Earnings Call: Q4 2020

May 28, 2020

Hello, everybody. This is Nato Gnarin serving as CFO as of April 1. I would like to thank our investors, analysts and the media for this opportunity. In order to prevent further an outbreak of COVID-nineteen, we are this time holding this session through the Internet. I know this is causing you on inconveniences, but Nikon has given its top priority to secure the safety of our employees and their families and all the stakeholders including our customers. Hope you understand this, and I do appreciate for your understanding. That said, I will cover the financial results for the year ended 03/31/2020, as well as our forecast for the year ending 03/31/2021. Slide three shows the summary for the year ended 03/31/2020. On May 12, we disclosed our revised financial forecast. Final revenue was JPY $591,000,000,000, down JPY 29,000,000,000 from the number we disclosed in February. Revenue went down JPY 117,600,000,000.0 year on year. We had a major decline in Imaging Products business. Though the mirrorless and camera grew in sales, but the market as a whole was affected by the COVID-nineteen due to the rapid market shrinkage and the delays in the new products launch. The overall impact here was as much as minus 70,000,000,000 yen In Precision Equipment business, though the Semiconductor Lithography business grew in revenue, FPD Lithography business went down due to the customer investment coming to a full cycle and the postponed installations of some products to the year ending March 3121. So all in all, Precision Equipment business as a whole went down JPY30 billion plus in revenue. Operating profit was 6,700,000,000.0 yen down 13,300,000,000.0 yen from the forecast made in February or down 75,900,000,000.0 yen year on year. Imaging Products business became a loss. On top of the decline in revenue, we had a development cost burden for new products as well as the impairment booked. By the way, the restructuring in Imaging Products, which we announced in November is progressing as expected. Our target being during this medium term management plan, we aim to reduce operating costs as much as JPY50 billion vis a vis the year ended March 3139. We have already reduced the cost by about JPY25 billion. Profit in Precision Equipment dropped. This can be partly caused due to the loss of onetime profit we had in the previous fiscal year due to the semiconductor device litigation settlement we had. Slide four shows the major changes from the previous forecast made in February. The first line, impact from COVID-nineteen, its negative impact on revenue was about JPY33 billion. Operating profit as shown in the yellow box JPY10 billion from COVID-nineteen and JPY10.3 billion from fixed asset impairment were the major factors pushing down the number. In Imaging Products business, we had intangible fixed asset impairment such as software and others. In Industrial Metrology business, we had impairment of goodwill at the time of the acquisition for Nikon Metrology, our overseas subsidiary for measurement. As shown in the table, though we advanced our efficiency and the cost reduction efforts, the total operating profit was down JPY 13,300,000,000.0 from the previous forecast. Please turn to Slide five. The first line from the top, profit attributable to owners of the parent was JPY 7,600,000,000.0, down JPY 9,400,000,000.0 from the previous forecast or down JPY 58,900,000,000.0 year on year. Free cash flow below it was negative JPY4.8 billion. This was mainly caused besides the drop in profit by the reduced advanced payment and the changes of payment terms. FX during this year shows that the Japanese yen appreciated against both the U. S. Dollar and the euro. Its impact on revenue was JPY14.2 billion and its impact on operating profit was JPY4.3 billion negatively respectively. Slide six is the summary of the performance by segment, which I will cover later. So allow me to omit my explanation here. Slide seven, the first segment is Imaging Products business, mainly cameras and lenses. Revenue was JPY225.8 billion, down JPY9.2 billion from the previous forecast back in February or down JPY70.3 billion year on year. Revenue had been progressing mostly in line with the previous forecast till the mid February, but with the COVID-nineteen impact becoming larger and larger, we suffered from a drop in revenue because the demand declined and parts procurement delay became quite obvious, particularly high end DSLR cameras and the lenses for mirrorless lenses were postponed in launch. By the way, the COVID-nineteen impact on the revenue in Imaging Products business was about 10,000,000,000 yen Volume sales ratio of mid range and high end cameras for professionals and in hobbies, our most important business area, improved steadily as well as its interchangeable lens tie ratio against the camera. Online sales ratio also grew. We are diversifying our sales channels. However, operating profit in Imaging Products business became negative JPY17.1 billion with the COVID-nineteen impact as much as JPY4 billion. Slide eight is Precision Equipment business. This business is to make and sell FPDS, Flat Panel Display equipments such as liquid crystal displays and semiconductors. Revenue here was JPY 2 and 39,700,000,000.0, down JPY 15,300,000,000.0 from the previous forecast or down JPY 34,800,000,000.0 year on year. FPD or the Flat Panel Display Lithography Systems revenue declined significantly as customer investment came to a full cycle and moving toward the end of the fiscal year, installations in outside Japan were postponed due to the COVID-nineteen outbreak. On the other hand, when it comes to the semiconductor lithography business, we completed four systems installations early in the previous fiscal year as the customers requested. The new systems sold increased by 13 units year on year, but it was not able to offset their loss in the FPD business making the overall revenue in the segment declined. Operating profit was JPY46.7 billion, down JPY4.3 