Regular Earnings Survey

FY09 Results: Small Gain in Op Profit Despite Two-digit Fall in Sales

Sales continued to slide,but op profit turned up first time in two years
Aggregate FY09 results showed an 11.5% y/y drop in sales, but a 0.8% gain in operating profit, a 20.4% increase in recurring profit, and a 586.4% jump in net income. Sales declined for a second straight year due to significant drags from the drop-off in demand, the strong yen and the fall in crude oil prices, all mostly in 1H. However, firms were able to offset setbacks at the top line with cost cuts from quick and effective restructuring, leading to a slight gain in operating profit. The expansion in recurring profit reached the double digits, though, thanks in part to the disappearance of restructuring expenses and other one-offs that weighed down year-earlier profit at firms reporting under SEC guidelines. Meanwhile, the sharp jump in net income stems in part from write-downs on securities, which seem to have played out after the flare-up in FY08. Headwinds from the global economic slowdown, the drop-off in demand, and the strong yen continued to buffet earnings in FY09, particularly 1H. However, corporate earnings entered a recovery track from 2H, bolstered by various government stimulus packages, additional belttightening measures, and a fading impact from production/inventory cutbacks.

Meaningful boost from SG&A cuts
The firms in our universe trimmed fixed costs (sum of cuts to personnel, depreciation and net financial expense) by just over Y2 trillion in FY09. Management took an even broader approach to belt-tightening, though, revising budgets for R&D, advertising and promotions, as well. In other words, in addition to paring COGS, companies made cutbacks to SG&A, even those areas often considered fixed in nature. All told, combined SG&A cuts reached an unprecedented Y6.2 trillion, declining 8% y/y. Cost reductions by quarter were Y1.9 trillion in 1Q, Y2 trillion in 2Q, Y1.6 trillion in 3Q, and Y600 billion in 4Q.

Return to black in electrical/electronics and automobiles provided sharp boost to recurring profit
Thirteen of the 28 sectors in our survey achieved recurring profit growth, including the three sectors staging a return to the black. The biggest gains came from electrical/electronics, automobiles and electric & gas utilities. The former two sectors ended the year back in the black, thanks to increased production (as inventory cutbacks played out), restructuring benefits, and lower costs, including savings from ongoing efforts to trim COGS. Electric & gas utilities benefitted from a favorable turn in the rate adjustment system (tied to prevailing fuel, gas and forex markets) and improved operating rates at nuclear power facilities. Meanwhile, the sharpest falls in profit came from steel, passenger transport and trading houses. Steel mills suffered from a steep decline in sales volume on production and inventory cutbacks at customers, and reported fewer gains on inventory valuation (of raw material stockpiles). Passenger transporters combated sluggish demand, particularly in their core market (business travel), while temporary reductions in expressway tolls and the H1N1 flu virus also generated significant headwind. At trading houses, the fall in resource prices was the biggest drag on profit.

Operating and recurring profit outshined our estimates, thanks mainly to assemblers
The 11.5% y/y decline in sales was roughly on target with the estimate from our March survey, but operating profit and recurring profit, growing 0.8% and 20.4%, outshined our forecast for a 0.8% decline and 13.7% growth. Manufacturers, led by assemblers, overshot our estimates by a relatively wide margin.

Recovery spreading steadily
Of the 28 sectors in our survey, 24 topped our recurring profit estimates. Of note, 14 of 15 manufacturing sectors and 10 of the 13 non-manufacturing industries outshined our forecasts. The numbers for either group are higher than the number of industries to which we made upward estimate revisions in March. We think these changes indicate a more balanced and broader recovery, with the rebound spreading from the export-driven manufacturing sector to domestic demandoriented non-manufacturing industries. Automobiles, electrical/electronics and precision instruments beat our estimates by the widest margins. At automakers, sales volume, bolstered by scrappage incentives, exceeded expectations, as did cost reductions. The electrical/electronics sector witnessed wider-than-expected improvement in earnings, particularly for electronic components, thanks to robust demand for LCD TVs, PCs and mobile phones. The recovery in copier sales and progress in cutting costs contributed to the strong showing at precision instrument players. In the non-manufacturing group, passenger transport, electric & gas utilities and retailing ranked highest among those sectors beating our forecasts, due in large part to additional belt-tightening. Meanwhile, losses on overseas projects at major general contractors dragged down the construction & home fixtures sector, which fell well short of our estimate.

Earnings recovery gained momentum from 2H as expected Sales declined 21.8% y/y in 1H but turned up 0.2% in 2H. Operating profit reversed course in a big way, climbing 435% after the 57.6% setback in 1H, while recurring profit climbed back into the black after contracting 63.2% in 1H. Modest recovery in the global economy and an end to production/inventory cutbacks stabilized sales in 2H, setting the stage for a stronger recovery in earnings amid sustained benefits from cost reductions.