Takashi Niino - President and CEO

I am Niino, President of NEC. Thank you very much for gathering today.

I will explain the summary of FY ending March 2019 Q2 Financial results that have been announced today. Page two shows the topics I will cover today.

Firstly, I’ll cover the results of the first half, then move on to our full-year forecast, and end by reporting the progress Mid-Term Management Plan 2020 announced this past January. Please note that there is no change for the full-year forecast.

Firstly, summary of the financial results. Page four is the summary of the first half financial results.

Firstly, revenue. Public and enterprise businesses increased resulting in 3.8% growth year-on-year.

Next, operating profit. Global business and others improved recording an increase of ¥6.6 billion year-on-year.

Although operating profit improved, net profit was down by ¥9.7 billion and due to the absence of gain on sales of affiliates’ stocks recorded in FY18. Page five shows the first half results on the right.

Revenue was ¥1,336.4 billion; operating profit, ¥13.8 billion; income before income taxes ¥21.8 billion; and net profit, ¥9.2 billion. Free cash flow was an outflow of ¥17.1 billion, a decrease of ¥92.5 billion year-over-year.

I will highlight the details later. Actuals for the first half posted an improvement of ¥35 billion in revenue and ¥4 billion in operating profit against our budget.

Page six is the first half results by segment. Operating profit of global business and others improved year-on-year.

Against our budget, revenue of enterprise and network services businesses outperformed why global business underachieved. Enterprise business overachieved in operating profit.

Now, let me walk you through each segment in detail. Page seven is public business.

In public infrastructure area, aerospace and defense businesses were up, contributing to recording ¥419.7 billion in revenue, up 3.8% year-on-year. In the absence of one-off profit of the public infrastructure area recorded in FY18, operating profit was down by ¥2.3 billion, resulting in ¥12.3 billion.

Page eight is the enterprise business. All segments including retail and services, financial institutions, and manufacturing industries trended upward, resulting in a revenue increase of 10.3% year-on-year, recording ¥211.7 billion yen.

In retail and services, convenience stores were a major driver while insurance and security houses were the main contributors of the financial segment. Companywide IoT platform moved on to the commercialization phase.

Inter-business -- development cost allocation to the enterprise business amounted to ¥2 billion. However, a hike in revenue absorbed this cost, enabling the enterprise business operating profit to be flat year-on-year, recording ¥15.7 billion.

Page nine, networks service business. IT services declined while network infrastructure increased, resulting in the revenue increase of 1.6% year-on-year, posting ¥176 billion.

While network infrastructure’s profitability improved, one-off loss of ¥3 billion was recorded for one particular IT service project, pushing operating profit by ¥2.1 billion year-on-year, resulting in ¥3.4 billion. Page 10, system platform business.

Due to an increase of business PC, revenue was up by 0.5% year-on-year, resulting in ¥242.6 billion. Investment costs for launching new products pushed down the operating profit by ¥1.3 billion year-on-year, ending at ¥4 billion.

Page 11, global business. Submarine cable system and display solutions declined, while safety solutions enjoyed a big boost, thus increasing revenue by 0.6% year-on-year, landing at ¥213.3 billion.

Safety and wireless solutions profitability improved, contributing to an enhancement of operating profit by ¥6 billion year-on-year, resulting in an operating loss of ¥5 billion. Page 12 depicts the global business in more details.

The bar graph on the left represents the revenue breakdown. On the right is a list of first half highlights.

Safety solutions newly consolidated Northgate Public Services and acquired new customers projects and realized organic growth, this led to a remarkable increase of revenue by 175% year over year. Service providers solutions revenue was down year-on-year but with the major new orders we see, we are observing a steady improvement.

Revenue of wireless solutions was flat year-on-year. Submarine cable systems revenue was down, in particular in Q1 and due to the phasing out of existing projects, but new orders trended favorably.

And we expect the full year revenue to recover and land on par with FY 2018. Page 13, net profit change.

Operating profit improved by ¥6.6 billion. However, in the absence of gain on sales of stocks of NED TOKIN and Renesas Electronics Corporation, which were recorded in FY18, financial income was down ¥15.6 billion.

All-in-all, therefore, net profit was pushed down by ¥9.7 billion year-over-year, recording ¥9.2 billion. Page 14 is free cash flow.

Let me explain why the first half free cash flow did year-on-year. Firstly, cash flow from investing activities on lower right hand.

In the absence of gain from sales of Renesas stocks and repayments of loans from NEC TOKIN recorded in FY18, which amounted to about ¥50 billion, cash flow was down by ¥56.7 billion. Next, cash flows from operating activities negative from the advanced amounted ¥10 billion made in the end of FY18 and an increase of receivables due to a boost in sales caused the cash flow to decrease by ¥35.8 billion.

