Tomita [ph] – IR
Makoto Kubo – Corporate EVP
Toshiba Corporation (TOSBF.PK) F1Q 2011 Earnings Call July 28, 2011 8:00 AM ET
Ladies and gentlemen, we would like now present the first quarter consolidated business results for fiscal year 2011. Thank you very much for joining us today. First, I would introduce the participants from Toshiba. Makoto Kubo, Corporate Executive Vice President; Yasuhiro Matsunaka [ph], Group Manager of Accounting Group; Kohei Hayashi [ph], IR Group Manager. And I am Tomita from IR Group. I’d like to act as a MC. First I would ask Mr. Kubo to present the business results.
Thank you. I would like to now present the first quarter consolidated business results of FY 2011. This is the first time that I make this presentation after succeeding Mr. Muraoka. First of all, I would like to let you know that in order to save energy during the summer, I am wearing called so called Cobis [ph], a tire, that means that I am not wearing a tire. So let me start with the key points of FY2011 first quarter.
Net sales decreased because of the strong yen, and also because of the impact of the Great East Japan earthquake. Net sales declined by 125.3 billion yen year-on-year. The negative impact of the strong yen was 81 billion yen of sales. Negative impact of the earthquake was 90 billion yen on sales. Operating income decreased due to strong yen and due to the effects of the earthquake, but the operating income remained in surplus. As for the net income, it was about the same level as a year earlier.
The negative impact of the earthquake on the operating income was 25 billion yen. As for the impact of the strong yen, for the full-year, we believe it will be neutral in dollar terms. In other words, there is virtually no impact but for the first quarter, the negative impact of the foreign exchange was 7 billion yen. D/E ratio improved 19% to 137%. Interest-bearing debt was about the same level as the year before.
Page four shows the overall first quarter results comparing the first quarter 2011 with the first quarter of 2010. Page five is the segment information. As you can see, the net sales of Home Appliances increased by about 8%, however other three segments declined. Social Infrastructure sales declined slightly. As for the Digital Products and Electronic Devices, net sales declined more than 60 billion yen. Operating income of Home Appliances increased. However in other segments – well the Social Infrastructure is the negative figure but I would say that this was very slight decline so almost flat. As for the Digital Products, the decline was 10.6 billion yen and profit was zero and Electronic Devices declined by 22.7 billion yen to 4.3 billion yen.
Page six shows the first quarter results comparing the three years, and I would explain the details of each segment later. Page seven is the analysis of the operating income and loss. In our case, usually we have a low profit in at the first quarter. There is a big difference between the first half and the second half of the year, especially in the fourth quarter, we usually have highest profit. So this has been the trend which still continues. And despite this, in the first quarter of FY2011 we had record high operating income of 33.8 billion yen.
As you can see, there was a price erosion and structural change which pushed down the operating income by 230 billion yen. And there was a value analysis cost reduction factor which pushed up the operating income and including the advanced process technology we increased that volume. And those three factors including the fixed cost reduction accounted for more than 230 billion yen which offset the price erosion and a structural change but due to the earthquake impact in the currency exchange, the operating income was pushed down.
I already touched upon the overall impact of the earthquake. There are three major factors as we see on this slide. First is the impact of component shortages on production which was 13 billion yen on net sales and 4 billion yen on operating income. Initially, there was a confusion in supply chain and we expected bigger impact. However, we utilized the inventories to continue the production or we used alternative components. The major impact was felt due to the shortage of the semiconductors in HDD as well as the System LSI which had difficulty of procuring special materials and production was stopped.
The second factor was the production halt due to the damaged manufacturing facilities. As we explained already, one was the System LSE example in Iwate Toshiba Electronics and also the Discrete Operation Toshiba components mainly the backend side. And in LCD, the Toshiba Mobile Display or TMD in Fukaya. However, the recovery of those operations were faster than what we expected. Already all of those operations have recovered to their pre-earthquake level.
So the biggest impact was the loss of sales to customers impacted by the earthquake, for example, car manufacturers. So because of this, our sales to those customers were reduced or postponed to the second quarter and onwards. This was 60 billion yen on net sales and 15 billion yen on operating income. Among our business segments, the Social Infrastructure segment suffered the most. Now let's look at each segment starting with the Digital Products. As I mentioned, the sales declined by 60 billion yen year-on-year. Reasons included the strong yen, sluggish LCD TV and PC performances in Europe and the United States and the end of Japan’s eco-point program as well as the optical disk drive business which declined in sales. Lower sales in LCD TVs and optical disk pushed down the operating income.
