Earnings Call: Q3 2021

Feb 4, 2021

This is Tokunari, CFO. I do appreciate your precious time despite your busy schedule to attend our financial briefing. On January 29, we had a timely disclosure including the revised forecast for the current fiscal year. Today, I am pleased to have this opportunity to share its details. Allow me explain the highlights for the third quarter from October to December. Revenue was JPY150.6 billion, down JPY2.8 billion year on year showing a slight decline. Operating profit was positive JPY 9,900,000,000.0, up JPY 5,900,000,000.0 year on year. This is the first surplus on the quarterly basis since October to December, first time in four quarters. For your further information, all the segments had positive numbers in substance in all the segments. Imaging Products, we had a record quarterly sales for mirrorless and cameras. Revenue declined year on year, but the deficit shrunk despite the decline in revenue, thanks to the improved product mix and the reduced business cost. This segment was profitable in real terms excluding factors such as restructuring related expenses. Precision Equipment both revenue and profit increased, thanks to the increased sales of FPD lithography systems supporting Nikon's overall profit. Healthcare and R business turned profitable, thanks to the record high sales of retinal diagnostic imaging systems on the quarterly basis. Slide three shows a table describing the major consolidated numbers for the third quarter from October to December. As you see here, revenue declined slightly year on year, but all the profit items became profitable including operating profit, profit before income taxes as well as profit attributable to owners of the parent. The surplus numbers surpassed the October to December numbers last year before COVID-nineteen. Free cash flow became positive JPY22.5 billion, up JPY21.7 billion year on year due to the increased revenue etcetera. Slide four shows the actual numbers by the segment for the third quarter. Operating profit in the middle column shows JPY9.9 billion as the consolidated total in the bottom line. One line above shows the positive operating numbers in all the segments except for the Imaging Products business. Imaging Products business will turn profitable in real terms if we exclude extraordinary costs such as restructuring related costs and others. The right hand side shows the positive operating profit increased in all the segments year on year. Slide five. Here now I'd like to explain the actual cumulative numbers for Q1 to Q3 on slide five. The middle column shows all the profit items in the second row and below are showing the loss in all the segments, but those numbers are actually better than the numbers explained in the interim briefing. We had a loss in the first quarter greatly impacted by COVID-nineteen. We also had a loss of 29,600,000,000.0 yen at the as did onetime cost for the impairment of the fixed asset in Imaging Products business and this number was depressed by the profit generated in the third quarter. Free cash flow became positive 10,400,000,000.0 yen on the cumulative basis at 5,700,000,000.0 yen year on year. Slide six is the summary of the performance by segment. Details will be covered later. Please look at the corporate P and L non attributable to any reportable segments, corporate expense is included here. It shows minus 11,600,000,000.0 yen but it improved by 5,800,000,000.0 yen year on year as shown on the far right. As described in the bottom of the slide, the actual improvement was JPY7.9 billion reflecting the effects from the cost reduction effort in the corporate expenses and others. From this slide seven onward, I will then explain the performance segment by segment. First segment is Imaging Products. The first row shows the revenue of 70,000,000,000 yen for the third quarter last year. Operating profit was minus 800,000,000 yen This time revenue was 52,300,000,000.0 yen down 600,000,000 yen Though revenue went down throughout the year, but we had the same level of profit as the one last year. This was realized because we had a good shift to the models for Pro and Harvest resulting into a steady increase in unit sales price. Average selling price for additional camera interchangeable lens type reached the highest level this year, showing in highest level in the past ten years for bodies and interchangeable lens. As for mirrorless cameras, currently in our focus products, the new products Z06 II and Z72 as well as mirrorless lenses became popular. Both bodies and lenses reached a record high for quarterly sales volume and revenue. We intend to further expand the line ups in mirrorless cameras. As for cost, we further reduced the business operation costs in advance. With this done, our Imaging Products business became profitable in substance for the third quarter. Slide eight, this shows Precision Equipment business. Both revenue and profit grew for the third quarter year on year. Revenue was up JPY14 billion and operating profit was up JPY1.4 billion. Installations in the FPD Lithography and the Systems were carried out well in advance particularly in China. The units sold were higher than last year resulting in increase of both in revenue and profit. In contrast, Semiconductor Lithography Systems resulted in decline in profit mainly caused by the disposal and write down of inventory despite we had rather good sales of new products. Now please look at Slide nine. Healthcare business in the third quarter shows growth both in revenue and operating profit year on year. Retinal