Edited Transcript of 6702.T earnings conference call or presentation 30-Jul-20 10:59am GMT

Tokyo Aug 1, 2020 (Thomson StreetEvents) — Edited Transcript of Fujitsu Ltd earnings conference call

Tokyo Aug 1, 2020 (Thomson StreetEvents) — Edited Transcript of Fujitsu Ltd earnings conference call or presentation Thursday, July 30, 2020 at 10:59:00am GMT

First of all, we’d like to thank you for taking the time to participate in today’s briefing on our financial results for the first quarter of fiscal year 2020. To help prevent the spread of COVID-19, today’s event is being held online.

Based on the explanation I provided to you in May, today, I will present our management direction and targets for the fiscal year as we look ahead to achieving our medium-term management targets for fiscal 2022.

Today, I would like to start by discussing how Fujitsu is addressing and thinking about COVID-19. I would like to reiterate that our highest priority remains the safety of the lives of our stakeholders, including customers, partners, employees and their families and everyone in the communities we serve. As we work to prevent the spread of the virus, we are engaged in business continuity activities and we are committed to fulfilling our social responsibilities.

We are presently providing free-of-charge support to local governments and health care institutions in Japan as they address the challenges of COVID-19, as well as free support in areas including education and ways of working. We are simultaneously continuing initiatives to support research, leveraging leading-edge technologies.

The impact of COVID-19 has led to unprecedented and rapid advances in digitization, shifting business and life online, while bringing about major changes to the normal patterns of social life. As data centered primarily on people becomes connected in increasingly complex ways, we view the role that is demanded of Fujitsu as leveraging technology to help create a society that is highly safe and secure as well as convenient. To this end, Fujitsu itself strives to become a reference model for the successful use of technologies in areas like remote work and web conferencing. As we demonstrated with the announcement of our Work Life Shift initiative, we are additionally working to change everything from our human resource policies, the role of our offices and even our very business in accordance with new ways of living and working.

In the software development work we do for our customers as well, we have shifted around 5,000 people, including our partner companies, to remote development work. Amidst the emergence of this new normal, it will become essential to reexamine business with bold new approaches in close partnership with our customers and other stakeholders throughout society. To this end, we have initiated the Reimagine Campaign, which will not only enable our customers to survive but to prosper, focusing on areas that urgently need to be addressed, such as the ways we work, manufacturing and health care. We remain committed to delivering value that is optimized for our new age.

Fujitsu has already been aiming to bring about the realization of a digital society, based on that perspective, and leveraging our insights and accomplishments to date in a variety of different industries. We are confident that we will continue to play a significant role in that journey.

As a technology company operating on a global scale, we have defined Fujitsu’s purpose in the following way: Our purpose is to make the world more sustainable by building trust in society through innovation. All of our business activities are geared towards achieving that purpose.

As we work to achieve that purpose, we recently revised the Fujitsu way for the first time in 12 years, outlining the fundamental principles governing all 52 group employees. The new Fujitsu way, which provides the foundation for independent decisions and actions of employees as they work to achieve our purpose, is comprised of 3 components: our purpose, our values and the code of conduct.

In the Fujitsu Group, the Fujitsu Way serves as our guidepost in determining all of our actions as we work to achieve our purpose. This chart, which is based on data from a research company, shows trends in the global IT market. As a result of COVID-19, we expect IT spending to decline in 2020. While there are still uncertainties, afterwards we expect spending to gradually recover.

Compared to traditional IT, including traditional systems integration work and on-premises systems and system maintenance, spending on digital areas such as digital transformation, modernization and the cloud is expected to trend higher and represents an area in which Fujitsu should focus its efforts.

Fujitsu identifies the digital domain, which encompasses areas of business opportunity for our customers, like digital transformation and modernization as an area For Growth. For Growth represents an area of future expansion, in which we will increase both the scale of our business and our earnings.

Traditional IT, including the maintenance and operation of systems and the provision and maintenance of hardware products, contributes to the stable operation of customer IT platforms and improves quality. We define this business domain as For Stability, and we will raise efficiency and profitability in this area. To the greatest possible extent, we will endeavor to deliver value to customers and society in these 2 business areas.

