Earnings Call: Q4 2024

May 14, 2024

Thanks for joining our financial results briefing session today. I will explain our financial results for FY 2023, the progress of medium-term business plan, and the forecast for FY 2024, which we disclosed today at 3:00 P.M. On the second page, here's a summary of the points I would like to share with you today. Firstly, revenue reached a record high for the year. In terms of profit, we secured a surplus through the profit attributable to owners of the company. This is the first time we have been in the profitability since FY 2018. Business contribution profit, operating profit, and profit attributable to owners of the company all exceeded the forecast from the beginning of the fiscal year. Operating profit, in particular, exceeded the forecast significantly. Regarding cash generation capability, which we are focusing on, we exceeded our forecast due to an increase in operating cash flow. Next, we will explain the progress of medium-term business plan. As announced on April 15th, we have begun discussions and signed a memorandum of understanding with Fujifilm Business Innovation Corp for strategic alliance in the multifunction printer, office printer, and production printer segments. In the precision medicine unit of non-focused business, we decided to transfer to Calyx the equity interest of Invicro, a U.S. subsidiary, which is responsible for drug discovery support services owned by REALM IDx, and the transfer of entire equity interest was completed on April 30th. In terms of strengthening our financial foundation, operating cash flow has been increasing, as I mentioned earlier, and we achieved a surplus of JPY 36.8 billion in the fourth quarter and JPY 83.3 billion for the full fiscal year. The fourth page shows the company-wide results for the fourth quarter and the cumulative total for the full year. Consolidated revenue for the full year was JPY 1.16 trillion. While revenue decreased excluding the impact of Forex, considering the rebound from the revenue increase effect from the elimination of order backlogs in the office unit in the previous fiscal year, we believe that the trend has been steady. The gross profit ratio for the full fiscal year improved by about 0.5 percentage points from the previous fiscal year. Production cost reductions also contributed to the improvement in the gross profit ratio. On the other hand, while personnel expenses increased due to review of regular salary increases in response to the worldwide surge in prices, we controlled SG&A at the same level as the previous fiscal year, excluding the impact of Forex. However, because of the recognition that further restraints are necessary in the future, we will optimize human capital through a global structural reform. In terms of profit, BCP decreased due to the increase of personnel expenses and the impact of eliminating the order backlog in the office unit in the previous fiscal year. However, BCP exceeded the forecast by JPY 2.0 billion. Operating profit increased significantly due to an impairment loss of JPY 116.6 billion in the previous fiscal year. This is also more than the forecast of JPY 8.0 billion. Free cash flow improved significantly from the previous fiscal year due to an increase in operating cash flow. Although the profit attributable to owners of the company slightly increased and free cash flow significantly exceeded the plan, we will pay a year-end dividend of JPY 5 per share as planned, because we are currently strengthening our financial foundation. The changes from the previous fiscal year by business are shown on page five. I will explain the situation by business later in detail. The factors behind the changes in operating profit are shown on page 6. Trends, excluding the impact of impairment loss, are similar to those of the third quarter. Although the digital workplace business and professional print business saw a large drop in their sales volume due to the elimination of their order backlogs, which was partly affected by the worldwide rise in personnel expenses, this was offset by favorable Forex, a decrease in air freight, normalization of logistics, and production cost reductions. Other income and expenses also improved. The main factors are described as follows. JPY 3.6 billion is gain on reversal of impairment losses regarding assets held for sales due to evaluation of the fair value of them from the transfer of equity capital of Invicro, and JPY 3.4 billion for gain on reversal of impairment losses relating Ambry Genetics because the good performance of Ambry's business were recorded. From page 7, I will explain the full year results by business segment on a business unit basis. In sensing unit, revenue of light source color continued to decline throughout the year, particularly from major customers because of the impact of restrained capital investment in display by customers. Object color and automotive visual inspection and others were solid compared to the previous fiscal year. In performance materials unit, demand for TVs recovered and films for small and medium-sized display also continued to recover. We also began sales of new high-performance films for smartphones that enable color reproduction even when polarizing sunglasses are worn. In the inkjet components unit, sales increased due to brisk exhibitions in Shanghai, China. Sales for industrial applications and growth areas were also solid. In imaging IoT solutions unit, sales increased due to the progress of distribution of monitoring camera solutions at sales companies in Europe and the U.S. But sales of MOBOTIX, a