Earnings Call: Q1 2022

Aug 5, 2021

This is Tokunari, CFO. I do appreciate your precious time despite your busy schedule to attend our financial briefing. Today, am pleased to report the first quarter results, our forecast for the full year and our sustainability strategy. These are the three points now I'd like to explain. First, highlights of the first quarter results, April through June. Revenue was JPY132.2 billion compared with the first quarter last year when we were severely impacted in revenue loss by COVID-nineteen, first quarter revenue was up 67,500,000,000.0 yen or up 104%. Revenue became almost 2x. Operating profit was 19,900,000,000.0 yen The four segments including Imaging Products business and Precision Equipment business became positive in operating numbers. Operating profit in Q1 includes one time factors including about JPY 2,300,000,000.0 from the sales of the idle land and sales profit of about JPY 2,000,000,000 from the retirement benefits release due to the revised pension systems of our U. S. Subsidiaries. Profit attributable to owners of the parent was positive JPY15.8 billion. Slide four shows the major numbers for the first quarter on the consolidated basis. Revenue and operating profit and profit before income taxes, profit attributable to owners of the parent and free cash flow, respectively, shows a dramatic improvement from the first quarter of the previous fiscal year. For your further reference, the far right shows the Q1 numbers two years ago prior to COVID-nineteen. The latest Q1 revenue did not recover up to the numbers prior to COVID-nineteen, But may I remind you that operating profit, profit attributable to owners of the parent etcetera surpassed the pre COVID numbers. The structural reform up until the last fiscal year as well as the efforts to make the balance sheet lean resulted in a lower profit loss breakeven point. Though the revenue is still on its way to recovery, but we believe we are firmly improving our profit making capability and structure. As shown in the bottom, comparing to the official numbers announced, vis a vis the full year operating profit forecast of JPY 20,000,000,000, it was JPY 19,900,000,000.0 for the actual Q1 number. And vis a vis the full year profit attributable to owners of the parent forecast of JPY 16,000,000,000, it was JPY 15,800,000,000.0. We were able to achieve almost the full year forecast just in three months from April through June. With this situation in place, we have revised our forecast, and I will explain them later. Slide five shows actual numbers by segment in the first quarter. Please look at the operating profit in the central column from top to down. Imaging Products business JPY 9,200,000,000.0 Precision Equipment business JPY10.6 billion. We achieved operating profit in all the segments except for Industrial Metrology and Others. The loss of Industrial Metrology and Others was caused by onetime factor of our subsidiaries, which are included in others. As shown in the far right, both revenue and operating profit were above the previous year in almost all the segments. Now allow me to move on to explain each business segment starting from Slide six. The first segment is Imaging Products business. Revenue in the first quarter was 50,000,000,000 yen almost doubled from 25,100,000,000.0 yen in the first quarter last year, and operating profit landed at positive 9,200,000,000.0 yen Thanks to the recovering demand in cameras, not only the mirrorless Z6 II and Z7 II launched last year, but also on high priced interchangeable lenses enjoyed strong sales. Shifting into models for professionals and hobbies, our strategic segment has been steadily advancing and higher ASP trend is still continuing. On top of it, we were benefited by the cheaper yen as well as by the lower sales promotion cost, which is going to be deductible from sales. All in all, revenue grew almost 2x. Operating profit improved significantly year on year due to the subdued and the deferred sales expenses in some items till Q2 and beyond. Slide seven shows Precision Equipment business. Revenue was JPY51.8 billion, up about 2.6 times year on year. Operating profit was JPY10.6 billion. FPD Lithography and Systems, no system sales were booked in Q1 previous fiscal year due to the impact of COVID-nineteen. We were not able to travel to China, but we completed installations of 13 units in April through June period, resulting in the increased revenue and profit. Semiconductor lithography business, we did not have new sales because the completion of some system installations were pushed out into Q2 and beyond. But thanks to the revenue and our contributions from the service business, etcetera, operating profit increased. Please look at Slide eight. Healthcare business, revenue was JPY 15,800,000,000.0. Operating profit was JPY 400,000,000. Revenue and profit grew year on year. Biological microscope sales grew mainly in The Americas. Retinal Diagnostic Imaging Systems recovered in the major U. S. And European markets. We enjoyed growth both in revenue and profit. Slide nine, this shows our components business whose disclosure starting from the current fiscal year. Revenue was JPY 7,700,000,000.0, operating profit was JPY 2,100,000,000.0. Both revenue and the profit grew year on year. EUV related components business contributed to the revenue expansion. Sales were strong in optical parts for semiconductor related equipment and in quarters for industrial equipment. Slide 10 shows the last segment, Industrial Metrology and Others. Revenue was 6,700,000,000.0 yen up year on year. In the Industrial Metrology business, revenue expanded thanks to the recovered CapEx in our customer companies in the electronic components, semiconductors and automotive related businesses. On the other hand, operating profit became negative JPY1 billion. The major reason for this goes to those domestic production