Earnings Call: Q2 2021

Oct 29, 2020

Good evening, everyone. I will explain about our financial results for second quarter fiscal year 2020, ending in March 2021. The main points are here. Fiscal year 2020, first half performance overview, first quarter to second quarter, and monthly changes and features. Then, the third quarter fiscal year 2020, the targeted profit structure after that, and the fiscal year 2020 full year earnings forecast, and the priority initiatives. What are the basic policies and target profit levels? With that in mind, the policy on shareholder returns and dividend forecast in fiscal year 2020. First of all, in second quarter, as you can see on the screen, we had revenue of JPY 211.5 billion, operating profit of negative JPY 5.2 billion, and profit attributable to owners of the company negative JPY 4.9 billion. Explanation is provided. In second quarter, decrease in revenue year-on-year was 28% in first quarter, but shrunk to 17% decrease in revenue year-on-year in the second quarter. By business, measuring instruments saw increase in revenue, while IT services remained flat year-on-year. Other businesses saw quarter-on-quarter revenue increase in a big way. By region, China had big increase in revenue, and Europe saw recovery to a little less than 90% of the prior level, and Japan and the U.S. had recovery to a little less than 80% of the prior level. As for the operating profit, as we had made assumption in the first quarter, we are able to recover to that level. In September, the profit on monthly basis as a company overall is in the black. I will go into more detailed explanation about the profit structure later on. The product mix is affected from North America, and it is still not how we would like to see it. The inventory cut in the production adjustment, we took some time to do that in the second quarter. That is reflected in the gross margin. We would like to implement our measures so that the SG&A continue to be held down under JPY 100 billion as same as first quarter. The structure reforms implemented last year continues to show in our improved numbers. About the improved capital efficiency and securing liquidity, the operating cash flow returned to black of JPY 17.5 billion, due to reduction in losses and steep reduction in inventory by JPY 17.7 billion over first quarter. Free cash flow improved to JPY 6.9 billion due to the restraints on capital investments, which were vast improvements over first quarter. There were no problems with liquidity, and JPY 30 billion of the JPY 85 billion in borrowing at the start of the fiscal year were repaid. Here, I continue to explain about the profit structure, including second quarter. As mentioned, revenue and gross profit. North America was a little bit lagging behind in the product mix. We had the inventory adjustment, so the operation was worsened compared to our plan, but we are going to improve the gross margin towards the third quarter. SG&A is restrained to JPY 100 billion, as I said, but it is not just that we are cutting the operation costs, but against this background of the COVID-19, we are doing our marketing in the online demonstration or we are using virtual web seminars. Not just in the business negotiation, but deal making and actually closing the deals on DX. We are putting emphasis on this as a company, and this endeavor is seeing fruitful results in the second quarter. About the overall fixed costs, we had fixed costs in sales and costs in SG&A. But in the second quarter, we reduced overall fixed costs by JPY 24.2 billion year on year. As for labor costs, that is according to plan, so we reduced by nearly JPY 9 billion. So far, we are realizing steady improvement in our revenues towards the second half, so that we are not relying on the revenue, so that we can have a good structure in place. Getting into monthly figures. May is actually the bottom of our revenue. After that, the monthly numbers have started to show improvements according to business segments as we show here. On the right-hand side in the bio healthcare, August and September, it seems to be dropping down. Because there had been the VAT impact, the demand before the VAT increase, if we exclude that effect for that, we see this dotted line. As for the business segments, revenues and operating profit, you can see in the middle of this screen, as you can see in this heading, the industrial business segment continued to post profits as in the first quarter, and Office Print and bio healthcare business returned into the black in second quarter. Professional Print, as we forecasted, is lagging behind compared to Office Print. That is due to lagging recovery in holding sales promotion activities. But from quarter to quarter, we are seeing improvement significantly, and also seeing new business is being declined. First quarter to second quarter change points, we show by KPI. Put very simply, as for Office Print, non-hard sales or the MFP units had recovered to roughly 80% of the level, and IT services business recovered to previous year levels. As for the regional breakdown, China, after June, is seeing increase in revenue, and that continues. Europe is seeing return to 80% plus prior level, the U.S. to 75% of the prior level. So both in Europe and U.S.A., September is going to see quite a big improvement. In IT services, business recovered in September from the contributions from solution projects for major clients. Professional Print, compared to Office Print, is lagging a little bit