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Toshiba's operating profit reset to zero by chip unit sale

Japanese conglomerate leans on infrastructure and seeks to sell off losing segments

TOKYO -- Toshiba expects an operating profit of zero for the year through March after removing its flash memory business from consolidated earnings, it said Wednesday, leaving it searching for a way forward.

Profits from money-earning segments, such as infrastructure systems, are forecast to be canceled out by losses in other sectors like PCs and televisions.

The Japanese conglomerate has dodged a potential delisting of its shares due to negative net worth, brought on by massive losses at U.S. nuclear power unit Westinghouse Electric. Toshiba decided to sell its crown-jewel chip business to help resolve that problem. But the year through March 2019, rather than a fresh start, will be a difficult one without Toshiba Memory.

Third-quarter earnings released Wednesday showed that keeping the memory unit probably would produce a record operating profit of 440 billion yen (4.11 billion), driven by chip demand from smartphones and data centers. But Toshiba President Satoshi Tsunakawa reiterated Wednesday that the company was sticking to its plan to sell at March's end to a consortium led by U.S. private equity firm Bain Capital.

"Bolstering profitability in infrastructure will be essential," CFO Masayoshi Hirata told reporters. That segment, which includes elevator and climate control systems, is to become key to Toshiba's income. But with orders declining, its operating profit is seen falling 16.4 billion yen on an annual basis for the year through March to 42 billion yen, on expected revenue of 1.26 trillion yen.

By contrast, operating profit for semiconductor operations is set to more than double year on year to 449.7 billion yen. Toshiba "cannot be at ease until it settles on how to grow infrastructure," Hirata warned.

Toshiba projects an operating loss of 5 billion yen in the energy systems segment, on sales of 840 billion yen, with profit weighed down by additional provisions booked in accordance with new orders for thermal or hydroelectric equipment. Nuclear power operations are seen declining in both revenue and profit terms, owing both to the contracting home market and to some business items growing less profitable.

Some thermal power generation products, such as gas turbines, are facing headwinds everywhere. The market for such goods "is shrinking across the globe due to concerns related to carbon dioxide emissions," Hirata said. "Broadly, we are curtailing thermal power operations and reallocating resources to other energy-related efforts."

As for the overseas nuclear power business, which triggered Toshiba's recent crisis, the company "will not build plants, but will export equpment while making sure it is profitable to do so," according to the CFO.

Toshiba's U.S. energy operations also carry risk stemming from the Freeport liquefied natural gas project under construction in waters off the state of Texas.

The Japanese company has contracted to buy 2.2 million tons of LNG per year from the project for two decades beginning in 2019. Selling the fuel should not be a problem, as "there are buyers for higher levels" than that volume, according to Hirata. The problem is that Toshiba has not yet struck a supply deal, and there are uncertain factors such as unsteady crude oil prices to consider.

The potential risk is "just over 10 billion yen per year," according to Hirata, which over 20 years could amount to about 200 billion yen in losses.

In the storage devices segment, Toshiba will still have hard disk operations. While earnings from HDDs are relatively low, with operating profit seen at 23 billion yen on expected sales of 430 billion yen, the costs are lower than those for the departing NAND memory operations. Toshiba will "continue expanding HDD storage volumes to meet clients' needs," Hirata said.

Operating losses in the PC business -- for which Toshiba is seeking a buyer -- are expected to worsen by 8.5 billion yen for a total of 9 billion yen in red ink, on sales of 170 billion yen. But the company is "proceeding with restructuring so as to turn [the business] around to profitability," said the CFO.

Toshiba plans to book 60 billion yen in restructuring costs for the year through March, and the "others" segment, including TVs and PCs, is expected to turn an operating loss of 40 billion yen. Those costs combined represent the potential for a 100 billion yen operating profit if the struggling elements can be sold and restructuring ended, in the company's view.

However, Toshiba added a number of vocal investors to its list of shareholders with its 600 billion-yen share offering in December. An operating profit of 100 billion yen "would fall far short of the return expected by shareholders," admitted Hirata.

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