To achieve our purpose, we are working on 4 priority areas in value creation and 3 priority areas in our internal transformation. I will explain each of these.

The first is rebuilding our global business strategy. We have revised our organization to create a 6-region structure, including Japan, to steadily implement our strategy on a global basis. With the 6-region structure, including Japan, we will expand our global business. Under the new structure, we will have global portfolios, account plans and offerings, while providing services that are optimized for each region.

For the technology supporting these services, we will concentrate our resources in priority areas to establish strengths that differentiate Fujitsu in the market. For example, in the field of computing, the supercomputer, Fugaku, we jointly developed with RIKEN, achieved the top ranking in the world in 4 different measures of performance. The Fujitsu-designed Arm processor utilized in Fugaku will also be used in supercomputers from Cray, part of HP Enterprise, and their application in a wide range of areas are currently being considered. We’ll promote the use of this technology for resolving issues facing society, such as in making contributions in advanced health care and research areas.

In the field of 5G, we are building a team for actively expanding our business outside of Japan. We have started to deploy our 5G base station equipment, and DISH Network in North America has also recently announced their decision to use our 5G wireless units in an important milestone for our 5G efforts. In addition, in R&D project for the post-5G era being promoted by Japan’s Ministry of Economy, Trade and Industry, Fujitsu was selected for multiple projects. We’ll be working on future-oriented development and technology research.

The second point is strengthening our issue resolution capabilities in Japan. To enhance our business rooted in the Japanese market, on October 1 we will launch Fujitsu Japan Limited, a new company responsible for business in Japan. The new company will take responsibility for business in areas, including the local government, education, health care and medium-sized enterprises, where factors that are unique to Japan play a major role.

With demographic changes, including the aging population and the falling birth rate, Japan is facing a variety of societal issues earlier than many other countries in the world. A number of other issues have also come into sharp relief in the face of the challenges of COVID-19. While leveraging digital technologies, we will work to resolve these issues through our business with customers.

In promoting our business, we will enhance our business-centered proposals, using the Fujitsu Group’s wealth of expertise across many industries and areas of business. We will shift to a cloud-first strategy in our approach to delivering solutions. We recently announced hybrid IT service, by which we upgraded our menu of cloud of services and our brand, including platforms with cloud functionality and overall operational services. We will optimize the roles and organizational structure of our group companies in Japan, including Fujitsu Japan.

Today, we additionally issued a timely disclosure for a tender offer for Fujitsu Frontech. The Fujitsu Group will integrate the company’s solution services for financial and distribution customers, as well as its front services such as palm vein authentication. We’ll continue to strive for an optimal formation to increase the value we provide to society and customers.

As an example of the third point, which is contributing to greater business stability, I’ll introduce the Japan Global Gateway. We established a gateway organization for the Japanese market to expand the use of our global delivery centers, which handle development work in accordance with our global standards. This will link our global delivery centers with frontline units, enabling remote support while promoting standardization, leading to enhancements in the quality and speed with which we deliver services to customers.

The fourth point is to become our customers’ best partner in digital transformation. And to that end, we are further focusing on enhancing our talent and organization. Fujitsu has positioned its capabilities in design as an important management resource. And on July 1, we established design center to provide design management, which uses design thinking in all kinds of business activities.

Also on July 1, we established social design unit to help make Society 5.0 a reality. It will create new businesses from the perspectives of society or consumers around different themes or markets such as health care, education and finance. We are working on developing strategic solutions that will help us grow our digital transformation business.

We additionally embarked on initiative to provide platforms that enable the mutual exchange of values in a variety of forms, including points and digital currencies. Through this, we would like to create new markets or form ecosystems in an environment that enables transactions among parties that transcend industry boundaries.

To make a full-fledged entry into the data platform business, we have decided to use advanced platforms for Palantir, which is a world leader in the field of data analysis. We have already started an internal implementation to achieve data-driven management at Fujitsu. We will use the expertise we gained from this experience and combine it with Fujitsu’s technologies to support the use of data and problem-solving for customers working to address a variety of societal issues.

