number of customers who are ready to be active in the OpEx in the downstream side.

As for regions, Japan is relatively firm. And as I said earlier, the overall situation seems to turn for recovery.

Next page shows, as we always show this to you, the trends of the control business by region. Japan, thanks to the productivity initiatives, particularly among the processing industry customers, active investments are underway. Both orders and sales are going rather well.

Next as for Southeast Asian region as well as in China, markets there remain rather strong. Though we had some concern after the end of the Chinese Communist Party Congress, China continued to grow rather strongly. As for the middle-aged, as I said earlier, though the oil pricing has come back a little bit, but the progress in all of the project launch has become kind of flat. So the competition continues to intensify, so there is not much change in this regard.

North America, the number of big projects is shrinking, but the product business actually are growing, thanks to the efforts we're making there. But still, we are faced with the challenges on the project side.

Next KBC Group challenge. How we feel about it? We are quite regrettable since we had this impairment loss in less than 2 years since acquisition. KBC Group is essential to our growth strategy. KBC is our big driver for our growth. With regards to KBC, oil and gas and petrochemical are the main businesses and they have a strong brand perception among some customers in the chemical industry, especially among executives. Whenever I have an opportunity, I always visit them and talk to them, sometimes by myself and other times accompanying members of KBC's sales team. While Yokogawa has always approached those customers as an automation supplier, we have strong relationships with their management teams. For the short-term, we are expecting synergy generated through sharing the customer base, that's what we're working on right now. The lead time, however, for customers' decision making on KBC's business model appears to be longer than we had originally expected. Compared with our products of automation systems, their offering is of a larger scale. That's part of the reason why it's taking a longer time than we had expected. That's what we believe.

In addition, we initially had some concern about KBC as a consultant firm. That may be negatively affected by the acquisition by Yokogawa, who is an automation supplier. Despite our concern, however, many customers see it as a positive development. It seems that C-level executives of customers are keenly aware of the great opportunity that they have to enhance efficiency and productivity by addressing their entire supply chain, including both upstream and downstream as a whole. They also have a strong recognition that the latest digital technology can make a strong impact. In that sense, KBC has strong domain knowledge and insights into the overall mechanism and processes, that's why many customers say they are excited about the opportunity. Although it is taking time, we would like to continue our efforts.

Well, I just talked about the short-term opportunities, another important objective of KBC acquisition is for Yokogawa to learn KBC's business model and use the expertise in order to be able to help customers in broader industries, enhance their management performance and productivity. Right now, Yokogawa members are learning KBC's business model and insights in order to create a new business model to apply it to wider industries. They have already started the initiative. This may take some time, but we will make sure to complete this initiative.

With regards to the future of the KBC Group, we would like to expand the OpEx solutions business going forward because customers are increasingly focused on OpEx, or operating expenses. We will first focus on the neighboring industries, such as chemical and petrochemical industries, to apply KBC's expertise and gradually expand the coverage and the volume of business.

As I said earlier, we are learning and internalizing KBC's business model right now. How we are applying the new expertise in Yokogawa's business is something we are figuring out and trying to incorporate in our midterm business plan, starting in 2018. In the next medium-term business plan, we would like to clarify how Yokogawa will create value using the new business model in industries other than oil and petrochemical.

With that, I would like to conclude my remarks. We feel sorry for the downward revision we have just announced, however, we would appreciate your continued support. Thank you.