billion from the previous forecast. In light of the one time profit we had last year from the patent litigation settlement as much as JPY15 billion. This segment's operating profit in real terms was about JPY20 billion year on year. Slide nine is the Healthcare business. Revenue here was 62,000,000,000 yen down 3,000,000,000 yen from the February forecast or down 3,000,000,000 yen year on year. Up until the third quarter, we were on the upward trend, but COVID-nineteen pushed down the sales of biological microscopes and retinal diagnostic imaging systems. This business is continuing its loss, so we try to select down investment themes and plan to have the loss year on year. We were okay up until the third quarter, but COVID-nineteen made our business for medical institutions sluggish, resulting into further extended loss to 500,000,000 yen year on year. Slide 10 is Industrial Metrology Business and Others. Revenue was JPY63.3 billion, down JPY1.7 billion from the February forecast or down JPY9.2 billion year on year. Revenue grew as planned in the growth segments of X-ray inspection systems and Non Contact three d Metrology. But customers in China and Asia were already restricting their CapEx then COVID-nineteen outbreak and impact was added pushing down the total revenue here. Operating profit including 3,600,000,000.0 yen from the impairment loss dropped 3,800,000,000.0 yen year on year. With this I have just finished my explanation about each business segment. Next, I will explain our forecast for the year ending 03/31/2021 using slide 11. We decided to make our performance and forecast undecided because it is rather difficult for us to make a reasonable estimation because it is rather impossible to know when the ongoing COVID-nineteen impact will come to an end. But we will disclose our forecast immediately after it becomes possible to make a reasonable calculation. So as of now, our performance forecast is undecided, but here now I'd like to take time to explain qualitatively our outlook for the major business area for the year ending 03/31/2021. Imaging Products business, though parts procurement situation is improving, but the supply chain as a whole is still under the influence of COVID-nineteen. And may I remind you that COVID-nineteen is hitting the camera demand directly. We are faced with a big drop in sales nowadays. There seems to be some signals for recovery particularly in China and some geos, but camera related business is considered to be luxury goods business. We have to assume for a tougher look, so it looks like we will have a loss in the year ending 03/31/2021, second year in a row. Precision Equipment business, though we are confirming rather firm demand, but it is still rather difficult for Japanese engineers to go abroad. This is resulting into difficulties in terms of product shipment, delivery and installation, though we are having discussion about the installation timing and others with our customers and partners. But some of the FEED installations we had planned this fiscal year now have to be postponed till the year ending 03/31/2022. As you see here, the environment surrounding us in this fiscal year is quite tough, never experienced in recent years. We have to assume a tough situation in terms of profit and loss. That said though, our equity ratio level is rather than healthy at 53.7%. Liquidity at hand and cash and deposit together amount to JPY400 billion or more. With this healthy financial situation in place, we would like to overcome this quite tough situation. Lastly, I would touch upon shareholder returns. In May, we told you in our financial briefing that during the medium term management plan, we aim a total return ratio of 40% or more full year on the dividend of JPY60 or more per share. But if drastic changes are developing, this policy may change. In light of the rapid deterioration of business environment, while we maintain the total return duration of 40%, but we have to propose quite regrettably that we withdraw the JPY 60 or more full year dividend per share so that we can secure our capability to keep investing into future growth areas and be able to cope with the crisis going forward. To be specifically, we propose for 10 as the year end dividend and JPY 40 as the annual dividend, down JPY 20 respectively from the past forecast. Yes, the business environment changes so abruptly, but it is truly regrettable that we are not able to keep our promise. As for dividend for the year ending 03/31/2021, like our forecasting performance, it is undecided. The slide here shows the results of the stock buyback we conducted in the year ended 03/31/2020. The number of shares acquired from November until March was 22,500,000.0 yen 6.1% equivalent of the total stocks issued have been fully canceled. Lastly, I would like to emphasize that we will keep an eye on changes in our business environment and we will keep the optimal balance between the growth investment and shareholder returns by having long term perspectives. This concludes my explanation. Thank you indeed for your kind attention. This is Omotate, President and CEO. I do appreciate for your precious time despite of your schedule to attend our financial briefing. First, I would like to take this moment to express my sincere wish for a quick recovery and for those who are infected and affected by COVID-nineteen. And furthermore, I would like to offer my sincere apology for the significant downward revision of the financial performance for the year ended 03/31/2020, despite it was caused by the unexpected situations. Now allow me to explain our response to COVID-nineteen as well as our progress on the medium term management plan including growth strategy. First, update on our response to COVID-nineteen. We will carry out our business in general by putting the top priority in the health and safety of employees, suppliers and customers. We are already carrying out those activities, including emergency responses including critical distributions in production and