behind in its recovery. But in Europe, it's 80% of the prior level, and United States it's 70% of the prior level. In the industrial printing, United States and Europe have improvement in non-hard, but for the hard, acceptance inspection is taking some time, but the order backlog is up in September, so that we are going to have the realization of sales in second half. As for the bio healthcare, a significant factor is the decrease in the number of the patients due to the impact from COVID-19. The first quarter and second quarter, it's the same situation, but as for that, we are seeing the steady monthly improvements in the number of patients. As for genetic testing, we are recently seeing rapid increase in the number of tests. In September, it's recovered to 93% at the level in February below the COVID-19. We had started the COVID-19 test in U.S.A., and in the second quarter, we are going to see the increase. As for the drug discovery support services, we had an order backlog of 150% compared to March end. However, the central nervous system was a bit lagging, but order is coming back in the second quarter. In the pipeline, in the second half, we can see the fruitful results from that. As for the industrial material and equipment, demand related to the smartphone manufacturing is helping overall increasing revenue trend. We will maintain this trend, and towards the year end, we are going to have the sales from the big TVs, and it is in an increasing trend compared to our prior plan. The supply chain, the inventory adjustment is over so that revenue is increasing in September. That's the change points between first quarter and second quarter. That's roughly the summary of the first half. I would like to go into the explanation about the second half. First, I will talk about the environment in the second half and the assumptions of the environment after the third quarter by businesses. In some countries around the world, we are seeing the COVID second wave and the third wave, so that there will be local lockdowns that will be restraints on the economy and the activities. That is going to continue in the second half. The first quarter, we felt the effect in the end of the three quarter and the fourth quarter as going to be the improvement. The assumption, we would need to be quite conservative and also as an assumption. We are not going to see the lockdown as a country in a chain reaction. I don't think that is going to happen in the same magnitude as we saw in the spring. I'm not going to discuss about the details, but the Office Print in the fourth quarter, it's going to be about 90% of the recovery. In 2021, then it's not going to be better by that level. Then it's going to go again into the decrease. As for the work style assumptions, we have the document optimization and the digitization, so that the local government and the health sectors, they would need to have the business that's essential. DX and OCR and RPA, we have the business opportunities. As for the Professional Print, it's lagging behind in recovery. But in 2021, the small and medium firms printing demand is still constrained, and also the demand is shrinking for the centralized printing departments of the corporations. The digital printing is going to recover in fiscal year 2021, so that the medium and large companies will be focused. The Professional Print, centering on the labels and the packages, the on-demand digital is increasing even under the environment of the COVID-19. This is going to be a sector that is going to increase in a big way. The health sector, end fiscal year 2020. Those patients that are coming to the hospitals are going to recover, but in the U.S., it's still at a constrained level. As for genetic testing, it is going to recover towards next year. Drug discovery segment, the clinical trials will gradually start up again. The measuring instruments, it's stated here that to the fiscal year 2021 is going back to the growth trend. We feel this as a positive development. Next, we go into the targeted profit structure in fiscal year 2020 after third quarter. As in the first half, we are going to reduce the fixed costs. As for the revenue, we would need to have assumption in relation to demand. By putting efforts on the self-help efforts, we are going to show even more in what we do in the second quarter, so that the revenue, as seen in the gross profit margin recovery, as we said here, although it is on a slow basis, North America is going to see improvement, so that the high speed segment is shifted to contribute to higher profit. The production utilization rate should be employed to have impact on the profit margin so that there will be recovery of the non-hard to contribute to profit. SG&A is going to be contained below JPY 100 billion, not just to be shrunk, but by DX, we are going to have the progress within the company and show it in the numbers. The total fixed costs, especially the labor cost, is going to be cut in JPY 10 billion or more year on year. With that in mind, I'll go into the earnings forecast in fiscal year 2020. The total of first half is shown at the left in actual numbers. In the second half, we forecast that the revenue will be JPY 485.3 billion and operating profit as JPY 14.9 billion in black. I will explain this in some more details later, but just briefly, we will book an allowance at the end of the fourth quarter for structural reform in office business to take measures early on rather than simply waiting until its recovery, which we have assumed to take time. The amount will be JPY 6.5 billion. Without this, the operating profit in the second half is forecast to be JPY 21.4 billion. But because of the JPY 6.5 billion being subtracted, our focus now is JPY 14.9 billion. Our focus for net profit is JPY 4.2 billion. Please take a look at the bottom part of this page. Let me explain about the capital efficiency a little more. We'll be selective in making investments. The new Mikawa factory is a selected investment we are making in order to consolidate manufacturing affiliates. This is to boost our production printing business, even against the backdrop of the U.S.