Ridgelinez, which started business operations as a new company in April, is now beginning its business in earnest. For Fujitsu’s own digital transformation, we are engaged in the fundamental transformation and evolution of the company. I would like to present 3 measures we are undertaking to this end. The first is data-driven management. We will decide which indicators need to be monitored and establish a system enabling the data to be accessed company-wide. We will also revamp our processes and systems to make rapid data-driven management decisions. To lead the way, we have started a OneERP project that will globally integrate such areas as financial accounting, procurement and logistics.

The second is evolving into DX talent and raising productivity. To make all 130,000 employees into DX talent, we’ll promote training in design thinking and agile approaches, while also seeking to create an atmosphere that values diversity. On the policy front, the job-based HR system was expanded to 15,000 employees in Japan from April. We will also promote the active placement of highly skilled talent.

The third is promoting participatory ecosystem-based digital transformation. To advance these initiatives, myself, the Chief DX Officer, Yuzuru Fukuda, the Assistant CDXO and DX officers assigned to 15 divisions throughout the company will be part of a company-wide DX project, which launched on July 1. The DX officers will work together as part of a dedicated team directly under my leadership as CDXO to promote a company-wide system. We will also create a forum for collecting the voices of customers and employees, and we’ll promote an ecosystem-based approach while widely incorporating this feedback into our decision-making.

To decisively advance the initiatives I have discussed, thus far, we’ll actively make the necessary investments. For value creation, we will develop services and offerings, make outside investments, including acquisitions, and make strategic investments to expand our digital transformation business with an eye toward the future. For our internal transformation, we’ll recruit sophisticated talent and make investments to enhance our existing pool of employees and internal systems. In terms of the scale of these investments, we are thinking to make growth investments of JPY 500 billion to JPY 600 billion over the next 5 years.

I will now discuss our management indicators. To fulfill our purpose, it is essential that Fujitsu achieve sustainable growth. To that end, we need to build relationships of trust with all of our stakeholders. From that perspective, in addition to the financial indicators we have been using, we are establishing new indicators to evaluate our activities in nonfinancial areas, giving consideration to society, customers and employees, for example.

We have established several priority issues under the heading of Global Responsible Business, including human rights, diversity and inclusion and well-being that we should focus on as a responsible global company. The evaluation criteria and priority activities for each of these issues is different, but they are related to each other. We think that focusing on these 7 issues will lead to greater trust from customers and employees. For that purpose, we have set Net Promoter Score as an indicator of trust from customers and employee engagement as an indicator for employees, and we are currently making preparations for them.

In addition, we want to objectively measure progress in transforming our organization and culture, using the Ministry of Economy, Trade and Industry of Japan’s DX promotion indices and work toward continual improvements. By working on both financial and nonfinancial management indicators, we seek to make stable contributions over the long term to society and our customers, and we seek to create, as a result, a positive loop that will lead again to Fujitsu’s own growth.

For fiscal year 2022, in our core business of Technology Solutions, we aim to achieve a revenue of JPY 3.5 trillion and an operating profit margin of 10%. Of that revenue amount in our For Growth digital business area, we aim to achieve even of JPY 1.3 trillion.

There has been no change to these targets since last year. Today, we are briefing you on our capital allocation policy. The details will be discussed by CFO Isobe, but I would like to explain my thinking on this subject. We aim to generate at least JPY 1 trillion in free cash flow over the next 5 years. The cash generated will be optimally allocated. First, we must maintain the current condition of our financial foundation. On top of that, as I explained just now, we must make investments in growth and we will be accelerating those investments. In addition, we want to continue to generate stable shareholder returns.

In addition to the above, from the perspective of profitability and capital efficiency, we will place importance on earnings per share.

Lastly, I would like to briefly touch on our financial forecast for fiscal year 2020. We are projecting revenue of JPY 3.610 trillion; operating profit of JPY 212 billion and an operating profit margin of 5.9%.

