Regular Earnings Survey

FY08 Earnings: Marked Profit Declines on Global Slowdown, Yen Appreciation

Marked downturn in earnings from 2H

FY08 aggregate earnings for the DIR 300 were as follows: sales, down 7.6% y/y; operating profit, down 53.4%; recurring profit, down 64%; net income, down 96%. From 2H, demand overseas plunged as global economies successively fell into recession. This forced makers and their suppliers to slash production in the automobile industry, where there was a double-digit drop in global sales volume, and in the PC, mobile phone, and digital camera fields. Sales turned down markedly in 2H, contracting 16.9% after gaining 2.4% in 1H due to the strong yen and simultaneous declines in sales volume and selling prices. Steep drops in operating rates squeezed profit, and fixed-cost reductions failed to keep up with the sharp pullback at the top line. In addition, firms adopting accounting standards in line with SEC reporting requirements recorded one-off losses, pushing aggregate earnings for our universe into the red at the recurring and net levels in 2H. Notably, assemblers recorded aggregate recurring losses over the full year as well. The significantly larger drop in net income relative to recurring profit reflects writedowns on investment securities, impairment charges on facilities, and reductions of deferred tax assets.

Profits down in all sectors; automobiles, electrical/electronics posted recurring losses

At the recurring level, all sectors suffered profit declines or fell into losses. Domestic demand-oriented sectors, such as software business, pulp & paper, broadcasters/ad agencies, and toiletries, experienced relatively limited recurring profit declines. On the other hand, profit declines were severe for exporters. automobiles, electrical/electronics, and precision instruments accounted for 60% of the aggregate profit decline. In fact, the automobile and electrical/electronics sectors fell into the red. All three sectors experienced severe headwinds from the strong yen. In addition, the automobiles sector was hit by volume declines and higher material costs, while electrical/electronics and precision instruments were hurt by slack global demand growth for hi-tech products, lower selling prices, and restructuring expenses.

Results differed little from our forecasts

Aggregate sales, operating profit, and recurring profit were virtually in line with our previous forecasts (released on 26 Feb 2009). That said, profit for manufacturers topped our estimate, while profit for non-manufacturers fell short. The overshoot for manufacturers likely reflects better-than-expected progress in cutting costs by assemblers, while the shortfall for non-manufacturers is chiefly attributable to increases in investment security write-downs and overpaid interest refund expenses. At the net level, earnings fell short of our forecasts in almost all sectors, chiefly due to sharp increases in impairment losses in response to the marked deterioration in the earnings environment.

Recurring profit exceeded our forecasts in 15 sectors, and fell short in 13. Electrical/electronics topped our estimate, as the recovery in demand on progress in inventory cutbacks was stronger than anticipated. On the other hand, trading houses (wider inventory write-downs, write-downs on investment securities) and non-banks (increased overpaid interest refund expenses) undershot significantly.

Sales, profit declined from 1H for assemblers; basic materials hit from 2H

On a half-year basis, earnings deteriorated from the top line downward. Aggregate sales gained 2.4% y/y in 1H, but turned down 16.9% in 2H. Operating profit slid 17.1% in 1H and plunged 89.7% in 2H. At the recurring level, profit dived 19.6% in 1H, and earnings dipped into the red in 2H. Sales and profit declined for assemblers from 1H, and the fallout spread to basic materials in 2H amid moves to pare inventories.