-China trade friction. But other than that, investment will be curbed to keep free cash flow in the black, as in the second quarter, at the value of JPY 5.6 billion. This is our earnings forecast by segments. I'm not going to go into details here, but let's take a look at the breakdown of the JPY 14.9 billion forecast for the second half of the year for profit. For office business, the number is JPY 12.2 billion. But if you add back the JPY 6.5 billion for the structural reform in view of the next fiscal year, this would be JPY 18.7 billion. This is the level we expect to return to for the second half of the year. These are the priority initiatives for the second half by business areas. First of all, for MFP, in the second half, we will complete the color and monochrome full lineup of i-Series. Through the completion, we will make sure to close the deals. As for IT services, there is an increasing number of inquiries coming in for telework and MIT. We will be enhancing sales for that. As for Workplace Hub, from the second half, we will have the new product, Workplace Hub Smart, which will be based on Windows, which will provide better flexibility to be able to address the requirement of the customers better. This sales is going to start in the U.S. as well as in Europe. This is not just for direct sales, but for a variety of partners. More flexibility is going to be provided. As for the production printing, As I said, mid-tier and major printing companies are where we find our demand, so we will capture high-end and KM-1e demand. Also, as for Light PP, new products are going to be launched in the second half. We will support the firm demand for labels by further expanding sales of label printers. As for bio healthcare, we will accelerate partner strategies according to the feature of each region and department. We are seeing already some results in the first half. We will accelerate that. IT service, which is added value, and also solutions for CARE Program, will make contribution in terms of sales in the second half. As for Ambry, unaffected people or healthy people, we have a CARE Program. Through that program, the number of tests has been increasing in terms of the ratio since the first half. We will be further expanding the market in the second half, and we will be also expanding the tests for COVID-19. As for in vitro, we will harvest results from order backlogs and expand pipelines. As for measuring instruments and performance materials, please read what is written here. With these priority initiatives, we will aim to achieve 14.9 billion JPY profit even after covering the cost for structural reforms. From here, let me explain what we will do towards 2022. Let us take a look at this graph. We have some basic policies to cover. We will restore operating profit in office business through the structural reform in the fourth quarter, and we will return the profit level to the fiscal 2018 because the fiscal 2019 profit was not satisfactory, so we would like to aim for the level in the fiscal 2018. What should be done will be implemented very quickly, not little by little, in order to restore the profit in 2021. As you can see at the left bottom, we have some activities for generating new businesses, but we have deficit, unfortunately. This is going to be one of the top priorities here in the company, to reduce the deficit to half towards the fiscal 2021. What should be changed in the strategy will be changed, and we will reduce the deficit by half. While maintaining the level of fixed cost, as you can see to the right, for the fiscal 2022, we would like to have new core business that would be coming after office business, so that such new business can make already profit contribution. As for the fiscal 2021, our management target is JPY 40 billion as an operating profit, and we are working on that target. What is the major initiative for that is to shift the revenue structure in order to increase the probability of achieving this JPY 40 billion. As for the fiscal 2022, the target is JPY 55 billion, and rather than relying upon office business simply, we would like to generate new business to achieve that target. Now, let's take a look at how to restore operating profit in office business. We will cover the items on the left-hand side, increased sales, greater efficiency, increase in gross profit, and reduction in SG&A. We will be covering these items. I'm not going to go into details, but what we have been working on will be accelerated in order to build muscle, so to speak, in our office business, and we will accelerate that. On top of that, to the right, we are looking at structural reforms through the allowance we are going to make. 10% of office personnel globally is going to be optimized. They may be shifted to Workplace Hub or IT services, or they may be shifted to other areas within the group outside of