While we expect revenue to decline because of COVID-19, we expect to maintain an operating profit margin that is essentially the same as in the last fiscal year. In our core business of Technology Solutions, for fiscal year 2020, we are projecting full year revenue of JPY 3.090 trillion and an operating profit margin of 6.4%. By shifting more towards the services business, which is higher profit margins, we expect to improve our operating profit margin going forward.

In an era of a new normal, sustainable growth is essential for Fujitsu to make stable, long-term contributions to society and customers. Based on this policy, we will continue to enhance corporate value from a medium to long-term perspective. We would appreciate your continued understanding and support for our business management.

With that, I’d like to conclude my part. Thank you for listening. Now Takeshi Isobe, our CFO, will give you further details in his presentation.

——————————————————————————–

Takeshi Isobe, Fujitsu Limited – Executive VP, Corporate Executive Officer, CFO & Director [2]

——————————————————————————–

This is Takeshi Isobe. Please look at the presentation materials. Today’s presentation will focus on 3 points: The fiscal 2020 first quarter financial results; our financial forecast for fiscal 2020; and our capital allocation policy.

Page 4. Starting this fiscal year, we are reclassifying our segments. We disclosed the details in the press release issued on July 28, so let me just touch on the key points. With the transformation of our business model that we have been working on for the past several years, we have been trained to concentrate our management resources on Technology Solutions.

Because our business structure has changed considerably, we have decided to reclassify our segments. First, I will explain the segment classification. Until now we had 4 business segments: Technology Solutions; Ubiquitous Solutions; Device Solutions; and Other/Elimination and Corporate. Now we have put Other/Elimination and Corporate under Technology Solutions. As a result, there will now be 3 segments plus Eliminations, which refers to the elimination of sales among segments. As medium-term targets for Technology Solutions, we aim for revenue of JPY 3.5 trillion and an operating profit margin of 10% by fiscal 2022.

Next, I’d like to briefly describe the subsegments within Technology Solutions. There are 2 main changes. The first point is how we will classify the business outside of Japan. Up until now, services and system platforms each included the descriptions of performance for the business outside of Japan. But now we are separating that out and aggregating it into a new subsegment called International Regions, excluding Japan.

The second point is our treatment of company-wide expenses. Up until now, we treated large-scale upfront investments, such as investments in the cloud or in next-generation supercomputers, as company-wide shared expenses that would generate group-wide returns. The scale of investments has already peaked for several projects. And with the objective of clarifying the responsibilities for generating returns on those investments, we are now putting these R&D expenses into their respective subsegments. We will disclose our financial results in this segment from fiscal 2020.

We will now turn to the financial results on Page 5. In the bold outline, we have a summary of the consolidated results for the first quarter of fiscal 2020. Revenue was JPY 802.7 billion, down JPY 35.9 billion. The impact of COVID-19 reduced revenue by JPY 35.8 billion, mainly in Technology Solutions. Excluding the impact of COVID-19, revenue was essentially unchanged from the previous year, but there were differences among the segments. Revenue in Technology Solutions increased.

In System Platforms, the Fugaku supercomputer, along with the demand for 5G base stations caused revenue to increase. In Ubiquitous Solutions, revenue declined significantly in comparison with the previous year when there is extraordinary demand relating to Windows 7. Revenue also declined in Device Solutions because of the impact of business restructuring. Operating profit was JPY 22.2 billion, an increase over the previous year of JPY 18.8 billion. In addition to the profitability of multiple businesses increasing, the higher profit was attributable to lower operating expenses.

Financial income, expenses, et cetera, amounted to JPY 3.6 billion, a slight increase from the prior year. At the bottom, profit for the period attributable to owners of the parent was JPY 18.1 billion.

Next is Page 7. We present increases and decreases in 3 categories as we did last year. The impact of restructuring comes from the impact of the Mie Semiconductor plant, which was excluded from the consolidated results from the second half of last year. The special items, in comparison with last year, shows the impact of not having the burden of last year’s restructuring expenses for Device Solutions.

Excluding these factors, in comparison with last year, revenue declined by JPY 21.5 billion, and operating profit increased by JPY 12.3 billion.