subsidiaries, which belong to others. Those subsidiaries posted a disposal and write downs of inventory and assets. Next, I will explain our forecast for the year ending 03/31/2022. Slide 12 shows the highlights for the forecast. For the full year, revenue forecast is JPY $520,000,000,000, revised up JPY 10,000,000,000 from the May forecast. As for breakdowns, Imaging Products are now revised up by JPY reflecting better than expected Q1 performance. Precision Equipment forecast is now revised up by JPY 5,000,000,000, reflecting better than expected sales for Service business. Full year operating profit is expected to become JPY 27,000,000,000, revised up by JPY 7,000,000,000. As for details, Imaging Products are now revised and up by JPY 7,000,000,000. This upward revision is coming from increased sales as well as higher sales price of products due to the improved product mix. Precision Equipment business is now revised at JPY 2,000,000,000 coming from the expected service business opportunities related to the high capacity utilization of the installed lithography systems. But corporate P and L non attributable to any reportable segments is now revised down by JPY 2,000,000,000 due to the revised profit and loss allocation between segments. All in all, we will have an upward revision as much as JPY 7,000,000,000. Profit attributable to owners of the parent is now revised up by JPY 6,000,000,000 from the previous forecast. For the full year basis, our forecast here is JPY 22,000,000,000. As for the annual dividend, it is JPY 30, unchanged from the previous forecast. Now please look at Slide 13. This table shows the major forecast numbers for the full year. I have already explained the highlights, so allow me to skip this. Next, I will then explain our forecast for the full year by segment. This page is a summary page, so allow me to go to each segment. Slide 15. First segment is Imaging Products business. Revenue is now JPY170 billion, up JPY5 billion from the May forecast. Digital camera market continued its excellent recovery, particularly in our focal market, mid and high end cameras and lenses is expected to remain strong. In order to monetize those market opportunities, in July, Nikon launched a new mirrorless camera, ZEN FZ, and we are pleased to say it is highly appreciated. Furthermore, in the second half this fiscal year, we plan to launch our mirrorless camera flagship model Z9 and lenses for professionals and hobbyists. With a strong demand coming from our customers, some of our products are running out in supply. So we intend to make further efforts to secure procurement of components, including semiconductors. With all these elements and constraints, we have revised up revenue for the full year to JPY170 billion, particularly taking into account the strong demand for professionals and hobbies as well as risk factors such as parts supply. Operating profit for Imaging Products business, full year forecast is now reversed up to JPY 12,000,000,000, up JPY 7,000,000,000 from the previous forecast. Now we are having a lower breakeven point and after having conducted impairment, disposal and value depreciation and other structural reform conducted in the previous fiscal year. And with the increasing ASP brought by the product mix, profitability of Imaging Products business is improving, So we can expect to grow in profit. Some expenses originally expected to incur in the first half will be deferred to the second half of the fiscal year. With this, we do expect to book as much as 10,000,000,000 out of the JPY 12,000,000,000 in the first half for the full year operating profit. Slide 16 shows the Precision Equipment business. Revenue is JPY $210,000,000,000, up JPY 5,000,000,000 from the May forecast. In FPD, customers and CapEx is trending to recover in small and mid sized panels. CapEx for the large panels is moving firmly. And now the delayed installations caused by COVID-nineteen are moving rather smoothly. We expect to install 45 units in the current fiscal year as forecasted back in May, as shown in the left bottom. Most of the operating profit is expected to be booked in the first half because we have many large sized panels business in the first half. As for the expected units for Semiconductor Lithography Systems, the forecast we made back in May is unchanged, as shown in the left bottom. For both FED and semiconductors, besides the lithography business, we are now having a good business for services, particularly in the current fiscal year, but up by the recent strong markets for digitalization and DX. The FED and semiconductor lithography systems actually are growing quite good. We see a high level of utilization of the units we had installed at the customer sites. With this, there is going to be an increased demand for maintenance replenishing of consumables and other services. With this in the background, we have revised our full year revenue for Precision Equipment business to JPY 5,000,000,000. Operating profit is now revised to be JPY 19,000,000,000, up JPY 2,000,000,000 from the previous forecast by reflecting the strong sales opportunities. As much as JPY 18,000,000,000 out of JPY 19,000,000,000 expected to be booked in the first half of the fiscal year because we have a concentration of delivery of G10, large sized panels in the first half. Now please look at Slide 17. For Health Care business, there are no changes from the previous forecast for both revenue and operating profit. Biological Microscopes and retinal diagnostic imaging systems, both markets are now recovering. Commercial production in the contract to sell development and manufacturing is advancing. Several projects are now underway and as planned in the so called CDMOs. And with these points in place, we expect the Healthcare business to make a record in revenue. We forecast to generate the profit of JPY 1,000,000,000 in the current fiscal year. It is going