Earnings Call: Q4 2021

May 13, 2021

This is Tokun Arin. Thank you indeed for your kind attendance. Please turn to Slide three. First, I'd like to go through the summary for FY 'twenty one March for the full year results. Revenue was JPY451.2 billion, a big decline year on year basis. Of the JPY139.1 billion, Imaging Products accounts for about JPY75 billion due to the market shrinkage and COVID-nineteen. Precision Equipment business was down about JPY60 billion, mainly due to the postponed installation of FPD systems. Operating profit was negative JPY56.2 billion. Excluding the one time costs, including impairment of fixed assets as much as JPY55.6 billion, the loss was limited at JPY600 million. Operating profit was negative 34,400,000,000.0 yen As shown in the bottom, as of August, we had assumed for the operating loss of 75,000,000,000 yen and net income loss of 50,000,000,000 yen As you see here, were able to reduce the loss numbers, respectively. Please turn to Page four. This graph shows the details of operating profit. The far left bar shows our forecast back in August. The number was negative 75,000,000,000 yen and you can see the changes we had since then. This JPY75 billion included risk buffer of JPY20 billion, structural reform costs for emerging products of JPY5 billion, the total of JPY25 billion. To its right, the actual consists of three major factors. 20,000,000,000 yen improvement coming from the imaging products in particular, surpassing the sales forecast as well as the improved product mix. 12,000,000,000 yen from the advanced business cost reduction, 14,800,000,000.0 from the other expense control and COGS reduction. Each operating profit was pushed up, resulting into the substantial loss of JPY 600,000,000, almost breakeven. In contrast, we had a negative JPY25.9 billion for the impairment of fixed assets, a part of our efforts to improve the company balance sheet, minus JPY25.3 billion for disposal and write down and minus 4,300,000,000.0 yen for restructuring related expenses. With this onetime cost item, a total of minus 55,600,000,000.0 yen being the major factor. Full year operating loss became 56,200,000,000.0 yen Despite the much larger impairment and write down losses, much bigger than the risk buffer of JPY20 billion, we were able to compress the operating loss vis a vis the plan. This can be explained by the increased revenue and profitability as well as the much larger cost reduction we carried out. This Slide five shows the details of the onetime costs I have just mentioned, such as impairment, disposal and write down on the quarterly basis. Please turn to Slide six. This shows the major items for the consolidated results for FY 'twenty one March. As shown in the right hand, we surpassed the previous forecast in all the items, which we announced back in February. Please pay attention to the second row from the bottom. Free cash flow now became positive of JPY22.9 billion. This was realized by the sales of securities we owned and others. Next slide. This slide shows the actual by segment. Impairment, disposal and the write down had a rather major impact. Except for the Precision Equipment business, all the segments show negative results. Please look at the second row from the bottom. Corporate P and L non attributable to any reportable segments. This includes the corporate indirect expense and others. Though it was negative 16,100,000,000.0 yen in the previous fiscal year, But with the business efficiency initiatives carried out, it now shows a substantial improvement of 7,500,000,000.0 yen year on year. In this section onward, I will explain the results by segment for FY 'twenty one March. The first segment is Imaging Products business. As shown in the top right, it grew JPY 5,200,000,000.0 compared with the previous forecast we made back in February. Since in the third quarter and onwards, the camera market itself recovered. And on top of that, we had a rather successful launch of new mirrorless products, Z6 II and Z72. All in all, operating profit grew to 4,300,000,000.0 yen from the previous forecast. As shown in the bottom right, we slashed JPY27 billion from business costs, including the advanced business cost reduction of JPY12 billion. The cumulative reduction over the past two years became JPY52 billion. With this done, we do believe it is quite possible to realize the planned cost reduction as much as 63,000,000,000 yen scheduled to be executed during the midterm management plan. We have just one year to go. In the last fiscal year, Imaging Products business had an operating loss of 35,700,000,000.0 yen But if we exclude the onetime costs such as impairment, it would become negative 12,000,000,000 yen As for the current fiscal year, we will further advance our structural reform efforts and put focus on the products for Pro and Hobbies to realize positive operation profit. Slide nine shows Precision Equipment business. Bottom left shows the market size and Nikon's sales in units. FPD, the restricted installation challenge is still going on in China, but we succeeded in selling a total of 29 units, up one unit from the February forecast. As shown in the