Page 8. I would like to now comment on the factors that caused increases or decreases in operating profit compared to the prior year. On the far left, operating profit in the first quarter of fiscal 2019 was JPY 3.3 billion. I will use this as a starting point for explaining increases or decreases from the prior year.

The first upward arrow shows the impact of not having the burden of last year’s special items and restructuring expenses, which in total reduced last year’s operating profit by JPY 6.4 billion. The next output arrow is positive JPY 3.8 billion. This was the increase in operating profit resulting from higher revenue of JPY 14.3 billion, mainly from the increase in revenue in System Platforms. The next upward arrow is JPY 8.2 billion. The profitability in all business segments, Technology Solutions, Ubiquitous Solutions and Device Solutions improved.

In Technology Solutions, the improvement was mainly from mainframes and software for which profitability is especially high. In Ubiquitous Solutions, in addition to a positive change in product mix towards high-spec products, we were able to maintain pricing. In Device Solutions, there was a significant improvement in electronic components.

The next upward arrow is JPY 12.3 billion from greater efficiencies and operating expenses. The expense of the upfront development projects decreased as investments for several projects had already peaked out and switched into the revenue-generating phase. There were also improvements to efficiency for the development of x86 servers due to changes to the global development organizational structure. In addition, because of the implementation of remote working for group employees, following the declaration of a state of emergency in Japan in April, there was a reduction in business travel expenses and all kinds of events were either canceled or moved online, resulting in a significant decline in first quarter expenses.

The last down arrow in red is the impact of COVID-19. There was negative impact of revenue of JPY 35.8 billion, a decline of about 4%. There was a negative impact on operating profit of JPY 12.1 billion. Adding everything together, operating profit in the first quarter was JPY 22.2 billion.

Page 9. I’d like to give some supplemental information on changes in revenue from the prior year in our businesses, excluding special items. In the center of the table, we have actual results in the first quarter and the comparisons with the prior year. To the right of the table, we present the breakdown of changes from the prior year.

Total revenue declined by JPY 21.5 billion from the previous year. Excluding the impact of COVID-19, revenue would have increased by JPY 14.3 billion, as COVID-19 reduced revenue by JPY 35.8 billion.

If you look at Technology Solutions, there was a slight JPY 1.9 billion improvement in revenue compared to the prior year. Excluding the impact of COVID-19, revenue in Solutions Services increased mainly from public sector projects that continued from the previous year, revenue in System Platforms were sharply from Fugaku, mainframe deals and an increase in demand for 5G base stations. As a result, Technology Solutions covered the decline caused by COVID-19, and we posted an increase in revenue. In Ubiquitous Solutions, revenue declined by JPY 29 billion, a sharp decrease from last year due to the impact of last year’s special demand.

Page 10. Here, I would like to comment on the status of orders in Japan. On an unconsolidated basis, orders in the first quarter of fiscal 2020 declined by 9%. The impact of the comparison with last year’s special demand for PCs is significant. But even if we exclude that impact, orders declined by 3%.

As I just explained, due to strong orders last year, revenue in the first quarter for Technology Solutions was able to cover the impact of COVID-19. On the other hand, orders, which represent future revenue, declined from the previous year’s first quarter because orders were especially strong during the same period last year, but also because of the impact of COVID-19.

Looking back on past economic slowdowns, because there are many large-scale and long-term projects in Fujitsu, changes in business results tend to lag behind economic trends. While there are variations among industry sectors, revenue from the second quarter onward might be weak due to the weak order demand. So we are focusing on trends in our orders.

Page 11. This slide shows the impact of COVID-19 in the first quarter. There have been negative impacts, such as delays in projects and business deals have been stagnant. On the other hand, there have also been positive impacts from new demand, so I will explain both the negative and positive impacts.

Revenue was reduced by JPY 65.5 billion as a result of negative impact. For some projects, mainly in the manufacturing, distribution and health care sectors, implementation timing was pushed back. In addition, deal activity stagnated for small and medium-sized enterprise customers. There was a slight impact on our supply chain, but that started to recover in April. And now our supply chain has nearly recovered. Outside of Japan, primarily in Europe and Asia, we were impacted by severe lockdowns and the impacts were relatively large in comparison with Japan.

