Toshiba Corp. (OTCPK:TOSBF) F3Q10 (Qtr End 12/31/2010) Earnings Call January 31, 2010 8:00 AM ET
Unidentified Company Representative
We now begin the announcement of the consolidated business results for fiscal 2010 first nine months and the third quarter. Participants are Fumio Muraoka, Corporate Senior Executive Vice President; (Yasuhiro Matsunaga), Accounting Group Manager; and I am (Kohei Hayashi), IR Group Manager, serving (SD&C).
I would now begin the presentation and the consolidated business results for fiscal 2010 first nine months. As I said, when we announced the first six months results, the mobile phone business has been classified as discontinued as a result of merger with Fujitsu's mobile phone business, as of October 1st. So the related figures are now removed.
First, in terms of net sales supported by growth in emerging markets and economic stimulus measures, mainly in Japan; such as eco-point systems, we saw notable increase that overcame the negative impacts from foreign exchange. We also saw higher sales in Semiconductors and in LCD TVs and PCs. Net sales overall increased by 4.7% year-on-year.
Operating income was the best ever for the first nine months period. It was in the third quarter of 2001 that we started to disclose on a quarterly basis and we were already making a year-on-year increase over the third quarter of 2000. Back in 2000, the operating income totaled JPY141.8 billion, we exceeded that and recorded JPY142.3 billion. Operating income was in black in all four segments of Digital Products, Electronic Devices, Social Infrastructure and Home Appliances.
Interest-bearing debts declined significantly on year-on-year basis, totaling JPY1,187.2 billion, a reduction of JPY203.8 billion year-on-year with generation of cash flow. As a result, debt-to-equity ratio was 153% and year-on-year improvement of 36%.
Page 4, shows the result in figures. The foreign exchange rate during that period was JPY87 to the U.S. dollar, which is JPY7 stronger year-on-year, and as for euro JPY140 to the euro, JPY18 stronger year-on-year. And as a result, the impact on net sales totaled JPY207 billion and the impact on operating income mainly coming from the weaker euro, amounted to JPY40 billion. Still, as you can see, we were able to see increase in both net sales and income.
By segment, Social Infrastructure saw a decline in net sales. Social Infrastructure also saw decrease in operating income, whereas Digital Products and Electronics Devices saw major improvement in net sales; and Electronic Devices and Home Appliances major improvement in operating income and resulted in profit.
Variance analysis on operating income and loss, price erosion and structural change pushed down the income by JPY565 billion. Currency exchange also pushed down the profit by JPY40 billion, but value analysis and cost reduction improved profitability by JPY442 billion and fixed cost reduction also had a positive impact. With the positive impact of volume change, thanks to increase in sales, operating income improved by JPY125.7 billion to a total JPY142.3 billion.
On page 7, you can see the three-year comparison. Net sales remained almost the same, since the Lehman Brothers collapse. Whoever, in terms of operating income and net income, we saw major improvement over the years.
By segment, first starting with Digital Products, net sales improved by 10%. LCD TVs and PC business saw a major growth. Contributing to this growth, especially LCD TV sales in Japan was very good during the third quarter.
As for operating income LCD TVs, PCs, Retail Information Systems and Office Equipment recorded increase, but storage devices that is HDDs and ODDs saw price declines, resulting in a decline in segment operating income by JPY3 billion. As for LCD TVs we saw increase, supported by Japan's eco-point system and growth in emerging markets, resulting in year-on-year increase and profitability was maintained.
As for PC business, net sales grew by 11%. We saw sales increase in U.S., Japan and Asia, which absorbed negative impact of the yen appreciation. We also saw increase in sales in terms of volume as well.
Operating income enjoyed increase, thanks to the continued good sales trend in the first as half, as well as the rationalizing procurement totaling the JPY6.2 billion operating income. In the third quarter the operating income totaled JPY4.8 billion and year-on-year improvement of JPY8.3 billion.
Electronic Devices, I'd like to talk separately for Semiconductor and LCDs. First, Semiconductors net sales improved by 9%. NAND flash memory sales increased, thanks to strong demand for mobile products and SSDs. Discrete also saw healthy performance, resulting in increase in segment sales. As for operating income, again owing to increased sales of NAND flash memory and cost reductions efforts, we saw a major improvement. Losses were recorded in '08 and '09, but we saw a major improvement to see profitability in 2010.
