Earnings Call: Q3 2020

Feb 6, 2020

This is Okan, Vice President and CFO, Nikon Corporation. I would like to thank you for your precious time to attend the financial results for the third quarter of the year ending 03/31/2020. Allow me to explain the overview of the third quarter results as well as the full year outlook. Revenue was 154,300,000,000.0 yen down 37,100,000,000.0 yen year on year. Operating profit was 4,000,000,000 yen down 17,900,000,000.0 yen On the cumulative basis from the first to third quarter, revenue was 444,400,000,000.0 yen down 81,800,000,000.0 yen year on year. Operating profit was 21,500,000,000.0 yen down 31,000,000,000 yen Imaging Products, while mirrorless and camera sales increased steadily, but the decreased sales of DSLR pushed down profit substantially. That said, restructuring effort explained in the last meeting is well underway as planned. Precision Equipment profit declined as a whole due to the loss of FPD and Equipment going above the increased profit in Semiconductor Equipment business. This shows in profit and loss for the third quarter. As I mentioned earlier, both revenue and operating profit went down from the previous year levels. Net profit was 3,900,000,000.0 yen down 14,000,000,000 yen year on year. Free cash flow was 800,000,000 yen down 16,100,000,000.0 yen year on year. As for FX, the Japanese yen appreciated 4 yen to the U. S. Dollar and it also appreciated 9 yen to the euro year on year. The currency had a negative impact of 5,000,000,000 yen on revenue and a negative impact of 1,600,000,000.0 yen on operating profit. This shows the results by segments. I will explain the details later. Cumulative profit and loss up until the third quarter is shown here. Both revenue and operating profit, as mentioned earlier, went down and the net profit was 20,200,000,000.0 yen down 20,500,000,000.0 yen year on year. Free cash flow was 4,700,000,000.0 yen down 43,400,000,000.0 yen year on year. Behind this was the loss in profit as well as the change we had in the payment terms for the domestic partner companies. This shows financial highlights by segments. Details will be explained later, but on corporate P and L non attributable to any reportable segments shows less negative amount year on year. The reason for this is, first, we had FX loss due to the liquidation of the Chinese factory for the Imaging business in 2017 as much as 1,700,000,000.0 yen for restructuring related cost. We also had 3,800,000,000.0 yen booked as sales gain from the idle land. Next, now I will explain the actual by segments. First, Imaging Products business. Revenue for the third quarter was 70,000,000,000 yen down 20,500,000,000.0 yen year on year. Operating profit was negative 800,000,000 yen down 9,400,000,000.0 yen year on year. As for the cumulative numbers up to the third quarter, revenue was 189,000,000,000 yen down 52,400,000,000 Operating profit was 1,200,000,000.0 yen down 20,600,000,000.0 yen In the third quarter, digital camera interchangeable lens type declined in the units sold and the average price went down due to the product mix change. Furthermore, we had to bear an increased initial cost in developing new products. So we had a big decline in revenue and profit. But mirrorless and camera enjoyed increase in both in revenue and the sales volume, thanks to the Z50 launched last November. Restructuring has been progressing as scheduled. And we have allocated 800,000,000 yen as a onetime expense for sales and production allocations optimization. Next, Precision Equipment business. Revenue for the third quarter was 51,500,000,000.0 yen down 13,200,000,000.0 yen year on year. Operating profit was 10,400,000,000.0 yen down 7,000,000,000 yen year on year. As for the cumulative basis and up to the third quarter, our revenue was 166,600,000,000.0 yen down 19,700,000,000.0 yen Operating profit was 35,800,000,000.0 yen down 11,400,000,000.0 yen In the third quarter, semiconductor lithography and sales volume grew both in new and refurbished systems. However, FPD lithography systems suffered a big decline in sales volume since our customers' CapEx for the G6 and the G8 panels peaked out. Precision Equipment business as a whole went down both in revenue and profit. Next, Healthcare business. Revenue for the third quarter was 16,500,000,000.0 yen up 200,000,000 yen year on year. Operating loss was 400,000,000 yen and further deteriorated by 200,000,000 yen As for the cumulative basis and up to the third quarter, revenue was 46,500,000,000.0 yen up 800,000,000 yen Operating loss was 1,600,000,000.0 yen improved by JPY 900,000,000. Right now, Diagnostic Imaging Systems by U. K. And Aptos continued to grow firmly, particularly in The United States. And it had record high sales for the cumulative number up to the third quarter. Biological