Earnings Call: Q4 2021

May 14, 2021

Good afternoon. Now allow me to explain the financial results for FY 2020 ended in March 2021. First, revenue in the Q4 was JPY 248,500,000,000, almost the same year on year. Gross profit was almost the same year on year. As for SG and A, we made our further efforts to reduce it. Operating profit in the 4th quarter was JPY 8,300,000,000. Profit attributable to owners of the company was JPY 5,400,000,000. I will give you details later, but the businesses that achieved growth in revenue and the profit in Q4 year on year were, as shown here, IT Services, including Workplace Hub, Existing Health Care, Measuring Instruments, Performance Materials and IJ Components. The numbers in the parenthesis show the growth rate. As for the full year basis, revenue was down 13% year on year, JPY 863,400,000,000. This had a great impact. But as for SNMA, it was reduced JPY 53,400,000,000 since the last year, resulting in operating loss of 16,300,000,000 yen and profit attributable to owners of the company was 15,200,000,000 yen In terms of the full year, we had growth both in revenue and profit in the industries, measuring instruments, performance materials, imaging IoT as well as IT services. Our Business Technologies business is still faced with severe COVID-nineteen plight, but some of the businesses are already showing recovery to the level of pre COVID-nineteen. This shows quarterly changes. Operating profit became profitable in the second half of the year. The same goes to the profit attributable to owners of the company. As for 8,300,000,000 yen of operating profit in the 4th quarter, it's going to be 11,500,000,000 yen if we are to take out the structural reform cost of 3,200,000,000 yen we had toward the end of the fiscal year. The bottom left graph shows year on year rates of increase or decrease. As shown in here, revenue was almost in the recovery mode in the Q4 year on year. Please find the details by region on Page 24, and please refer to them later. Gross profit margin hit the bottom in May. Yes, we had big gap, particularly in Office and Printing due to the print volume impact. But with this recovery, the gross profit margin improved. With the industry business becoming bigger, the gross profit margin gap was reduced. SG and A has been constrained. All in all, as shown in the breakeven point in the top right, its ratio became 93% in the 4th quarter. As for the free cash flow, it grew from the positive 6,900,000,000 yen in the 2nd quarter to 14,900,000,000 yen and further to 35,900,000,000 yen in the 4th quarter. Here, I would like to make a comparison between the actual results vis a vis the earnings forecast we made. As you've seen here, we had both positive and negative aspects. Positive side, profit attributable to owners of the company exceeded the target by 2,800,000,000 yen. Non consolidated profit also improved. Earlier, I touched upon free cash flow. It was up 33,700,000,000 over the forecast. This is mainly driven by operating cash flow. We had initial borrowings of JPY 85,000,000,000, but we paid back as much as JPY 65,000,000,000. With this done, equity ratio as of March end was up 0.5 points compared with the end of previous fiscal year. In comparison to the end of Q1 when it was quite tough, it went up 3.2%. As planned, we will pay period end dividend, JPY 15, up JPY 5 from the midterm. We plan to have HSN under 100,000,000,000 yen in all the quarters. Excluding the FX impact, it went under 100,000,000,000 yen in real terms in the Q4. Industry business came in as we had expected. Measuring instruments had a record high for the Q4 if we are to exclude the Q4 in FY 'seventeen when we had a special demand for OLED. Performance Materials also had a record high in the 4th quarter on the quarterly basis since we started its disclosure. You may have a concern, but the company already has finished its evaluation of business, including Precision Medicine Business and told us there is no impairment loss on goodwill to be applied. As for the negative side in terms of the forecast we made, we were particularly affected in January February by the lockdown imposed again in Europe and the U. S. As shown here, though now we had forecasted a 90% recovery in the non hardware revenue, but it turned out to be 84% in office and 88% in Production Printing. This gap had its impact on operating profit. Though I will explain this later, the number of units in North and Hardware sold recovered in March. This will have a positive impact on the non hardware business in FY 'twenty one. Another point about the genetic tests being conducted by ANBLY. Yes, the number of visits to hospitals in the U. S. In January February declined. The recovery of number of tests started in the latter half of March. So its contribution to revenue will take place in FY 'twenty one. As for the structural reform, its plan has been postponed partly due to the negotiation we had with labor unions in Europe. This slide shows those points quantitatively. I will not repeat the positive aspects, but profit attributable to owners of the company was up JPY 2,800,000,000. Next line shows free cash flow. Programs were paid back. Equity ratio being 45.3 percent with the rating down in March and dividend, SG and A, Industry and Business operating profit was JPY 15,600,000,000. So we ended the Q4 with those numbers. The negative points are reflected in this table. Against the loss forecast of 