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Executives

Hideo Ito - Former Chairman and Chief Executive Officer

Makoto Kubo - Corporate Senior Executive Vice President and Director

Toshiba (OTCPK:TOSBF) Q3 2013 Earnings Call January 30, 2014 ET

Hideo Ito

It is now time to start the announcement of fiscal 2013 first 9 months and third quarter consolidated business results. Thank you very much for coming despite your busy schedule and rain outside.

I'd like to first introduce the participants. Makoto Kubo, Representative Executive Officer and Corporate Senior Executive Vice President; Accounting Manager, Naohiro Tomura; and from PR and IR, Kohei Hayashi.

I'll be serving as emcee. I'm also from PR and IR. My name is Ito. First, the presentation by Makoto Kubo.

Makoto Kubo

Good evening. I'd like to announce the fiscal 2013 first 9 months and third quarter consolidated business results. On Page 3 of the handout, you can see the key points of the first 9 months. Net sales were JPY 4,588.8 billion. On a year-on-year basis, 13.5% increase or JPY 545.8 billion. All 5 main segments saw higher net sales than in the year-earlier period.

Electronic Devices & Components recorded considerably higher sales on continuing higher sales of Memories. Energy & Infrastructure sales increased on a healthy performance by Social Systems, including Photovoltaic Power Systems. Community Solutions also saw a sales increase on good performance by the Elevator business and Toshiba TEC. Healthcare Systems & Services and Lifestyle Products & Services also saw higher sales.

Overall operating income increased by JPY 55 billion year-on-year, which is the highest ever since we introduced the quarterly accounting system. Operating income totaled JPY 153.3 billion, the highest ever for a 9-month period. Income before income taxes and noncontrolling interest totaled JPY 91 billion, reflecting a various onetime accounting treatment, the same as in the previous year.

Net income was JPY 38.7 billion, with increase in tax payments. This was better than the forecast announced at the end of October.

In terms of operating income, Electronic Devices & Components recorded its highest ever operating income in this 9-month period and in the third quarter, recorded an even higher level of profit margin than in the first half.

Community Solutions and Healthcare Systems & Services also reported higher operating income. Energy & Infrastructure saw lower operating income than in the same period a year earlier due to stabilization of demand for thermal power equipment that increased sharply after the 2011 earthquake in Japan. The thermal power equipment did record a profit, but it decreased because of the decline in the demand for higher profit margin products.

During the first half, the overseas nuclear power business had to be revised because of the devaluation reflecting the falling uranium prices, and also due to the costs associated with the decontamination work at the fuel plant which has been shut down.

There also were increase in expenses and costs in relation to the stricter regulations by the regulatory authorities, including the quality standards. We revisited the expected costs for the future for the new construction project, which were reflected and resulted in lower profit.

In the Lifestyle Products & Services, much higher third quarter operating income was achieved than in the second quarter.

As for PC business, restructuring efforts are continuing. But in Japan, DRAM and other prices increased. And with the depreciation of the Japanese yen, selling prices were revisited and there were some expenses associated with the inventory in Europe.

During the third quarter, there was some slight loss during this period. These are the key points for the operating income. On Pages 4 and 5, you can see the specifics of the figures that I just explained.

On Page 6, you can see the net sales, operating income and loss and net income and loss for the last 3 years.

Page 7. You can see the operating income and loss analysis. JPY 98.3 billion in fiscal 2012 and JPY 153.3 billion in fiscal 2013. During this 9-month period, currency exchange had an impact of JPY 53.5 billion. On a 9-month cumulative basis, the exchange rates were, in fiscal 2012, JPY 80 to the $1; and in fiscal 2013, JPY 99 to the U.S. dollar. Euro, JPY 102 to the euro, up to JPY 131 to the euro.

The breakdown by segments are explained from Page 8 onward. In Energy & Infrastructure, net sales increased by JPY 77.9 billion or 7%. Sales continue to rise, largely due to increased sales in the Renewable Energy business, including Solar Photovoltaic Power Systems; and in the Social Infrastructure Systems business, including Railroad Systems, Automotive Systems and Industrial Equipment.

As for the Nuclear Power Systems in Japan, we believe that we have hit the bottom. But overall, we saw increase in net sales.

As for operating income. In Social Infrastructure Systems, operating income continued to increase on good performance by Solar Voltaic Power Systems. But as was explained earlier, Thermal Power Systems saw lower operating income, but secured high profitability. This lower operating income is due to a decline in high profit margin systems.

And as for overseas Nuclear Power Systems, with the falling uranium prices, devaluation took place and there were some expenses related to the decontamination work of the plant that's been shut down. Also, there were some expenses in relation to the stricter regulations, which resulted in the review of the estimated cost of new construction projects. This resulted in lower operating income.