the office business unit, and they will be, of course, educated and trained for that purpose. So we will be slimmer through the structural reforms. For that, we have one-off expenses of JPY 6.5 billion. As for the effect we expect in the fiscal 2021, this JPY 6.5 billion is on top of the structural reform we have been pursuing this fiscal year already, and this will generate JPY 15 billion effect. On top of that, we will have sales cost reduction as well as R&D cost reduction to generate JPY 25 billion more profit with quite high probability. Now, let's take a look at how we are going to accelerate improvements of profit in new business. As for Workplace Hub, mainly, we have two things, two strategies. As for Workplace Hub, we will make it available for customers to select MFP i-Series as a part for Workplace Hub composition. This is to improve flexibility, such as scan speed. We can also leverage existing R&D resources for office business for Workplace Hub. We have been developing dedicated Linux OS, and we'll be replacing that with Windows, which will form a basis for Workplace Hub Smart. That way, customers can get on cloud more easier, and applications can be more easily combined. This will be rapidly expanded. This is not just for MFP sales, but also for IT service personnel within our company, and this will provide more flexibility to the partners as well. Linux-based OS development has been taking too much time, and we have not been agile enough to respond to customers' requirement. We already have the sales network, so through the shift of the strategy, we'll be able to address this challenge. As for the bio healthcare, the CARE Program is for unaffected people and healthy people. So this is going to be eight times bigger than the genetic market that we see right now. According to other market research, it is actually as high as 32 times, and this is what is written in the appendix, and that market research is more accurate. With this, not just in the U.S., but also in Japan, we would like to start such genetic testing in the fiscal 2021. We will, of course, improve efficiency, and we will reduce the time needed for analysis that would be leading to cost reduction as well. Together with Invicro, we will be able to establish a global molecular analysis platform. We have been making quite a heavy investment into that in the fiscal 2020, but we will be able to start utilizing that data in the fiscal 2021. Ambry and Invicro, they are unique in their own light. By combining capabilities of Ambry and Invicro, and through that combination, we will be able to become a global key player. The analytic platform, which is really at the core of the genomic analysis, we have a lot of potential for making investment going forward. This is something I feel on the ground in the United States. In that sense, the value of this business, how are we going to materialize that? How are we going to attract more investment into this new opportunity for growth? We have to think about the finance. We have flexibility here, and we have some options on the table that are under consideration. As for other new business, we will be having selection and concentration, and if growth is not expected, we will deal with that business area appropriately. Now, we have changed our business segmentation. This was actually something that was decided for the midterm management plan, which has not been announced yet. As you can see to the left, we have core and growth business, and we have new businesses, and they are incorporated into new business segments. We have expertise in imaging IoT platform, and we would like to pursue DX through these new segments. Core business, that is the office business, towards the fiscal 2021, we will have structural reform, and we would like to build new business areas that would be next to office, which can be Professional Print or bio healthcare business, and we would like to focus on measurement, inspection, and diagnosis. We would like to increase the share of profit contribution of such businesses towards the fiscal 2022. So we are now looking at the three pillars that will be generated after the office business, Professional Print and industry and bio healthcare. We have expertise in measurement, inspection, and diagnosis. Rather than providing just simple devices, we would like to provide image IoT platform. We will be growing these three business areas so that they can have profit contribution starting from the fiscal 2022. We will have further announcement in the IR day that is planned for the end of November. Myself and other members of the management will give you more further explanation. This is the last page. As for capital policy, we will thoroughly raise ability to generate cash with revenue structure reforms and changes of business portfolio. In terms of investment, we will be selective, and that way, we will solidify the shareholder's return. This year, we fell to a loss in the fiscal 2020, but we will implement measures towards the fiscal 2021. We will shift the portfolio, and we will return the profit level to the level before. We would like to expand the probability of that. With that in mind, for the dividend of the fiscal 2022, we will maintain the level of the fiscal 2019. For the interim dividend, we will pay 10 JPY per share. For the period end dividend, 15 JPY per share, a total of 25 JPY per share. This is just to show you the new segments and earnings forecast of that. Thank you very much for your kind attention.