top right, for the entire Precision Equipment business, the revenue was down 5,300,000,000.0 yen from the February forecast. The major reason for this is the delayed acceptance test of one ERF Immersion System pushed out into the current fiscal year. Operating profit with this postponement, the number went down by 2,600,000,000.0 yen But may I remind you that we secured the profit of 1,400,000,000.0 yen for the full year basis. Please turn to Slide 10, Healthcare. Healthcare business had growth both in revenue and profit compared with the February forecast. Both biological microscopes and retinal diagnostic imaging systems are now on the recovery track since Q3. Operating profit was negative for the full year, but excluding the fixed asset impairment of 2,500,000,000.0 yen the loss would be hovering around 500,000,000 yen Slide 11 shows industrial metrology and others. Revenue went down year on year. This was caused by the sluggish CapEx on the side of automotive customers particularly. Operating profit was positive JPY 2,700,000,000.0 in substance, excluding the onetime cost. Next, I will explain our focus for the current fiscal year ending 03/31/2022. Slide 13 shows the highlights. Revenue, yen $510,000,000,000, up 58,800,000,000.0. We forecast to expand sales in all segments driven by recovery from COVID-nineteen pandemic. Imaging Products, on top of the market recovery, with the more or less sales expansion, revenue here is expected to grow 14,800,000,000 Precision Equipment revenue is expected to grow to JPY 20,300,000,000.0, driven by the greater sales volume in small and mid sized panels for PFPD. Operating profit is expected to become positive of JPY 20,000,000,000, getting away from the loss we had in the previous fiscal year. We aim to be profitable in all segments. We do expect to see revenue recovery in all businesses. We can also expect to see a benefit of a smaller depreciation burden. So we do expect all the segments to turn in positive. Profit attributable to owners of the parent is forecast to be JPY 16,000,000,000. Dividend forecast with the expected earning recovery in the profit this year and as well as the expected earning recovery going forward, we set the annual dividend increase of JPY10 year on year. Slide 14 shows the major items for the full year, including the numbers from the previous fiscal year. I have already explained the major points. Here, now I would like to explain the revision for business segments we have made. Digital Solutions BU, customized products BU and glass BU used to belong to industrial, metrology and others, now belongs to components business. These three new business units are engaged in the same solution business in terms of delivering parts and components to our customers. Please move on to Slide 16. This shows our full year forecast by segment. To help you on our in the yellow box, the top number shows revenue and the bottom number shows operating profit. From the top, Imaging Products business. Operating profit there is JPY5 billion, Precision Equipment business JPY17 billion, Health Care business, JPY1 billion, Components business newly created, JPY8 billion and Industrial, Metrology and Others, JPY3 billion. As you've seen, we intend to become profitable in all the segments. Second row from the bottom, corporate P and L, non attributable to any reportable segment, is expected to improve by 2,100,000,000.0 yen year on year. Now I will go segment by segment for the full year on our forecast. First, Slide 17, Imaging Products business. Revenue is expected to be 165,000,000,000 yen up about 15,000,000,000 yen year on year. As shown in the bottom left, the market is now on the recovery trend. DCIL cameras are expected to grow as a whole by 5% year on year. As shown in the top right in sentences, Nikon will not chase after the number of units sold, rather we will make a further shift toward higher end and mid range models, while keep an eye on the pro and hobbies market. To be specific here, we plan to further expand the lineups of mirrorless bodies and lenses. We will aim at improving unit price and profit. Recently, we are observing the global semiconductor is in a tight supply demand situation. So there is a concern for possible disturbance in the electronic components and others. So we need to look at possible alternatives. We will make efforts for stable procurement. Business cost to be reduced JPY11 billion in this fiscal year. We plan to reduce the cost by as much as JPY63 billion for three years to come. Imaging Products business, this has caused concerns with our stakeholders and customers. But in this fiscal year, we will go for a profit, and we'll meet with your expectation here. Slide 18 is about Precision Equipment business. Revenue is JPY205 billion, up JPY20.3 billion year on year. FPD, CapEx is still continuing with the customers, both mid-, small as well as large sized panels. Orders for us seem to be rather firm. COVID-nineteen postponed the installation of FPD systems, but now it will be progressing smoothly one after another. Next, SPE, sales of refurbished systems, primarily in KRF and I Line to increase, but new systems will