On the other hand, revenue rose by JPY 29.6 billion as a result of positive impacts. There were increases in revenue from new demand, such as the expansion of PCs and infrastructure, as well as provisions of solutions stemming from remote work.

Page 13. Now let me explain our segment results, primarily in relation to last year’s results. First is Technology Solutions. Revenue was JPY 679.1 billion, slightly higher than last year. Operating profit was JPY 12.6 billion, an increase of JPY 5 billion from last year.

Now I will explain the details for each subsegment. Page 14, Solutions Service segment. Revenue was JPY 376.8 billion, down 3.1% from the prior year. Revenue from the public sector increased, mainly from projects that had been ongoing from last year. But revenue in the subsegment declined because of the impact of COVID-19. Implementation timing was postponed for new projects, mainly in the manufacturing distribution and health care sectors. Operating profit was JPY 17.8 billion, essentially unchanged from the previous year. Despite the impact of lower revenue as a result from COVID-19, operating profit remained essentially the same because of improvements in profitability, such as from increases in software and greater efficiencies in operating expenses.

Page 15, System Platforms. Revenue was JPY 151.7 billion, a 24% increase over the prior year. In addition to the shipment of Fugaku and the increase in mainframe deals, there was an increase in demand for 5G base stations and revenue increased for both system products and network products.

Operating profit was JPY 5 billion, an improvement of JPY 11.5 billion over the prior year. In addition to the effects of higher revenue and improvement in profitability from higher mainframe sales, there was also greater efficiencies in operating expenses, leading to a significant improvement.

Page 16, International regions excluding Japan. Revenue was JPY 171 billion, down 8.2% from the previous year. In addition to the impact of COVID-19, there were adverse changes in exchange rate, exits from unprofitable countries in Europe and an exit from a product business in North America that resulted in lower revenue. There was an operating loss of JPY 3.7 billion. The impact of the decline in revenue was large, resulting in a deterioration of JPY 3.2 billion from the prior year.

Page 17, Ubiquitous Solutions. Revenue was JPY 73.8 billion, down 28.2% from the prior year. Revenue declined from the prior year when there was a special demand for upgrades relating to Windows 7. Operating profit was JPY 4.2 billion, an increase of JPY 0.6 billion from the prior year. Although the impact of the decline in revenue was significant, there was an increase in the proportion of sales accounted for by high-spec products, and there was an improvement in profitability because sales prices could be maintained.

Page 18, Device Solutions. Revenue was JPY 68.3 billion, down 18.1% from the prior year. Excluding a decline in revenue of JPY 14.3 billion from business restructuring, revenue was almost flat. Operating profit was JPY 5.3 billion, an improvement of JPY 13.1 billion from the prior year. There was a positive impact of JPY 6.4 billion from last year’s business model transformation expenses and business restructuring. Improvements in the profitability of electronic components improved profit in actual business results, excluding the impact of special items of JPY 6.6 billion.

Page 19, cash flows. Cash flows from operating activities were JPY 148.8 billion. This is an increase of JPY 32.5 billion from the previous year, mainly from higher profits and lower inventory assets. Cash flows from investing activities were a net outflow of JPY 10 billion, essentially unchanged from the prior year. Free cash flow was JPY 138.8 billion.

Slide 20. This is the balance of assets, liabilities and equity. Total equity was JPY 1,343,500,000,000. Equity attributable to earnings of the parent ratio, shareholders’ equity ratio, was 41.4%. This represents an increase of 2.5 percentage points from the end of the prior fiscal year. The improvement is attributable to higher profit and progress in reducing assets.

Page 22. I will now discuss our forecast for fiscal 2020, which we refrain from announcing at the beginning of the fiscal year. These are some assumptions behind our forecast. We formulated the forecast based on the assumption that the stagnation in economic activity stemming from the impact of COVID-19 bottomed out in the first quarter, that there would be a recovery in the second and third quarters and that corporate activity would fully reopen in the fourth quarter.