German subsidiary, decreased. The system integrator, Force Security, acquired in the U.S., has performed strongly. In the industry business as a whole, BCP posted a decline due to the impact of lower sales of sensing unit, which performed well last year. On page 8, I will explain the results of healthcare business. Sales volume of digital radiography used in X-ray diagnostics remained strong for clinics in Japan, while for the hospital market, the sales in Japan and the sales of X-ray systems in the U.S. slowed due to restrained investment. Sales of dynamic digital radiography systems with high added value using our proprietary technology grew steadily in the U.S., but revenue for medical imaging unit as a whole declined due to the impact of sluggish sales to hospitals. In precision medicine unit, Ambry continued to achieve profitability on a non-consolidated basis due to an increase in the number of received sample for genetic testing. Drug discovery support service is improving the status of clinical trial implementation for the full fiscal year. In the business in Japan, we are steadily increasing orders of GenMineTOP Panel Inspections, which we launched in August last year. While precision medicine unit narrowed the loss, BCP for the entire healthcare business did not significantly reduce the loss, affected by a decrease in revenue of medical imaging unit. Page 9 is about professional print business. Revenue from hardware in production print unit remained almost unchanged from the previous fiscal year, excluding the impact of the order backlog in the previous fiscal year. The sales volume of color models was also unchanged from the previous year, but the number of heavy production print that we are focusing on aiming to cultivate customers for medium to large size printing companies is growing significantly by 31%, which will lead to the expansion of non-hardware in the future. In industrial print unit, sales volume increased in all domains, including label printing press and textile printing press. Non-hardware continued to increase due to an increase in the number of printing press in operation in the market and an increase in proportion of digital printing among customers. Revenue in the professional print business as a whole increased, but BCP decreased due to an increase in SG&A expenses caused by growth investment in industrial print unit. Page 10 is about digital workplace business. Hardware revenue for office unit was 90% of the previous fiscal year, but excluding the impact of elimination of the order backlog in the previous fiscal year, it was solid at 104% and has maintained momentum since the third quarter. Non-hardware revenue was 98%, roughly unchanged from the previous fiscal year, excluding the impact of elimination of the order backlog, and increased in China and India. We are also expanding our OneRate to medium to large customers with cross-selling of solution-based products. In addition, we are strengthening sales of products related to security and print management through direct sales channels. As a result, office solution is growing. In DW/DX unit, services that help companies improve their business operation were strong. In Japan, the number of successful cases is increasing due to the strong performance of Cotaba, AI SaaS service for specific industries such as hotels and tomoLinks for education and others. Cost reductions due to reductions in fixed productions costs of office unit, reductions in material costs, and reductions in logistics costs and air freight and other factors contributed to the profit. In addition, the loss narrowed due to the restraint of SG&A expenses for DW/DX unit and other factors, resulting in an increase in profit. This section explains the progress of issues in medium-term business plan. This is page 12. As explained at the beginning, we have begun discussions and signed a memorandum of understanding with Fujifilm Business Innovation Corp for strategic alliance in the multifunction printer, office printer, and production printer segments. The aim is to strengthen the foundation of the business technologies business and to prepare for potential risks. The main content of the discussions is as described, but we are preparing to establish a joint venture in the second quarter of FY 2024 in order to coordinate the procurement of raw materials and parts. Through this collaboration, we intend to build a robust supply system for products and strengthen our environmental response and business continuity capabilities. We will also discuss business alliances in the toner development and production, where both companies have strengths. Page 13 shows the trends in BCP of non-focused businesses and direction-changing businesses. The loss for the full fiscal year narrowed by about JPY 3.5 billion from the previous fiscal year. In particular, the loss in precision medicine unit in the non-focused business, which I explained, improved significantly. With regard to the direction-changing business, we narrow down regions, countries, and business areas, and plan to implement strategic options, including withdrawal and utilizations of third-party capital in FY 2024. In addition, in the DW/DX unit, we have optimized the domestic development structure and resources in the fourth quarter of FY 2023. On page 14, we will explain the progress of the cost structural reform, which aims to strengthen our financial foundation. Total assets were reduced by JPY 25.7 billion from the previous fiscal year-end due to the repayment of debts and the reduction of working capital and other factors. Excluding the