decline during this transitional period in the customers' CapEx. In semiconductor business, it now appears that there will be an firm demand in the future among the major U. S. Customers. So we'll make a good preparation now so that we can make profit several years from now. We need to secure new stable customers. With all these points in mind, Precision Equipment business operating profit is expected to be 17,000,000,000 yen Please look at Slide 19. Health Canada business. Revenue for FY 'twenty two March is 70,000,000,000 yen up 7,200,000,000.0 yen year on year. Biological microscopes, The Americas market recovery will contribute to the growth in our revenue. Retinal diagnostics imaging system is expected to hit a new record in sales following the previous fiscal year. Cell contract manufacturing will finally start its commercial production this fiscal year. With all these points in mind, for the entire Healthcare business, we expect a record high revenue. Operating profit is expected to be JPY1 billion. This is going to be the very first ever operating profit in the history of Healthcare business. Next slide. This slide then explains the components business we have newly created. Starting from the current fiscal year, we decided to disclose these numbers as an independent segment because we can expect to generate substantial amount of profit, particularly in EUV areas. As shown in the bar graph, expected revenue in the first year is 35,000,000,000 yen and expected operating profit is JPY 8,000,000,000. Optical components, EUV related components and optical parts encoders and photomask substrates for FDD, one of them will expand itself, particularly in EUV related components business is expected to progress firmly. We believe it has entered the phase of revenue generation. This is the last slide for numbers. This is Industrial Metrology and others on Slide 21. Others do include our production subsidiaries and others. For the full year, revenue is expected to be 35,000,000,000 yen operating profit of 3,000,000,000 yen This segment is also expected to become profitable. In the current fiscal year, we do expect our customers, namely electronic components and automotive related CapEx to recover. We expect our sales will expand in image metrology system, X-ray inspection systems and non contact metrology systems. Operating profit is expected to make an affirm recovery, and we plan to be profitable. That's all for my part. Lastly, I would like to make a summary about the previous fiscal year. We were greatly unaffected by COVID-nineteen, particularly in the first quarter. Revenue unfortunately went below 500,000,000,000 yen Operating profit also suffered as much as minus 50,000,000,000 yen But Imaging Products business in particular as President Ume Taten explained, we advanced its structural reform. Thus we made an effort in improving our balance sheet. We try to become lean. With this done, we believe our future risk has been reasonably reduced. As for the outlook and for the future, particularly now for the current fiscal year, we will make an effort to make all the segments to become profitable, including the newly created component business. We aim at 20,000,000,000 yen for the corporate operating profit and 16,000,000,000 yen for profit attributable to owners of the parent. And we like to make this current fiscal year to be a year to lead us to the sustainable journey yet to come. In concluding, I would like to now solicit your continued support with our investors and all the people concerned. Thank you indeed for your kind attention. I am pleased to update you on the progress we are making in our medium term management plan. The current fiscal year is the last year of the plan. Slide '23, please. The goals of the medium term management plan is to build a foundation for mid- long term growth and to achieve ROE of 8% or higher. Of these two, we are making a solid progress building a foundation for growth. The component business newly created is expected to enter a revenue making phase this fiscal year, thanks to the efforts we made in optical components and EUV related components. The Material Processing business is making a good progress in finding our customers by leveraging open innovation and the sales networks of our partner vendors. For business scaling, we have already started initiatives in reinforcing the organization by creating new units. While maintaining discipline on investment, we intend to accelerate more in our M and A strategy. In contrast, as for 8% or higher ROE, it seems to be rather difficult to achieve this goal in the current fiscal year, which is the last year of the medium term management plan. Yes, there were external factors involved, but it is quite regrettable that we simply cannot make it. I would like to offer my sincere apologies here. Being a listed company, this is something Nikon should be able to succeed, generating stable cash returns in excess of capital costs. By implementing these strategies, I am going to explain now Nikon will try to achieve this goal of 8% ROE as soon as possible. We will stick to our basic philosophy to strengthen business profitability