As a result of all these factors, free cash flow was down by ¥92.5 billion year-on-year. But as you can tell, there is no negative business impact.

Let me now move on to full-year forecast. Page 16, please?

The full-year forecast is unchanged from the announcement made on April the 27th. Operating profit is projected to go down by ¥50 billion.

This is due to onetime business transformation cost as well as the growth investments as announced in the full-year briefing. So, far performances are in line with the plan that we have internally.

For the second half, we have both upside potentials as well as downside potentials. However, overall, we believe that we can achieve the full-year guidance.

Page 17, please? This is about the business environment.

This chart shows the IT services order trend in Japan. During the first half, we had favorable areas such as financial, public and manufacturing.

As a result, on year-on-year basis, we had 7% growth for the first half of fiscal year. Based on the strong trend at the moment, because of these areas where we had strength, we expect to improve the full-year performance.

Page 18 shows the full-year operating profit forecast for the global business. The bar chart on the left hand side shows the global business operating profit actual for the first half and forecasted for the second half and full-year.

For the first half overall, the profit went up by ¥6 billion year-on-year, driven by the safety business turning to the positive territory on the back of higher sales and wireless solutions improvement of profitability. During the second half, we expect to increase the operating profit by ¥22 billion year-on-year.

The safety business has been showing a firm trend. The wireless solutions business is also expected to improve due to the absence of the ¥3 billion loss-making project, which we had in the second half of last year as well as the ¥3 billion business transmission costs we had last year, as well as expected benefit of ¥1.5 billion from business transformation.

On the other hand, service providers solutions, energy and the display businesses have some downside risks, which require continuous attention. Lastly, let me move on to the progress on the medium-term management plan.

Page 20 shows the 3 policies under medium-term management plan. And the summary of progress in the first half.

The first point is about profit structure reform. In order to reduce the SG&A, we have introduced an early retirement program, starting this week.

And so far, we have progress as expected. Now, so for the business structure.

For the wireless solutions business improvement, we are taking measures for profit improvement. And for the energy business, we agreed on the new buyer in August of NEC Energy Devices and are promoting a profit structure reform of NEC Energy Solutions at the moment.

The second area is the growth realization. NEC’s Safer Cities, which is defined as the new growth engine is showing solid expansion due to the consolidation of NPS and organic growth.

The third area is execution capabilities reform. The Project RISE has been put into place in order to maximize the potentials of employees.

And as part of the project, we have formulated the Code of Values, which show the expected behaviors as members of the NEC Group. There are several initiatives that I’d like to explain to you in detail.

First, on page 21, this is the progress and status of NEC Safer Cities. The safety business, which was positioned as the growth engine group of business under 2020 MTMP has two parts, organic and inorganic.

For the organic, we acquired project from the U.S. government agency and strong outlook is there on airport airline projects in APAC, Europe, and Middle East and other areas.

For inorganic, we have a positive outcome from NPS synergy and we have acquisition and investment activities as well. So far, the safety business has been showing steady progress on both sales and profit fronts.

We will continue to promote these activities for the organic growth as well as M&A activities. Page 22 shows the initiatives for the wireless solutions business or Pasolink.

The most important objective of the first half was to achieve positive profit for that business. And we were able to achieve that by promoting selective order taking for higher profitability and focused product lineup.

And as a result, for the second half -- for the first half, we were able to achieve improvement in profitability. In the second half, we will accelerate initiatives to improve profitability on the medium basis.

And we have started a discussion and actions to secure profitability for the medium term, which is to be finalized within this fiscal year. One the next page, I’d like to touch on the 5G partnership aiming at global market.

As announced on October the 24th press release, we have concluded a partnership with Samsung Electronics to strengthen the next generation business portfolio including 5G. We will take full advantage of each other’s strengths to jointly develop products based on 5G standards and jointly explore global market and take a leading position on a whole 5G on a global basis and accelerate software and services business.

Page 24 shows Project RISE. In order to change the NEC culture fundamentally, we have started the Project RISE.

This project has six drivers to accomplish this aim. We are focused on three drivers this year, namely, Code of Values.

We have formulated and we are disseminating this, and establishment of personal appraisal system to promote growth and application of the system to the management personnel and implementation of initiatives to realize 50% reduction in business processes and operations to streamline operations. As explained, during the first half, we have seen signs of improvement in several different areas.

During the second half, we will continue with transformation and initiatives to achieve full-year and the medium term targets. With this, I would like to conclude my remarks and presentation on financial results as well as Medium-Term Management Plan 2020.

Thank you for your kind attention.