The breakdown for Semiconductor business, Discrete, System LSI and memory all saw improvement in terms of operating income. However, for net sales, System LSI saw a decline of JPY4.6 billion due to decline in sales of leading edge SoC. As for memory, 18% or JPY69 billion improvement in net sales, thanks to improvement in sales and volume of NAND flash memory.
In December of last year, there was power outage at Yokkaichi plant, but no impact, in terms of the third quarter results either in sales or income. As for Semiconductor quarterly trend in the third quarter alone we saw the income totaling JPY11.6 billon, since second quarter of fiscal 2009 profit is recorded for the sixth consecutive quarter.
LCD business, net sales increased by 4%. LCDs for PCs have been discontinued, but we continue to see increase in demand for mobile products, resulting in the 4% increase. As for operating income, thanks to restructuring efforts that restored financial health, added with increased demand and successful cost reduction efforts, we saw the operating income totaling JPY7.3 billion. In the third quarter alone, operating income was JPY3.3 billion and year-on-year improvement of JPY13.1 billion.
Social Infrastructure, we saw a decline in net sales by 4%. Nuclear and Transportation business demonstrated firm performance. But Power Systems, and Industrial Systems and Solutions felt an impact of order decline and a sluggish economy in the previous year, resulting in overall segment sales decline. As for overall operating income, Power and Industrial System saw a declining operating income due to declining sales, but overall we were able to see the operating income totaling JPY6.4 billion.
Home Appliances, net sales increased by 4%, thanks to the continued effect of Japan's eco-point system, resulting in buoyed sales of White Goods and home air-conditioners. Operating income also enjoyed the effect of increased sales in the White Goods and the effect of structural reform, resulting in the operating income of JPY4.1 billion, and improvement year-on-year of JPY12.8 billion.
Non-operating income and loss resulted in the loss of JPY54.3 billion and improvement year-on-year of JPY3.6 billion. This includes the restructuring cost of JPY20 billion over this nine-month period. On year-on-year basis this is JPY5.0 billion less. So this improvement in non-operating income and loss of JPY3.6 billion comes almost entirely from the reduction in restructuring cost.
Income tax and others are shown on Slide 18. Income and loss from continuing operations totaled of JPY88 billion. Income tax amounted to JPY32.6 billion. And income and loss from discounted operations, meaning the mobile phone business, totaled JPY7.6 billion. And after removing the income and loss attributable to non-controlling interest of JPY7.6 billion, net income totaled JPY14.2 billion. And year-on-year improvement of JPY108.5 billion returned from loss to profit.
Free cash flows, positive JPY21.4 billion, cash flow from operating activities resulted in net cash inflow of about JPY172.2 billion. From investing activities, net cash outflow of JPY150.8 billion, year-on-year the cash flow deteriorated by JPY75.5 billion. Especially, the cash flow from operating activities deteriorated by JPY111.6 billion, this is because during fiscal '09 there was reimbursement of corporate income tax because of bad profit and loss during that year. And also compared to '09 and 2010, we saw a decline in advance payment, which resulted in the difference of over JPY111 billion.
The total assets declined by JPY233.4 billion with the reduction in accounts receivables and fixed assets. The interest-bearing debt was reduced by JPY203.8 billion with improved free cash flow. As for total equity, the equity attributable to shareholders of the company declined by JPY21.9 billion.
During this period we made the net income of JPY40.2 billion, but with the payment of dividends and others. Overall, we should have seen the increase by about JPY32 billion, but with the accumulated other comprehensive loss of JPY53.4 billion difference since the end of March, which comes from the deterioration of the foreign exchange translation of JPY63 billion, we see the difference all together.
As for the debt-to-equity ratio, we saw an increase in interest-bearing debt. And in the meantime we saw the equity attributable to shareholders of that company improve and as a result, the debt equity ration improved by 36.253%.
As for the third quarter results, October-December period we again saw increase, both in terms of sales and operating income. Exchange rate was JPY83 to the dollar, JPY7 stronger year-on-year, and JPY130 to the Euro, JPY20 stronger year-on-year. This pushed down net sale by JPY76 billion and operating income was reduced by JPY17.0 billion, as a result. As a result, the growth rate of net sales was reduced, but we were able to see increase in operating income, income from continued operations and net income.