and acquire growth engines. We will strengthen our corporate values by raising our capability to make money. This shows Slide 24 shows the progress in a glance of our business strategy, which I will talk today. I will particularly expand on the core businesses, Imaging Products business and Precision Equipment. I will also explain Components business and Material Processing business in Digital Manufacturing. I will cover them later one by one. In the long term growth areas, we have Vision Systems robotics. Here now, we are developing sensors, robotics, smart cameras so that we can contribute to the digital transformation and automation, which are advancing in the society and the pharmaceutical industry. In the healthcare domain, we will expand our profit by selling biological microscopes and retinal diagnostic imaging systems. We will deliver on growth by an expanding profit by offering drug discovery support services and contract cell manufacturing and others. Slide 25, please. Here now, would like to explain Imaging Products and Precision Equipment business areas one by one. In Imaging Products business, we will carry in our structural reform efforts as planned. There is no change as for our policy to focus on Pro and Harvest. In camera business, we will grow mirrorless and camera Zener systems. We would like to deliver them to professionals and hobbyists both at home and abroad. By the end of the current fiscal year, we will launch flagship body in C9, expand the line ups of the Z mount lenses. We plan to expand our soft end to assist expression in video editing and filming assistance and stronger integration with SNS. As for investment for R and D, we continue our investment in order to improve our competitiveness and to gain support from our target customers. We intend to extend the technology we have acquired from our long history of camera business to B2B. Nikon should offer its unique image experience, and we should enter three d in the contents business. In strengthening the business fundamentals, by cutting 63,000,000,000 yen out of business costs, we can still be profitable even when revenue is less than 150,000,000,000 yen the level we had in the previous fiscal year. We still can generate profit. To be specific here, we plan to work on optimizing more than 2,000 employees. We'll also consolidate our production sites and sales companies. In the previous fiscal year, we scrutinized our future risk factors, and we took off some facilities and inventory from the balance sheet as much as 30,000,000,000 yen By executing those actions firmly, we would like to generate profit this year. Slide 26, please. Here, now I'd like to talk about the Precision Equipment business. Market is quite alive with the DX or digital transformation. We need to further strengthen our products, and we need to diversify our earnings. At the same time, we need to look into the future to identify the kind of technology and products to be needed. By doing so, it is imperative for us to place this Precision Equipment business into our core business. In FPD lithography business, we will endlessly seek after higher customer values in terms of higher resolution and productivity. In the semiconductor lithography systems, we are leveraging our business with core customers in order to get away from the situation where we depend upon just one company. We started working on diversifying our customer base, both at home and abroad. And we are now getting some good results from those stable customers. Someday in the future, we will enter the enabling technology area of lithography. We are also expanding our service business area. Here now, we are utilizing the customers' equipment data. We are hoping to identify the possible needs of relocation, modification and improvement. In parallel, we are now putting more focus on refurbishment and reuse business. Furthermore, we are exploring the possible opportunities in the lithography and peripheral business. Here, we plan to integrate our strong precision control and high precision measurement technology. We are already getting some results in this area. We are getting some results with our Litho Booster and Macro Inspection Devices, AMI, which can contribute to improving yield for advanced processes for semiconductor manufacturers. Last year, one of the major issues we had to address was the risk related with the overseas travel restriction. We enhanced our remote support. We have helped those local engineers to deliver the services for installation and initial operations of the equipments at the customer sites. We are now expanding our overseas operations. As of the March 2021, we impaired JPY 20,000,000,000 plus in fixed assets and inventories based upon the future risk scrutiny we conducted. By executing those measures as firmly as possible, we will try to expand earnings in our lithography systems, services and the lithography in peripheral areas. We try to have a good balance in our revenue portfolio. Slide 27, please. In growth in areas, and I will expand on two areas. First is component business. Here, our efforts to develop customer needs, we are now going to generate