Moving to PC business, sales declined by 18%. Japan business was strong, however in western countries especially Europe, the performance was poor and there was an impact of strong yen. Operating income increased because of the healthy performance in Japan and also because of the effect of cost reduction measures. Now Electronic Devices, I’d like to talk about semiconductors and LCDs separately. The sales of the semiconductor declined by 49.1 billion yen. NAND flash memory demand was firm. However it was affected by the strong yen.
In addition to this, in the first quarter, while there was a major earthquake on the 11th of March and also aftershocks which affected the Chubu area. And because of this, memory production in Yokkaichi was lower than our plan. As for System LSI, as I said there was an impact of the earthquake on the manufacturing subsidiary, also our customers including car manufacturers were damaged by the earthquake. And there was a shortage of special materials for System LSI which affected the production of the System LSI.
NAND Flash memories secured profit. However, because of the strong yen, it was down year-on-year, and System LSI operation was affected by the earthquake and overall operating income ended at 1.6 billion yen. Page 13 shows the business results breakdown including Discrete, System LSI, and Memory. Page 14 shows the quarterly operating income trend in the past two years.
Moving onto LCD business, sales were down significantly. The major reason for this is the sale of PC display manufacturing subsidiary in Singapore last year. And also there was an impact of the earthquake in our operation in Fukaya. As for the operating income, it was higher. This was mainly because of the good performance in the display used in the mobile devices especially the smartphones and there was a result of the cost reductions. Social Infrastructure sales were down and profit were down slightly. The Thermal and Hydro Power systems, Transportation Systems continued to be strong, Medical Systems business was flat, but overall, sales were slightly down due to the strong yen.
The Power System business was strong and the Medical System profit increased. However due to the yen’s appreciation, the operating income was down. Turning to Home Appliances, we saw strong performance in White Goods especially the Home Air-Conditioners and also for the power saving purposes, LED Lighting sold well as well as the Industrial Air-Conditioning. And because of those higher sales, we turned profitable.
Page 18 shows the non-operating income and expenses. We saw improvements in income on sales of the fixed assets as well as foreign exchange loss. As for the income tax and others, last year there was a loss from the discontinued operations which we did not have in this first quarter so that was an improvement. Turning to cash flows. Free cash flow was minus 93.1 billion yen. The cash flow from operating activities was minus 11.8 billion yen. This might sound like an excuse, but there was some special factors which accounted for about 45 billion yen.
One of that is in relation to the earthquake. We have been doing our best for the restoration as a Toshiba Group. So we have been taking our measures for this purpose. So due to this, the inventories were slightly up. This accounted for a little more than 30 billion yen. Another factor is not directly related to the earthquake but the payment from the customers. Sometimes it was postponed to the second quarter, however we needed to pay the vendors in the first quarter, so it was a temporary timing delay and this accounted for about 10 billion yen.
So those special factors will be resolved in the second quarter. Having said that, the cash flow from investing activities increased. And this is for the strategic investment for the future, for example in the Medical segment, we acquired Vital Images in United States and made the capital investments in Yokkaichi. So throughout the second quarter, we will make sure to generate profits as well as to improve the efficiency of the assets so that we can improve the free cash flow.
Next is consolidated balance sheet. On the assets side, inventories and others increased. Under others, assets increased because of the acquisitions as well as the strategic investments in Yokkaichi. Looking at the total equity, the equity attributable to shareholders of the company vis-à-vis the total assets was down by 0.4% from the beginning of the year, but it has improved by 1.7% year-on-year. D/E ratio has improved to 137%. The interest-bearing debt level was same as the previous year and the equity increased.
Finally I would like to talk about the forecast for FY2011. We made no changes to the forecast that we announced on the 9th of May for the overall targets as well as the segment targets. I am not sure whether we explained that in May but as you see forecast for net sales is 7,000 billion yen and operating income 300 billion yen. Assumption for the first quarter was 1,350 billion yen for the net sales and zero for operating income. Sales was lower than that assumption by 23.9 billion yen, but the operating income was actually 4.1 billion yen. So basically we believe that we are inline with those targets. As for net income, our assumption was minus 15 billion yen. And as I said, for the full-year forecast, we made no changes from the May 9th forecasted for each segment.
That concludes my presentation. Thank you for your attention.