13,000,000,000 yen for the entire company, we generated a GAAP of 3,300,000,000 yen. The reason for this is shown here by segment. Office had a negative 2,700,000,000 yen Production Print being negative 900,000,000 yen Precision Medicine being negative 900,000,000 yen They are the reason for the gap of 3,300,000,000 yen As I have mentioned this earlier, in Office, non hardware and operating profit was down 3,400,000,000 yen. Within print volume impact in production print, its impact on operating income was 300,000,000 yen. That's it here. And I would like to go through the details of the additional structural reform plan. We forecast this to be 5,000,000,000 yen but it turned out to be 3,200,000,000 yen So the gap here is 1,800,000,000 yen With the partial delay in Europe, which I mentioned earlier, this 1,800,000,000 yen has since helped us in terms of the cost incurred. Out of this 1,800,000,000 yen 1,500,000,000 yen goes to office and production print. So the gap of 2,700,000,000 yen for office will become 4,200,000,000 yen in real terms, of which 3,400,000,000 yen is non hardware, 900,000,000 yen for professional print will become 1,200,000,000 yen in real terms by adding 300,000,000, of which printing volume is 300,000,000 and the remaining is heavier. Precision Medicine ended 7,600,000,000 yen in revenue due to the impact in January February, as I have mentioned earlier. But I will explain this later. The number of samples received for genetic tests recovered dramatically in March. It grew 6% in Q4 against the forecast in terms of the testing of the samples. Now those numbers are plotted in those graphs. The left graph is office. The blue line is non hardware. At the end of the third quarter, non hardware recovered 85% year on year. As shown in the dotted line, our original expectation was 90%, but it turned out to be 84%, down 1%. The reason for this is the factors we had in January February in the U. S. And Europe. In March, it recovered up to 91%. In the meantime, the hardware in ratio was 100% in the 4th quarter. In March, it was actually as high as 120%. Moving on to production print, non hardware. It was 88% visavis the forecast of 90%, but it was 95% in March. As for hardware, it was 112%, and in March, it went up to 140%, showing a high recovery. The number of genetic testing samples received by ANBLY is shown here in the bar graph. Yes, it was rather slow in January February. March shows a recovery, and this recovery is going to have its impact on performance in FY 'twenty one. This graph shows operating cash flow. It shows the changes over the past 5 years. As shown here, the annual number is 78,100,000,000. It is actually the highest in the 5 year period, and the total for the second half was 68,400,000,000 yen Here, let me now look into the industry business. I would go through the quarterly revenues of the core businesses, namely measuring instruments and Performance Materials. This shows the quarterly revenue for 5 years. The left measuring the instruments. The latest Q4 shows 9,600,000,000 yen in revenue. This is rather comparable to the number back in FY 'seventeen when we had a special demand for OLED. But in the background, we acquired in 2019 AMIS Systems for automotive visual inspection measurement. And furthermore, in the Q4, we acquired SPECIM, giving us new domains such as food and pharmaceuticals. So they are now getting into our consolidated results. Performance Materials revenues are shown here. Starting from the Q2 in FY 2020, it grew firmly. For the full year, it became JPY 46,800,000,000. This business is now backed up by large displays as well as our strong capabilities such as thin films, both small and medium sized displays and mobile displays. We are now promoting our new resin film called Sankey, and its true value is now getting appreciated. These two operations are the core of Industrial Health Business, the former segment. Its operating profit is shown in the line. From the 3rd to the 4th quarter, it surpassed the 20% line. Measuring instruments and performance materials and Western are quite popular in IGR Components whose number is not yet disclosed, but it has a high profitability, show revenue increases that also improve the profit ratio as a whole. I may be repeating the same point here, but in the measurement instruments, we are currently reducing our dependency on displays, while accelerating our efforts in other areas such as recycling, food, remote sensing and pharmaceuticals. This concludes the section on the summary of FY 'twenty results. Now I would like to move on to our focus for FY 'twenty one. Revenue is expected to be 940,000,000,000 yen up 9% year on year. Operating profit is 36,000,000,000 yen and profits attributable to owners of the company is 19,000,000,000 yen. Assumption for ForEx is 125 yen to a euro. I will go into details in the next slide. I have just touched upon the assumed foreign exchange rate. Revenue increase of 9% is on expectation of recovery from the first half of FY twenty twenty. And we should be able to leverage our business opportunities coming from COVID-nineteen pandemic. This is behind the 9% increase in revenue. Here now I'd like to emphasize that we do believe there is going to be a good chance for us to realize around 3% in gross profit. Recovery of revenue can be expected from the region and product mix improvements as well as recovery in non hardware business. Industry, more than 20% in gross