Although recently, we are seeing infection spread again, we are not assuming another major weakening of economic activity, mainly because of the emergency measures being taken. In terms of the impact on our financial results, in Japan, we have assumed another major impact on earnings from customers in the manufacturing, distribution, retailing and health care sectors. Outside of Japan, in addition to major stagnations in economic activity due to severe lockdowns, the foundations of our business are still relatively weak compared with Japan, and we expect it will take time for our business to recover.

Page 23. This is our financial forecast for fiscal 2020. We expect a revenue of JPY 3.610 trillion, a decline of JPY 247.7 billion from the prior year. We have assumed a decline in revenue of JPY 110 billion stemming from COVID-19, mainly in technology solutions. Aside from that, we expect revenue in Ubiquitous Solutions to decline compared to last year when there was a special demand. We expect operating profit of JPY 212 billion, essentially unchanged from the prior year. We expect variations among the segments, which we’ll explain in a waterfall chart. We expect profit for the year of JPY 160 billion essentially flat.

Page 24. Here, I will discuss the factors affecting changes in operating profit compared to last year. On the far left is fiscal 2019 operating profit of JPY 211.4 billion. I will use this as my starting point in explaining changes from last year. The first upward arrow is the impact of not having last year’s burden of special items and restructuring impacts, which reduced operating profit by JPY 14.5 billion. The next output arrow is an increase of JPY 45.9 billion in operating profit in Technology Solutions.

In addition to improved profitability in Solutions Services and an increase in demand for 5G base stations, we expect greater efficiencies in operating expenses. The next downward arrow is a decline in operating profit of JPY 24.4 billion in Ubiquitous Solutions. The expected decline reflects the comparison with last year, where there was special demand. The next upward arrow is an increase of JPY 12.4 billion in Device Solutions. We’re projecting higher demand and improved profitability in electronic components.

The next downward arrow, in red, is the impact of COVID-19. We expect revenue to decline by JPY 110 billion or roughly 3%. We factored in a decline in operating profit of JPY 38 billion. The last downward arrow in gray represents, as this fiscal year’s special item, JPY 10 billion in business model transformation expenses we have included in Technology Solutions. Taken together, we expect operating profit of JPY 212 billion for fiscal 2020.

Page 26. Here, I will discuss our expectations for the full year impact of COVID-19. From negative impacts, we expect revenue to be reduced by JPY 178 billion and operating income to be reduced by JPY 60 billion. On the other hand, from positive impacts, we expect revenue to be increased by JPY 68 billion and operating profit to be increased by JPY 22 billion. We expect the total impact, therefore, to be a reduction in revenue of JPY 110 billion and a reduction in operating profit of JPY 38 billion.

I have already touched upon the negative impacts, so here, I will comment on our expectations regarding the timing of the recovery. In Japan, we expect such sectors as manufacturing and distribution to bounce back starting in the fourth quarter, and we expect a full-fledged recovery in the first half of next fiscal year. Outside of Japan, we expect severe conditions to continue through the fiscal year, and we expect a recovery next fiscal year and beyond.

On the other hand, there are also positive impacts. A large proportion of the positive impacts stem from dealing with remote work. But aside from that, we expect to provide solutions that are needed for society in the new normal era.

Page 27. On the top of the page, we present areas in which we can reimagine business for the new normal era. Based on such keywords as digital, remote, labor saving, and touchless, we’ll deliver solutions needed in each industry sector and aim to contribute to greater trust in society, while also expanding our business through new opportunities.

At the bottom of the page, we have Work Life Shift, and we will promote changes in the ways people work. We expect a certain reduction in expenses, but we simultaneously expect to deliver improvements in productivity and employee satisfaction, not stopping at cost-cutting measures. We will also establish the solutions needed to achieve these objectives and propose them to customers.

Pages 28 and 29 have details on our forecast for each segment, so please refer to them and our supplemental materials.

Page 30. This is our forecast for cash flows. We expect free cash flow of JPY 170 billion. Because this year we will not have the cash inflows from the sale of businesses and the sale of shares, we expect free cash flow to be JPY 63 billion lower than last year.