microscope continued to enjoy a growth in revenue. Our decision to make selective investment for our long term growth areas and turn out to be successful in reducing operating loss firmly. Next, Industrial Metrology business and others, including our custom products, glass and encoder business. Revenue for the third quarter was 15,500,000,000.0 yen down 3,500,000,000.0 yen year on year. Operating profit was 1,200,000,000.0 yen down 900,000,000 yen As for the cumulative basis and up to the third quarter, revenue was 42,200,000,000.0 yen down 10,500,000,000.0 yen Operating profit was 3,600,000,000.0 yen down 1,200,000,000.0 yen Revenue in the third quarter was depressed due to the constraint and CapEx by our customers. However, the size of the decline turned out to be almost halved as we had planned due to the controlled expense on our side. Next, I will cover the full year forecast for the year ending 03/31/2020. This time, we do not reflect an impact from the new coronavirus outbreak. We did not change the forecast that we made last time as for revenue and operating profit and the net profit. As for dividend, we have not changed the annual dividend being 60 yen But as you know, the outbreak of this new coronavirus is causing a rapid concern for possible economic slowdown of China and the world. On top of the depressed and final demand such as consumption and investment, there is a serious concern about the supply chain. With the infection spreading, the local operation could be suspended much longer than we had expected. If the outbreak has a major and has serious impact on the overall logistics, then its impact on the global economy may become a lot longer than we are assuming now. Of course, the Nikon is making its effort to collect information day in, day out and trying to fully understand its impact. But if the problem is to continue a lot longer, we particularly have to pay attention to our FPD systems business and Imaging business. As for FPD and Systems business, if the installation work is to be suspended a lot longer, Expected revenue and operating profit from several units will be postponed to the next fiscal year from the current fiscal year. As for Imaging business, it is rather difficult for us to fully appreciate the depth of the impact as of now. But on top of the consumption mind being suppressed, there could be an impact on the parts procurement. So we are now carefully and trying to understand the specific impact against us. At any rate, we intend to keep an eye on if local companies and factories are resuming operations or logistics is coming back. Until we get to see restarting economic activities, Nikon needs to make efforts in gathering information and we need to fully understand its possible impact on our business performance. Though we do not reflect the impact from the new coronavirus, in case we started to see possible major modifications, we will disclose them timely and appropriately. We announced the share buyback last November. As of the end of last month, we have gained 3.5% of the total stocks issued or about 14,000,000 stocks. The acquired value is now about 20,300,000,000.0 yen vis a vis the cap of 30,000,000,000 yen we have progressed up to 68%. We plan to cancel all newly acquired own shares by the end of this fiscal year. This shows the overall forecast for the full year. Revenue is $620,000,000,000 yen down 88,600,000,000.0 yen year on year. Operating profit is 20,000,000,000 yen down 62,600,000,000.0 yen Net income is 17,000,000,000 yen down 49,500,000,000.0 yen We have not changed those numbers since the last time. Free cash flow is 15,000,000,000 yen down 28,500,000,000.0 yen the same forecast since the last time. Exchange rate assumption, yen 108 to the U. S. Dollar and 121 yen to the euro. Since the last time, the U. S. Dollar depreciated by 1 yen but the euro has not changed. FX impact assumption year on year on revenue shows minus 15,800,000,000.0 yen and minus 4,700,000,000.0 yen on operating profit. For your further information, when the currency moves 1 yen the sensitivity on the revenue in the second half is 600,000,000 yen with the U. S. Dollar and 200,000,000 yen with the euro and about 100,000,000 on operating profit for both U. S. Dollar and euro. Next, I'll go through numbers by segments. This table consists of new forecast and a change from the previous year and the previous forecast. I will go into details in the following slides. May I remind you that excluding restructuring related expenses, consolidated operating profit is 26,700,000,000.0 yen as shown in the bracket and in the bottom line, the same from the previous forecast. First, Imaging Products business. Revenue was $235,000,000,000 yen down 61,100,000,000.0 yen year on year. No change in from the Haila's forecast. We have not changed in the basic