margin, definitely has a higher gross profit. Precision Medicine has 60% plus gross profit ratio. Therefore, if its sales goes up naturally and its margin will go up. However, we're strategically spending advanced investment in SG and A, which makes achieving higher operating profit challenging, but gross profit will enjoy large advantage from precision medicine sales. As for our SG and A, we will continue to keep control to maintain quarterly level under 100,000,000,000 yen and we certainly will take on the challenge of generating operating cash flow of 100,000,000,000 yen a year. As for our full year operating profit of 36,000,000,000 yen this requires portfolio transformation I shared with you in our IR Day last year. It's the 4 quadrant capital policy: 1, about changing the way we run our low profitability business, even if it means finding alternative best owner to run the business. And the other one is about our strategic new business. I did mention more about the portfolio transformation in our IR Day like financing the scheme flexibly, looking at all possibilities. And we don't want to postpone starting the task. It will be done within the 2 year midterm plan during years 'twenty one 'twenty two and as soon as possible. That's where the portfolio transformation, 4,000,000,000 yen comes from impacting operating profit. It is a one off expense, and we do feel it is important to factor in all these elements in deriving the 36,000,000,000 yen What are the risk factors then? First, the upside. We certainly can talk about FX because our currency assumption is 125 yen We will make currency reservations, but more than that, we believe the upside will come from early recovery of demands due to more people getting vaccinated, especially because we have higher exposure to the U. S. And European market. On the other hand, the steep recovery of demands will likely cause increase in materials price for an extensive period. Although we have factored in some impacts of this, it is still a risk factor for us. And it will be a downside risk, especially if the high price stays that way for long. This page shows factors in operating profit increase or decrease from FY 'twenty. Simply put, particular factors mainly around our business technologies will add 17,000,000,000 yen This includes effect we can enjoy from structural reforms as well as additional expense. On the other hand, naturally, global subsidies will go down. In net, it's 17,000,000,000 yen Then there's the 32,000,000,000 yen contribution from increase or decrease of Business Technologies plus digital workplace professional print businesses. All that in total tells you that Business Technologies added 49,100,000,000 yen more to our operating profit as you can see below. Healthcare adds another 5,400,000,000, industry 7,400,000,000. But corporate and others is minus 9,600,000,000 yen increase in expense. Part of this is the one off 4,000,000,000 yen portfolio transformation expense I mentioned earlier. There is also what we call corporate R and D that will increase, in other words, strategic parts of R and D efforts that we want to keep on investing for our future. So that's also something that you can find here. And now this slide shows how revenue and operating profit changes by segment. I will be elaborating more on this in the following slides. But then, for example, you can see what the first, for example, digital workplace with office at its core, is expecting in terms of sales growth in 2021. During FY 'twenty, we focused on non hardware offerings. And this year, we are going to aim to achieve 84% of FY 2019. In other words, we want to be a bit cautious for FY 2021, and that's why the previous Q4 actuals of 84 percent visavis FY 'nineteen is going to be the baseline assumption throughout the entire FY 'twenty one. What about sales growth? Here, on this slide, we write about digital workplace with 20,000,000,000 yen increased profit for more business aside from 15,000,000,000 yen increase from particular factors. For example, we expect to acquire large scale projects with our full lineup of new products. We also mentioned about one rate. It's about applying one unified charging rate regardless of printing volume. One rate is now being offered in increasing more overseas market, and this scheme contributes to our gross profit. We also utilize AI to offer optimal proposals. And the DWDX is about our IT service and workplace hub. Switching core software to in house development to gain gross profit, outsourcing service, back office operations to offer increased gross profit as well as to enhance flow of IT service profits. And then as cybersecurity has now become even more a critical theme, we can offer cybersecurity diagnosis combined with Workplace Hub enabling us to become 1 in security for managed IT. We're also working with local governments to offer electronic application and processing as part of our core IT services. This is where we will also intentionally reduce development costs by 4,000,000,000 yen to seek more profit. As for professional print, there's 2,000,000,000 yen increased profit by particular factors and another 12,000,000,000 yen coming from business growth. For non hardware offering, here, our Q4 actual was 88% of FY 2019, but we expect there will be some recovery. Thus, our base assumption will be to achieve 90% of FY 'nineteen. We're gaining competitiveness, expanding combination of high end product printing IPs