Page 31. This is our plan for dividends in fiscal 2020. We are planning to pay an interim dividend of JPY 100 per share, and an end-of-year dividend of JPY 100 per share for a total of JPY 200 per share. This represents an annual increase in dividends of JPY 20. Although our profit forecast for this year is essentially flat, we expect to be able to maintain a certain level of profit and a sound financial foundation. Therefore, in accordance with our policy, we plan to have stable increases in dividends.

Lastly, I would like to explain our capital allocation policy. First, I will discuss the direction of our financial strategy behind the capital allocation policy. The basis will be a solid financial foundation. As a company supporting societal infrastructure, maintaining sustainability that can withstand short-term changes in our business environment is more important than anything else. The present circumstances, including the COVID-19 pandemic, certainly drive home this point. On top of that, we seek to strike a good balance between strategic growth investments and stable improvement in shareholder returns, leading to continuous improvements in corporate value.

Page 34. This chart shows an overall summary of our capital allocation policy based on the direction I just mentioned. This is a major concept, and we think we need to go a bit beyond the financial targets we have set to achieve in fiscal 2022, and we are thinking of a range over the next 5 years.

The first point is cash flows, the funding source offering the basis for allocations. Over the next 5 years, we seek to generate over JPY 1 trillion in free cash flow. The second point is the allocation of those funds. Based on our financial foundation. We seek an optimal distribution of cash between growth investments and shareholder returns.

Next, I’ll discuss each section. Page 35. First, I’ll discuss the source of funds and how we seek to generate a stable cash flow. In addition to the cash flow generated from the growth in our business, we will generate additional cash by optimizing our existing assets. The diagram below illustrates this concept. The basic business cash flow is a cash flow generated from our core continuing businesses.

In addition to this, by optimizing our existing assets through sales across shareholdings and noncore assets, we’ll further concentrate on our core business. By combining these two, we seek to generate over JPY 1 trillion in free cash flow over the next 5 years.

Page 36. Next, I would like to discuss our thoughts about capital allocation. First, we will maintain a solid financial foundation. In recent years, we have worked to strengthen our financial foundation. While it may not yet be solid as a rock, we have been working to achieve, to a certain degree, a healthy financial foundation. We plan to achieve further improvements by improving capital efficiency, and we do not expect to need additional cash anytime soon. Taking the current global economy into consideration, we’ll move forward while paying close attention to the funding environment.

Page 37. The second point about capital allocation is that our highest priority is on growth investments. As CEO Tokita mentioned in his presentation, we’ll actively invest in creating value to deliver to our customers and to transform Fujitsu into a digital transformation company. Over the next 5 years, we plan to make investments of JPY 500 billion to JPY 600 billion. The details of the investments are shown on the slide. In making growth investments, we will thoroughly monitor the returns on each investment and use discipline in our investments for growth.

Page 38. The third point of capital allocation is shareholder returns. Based on the growth stage of our business and profit, we seek to generate stable and continuous improvements in shareholder returns over the medium and long term. We plan to make stable dividend.

While we cannot predict our future business environment, we are working to be able to increase our dividend payments in fiscal 2020. In addition, if we have surplus funds accumulated over the long term, we will use them to make share repurchases. When implementing such repurchases, we will make agile determinations in consideration of the economic environment and the supply-demand balance of funds.

That concludes my discussion of our capital allocation policy. Lastly, Fujitsu will strengthen its ability to generate cash flow, and by the optimal allocation of that cash flow, will seek to grow its business and improve its earnings and capital efficiency. We’ll focus on EPS in terms of capital efficiency as we aim to grow our business and improve profitability through our financial targets of improving the growth in our revenue and operating profit margin. We will make steady efforts to ensure sustained growth in EPS over the medium to long term.

In this new normal era, Fujitsu hopes to contribute to the establishment of a more resilient society. New lifestyles in ways of thinking, which mark a departure from the pre-COVID-19 era, are starting to emerge. Again, Fujitsu would like to contribute to making a more flexible and resilient society by leveraging our technologies to realize values in society from the perspective of what would be an ideal state for society and customers.

That concludes my presentation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

Source Article