to be the very first surplus on the full year basis since this business got started. Next slide shows the newly created component business. For component business as well, there are no changes from the May forecast. Revenue being JPY 35,000,000,000 and operating profit being JPY 8,000,000,000. On top of the highly profitable EUV related component business, we are having a rather foreign business in optical components for semiconductor related equipment manufacturers as well as encoders for industrial metrology. We do believe we can achieve JPY 8,000,000,000 fully, we forecast for the full year operating profit. Now the last slide for the financial numbers. This Slide 19 shows Industrial Metrology and others. Others include production subsidiaries. We have not changed the full year revenue and operating profit since the last forecast we made. Industrial metrology business has its customers in electronic components, semiconductor and automotive related companies. And then CapEx is continuing to recover. We do expect to see further growth in revenue from our image metrology system, X-ray inspection systems and non contact three d metrology, etcetera. For the entire segment, Industrial Metrology and others put together, we'll aim at 3,000,000,000 yen for the full year in operating profit. Next, I will explain our sustainability strategy. Our sustainability consists of two aspects. Firstly, to reduce global and environmental impact coming from our company's economic activities secondly, to make our aggressive contributions to the sustainable society through our core business activities. As for the first aspect, we have a long term goal to achieve carbon neutral by 02/1950. Under this goal, we have specific initiatives to reduce our global warming gas emission from our plants and offices by more than 70% in FY 02/1930, while making a shift to renewable energy as much as 30% in our total power consumption. We have already started these specific actions. At the same time, Nikon does believe it is important for us to be engaged in activities to aim at sustainable societies through our core business activities. Nikon has three sets of ideas here: innovate the process of manufacturing, contribute to a more comfortable society with imaging and sensing technologies and contribute to people's health and quality of life. And we have positioned them as our long term growth domains. And here now, we commit ourselves into delivering a set of values which are best fit with and unique to Nikon. To be more specifically, in the digital manufacturing domain, where Nikon will aim at monozukuri innovations. In order for Nikon to contribute to the space industry with our unique optical processors, we acquired a U. S. Company in April, who specializes in contract processing of satellite parts. We like to leverage our optical processing machine to reduce resistance so that we can improve fuel efficiency and reduce CO2 in turbines, wind power generation, airplanes, etcetera. We actually signed a joint development agreement with Sharp Corporation to implement biometrics technology such as SharkSkin to implement auto units of air conditioners and other home appliances to imitate living organisms. To contribute to a more comfortable society with our Imaging and Sensing technology with six years coming up, Nikon is now engaged in joint validation research with SoftBank Corp. In the fields of optical telecommunications. We are also engaged in efforts, which are already underway now for remote shooting system to be used in many sport competition events in collaboration with our U. K. Subsidiary, MRMC. Furthermore, in the health care domain, to contribute to better health, our subsidiary, Nikon Cell Innovation Company Limited, is now collaborating with a major Swiss biotechnology company, Lonza. They are developing and manufacturing new drugs for the regenerative medicine, the so called CDM-one operations. As you could see here, Nikon has its aspiration to solve social and environmental issues by leveraging our unique technologies. By contributing to realizing sustainable society, Nikon would like also to enjoy its own sustainable growth. This concludes my explanation. Here now, I'd like to summarize the first quarter. Though we were impacted by the COVID-nineteen in Q1 last year, but since then, our business performance has improved significantly. We were able to almost achieve our full year forecast officially announced just during the first quarter, namely JPY 20,000,000,000 in operating income and JPY 60,000,000,000 in profit attributable to owners of the parent. Looking at the segment by segment, thanks to the structural reform we conducted in the last fiscal year as well as the market recovery. Imaging Products business made a firm profit and our core business, Precision Equipment, Fitting and Semiconductor business also enjoyed a firm growth and our newly established Component business made progress as we had planned. All in all, we were able to have rather a smooth start for our profit making goals for all the segments. With these rather favorable situations in place, for the first quarter, we made upward revisions for operating profit being JPY27 billion, profit attributable to owners of the parent being JPY22 billion, respectively. And something unique to the current fiscal year, we do expect that for the entire company basis, we will have a consideration of profit booked in the first half because our four core segments, Imaging and Precision, tend to have profits being generated in the first half of the fiscal year. Lastly, Nikon has a strong expression to get away from the loss we made in the last fiscal year. Nikon would like to move on to sustainable growth to come. We are here to actually meet with expectations coming from the shareholders, investors and may I wish for your continued support and understanding here. Thank you indeed for your kind attention.