earnings starting in the current fiscal year. While generating revenue in optical and EUV related components, we plan to develop key components, which we can expect to get high market share. Going forward as well, we would like to offer the most appropriate solutions for our customers who are asking for more diversified and sophisticated requirements. By doing so, we would like to aim at further growth in our components business. Another area is material processing business. By delivering the special processing in a short time with lower cost but with higher precision, we like to build an innovative ecosystem, which will solve customers' big issues. Here, Nikon would like to create new markets and new industries in the domain of monozukuri or manufacturing excellence. Here, now I'd like to share two specific cases we are making this year. The first case is Nikon was selected to participate in contract processing for small and midsized satellites. It is said that going forward, as many as 1,000 satellites will be launched per year in the small and midsized satellites area. There is a need to make components which are light but complex in geometry. Nikon acquired an American company, MOF3D, in March. We are now planning to get contracts with Boeing and others in aerospace industry for outsourcing business. In regard to the rivelet processing for the reduction of the fluid resistance, we have entered agreement with an Australian company called BST or Bionic Surface Technologies. BST is an advanced solution company based upon its fluid dynamics and expertise. We are going to combine simulation technology from VHD and our optical processing technology to deliver rivet based solutions. As a part of this initiative, we are going to outsource rivet processing to Sendai Nikon, one of our subsidiaries, which used to make cameras. By applying this rivet processing to an impulsion of the home vacuum cleaners as well as to jet engine fan blades, we should be able to improve fuel efficiency and reduce carbon monoxide and make our contributions to realizing the sustainable society. Slide 28, please. We are now making a steadying effort in the reforms to support management with long term viewpoints. We will advance business process reforms. We will reduce the total cost of more than 80,000,000,000 yen which accounts for more than 15% in the total revenue. Major areas for this are the head office and the procurement as well as image related cost. As for R and D, I as CDO keep an eye on the entire R and D themes and I am responsible to allocate resources. For strengthening our Monozukuri Foundation, we decided to appoint a CMO, Chief Manufacturing Officer. With CMO, we will gather and centralize information and functions. As on the shift in human resources, in Japan, we will reassign 1,001 people, mainly from engineering to growth areas. In overseas, we will work on optimized workforce covering 1,500 more employees. We need to be firm and determined in this process. As for the balance sheet, in order to minimize future restructures and improve liquidity of the assets we own, We have already liquidated a total of JPY100 billion plus. There is no change as for our basic thoughts on the side of midterm and long term capital allocation. We are still focusing on stable dividends, and the total shareholders' return ratio is 40% or more. We intend to sustain our investment up to 40% for strategic investment. Lastly, for corporate governance, we established a nomination committee with the outside direction as chair. We will make further efforts to improve successor training plans. Excuse me. We will make further efforts to improve successor training plans. Outside directors, Mr. Nihiru Ta with the general chemical manufacturing background, who also had served as the Chair of the Board of Directors of Precision Equipment Company. Mr. Morayama, he has a background in general heavy equipment manufacturing company. We have Mr. Yamagami, who is a female attorney. While focusing on qualification, we are trying to expand diversity. Now our Site Directors account for about 45%. We are here now to make further efforts for governance, which will help us to further improve our corporate values. My last slide summarizing the points and I have just explained. Starting from the left, we have to fully grasp the changes going on in our management environment while addressing issues and challenges to strengthen the management foundation. By doing so, we need to make the whole existing business operations as profitable. Furthermore, by engaging ourselves into the three long term growth areas, ultimately, we should be able to offer our values to the society. I believe this is going to be Nikon's corporate mission. I promise to you that we are all united within Nikon and to address those issues and challenges. You'll see more on the slides and after this, you will find useful information there and I hope for you to understand our basic policies for sustainability. And some of the slides we use when we announced the medium term management plan just for your reference purpose. This concludes my explanation. Thank you indeed for your kind attention.