Diagnostic Imaging Systems reached a quarterly high in sales. Biological Microscopes performed well in sales, pushing up the overall results for this segment. Operating profit partly thanks to the cost control efforts turned out to have been positive from the loss of JPY400 million in the previous year. Slide 10 shows Industrial Metrology business and others. In the third quarter, Digital Solutions, which are included in Others had a good component business particularly. Within expense restraints and effect in place, the segment as a whole shows growth both in revenue and profit. Next, I will move into our focus for the full year ending 03/31/2021. Slide 12 shows the highlights. Revenue was revised up JPY20 billion from the previous forecast to JPY450 billion. As for details, Imaging Products segment was revised up by JPY5 billion, reflecting the improvement in the third quarter. Precision Equipment business was revised up to JPY15 billion, reflecting a good recovery in sales units of FPD lithographed systems. Operating profit revised up by JPY 10,000,000,000. From the previous forecast, it is expected to stay at minus JPY 65,000,000,000. As for details, Imaging Products revised upward 5,000,000,000 yen driven by the increased revenue as well as the advanced reduction in business examples. Precision Equipment and FBD lithography and the system grew in revenue outweighing disposal and write down of inventory. With this, it was revised up to JPY 3,000,000,000. Corporate P and L non attributable to any reportable segments revised upward JPY 2,000,000,000, thanks to the headquarters cost reduction and others. Profit before income taxes was also revised about JPY10 billion, the same amount as the operating profit. Profit attributable to owners of the parent revised about JPY8 billion to make the full year end loss to be around minus JPY42 billion. Annual dividend, 20 is going to be maintained. Please look at on the slide 13. Here now I'd like to explain the differentiation from the forecast we made back in November, the loss of 75,000,000,000 yen for the year ending 03/31/2021. So allow me to go through these details. First, we are expecting to have an improvement of 7,000,000,000 yen for the full year coming from the improved profit in Precision Equipment business. We are still having travel restrictions into China and others, but it could be more likely to have a much less impact from COVID-nineteen pandemic than we had expected. Next, we expect to have improved operating profit in Imaging Products business as much as 3,000,000,000 yen This is coming from the good sales of mirrors and cameras and bodies and lenses and others. In terms of new products, they turn out to be quite popular, resulting into more ratio of high end products than we had expected, resulting into better product mix. Next is the benefit of 2,000,000,000 yen coming from additional expense reduction in Imaging Products business. We are now having this effect because we are advancing to execute our original benefits cost reduction earlier than we had planned. On top of that, we can expect to have a total of expense reduction at headquarters giving us as much as JPY3.6 billion for the full year. That said though, the disposal and write down of the semiconductor equipment and other inventory as much as minus JPY 5,600,000,000.0 we had in the third quarter now will push down operating profit. All in all, we are forecasting operating profit for this fiscal year ending 03/31/2021 would become minus 65,000,000,000 yen all around. This is our latest forecast. The graph on the right shows a true on a pure operating profit excluding impacts coming from COVID-nineteen or onetime costs and other special factors. We had assumed the COVID-nineteen impact would be as much as minus JPY55 billion at the time of the interim report, but now the impact is now suppressed by JPY 7,000,000,000 to be reversed to be minus JPY 48,000,000,000. One time cost is now calculated to be a total of minus JPY 35,200,000,000.0 coming from minus JPY 29,600,000,000.0 we allocated in the first half as well as the evaluation loss of 5,600,000,000.0 yen in the third quarter. Then we have minus 5,000,000,000 yen for structural reform related costs. And if we are to eliminate those factors then we can calculate the true on a pure operating profit. Slide 14 shows a table of financial highlights for the full year ending 03/31/2021 including changes year on year and the previous forecast. I have already explained the outline. Here now I like to explain our full year forecast by segment. I will skip the summary page. Slide 16, the first, Imaging Products business. The left of us in retina show revenue being 145,000,000,000 yen revised up by 5,000,000,000 yen from the previous forecast. Besides the market shrinkage, COVID-nineteen is pushing down the units sold greatly, but we raised our forecast for the revenue reflecting by mirrorless new products popularity in the third quarter. We expanded mirrorless lineup to six cameras and 18 lenses. We advanced shifting toward a prone and hobbyist models and because of this selling price has been steadily improved. Operating loss shown in the right left improved by 5,000,000,000 yen from the last forecast. It is expected to be minus 40,000,000,000 yen Business cost is planned to be reduced as much as 63,000,000,000 yen during the current midterm plan, which will come to end in the next fiscal year, of which we will advance to reduce 2,000,000,000 yen So we plan to reduce as much as 22,000,000,000 yen The cost for the structural reform for the