Main projects implemented in the third quarter in Energy Infrastructure are shown on Page 9. Top half shows the strategies, and the lower half show some of the main orders received. In India, we completed the acquisition of T&D business from Vijai Electricals Ltd. And as was recently announced, we agreed to acquire a 60% holding in NuGeneration Limited, which is a U.K.-based nuclear company as a first step towards the construction of 3 units of AP1000.

In terms of orders received during the third quarter, we have smart meters for CPS Energy in U.S.; and as a continued orders, motor inverters for the Ford Motor Company in the U.S.; as well as railway systems for major Bangkok rail construction project in Thailand; and also a continued deal, electrical systems for locomotives in China, among many others. Through these developments, in terms of order backlog in the Energy & Infrastructure Group, we see a steady increase. Compared to a year earlier, order backlog increased by 8% to total JPY 3.25 trillion.

In Community Solutions, net sales increased by JPY 132.2 billion or 17%. Segment sales increased. Disaster Prevention solutions, Elevator & Building Systems and industrial air-conditioners, maintained solid growth.

Toshiba TEC recorded higher sales, mainly in the POS business due to the acquisition of IBM's Retail Store Solutions business, which resulted in increase in MFPs.

Operating income increased mainly on Elevator business and Commercial Air-conditioner business on business expansion of emerging markets, along with increased operating income recorded by Toshiba TEC.

Main projects implemented in the third quarter in Community Solutions include the acquisition of stake in UEM India Pvt. Limited, a water treatment engineering company so as to start the water treatment business following that in Indonesia, and you can see the rest.

Healthcare Systems & Services. Net sales increased by JPY 13.9 billion or 5%. Sales rose on increase of equipment sales, especially computerized tomography systems in emerging markets such as Turkey. Higher sales were also the result of a solid performance in the service sector, following an increase in unit installations. Operating income increased mainly coming from the service sector and equipment sales in emerging markets.

Main projects implemented in the third quarter in Healthcare Systems & Services. So as to expand from conventional diagnostics business to the periphery equipment, on October 1, we established Healthcare Business Development Division to enhance and strengthen this part of the business. We also started operation of Research Development Center in Dalian, China to prepare for the expected expansion in emerging countries.

Electronic Devices & Components. Net sales increased by JPY 351.3 billion or 37%. Sales increased as the Memory business continued to record solid sales. And in addition, the Storage Products business saw growth mainly in 3.5-inch HDDs. Operating income increased by a whopping JPY 113.3 billion. During the third quarter, the supply and demand in the market softened somewhat and therefore, compared to the second quarter, Memory shipments declined somewhat.

In addition, the selling price level declined in accordance with the development in the market. So second -- compared to the second quarter, NAND memory sales dropped by about 10%. However, this decline was more than absorbed by the cost reduction efforts. In terms of the profit margin, we were able to maintain better margin than in the first half. On a segment basis, we were able to achieve the best-ever operating income.

The main projects implemented in the third quarter include the acquisition of OCZ Technology Group's SSD business assets to enhance and strengthen our SSD business, and there are new products and new orders as you can see on Page 16.

Page 17 shows the breakdown of the Semiconductor & Storage Products business results.

On Page 18, you can see the quarterly trend in operating income for the Semiconductor & Storage Products business. We've been saying that the business are doing well. But as you can see, compared to the second quarter, the income in the third quarter declined by about JPY 11 billion. And as I said earlier, the sales of NAND flash memory fell by about 10% in the second -- compared to the second quarter. The operating margin is about the same, and that is reflected in this decline.

And in fiscal 2012, we made NuFlare Technology as the subsidiary, and the sales from this operation expected for the third quarter shifted to the fourth quarter. And therefore, during the third quarter, almost no sales were recorded. That also is a factor here.

Lifestyle Products & Services, TVs, PCs and home appliances. On a 9-month cumulative basis, the operating loss totaled JPY 41.4 billion. As you can see at the very bottom, during the first quarter, the operating loss totaled JPY 25.7 billion. Although it's not sufficient, in the second quarter, we were able to reduce by more than 50% to JPY 11 billion. And in the third quarter, we promised to return to profitability. I have to apologize that we did not achieve that because of the loss in PC business, which is reflected in this JPY 4.7 billion loss as was mentioned at the very bottom or very outset.

As for TVs and PCs, we were able to turn to profitability in the third quarter. Although it's not sizable. As for TV, no losses. And for White Goods, slight profitability.

As I said, JPY 4.7 billion is a loss in relation to PC business. We are seeing structural reform progressing for PC business in the Japanese market. DRAM and other components' prices increased and, with the depreciation of the yen, we are taking some time in the revision of the selling prices. And also, during the third quarter, we recorded some expenses in relation to the inventories in Europe. We plan to make an improvement on this during the fourth quarter.