impact of Forex, we reduced by JPY 121.8 billion. Under the circumstances of the depreciation of the yen, we recognize that we are making steady progress in reducing assets. The graph on page 15 shows trends in inventories and operating cash flow. Inventory turnover decreased to 3.62 months, which is an improvement from the planned level. However, we recognize the need to further optimize the inventory turnover. Operating cash flow totaled JPY 83.3 billion for the full fiscal year due to profitability and reduction of inventories. This section explains about FY 2024. On page 17, I explained the forecast for FY 2024. The Forex assumptions are JPY 140 to the US dollar and JPY 150 to the euro, which are conservative from the current actual rates. Revenue is JPY 1.16 trillion, the same level as FY 2023 results. Excluding the transfer of businesses and the impact of Forex, we expect revenue to increase by about 3% in real terms. BCP is expected to increase by 54% to JPY 40.0 billion compared to FY 2023 due to the improvement of business earning capabilities, mainly in the strengthening areas of industry business, including the recovery forecast for sensing unit in the second half and later, capturing the effects of global structural reform, and reducing the loss associated with the selection and concentration of businesses. Meanwhile, operating profit is projected to be JPY 13.0 billion due to one-time expenses arising from the implementation of global structural reforms, including human capital optimization and expenses related to selection and concentration of businesses. Despite the forecast of the improvement of finance costs and others from FY 2023, profit attributable to owners of the company is expected to break even due to the decrease in operating profit. The breakdown of forecast by segment is shown on page 20. In BCP, we expect strengthening businesses, such as the industry business and the professional print business, to become the drivers of the increase in profit. In operating profit, one-time expenses related to business selection and concentration and structural reform are incorporated in corporate, et cetera. Please note that when implemented, these expenses will be recorded for each applicable business segment. On page 19, the factors behind the changes in operating profit for FY 2024 are summarized. The impact of Forex is assumed to be a strong yen, and sales volume and others incorporate growth in strengthening businesses and changes in the business mix. In addition, BCP will increase due to the reduction of losses caused by the selection and concentration of businesses and the partial effects of structural reforms. As explained earlier, in terms of operating profit, one-time expenses associated with structural reforms and business selection and concentration are factored in other income and expenses. On page 20, the image of BCP and operating profit for FY 2025, the final year of medium-term business plan, which was explained at the management policy briefing session in April, is shown. As I explained earlier, in FY 2024, we will record a temporary expenses of JPY 20.0 billion associated with structural reform and expenses related to selection and concentration of businesses. We expect the BCP ratio to be 5% or more due to profit growth and strengthening businesses, in addition to the effects of these expenses being realized in FY 2025. Operating profit is also expected to increase significantly from FY 2024 to FY 2025 because temporary factor will normalize. We will continue to strengthen our cash generation capabilities and financial foundation and aim to achieve ROE of 5% or more in FY 2025. On page 21, I will explain our dividend policy for FY 2024. As for the capital allocation outlined in medium-term business plan, we reduced interest-bearing debt by JPY 45.8 billion in FY 2023. We will continue to reduce our debt. With regard to dividends, there has been no change in the dividend policy from before, but as investment in businesses and reduction of interest-bearing liabilities are the highest priority, no dividend will be paid for FY 2024 at this moment. This section introduces our ESG initiatives. Page 23 is a topic of external evaluation. In Nikkei WOMAN Survey on the level of women's active working in companies, we were selected fifth within the same industry. In addition, we have received external evaluations of our initiatives, such as being awarded supplier activities by companies related to climate change. Page 24 shows the initiatives related to recycled plastic material technology explained at the medium-term business plan progress briefing session in April. In order to realize a decarbonization society, which is an important theme in addressing environmental issues, we have worked to increase the use rate of recycled materials for MFPs and have maintained our position as one of the top in the industry. We announced yesterday, and we have jointly developed a recycling material for the exterior part of NEC Platforms' Wi-Fi router. This is accomplished by increasing the strength and flame retardancy of recycled polycarbonate through the advanced formulation design technology and injection molding technology that make materials with high recycling material usage rates to high-quality plastic materials that we have cultivated. By accumulating these examples, we will promote the provision of new value in the recycled material supply chain and realize effective use of limited resources, which is one of our material issues. I will finish explaining this to you. Thank you very much for your attention today.