current year is going to be 5,000,000,000 yen Imaging Products business with high end shifting and structural reforms aims to be profitable even when revenue is less than JPY150 billion. This is a part of our effort to improve our financial strength. Consolidation of plans of subsidiaries was reported this week by the media as part of this effort. We are recently making sure progress and becoming profitable excluding special factors and we will continue our efforts to generate profits as long as possible. Slide 17 shows Precision Equipment business. Revenue actually in our left blue column being JPY190 billion, up JPY5 billion from the November forecast. FED due to the stay home phenomenon CapEx for small and mid sized panels is recovering and CapEx for large panels is also firmly progressing. With the travel restrictions, we are still faced with restricted working environment, but installations are progressing earlier than we had expected. Sales volumes increased six units versus previous forecast of 22 units we made in November. We now expect to have a total of 28 units to be installed. This should be done by the March. In contrast, we are still having a tough time in semiconductor lithography systems. Major customers have already done the first round of investment and some customers are affected by COVID-nineteen resulting in delayed deliveries and orders. The number of units sold has declined greatly. Operating profit for the entire Precision Equipment business is now revised at 3,000,000,000 yen and it is expected to become 4,000,000,000 yen FPDN is increasing particularly the revenue opportunities, but disposal of inventory and asset and write down will kill some of the improvements. So the increase is going to be expected to be in net 3,000,000,000 yen In Precision Equipment business, services business is the basic source of revenue. We will make further efforts moving into peripheral business opportunities such as measurement and inspection equipments and we will make efforts to explore new customers in the space of the lithography business operations. Please look at slide 18. Healthcare business has not changed both revenue and operating profit from the previous forecast shown in green and gray respectively, which then order taking activity resumed both in biological microscopes and retinal diagnostic imaging system. We are on the recovery track in the second half, but it was not big enough to offset the magnitude of the revenue decline we had in the first half. The contract and cell manufacturing is progressing well in multiple projects. Next year production will scale up and it is expected to make its contributions to the performance. In light of these factors, we do believe we can achieve a profit in the Healthcare business in the next fiscal year. Lastly, on Slide 19, on Industrial Metropolitan Business and Others. In others include Digital Solutions and Glass business. We have not changed our focus for the full year on revenue and operating profit from November numbers. In this Industrial Metrology business, electronic components, semiconductor related as well as automotive are on the recovery trend. We do expect to have a decline in revenue year on year. Others include our business collaboration with the DMG Moly Company Limited as well as Velodyne and LiDAR Inc, including LiDAR sensor production and the components business and others. Operating profit, we had an actual impairment of fixed assets as much as JPY3.2 billion in the first half. With this, we expected to have a loss of JPY2 billion. But excluding this onetime cost, we are now having a surplus in substance and this should give us a good leeway to the next year's profit. That's all as for my explanation. Here now I'd like to summarize the third quarter. We generated a profit or the possible profit by excluding special factors in all the segments. For Nikon Corporation as a whole, we generated a positive 9,900,000,000.0 yen returning to operating profit baseline since the last quarter. Free cash flow on the cumulative basis was up in the third quarter. We are able to confirm the recovery trend in the third three months period. But as we described this on slide 20, we still have many issues we need to address in order to achieve sustainable growth. In order to improve the balance sheet, we have conducted a thorough checking into our assets. We have done a large amount of impairments and write off. We have not done yet here. We will further continue our efforts here on in the fourth quarter as well in order to further reduce low profit making assets and others. Imaging Products business is going well recently, but we need to make further efforts in order to stable and generate profit because it seems that we have just been helped by the market recovery. For Precision Equipment business, while FADENA is going well, we have to work hard so that we can generate revenue in Semiconductor Equipment in a stable manner. In order to make sure our stocks will recover, we believe it is important that we can show our future growth pillars as clear as possible. Building a platform for growth is going to be a top priority. As you've seen, there are still many issues and tough journey is still ahead of us, but we would very much like to leverage the most recent recovery and will go for profit to be generated in the entire segment and for the entire company at Nikon Corporation. We need to move into the next growth. May I solicit for your continuing understanding and support with our shareholders and investors? Thank you indeed for your kind attention.