Nonoperating income and losses and expenses, as was mentioned at the very outset, we saw increase in cost compared to the same period a year earlier. Especially in terms of income or loss on sales of fixed assets during fiscal 2012, we saw income, but we did not see an income during fiscal 2013. And you can see a large increase in others.

As we explained when we announced the first half results, we sold the semiconductor subsidiary in Malaysia and we saw some of the impact of the past profit in terms of the foreign currency adjustment. And there also were some expenses in relation to the provision on some of the litigations. As has been reported by media and others in Europe, there is a litigation regarding the gas insulated switchgear for the power transmission system. We have been accused of cartel. We continue to contest this allegation. There also was provision in relation to what happened during the first half, which has already been announced. There was an inappropriate accounting treatment by a subsidiary of -- our subsidiary in the area of Medical Systems.

Income tax and others, there was an increase in tax expenses.

On Page 22, you can see cash flows. Compared to fiscal years 2011 and 2012, there has been an improvement. Still in terms of cash flow from operating activities, it's not sufficient, resulting in net outflow of JPY 121.3 billion. This may sound like an excuse, but during the first half, the free cash flow resulted in net outflow of JPY 146.7 billion. During the third quarter, we recorded a net inflow of JPY 25.4 billion, meaning, a steady improvement. And in addition, by the first half or by fiscal 2012 for semiconductors, PCs and TVs, we did not have sufficient inventory management, resulting in deficit in operating capital. But this is turning into profitability and yet, we have yet to achieve sufficient amount of net cash flow.

For the third quarter, we saw an inflow. And as has been mentioned since last fiscal year, we are seeing a concentration of payment from the power utilities in Japan to the fourth quarter. We've been trying hard to expedite the acceptance so as to have the payment made earlier. But in reality, unlike in the past, we are barely seeing an advance payment. And therefore, we are seeing a concentration of the acceptance in the fourth quarter. Acceptance means payment made. But this being the case, we are not seeing the payment on a steady manner until the third quarter. We will be making similar efforts as we made in the last fiscal year and therefore, we expect a large increase in the fourth quarter so that, in terms of free cash flow, we should be expecting a plus of JPY 100 billion on a full year basis.

On Page 23, you can see consolidated balance sheet; and Page 24, total equity.

I'd like to draw your attention on the accumulated other comprehensive losses. As was explained at the last meeting, with the depreciation of the yen, we are seeing a large improvement in comprehensive income. And therefore, the equity attributable to shareholders of the company to the total assets improved by 3.3% to 18.9%.

Debt-to-equity ratio is improving, reflecting the net inflow in free cash flow in the third quarter. Although the interest-bearing debt hasn't changed much, we are seeing an improvement, 128%, although we are not happy with this figure.

Until the last meeting, we have been talking about the continued negotiation on the sale of equity in Westinghouse that we bought from Shaw Group. We are still continuing with the negotiation, and it's unlikely that we are going to see the payment made by the end of this fiscal year. Even excluding that, we expect an improvement in equity attributable to shareholders of the company much larger than originally anticipated. We are also seeing an improvement in the pension obligation adjustment. In light of these factors, we believe that the debt-to-equity ratio can be lowered to 100%.

Pages 26 and 27 show the results for the third quarter overall. On Pages 28 and 29, forecast for fiscal 2013, including the forecast by segment. No changes have been made from the forecast announced in October 30 and therefore, we are expecting the full year net sales to be JPY 6.3 trillion; operating income, JPY 290 billion; and net income, JPY 100 billion. Having said that, in terms of net sales, we are actually expecting larger figure than what's shown here.

As for operating income and loss, we have not made any revisions. When we announced the forecast by segment back in October and talked about JPY 290 billion, we talked about overall buffer of JPY 50 billion or so as shown at the very bottom of Page 29.

Of that JPY 50 billion operating income, JPY 30 billion or so have been accounted for. One is in the area of Energy & Infrastructure centering on nuclear, at home and abroad. And also, because of the Lifestyle Products & Services, we promised that the loss will be eliminated in the second half. But during the third quarter, Lifestyle and Products & Services recorded a loss of about $5 billion. These 2 are the major factors of JPY 30 billion out of JPY 50 billion, which means there are JPY 20 billion or so still remaining.

In Electronic Devices & Components, we did not change the forecasted operating income of JPY 210 billion on a full year basis, which would mean that, for the fourth quarter, we are expecting an operating income of JPY 41.4 billion in this segment. But looking at the results for the second quarter and the third quarter, we expect the actual operating profit from the segment to be about JPY 10 billion more than that figure.

And in the meantime, in Energy & Infrastructure, we are expecting a concentrated payment to be made. And therefore, we believe that the JPY 290 billion would be a minimum amount for the operating income, and we should be able to benefit from this JPY 20 billion buffer, which will not be used.

That concludes my presentation. Thank you for your attention.

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