Earnings Call: Q1 2021

Aug 6, 2020

This is Omotate, President and CEO. I do appreciate your precious time despite your busy schedule to attend our financial briefing. In order to prevent a further surge of COVID-nineteen following the last time, we are again holding this session today online. I know it is not necessarily the best format for you, but I hope you understand this and collaborate with us. Today, we would like to report to you the financial results for the first quarter of the year ending 03/31/2021. We also now like to report to you our forecast for full fiscal year ending 03/31/2021. Last time this was treated as undecided. We are also unhappy to report to you our forecast for dividend. Details will be explained by Mr. Tokunari, CFO later. So do allow me in the outset to share just briefly the outline of the report. First, full year forecast. It is quite regrettable to report to you that operating profit forecast being a loss of JPY75 billion. Profit forecasts attributable to owners of the parent being a loss of JPY 50,000,000,000. As for dividend per share, it is JPY 20 for the full year, JPY 10 for the first and the second half respectively. Yes, it is a fact. In the background is the COVID-nineteen pandemic, which we had never experienced before. But I would like to offer our sincere apology to all the in house stakeholders including shareholders, investors and customers because we executives are clearly responsible for this forecast since it is us who are at the helm of the business management. In order to clarify who is responsible for this, we decided not to pay bonus to the directors and officers and reduce their monthly compensation. Going forward, we will make further efforts to advance the structural reform in Imaging Products business, which is the most urgent area in order for us to become profitable again in the next fiscal year. We will update to you on our recovery journey as soon as possible. Now I will have Tokunari to go into details. This is Tokunari, CFO. Now allow me to explain the results for the first quarter as well as our forecast for the full fiscal year. Slide three shows the summary for the first quarter of the year ending March 3121. Revenue was JPY 64,700,000,000.0, down JPY 78,200,000,000.0 year on year or 55%. Yes, it is a big drop. Operating profit was a loss of JPY 20,500,000,000.0, down JPY 29,800,000,000.0 year on year. On the quarterly basis, this is the largest operating loss in our history. The COVID-nineteen impact was so enormous, forcing us to have declines in revenue and operating loss in all the segments. Please give me Slide four. The first line from the top, profit attributable to owners of the parent was JPY thirteen point five billion, down JPY 21,700,000,000.0 year on year. Free cash flow became negative JPY 18,200,000,000.0 due to a big decline in profit. Exchange rates, yen appreciated both against the dollar and the euro year on year. Its impact on revenue was JPY 1,700,000,000.0 and its impact on operating profit was JPY 300,000,000, both had negative impact. Slide five is a summary sheet of the segment specific performance, which I will cover after the slides, so allow me to skip this page. Slide six shows the first segment, Imaging Products business. Revenue was JPY 25,100,000,000.0, down JPY 42,200,000,000.0 year on year. With the markets continued to shrink, this segment was doubly affected by COVID-nineteen. Sales in China recently recovered to the last fiscal year's level. Other regions hit the bottom in April and are trending to recover gradually, but all the categories including digital camera, interchangeable lens type show big declines from the previous year as shown on the slide. Though we made our efforts to control sales expense and others, but the final operating profit ended up with the loss of JPY8.1 billion. Slide seven is Precision Equipment business. Revenue was JPY 19,600,000,000.0, a big decline of JPY 32,200,000,000.0 year on year. FPD Lithography Net System revenue was zero because we simply could not resume installations locally. During the three months in the quarter, we sold nothing because our Japanese engineers simply could not go overseas due to the restrictions and travel. In the Semiconductor Lithography and the Systems business, some of the systems were installed in the previous year because some customers asked us to do so. Furthermore, due to the restricted overseas travel, we sold only two new systems way down from the previous year. All in all, operating profit for the entire Precision Equipment business became a loss of JPY 5,100,000,000.0. Please look at Slide eight. Health Canada business was JPY 10,300,000,000.0 in revenue, down JPY 2,600,000,000.0 year on year and operating profit became a loss of JPY 2,400,000,000.0. With the lockdown carried out in the major cities overseas, we suffered from declines in orders starting from February, which pushed down both revenue and profit in the first quarter. The number of biological microscopes sold went down, particularly in The Americas. Retinal diagnostic imaging systems were affected due to the slow recovery of the major markets of The U. S. And Europe. Slide nine shows Industrial Hematology and Others. This segment consists of Industrial Hematology business and Visual Solutions business, Custom Products business and Glass business. Revenue here was JPY 9,500,000,000.0, down JPY 1,300,000,000.0 year on year. Operating profit was a loss of JPY 400,000,000 year on year. Even before COVID-nineteen, we had expected our customers in China and other Asian countries would restrict their CapEx, particularly in industrial metrology. But with the search of coronavirus orders were postponed and our sales activities have been restricted and deliveries have been postponed. All in all, everything pushed down revenue and profit. Next, I will explain the forecast for the full year ending 03/31/2021. Please look at the Slide 11. This shows the highlights of the forecast for the full year. So far, the forecast was undecided. Yes, the COVID pandemic is still going on, and we are still faced with