supply chain management. While keeping an eye on the changes taking place day in, day out, The management is now taking actions flexibly and dynamically. Next, I will report on the progress on the medium term management plan. Last year, we announced our goals by the March, build a foundation for growth over the mid to long term, aim to achieve 8% plus ROE. There is no change that by achieving these targets, we will increase the corporate value. We intend to realize these targets by advancing our strategic investment into growth areas. Now looking at each specific business, Imaging Products business, the market shrinkage is likely to accelerate while the competition continues to become harsher. And the COVID-nineteen impact is definitely severe. With this tough business environment in place, we need to further rebuild our business. By doing so, we will aim to achieve a profit at an earlier stage. In regard to the Precision Equipment and Healthcare business, though we are impacted by COVID-nineteen, but we do believe that these markets are going to be firm on the mid term basis. So by expanding business opportunities, we will expand our profit scale here. As for growth areas, though I will go through details later, but we are now working on alliance initiatives and products launch. We intend to make them as our new business pillar and shorten her scale moving into the next fiscal year. In the governance area, we have already established last year and nominating our committee chaired by an external hall director. With the latest in change, duration of the external directors now went up to 45%. For your further information, we now have Mr. Shigeru Murayama, who has a rich background in heavy machinery as well as Ms. Asako Yamagami, who is a lawyer, our first female director. As you see, we are now advancing our diversity. We are here now to further advance corporate value by enhancing governance by the Board of Directors. Here now I will explain the progress made and the policies to follow in each business. First, I will touch upon the three businesses, Imaging Products, Precision and Equipment and Healthcare. In Precision Equipment business, we aim to generate cash in a stable manner, so we will secure cash for our growth. In Imaging Products business, we aim to become profitable at an earlier stage. With the tougher business environment going on, I have to say that it is rather difficult to achieve the goal of stably secure JPY20 billion or more operating profit, which we announced last year. I will explain how to cope with this concretely using the slides to follow. As for the Precision Equipment business, we are now getting specific on F and deals for small and mid sized panels. For the year ending 03/31/2022. We are having competitive advantage and we will expand our profit by surely meeting with the demand coming from high resolution displays. Semiconductor market is here now to grow on a stably on mid to long term basis. We do believe that the next bit of revenue opportunity will come from the investment into seven nanometer. We plan to strengthen our China business as well as semiconductor measuring equipment, where we expect to see a growth in investment. In Healthcare, we do believe that the existing products like microscopes and ophthalmology devices will grow firmly. We are scaling up a contract cell manufacturing as our new area. Here, we will further aim at bigger profit and further growth. Here, I will explain the progress of restructuring in Imaging Products business. In November, we announced our plan to cut 50,000,000,000 yen in business costs compared to the year ended March 3139. While faced with the tougher situation, we aim to realize an early in profit and to accelerate on a deeper restructuring efforts and to advance our planned initiatives and to further increase in cost reduction. Details are shown here. We will further select down in the product development. We will further promote platform initiatives and we will aggressively shift resources into growth areas. In sales, we will have a fundamental shift by leveraging digital marketing and other technologies. More aggressively, we will review our sales strategy and optimize sales companies. Thus, we intend to improve efficiency as thoroughly as possible. In production, we continue our efforts to optimize site function and size. At the same time, we will advance production capability and technology usage for other businesses. Next, a progress of new business areas and the cost reform. We will create a synergy by M and A. With this, we will create business opportunities in growth areas. We will surely expand in scale and execute cost reform. In April, we launched Digital Solutions business unit. Our foundation has been a component and encoder business, but this new unit is responsible for integrating material processing and division system and robotics related businesses as the core of the new growth. They will collaborate with next generation project division directly reporting to the development function and launch specific business opportunities. In component business, we have advanced LiDAR and Precision Optical Components business. They are firmly advancing. Cost reduction and effort as shown in the right hand, aiming at JPY18 billion in reduction. Last year, now we were able to achieve more than other target. In the meantime, due to further reduction in production of Imaging products, there were no less procurement of materials thus becoming a headwind against us. But we added here distribution reform by further slimming indirect and administrative operations so that we can achieve cost reduction more than the target number. Here I will explain the progress of the growth area activities. The left diagram comes from the medium term management plan announced last year. Major points of the progress to date now listed on the right hand side. In digital manufacturing, we launched optical processing products into the market and began collaboration with customers using our