at mid and major printing companies as well as offer high end functions. Our and that is exactly what we want to do. And our highly differentiating IQ501 will now become a standard offering, and we will launch a new model for high- and medium speed label printer, where we are very strong at. We will also continue expanding PP sales in China, which was at its highest in FY 'twenty. And of course, cost reduction is also important. But at the same time, we will also include possible impacts of known risks in the first half, namely semiconductor shortage and materials cost increase. For health care business, strengthening our digital business, especially in Asia, will be the key to increase our profit. In Japan, we will start remote diagnostic services utilizing Infomiti platform used in over 10,000 medical institutions, expand sales of high value added Doctor integrated X-ray systems and be proactively engaged in establishing clinical value of dynamic Doctor in Japan, U. S. And China. For precision medicine, we are finding steady increase in RNA test AmbreScore offering, enabling us to differentiate ourselves. We are also expecting resumption of clinical trial for in vitro, especially because there wasn't much progress with clinical trials in FY 'twenty due to reasons by the patients. We will also deploy care program for able-bodied people in Japan and the U. S. We've also recently announced a couple of months ago that we will deploy Lattice operating on IoT platform. While we execute all these plans and strengthen top line growth, we will also make sure to implement necessary cost reduction efforts as well. Next, measuring instruments. We now have new technology for displays. We will promptly introduce and solidify its performance, but we also will work on other non display applications, for example, auto, food and pharmaceutical, to add more profit. For materials and components, we will accelerate our current initiative to increase market share within large sized TVs as well as work on small and midsize thin film technology. I already spoke about inkjet components, but again, we expect 40% sales growth. We've been competitive in regards to durability, enabling us to strengthen POD field. We've also strengthened our MEMS technology, expanding to package and building materials. We also describe here our initiatives for components, as you can see. Another midterm growth driver is imaging IoT solutions, motoVix. We will utilize this in offering managed security solution, expanding sales in East Europe as well as in North America. We developed Foresight, image analyzing platform using AI. And we will upscale our works here with a partner during FY 'twenty one. Now going back to Slide 12 a while, earnings forecast for FY 'twenty one, because I want to explain what's changed from what I said in our IR day back in November. Now I know that I said that the management's goal for FY 'twenty one is to achieve operating profit of JPY 40,000,000,000 Now by the way, we already have been able to benefit by JPY 4,000,000,000 from FX, mainly from Europe. So that's already a bonus in achieving 40,000,000,000 yen However, let me once again iterate that we are being a step more cautious in forecasting printing volume of the business technologies. We also now have to factor in other risks, including semiconductor shortage, and that swipes away most of that 4,000,000,000 yen FX bonus. In addition, there is the expense associated with portfolio transformation, which we did not allocate any numbers in November. But we decided to record expenses this time instead of pushing it aside. So if you subtract 4,000,000,000 yen for this part from 40, that then gives you FY 'twenty one forecast of 36,000,000,000 yen Now for our FY 'twenty two outlook. Now we don't plan to change our current operating profit target of 55,000,000,000 yen we mentioned in our previous IR day. I will skip details today, but let me emphasize that we are all proactively working to ensure our profit growth from FY 'twenty one so that it will mark foundation for all the initiatives you find here to secure an even further profit growth in FY22 as well. So that's what I wanted to point out on this slide. But here's my final slide. Again, we are in the midst of transforming our portfolio. We're working basically on 2 areas: 1, the office demand where we base ourselves in offering digital workplace. And we need to make sure that we transform our IT service offering to something unique, not just any ordinary IT service. 2nd, we need to reduce our overall reliance on office digital workplace and build a next pillar of our business. And that shall complete our entire portfolio transformation. No doubt that this will be completed by the end of FY 'twenty five, but we also need to accelerate the progress during FY 'twenty one and 'twenty two, including strategic resource and capital reallocation on human resource and R and D spending, as you can find on this page. On the other hand, we have to be mindful of our operating cash flow and cost structure, cost controlling where required, such as keeping SG and A within 100,000,000,000 yen Finally, for shareholder return, in light of FY 2020 improvement in cash generating capacity and heightened probability of profit improvement throughout FY 2022, the annual dividend for FY 'twenty one will be JPY 30 per share. That is JPY 5 increase from FY 'twenty. So with that, I will conclude my presentation. Thank you.