uncertainties as for the future course. But we believe information sharing with investors is critical. So this time we decided to announce our outlook based upon the information that we can gather with our reasonable assumptions. That said, revenue for the fiscal year is forecasted to be $420,000,000,000, down JPY 171,000,000,000 year on year. By business, as shown here, Imaging Products business revenue is down 42% year on year. Precision Equipment business is forecasted to be down 28% or higher. Operating profit is down JPY 81,700,000,000.0 year on year, showing a loss of JPY 75,000,000,000. The loss for operating profit for a full year is the first time we had since the financial crisis we had back in the year ended March 3130, indicating the biggest loss in our history. By segment, Imaging Products business is forecasted to be a loss of JPY40 billion. Precision Equipment business, which has been greatly affected by the restricted overseas travel, is forecasted to be a surplus of JPY 10,000,000,000. For your information, this forecast does include a risk buffer of JPY 20,000,000,000 for our preparation for the further performance fluctuation risk as well as additional structural reforms and our being ready for a possible evaluation loss in fixed assets and inventory. Though we are faced with a tough time, but our equity capital is expected to remain at 50% or higher. We have secured more than JPY 400,000,000,000 in liquidity on hand for working capital, total of cash and deposit plus commitment lines of credit and others. With this financial soundness, we intend to overcome the ongoing tough situations we are now faced with. But here now, I would very much like to offer our sincere apology to all our stakeholders, including shareholders for the big drop in our forecast for revenue and loss and profit. As for shareholders' return, we would like to make the full year dividend to be JPY 20 per share. We announced our policy of total return ratio of 40% or higher cumulative period of medium term management plan for the year ending 03/31/2022. With this in mind, in light of the future profit plans as well as liquidity on hand and investment capabilities for growth from next fiscal year onwards, we intend to maintain the interim dividend of JPY 10 or JPY 20 for a full year. As President, Matateen mentioned in the outset, with the assumed loss for the current fiscal year, in order to clarify management responsibility, we will reduce compensation for directors and officers. To be exact, Chairman and President and other executive officers effective in September for the foreseeable future. Their monthly compensation will be reduced depending upon the position up to 20% in maximum and there will be no bonus to be paid to them for the year ending 03/31/2021. Slide 12, the second line from the top, with the assumed loss of JPY 75,000,000,000 in operating profit then a profit attributable to owners of the parent. The first line from the top would be a loss of JPY 50,000,000,000. This final loss number is also the largest in our history. As for the exchange rate S. Dollar and JPY115 to the euro. Based on the actual rates in the first quarter, for the full year JPY106 to the dollar and JPY116 to the euro. Please refer to Slide 13. Here, I will explain the breakdown of the operating loss of JPY 75,000,000,000. Of the JPY 75,000,000,000, 5,000,000,000 is the Imaging Equipment business restructuring cost addition already made. JPY20 billion is for risk buffer such as future risk factors, additional structural reform costs as well as possible loss and evaluation in fixed assets and inventory. Excluding the total of 25,000,000,000 yen of those special factors, the real or the substantial operating loss would be 50,000,000,000 yen Of this 50,000,000,000 yen 20,200,000,000.0 yen has already been booked in the first quarter. As for the second quarter, since July, overseas travel hub for FPD Lithography and other Apprecipient Equipment business resumed one after another, but sales recovery is still weak and excluding special factors, operating loss is expected to be JPY 18,800,000,000.0. However, moving into the second half, we do believe the loss number will become rapidly and smaller because we should be able to grow our revenue by having more installations of FUD lithography and others in Precision Equipment business gradually. Unfortunately, this fiscal year now will be stuck with COVID-nineteen impact and this total impact is estimated to be JPY 65,000,000,000 in operating profit. We are improving our current business process so that we can secure our revenue opportunities as firmly as possible by delivering and installing our products as surely as possible even though we are still faced with the ongoing restrictions in overseas travel and movement. With this done, we are hoping to generate profit in a more stable fashion from next fiscal year and onwards. Slide 14 is the financial highlights by segment since I will cover them in the next slide onward, so allow me to skip this page. Slide 15, here now I'd like to start with Emerging Products business. Revenue forecast for the business for the full year is JPY130 billion, down JPY95.8 billion year on year. COVID-nineteen impact hit the bottom in the first quarter. Though recently, we're seeing some recovery, but still its impact making the marketplaces shrink so great. Our digital camera interchangeable lens type and interchangeable lens would go down by 51% in sales volume and Compact Digital Camera would be down by 70%. Operating profit would go down by JPY 22,900,000,000.0 year on year and we forecast a loss of JPY 40,000,000,000. Full year operating loss in Emerging Products business is going to be two years in a row. Emerging Products business announced its structural reform in November and it is progressing firmly against the target of JPY 50,000,000,000 reduction in business costs compared to the year ending March 2019. During the mid term management plan, we executed the reduction as much as JPY 25,000,000,000 in the previous fiscal year, one half of the target. In order to respond to the