Third quarter results by segments almost are same as for the first nine-month period. Social Infrastructure saw a decline in net sales, the operating income declined in Digital Products and Social Structure, while operating income increased for Electronic Devices in Home Appliances. We saw profit in all four segments of Digital Products, Electronic Devices, Social Infrastructure and Home Appliances during the third quarter.
So far, I have been comparing mainly to the previous year. Also I would like to compare it to the initial forecasts as well. In terms of income, we were able to see the performance, doing better than the original forecast. So we have decided to make an upward division on the full year forecast for income.
As for net sales, there is impact of the stronger yen as well as the discontinuation of the Mobile Phone business. Altogether, we have decided to revise the net sales downward by JPY400 billion. The initial forecast we were expecting the net sales for Mobil Phone business to total JPY113 although for JPY7 trillion overall but that's gong to disappear. And in terms of the impact of the stronger yen we are expecting the decline amounting to JPY140 billion.
On the annual basis, the exchange rent assumption is JPY86 to the U.S. dollar and JPY113 to the euro. Initially, the assumption was JPY90 to the U.S. dollar, so now it's JPY4 stronger, and euro initially JPY120 to the euro, so that's JPY7 stronger. Overall the impact will be JPY140 billion and other impact would total JPY160 billion.
As for income, however, we are now expecting operating income of JPY250 billion. Income and loss from continuing operations, the initial forecast was JPY150 billion. We are now going to increase that by JPY40 billion to JPY190 billion. Net income and loss, JPY70 billion, improvement of JPY30 billion to total JPY100 billion.
As is shown in the remarks, we are not including anticipated results from foreseeable changes on tax rates, because we have yet to see the relevant bills being submitted to the Parliament. So there we expect a temporary negative impact, we are not including those impacts in this forecast.
Let me also talk about the operating income and income loss figures. The figures remain the same at JPY250 billion, but actually we are expecting an increase by JPY20 billion to total JPY270 billion. However, in the initial forecast, the restructuring cost of System LSI of JPY20 billion would now be treated as the impairment loss.
And impairment loss would be included in the operating income, and therefore, while we are expecting the operating income to total JPY270 billion, this will now come down to JPY250 billion. But in the meantime the non-operating income should improve by JPY20 billion. And with the impact of others, we are increasing the income from continuing operations by JPY40 billion and net income by JPY30 billion.
And also, in the area of Semiconductors as will be explained later, while memory business is enjoying good results. We are seeing deterioration in the System LSI business. So overall for Semiconductor business, we were expecting the income of JPY100 billion, but in this revised forecast, operating income as estimated at JPY100 billion and with the impairment amounting to JPY20 billion. We are expecting the operating income of JPY20 billion for the Semiconductor.
Forecast by segments. Net sales on year-over-year basis, we're expecting increase in all segments, but compared to the initial forecast other than Home Appliances, we are expecting a decline in all other areas. Especially for Digital Products, which would be highly impacted by the stronger yen, added with the discontinuation of Mobile Phone business, we are expecting a decline of JPY230 billion. Electronic Device is almost the same, budget decline in sales of about JPY10 billion, and Social Infrastructure JPY240 billion decline.
Operating income for Digital Products, deterioration of JPY10 billion. While TV and PC business are doing well, doing better than the initial forecast. But Hard Disk Drive is now suffering due to declining selling prices as well as volume decline. Altogether, Digital Products would be going down by (JPY10 billion). Still we are expecting the operating income to a total of JPY20 billion.
Electronic Devices, JPY90 billion, same as in the initial forecast. JPY80 billion in Semiconductor, JPY20 billion less than the initial forecast, because of the impairment lost. But we are expecting the LCD improvement of JPY10 billion. So overall, we are expecting the same amount of operating income.
Social Infrastructure, JPY10 billion decline, but we are still expecting the operating income of JPY140 billion, accounting for a lion share of the overall operating income. Home Appliances, we are expecting an improvement by JPY2 billion to JPY5 billion. Overall, we are expecting JPY250 billion operating income.
We have made major improvements from the initial forecast as for operating income. So while the figures remain the same at JPY250 billion, actually we are expecting the operating income to total JPY270 billion.
Thank you for your attention.
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