products. For example, we supply the non contact three d meteorology and systems to machine tool manufacturers. In Vision System and Robotics area, we started manufacturing LiDAR sensors as contract manufacturer for Velodyne in The United States as scheduled. We are now expanding production volume. We also now launched Intelligent and actuator unit for robotic joint unit for collaboration robots. We also developed and began sales of embedded cameras. Healthcare, we obtained manufacturing license for contract cell manufacturing. This we believe is an important step for real business opportunities. We conclude our contract with HeartSpeed to produce an IPS cell derived cardio home myocytes now for clinical trials. We finished our development for AI diagnosis by retinal cameras and now we are preparing to start its usage in Europe. Next, our strong focus area, namely material processing business. Here, I will explain in details. Nikon aims at solving our customers' business issues. In other words, we would like to help customers to relieve pain points substantially by offering our unique processing capabilities into core components. For this, we will leverage Nikon's unique optical processing technology. In the areas of additive processing and removal processing, which we have already introduced to you, we have already began shipping those capabilities to our customers. This time, we are introducing rivelet processing. With these capabilities available, we should be able to combine them in a manner best matched with the specific customers' needs. This will give us to deliver extra new values and to benefit our customers in the ecosystem. We will further advance our collaboration with the companies both at home and abroad. In lodging material processing business, we are now trying to explore and identify the customer values. We are now having good dialogues with our customers, so we can truly realize the value we can deliver to our customers. Additive process center in the left can be used for repair of molds and turbine blades. With this, they do not have to make those new parts, thus contributing to cost reduction. We are already now using those capabilities to create unique opportunities together with our customers. The center shows removable hard processing. This can replace metal hand scraping. This can be used to make micro machining dies. We are collaborating with launch customers in this ultra precision processing area. The right shows roulette processing. This is a new addition. This is a processing technology to reduce fluid resistance. This can be applied to a turbine blades and in a surface of aircrafts, resulting in a better fuel efficiency and CO2 reduction. Allow me to explain the riblet processing a little bit further. Recently, biomimetics, imitation of living organism is in the spotlight. Organism has a variety of functions and the principles and biomimetics is to observe and analyze them. This is a kind of top down approach to make things by imitating them With three d printing and microprocessing technologies combined, we may be able to have more possibilities to produce parts and products, which have quite unique functions. Biblet processing this time is based upon the surface shape of shark skin. This structure was actually used in the swimsuit and create a hot topic during the Beijing Olympic Games. With the periodic structure in the range of several nanometer to several tens of nanometers, we can create the surface which can reduce the fluid resistance. With this, we can improve energy efficiency including fuel consumption reduction. Based on the assumed benefit, the market may grow as much as 1,000,000,000,000 yen We are already working with several potential customers for specific ideas. We believe this is also an important from ESG perspectives. We will leverage possible alliances in many possible areas in the value chain in order to advance the Material Processing business. We announced our capital alliance in February with Kudia. Its optical comb based measurement is expected to bring about major innovation. XVision, two years ago, it became our affiliate and it's a high speed image processing technology is also critical. Last year, we reached a basic agreement with DMG Mori. We entered the official business agreement with DMG Mori in March. As we announced this week, going forward, DMG Mori will jointly sell laser milestone 101. GMT Mori also plans to embed our LCN15DX into its products. More plans are to come. In contract processing services, we aim to further expand our access to customers and aim to expand the scope of value offering. We will first work internally and then expand the business as time goes on. This slide shows business expansion scenario for growth areas. On the mid to long term basis, we position materials processing as the core for our growth. We aim at more than JPY100 billion in revenue. We will use M and A to realize our growth scenario. Strong relationship with customers is going to be quite critical, so we will put emphasis on joint development projects as well as partnership building. Lastly, I will explain our mid to long term capital allocation. This slide was shown to you on the last year. Though the capital resources allocated has been reduced due to the rapid change in the business environment, but in principle, we continue our policy to focus resources on new fields and to establish new core pillars of profit. So going forward, we get a priority to strategic investment to build growth foundation. With this, there could be some modifications in terms of shareholders' return, but we will not change its proportion. Of course, with the ongoing situation upon us, we simply cannot loosen our belt, but it has given us new opportunities to start new initiatives in a flexible and dynamic way, making us truly united as one team to overcome the difficulties in front of us so that we can truly start this journey for building our growth foundation. That's all from me. Thank you indeed for your kind attention.