assumption for the market outlook and we have not changed our focus for our products as you see on this slide. We haven't changed them from the last time. As I mentioned at this point earlier that this time, we do not take into account possible impact coming from the outbreak of the new coronavirus. Operating profit being the same as the last time is 10,000,000,000 yen down 32,000,000,000 yen year on year. We are now assuming for the current fiscal year, now 5,000,000,000 yen for restructuring related cost. So if we exclude this expense, our forecast here is going to be a loss of 5,000,000,000 yen We continue to make further efforts in reducing SG and A and R and D cost, but an impact coming from the revenue decline and the rather large initial cost incurred due to the extended lineup of mirrorless and camera, we are now assuming that we will be in a phase with rather tough situations for two years this current year and the next fiscal year. Next, Precision Equipment business. Revenue has not changed. Yen $255,000,000,000, down 19,500,000,000.0 year on year. FPD sales unit forecast is still 32 units unchanged from the last time. Nikon is the only supplier with our G10.5 with the premium price. And this product will grow from the previous year, but G6 and G8 decline in sales will have a great impact. As I mentioned earlier, please be reminded that this time, we do not take into account any possible impact from the new coronavirus outbreak. Semiconductor Lithography and Systems, 30 new units and 11 refurbished units, no change from the last forecast. With FAD Lithography Systems loss and revenue exceeding the growth in the profit with the Semiconductor Equipment business. Our forecast for operating profit is 51,000,000,000 yen down 30,700,000,000.0 yen year on year basis. No change here since the last time. In the previous year, we had a one time profit of 15,000,000,000 yen or so last year from the settlement for the patent litigation. Excluding this, our forecast here is going to be down 15,700,000,000.0 yen year on year. Next, Healthcare business. Revenue in our forecast is 65,000,000,000 yen down 400,000,000 yen unchanged from the previous forecast. We do expect both Biological Microscope and Retinal Diagnostic Imaging System continue to grow, primarily mainly overseas. Yet with the negative impact from the FX, we expect the revenue to be flat year on year. Operating profit forecast has not changed. However, the loss will be halved and there is no change as to our plan to be profitable next fiscal year. Lastly, Industrial, how Metrology business and others. Revenue in our forecast is 65,000,000,000 yen down 7,500,000,000.0 yen year on year. No change from the last forecast. With the economic slowdown, Chinese and other Asian customers may reduce in planned CapEx. So we are forecasting a decline in revenue. Yet in industrial metrology business, we expect the market share of non contact three d metrology systems will steadily grow because our customers are giving us really good feedbacks. Operating profit is 4,000,000,000 yen down 2,900,000,000.0 yen year on year. No change from the last forecast. In order to minimize the revenue drop, we will further improve cost and reduce expenses. We will continue our investment for the future growth, such as components of business. That's all for our full year forecast. Though we are still faced with a tough environment, as Mr. Matataen, President and CEO stated back in November financial results meeting, we will surely execute in our restructuring plan for Imaging Products business. And we are now making our best effort for our growth strategy for the midterm management plan centering around Materials Processing business and others with a sense of speed. As for the comprehensive business alliance with DMG Mori, we are making steady progress in going over details. Our mid term management plan aims at acquiring new engine quickly through an active investment into new areas, the top priority. We are now accelerating our specific activities to work on our growth strategy, which should be feasible enough based upon our strength and assets. Here we have to be thorough and quick, while always having a sense of time line. In order to fully support such a strategy, our capital allocation policy should be to give the top priority to our growth investment. This portion has not changed a bit even now. Why not to have a bold capital injections through M and A and alliance, so we could be quick in driving growth opportunities. And there is no change at all in this fashion. This is still the most important challenge for us and we will definitely work out on this so that we can get back to you and share the specific outcome at an early stage. With this now, I'd like to close off my remarks. I'd like to thank you for your kind attention.