much faster pace of the market shrinkage, we increased the cost reduction target from JPY 50,000,000,000 to JPY 60,000,000,000. We will reduce in the cost as much as JPY 15,000,000,000 in the current fiscal year. Restructuring relevant expense was JPY 2,700,000,000.0 in the previous fiscal year, but in the current fiscal year, the number plan is JPY 5,000,000,000, particularly in the second half. Imaging product business is now on its way to expand its new product lineup in order to make up for the delay we suffered in the mirrorless and cameras market. We plan to make initial investment in the current fiscal year to develop and mass produce mirrorless cameras and their dedicated lenses. Yes, we admit in a tough situation continues in terms of revenue, but we are committed to launch the types of products which will meet with the needs of professionals and hobbies as surely as possible. We should be having a foot line up next fiscal year. We do hope we can secure a solid and firm share in the so called bedrock market of professionals and hobbies. The latest sales number clearly indicates we are firmly increasing our sales ratio in mid range to high end cameras with our lenses and targeting professionals and hobbyists. We will further continue to make on a shift toward high value added products as surely as possible. We'll accelerate our structural reform and aim to make a profit in our Imaging Products business as soon as possible. Slide 16 shows Precision Equipment business. Revenue forecast is JPY 175,000,000,000, down JPY 70,000,000,000 year on year. In FPD, CapEx for small and mid sized panels are recovering on the customer side. CapEx for large panels remains firm. We know there is a solid demand. Since February, Japanese engineers were not able to go overseas, but thanks to the help and the collaboration from our customers and other people. Our engineers are resuming their travel overseas since July. However, our engineers have to be compliant with two week isolation rule for observation upon arriving at foreign countries as well as upon returning to Japan respectively. With these restrictions still inflected upon them, the total number of installation for this year would be 18 systems as of now. We still have a firm need for FPD lithography. There are 40 or more systems awaiting for the local installation as well as the orders we have already received and in the process of manufacturing. Those installations we have not completed this fiscal year will be a part of the revenue for the next and future years. As for Semiconductor Lithography Systems, our major customer had completed a full cycle of CapEx. COVID-nineteen caused delayed in system delivery or delay in orders to be received. With all of these situations, we forecast the total sales of the new products would be 19 units, down 15 units year on year. With all these in cases in place, operating profit for the entire Precision Equipment business would been up to JPY 10,000,000,000 or down JPY 38,000,000,000 year on year. May I remind you that for this particular business, we need to have R and D efforts on the continuing basis. So we keep an eye on growth areas for us, and we are increasing our R and D spend for these areas. This is one of the reasons why we are having much more decline in operating profit compared with the declined revenue. Slide 17 shows Healthcare business. Revenue forecast is JPY 57,000,000,000, down JPY 5,000,000,000 year on year. Both biological microscopes and Retinal Diagnostics Imaging Systems are expected to recover in the second half, thanks to the resumed sales activities, but it will not make up for the loss we had in the first half. The contract cell manufacturing business is moving forward as planned in terms of the facility and extension and the progress on the collaborative projects with our customers. With this revenue in regenerative medicine is expected to grow year on year. Though we originally aimed at operating profit in the current fiscal year, but we had a big impact from the desalination in the first half. With this, unfortunately, we expect to have a loss of JPY 5,000,000,000. Though it will be one year later, we would like to aim at profit in the next fiscal year. Though it is not mentioned in the materials, The U. S. Company, Barclays Light, where now we made an investment, had an IPO in NASDAQ the other day. It is a startup company specialized in biopharmaceuticals utilizing its unique OptoSelect technology and genome analysis and cell treatments products and services. Nikon has its exclusive agreement here in Japan to sell her Berkeley Analyte's Beacon, which is a sell sorting platform. With that, I'll listing how we plan to book JPY 5,800,000,000.0 as the gain on valuation of investment securities in the second quarter. This profit is going to be included in the consolidated financial profit, so it will not affect our operating profit, which you see here, but it should make its contribution to profit before income taxes as well as to profit attributable to owners of the parent. Slide 18 shows Industrial Metrology business and others. Revenue forecast is JPY58 billion. Despite COVID-nineteen, we are expecting to have the same revenue level as the previous year. This business, Electronics Components and Automotive and CapEx recovery is rather slow, so expect to have a big decline in revenue. On the other hand, in Others, we expect it to grow in revenue in the Digital Solutions business, including Precision Optical Components and others. Now we are getting results from the early investments we made so far. Operating profit forecast is zero, breakeven. That's all from me. Though the situation surrounding us continues to be tough for some time to come, but we will carry out a variety of initiatives for more stable profit, making while leveraging the JPY 20,000,000,000 we booked as risk buffer. At the same time, we should make an efficient investment for future growth so that we can put Nikon back onto the growth track again. I would like to ask for your support and understanding for this. Thank you indeed for your kind attention.