Earnings Call: Q1 2020

Aug 6, 2019

Thank you indeed for your precious time for our financial results for the first quarter of the year ending 03/31/2020. This is Noga, Shino Executive Vice President and CFO, Nikon Corporation. First, do allow me to explain the overview. In the first quarter, revenue and operating profit dropped 24,000,000,000 yen and 9,700,000,000.0 yen respectively year on year due to the reduced sales volume in entry and mid DSLR cameras and FPD lithography systems. Operating profit resulted in JPY9.3 billion, down 51% year on year, yet it is still proceeding almost accordingly to our full year forecast. As has been already reported, we had a buyback in operation of 6,667,200 shares for the value of 10,000,000,000 yen which accounted for about 1.7% of the outstanding shares from May 10 to June 2019. As for the first half and the full year forecast, thanks to the actual performance in Q1 almost on the plan, we have not changed our forecast from the previous time for revenue, operating profit and profit attributable to owners of the parent. ROE is expected to be 7%. Annual dividend is JPY60 and interim dividend is JPY30 unchanged from the previous forecast based on our new policy for shareholders return. With on a share buyback, the average number of the stocks is expected to decline. So we plan to reduce the expected payout ratio by 0.5 points to 56.1%. Next, I will explain the first quarter numbers. Allow me first to explain the consolidated revenue and profit. The actual numbers for the first quarter are shown in the column in the yellow box. Revenue was JPY142.9 billion, down JPY24 billion. Operating profit was JPY9.3 billion, down JPY9.7 billion year on year respectively. Profit attributable to owners of the parent was JPY8.2 billion, down JPY8.1 billion. Free cash flow was negative JPY700 million, down JPY28.3 billion year on year. Though we had a patent litigation settlement with ASML, besides the profit decline, we had a reduction in the advances received as well as the changes in the payment terms for the domestic partner companies and others. As for exchange rates, we had JPY1 depreciation to the U. S. Dollar and JPY6 appreciation to Euron in the first quarter. FX impact on revenue was negative 1,900,000,000.0 yen and its impact on operating profit was negative 900,000,000 yen year on year. This shows the numbers by segment. I will give you details of each segment in the following pages. Corporate profit and loss not attributable to any reportable segments improved by JPY3.6 billion, but it does include the gain from sales of the unused land of JPY3.8 billion. First Imaging Products business, revenue was JPY67.3 billion, down JPY11.8 billion. Operating profit was JPY3.5 billion, down JPY8.9 billion. Due to the declining markets, the units sold declined in all the products categories. Digital camera interchangeable lens type went down 21% to 450,000 units year on year. Interchangeable lenses were down 17% to seven and forty thousand units and compact DSC was down 37% to 270,000 units. In the segment of digital and camera interchangeable lens type, our mirrorless camera launch last year made a contribution and unit sales of the high end full frame camera increased mainly in Europe and The United States. However, entry and mid DSLR cameras declined particularly in China and Asia. Interchangeable lens, mirrorless camera lenses increased driven by the two new products launched in April. However, the growth did not cover the loss in the DSLR lenses and units sold. In the previous fiscal year, DIN eight fifteen and high end DSLR camera made a great contribution to the revenue. However, this year the revenue declined and we had to bear within high initial development cost for new mirrorless camera lenses pushing down both the revenue and profit greatly year on year. The mirrorless and cameras and the dedicated lenses we launched in September are contributing firmly to the revenue. But the market started shrinking starting from the latter half of the previous year and decision has been accelerating. And its impact on our sales volume of DSLR and body lenses is continuing. And I am afraid that this tough situation is going to continue for some time to come in second quarters and onwards. Next, Appreciation Equipment business, revenue was JPY50.9 billion, down JPY8.1 billion year on year. Operating profit was JPY10.1 billion, down JPY4 billion. FPD Lithography Systems, Gen five and Gen six went down by one to two units. Gen eight down nine units to three units and Gen 10.5 was four, same as the last year. Overall, the units sold went down 10 becoming nine units. For FPD Lithography business, revenue and profit decreased due to a substantial reduction in Gen eight sales as Chinese manufacturers investment for TV panels have shifted from Gen eight to Gen 10.5. So both revenue and profit declined as we had forecasted. On the other hand, Semiconductor Lithography Systems had two more units in ARF Immersion Systems resulting in six units in the new sales, up three units. So Semiconductor Equipment business grew both in revenue and profit year on year offsetting partially in some of the negative profit of FPD Systems. Healthcare business revenue was JPY 12,900,000,000.0, down JPY 400,000,000. Operating profit was negative JPY 1,900,000,000.0, showing an improvement of JPY 200,000,000. Sales of retinal diagnostic imaging systems by UK Optus increased particularly in The United States and we achieved record high sales. In the meantime, overall revenue resulted in a slight decrease as sales of biological microscope declined in other regions except for The Americas. All in all, deficit was suppressed by improving the biological microscope cost and by focusing investment themes of the long term growth areas. As for the themes we selected while managing the risk thoroughly, we are increasing our resources appropriately. Here now I'd like to be a bit more specific for your further information. We established our centers in The United States for pharmaceuticals and biotechnological ventures in order to support new drug development research activities. We are also expanding our business and capital partnership with Helios in the form of convertible bonds in order to acquire wider business opportunities in the cell production area. Lastly, I'd like to explain the Industrial Metrology and others. Revenue was 11,700,000,000.0 yen down 3,700,000,000.0 Operating profit was 400,000,000 yen down 700,000,000 yen Revenue was adversely affected by the delayed investment by our customers in industrial metrology and other businesses. But we are able to compensate some of the negative impact in profit by controlling our expenses. Others, namely in our Custom Products, Glasses and Encorders had declines in revenue and profit affected by the postponed CapEx investments by our customers just like industrial meteorology. Next, I will explain our focus for the year ending 03/31/2020. First, our forecast for the corporation. Please look at those numbers in the yellow box. In light of the actual numbers for the first quarter being within our plan, we have not changed our forecast from the last time. Revenue being JPY670 billion, down JPY38.6 billion or 5% year on year. Operating profit was JPY52 billion down JPY30.6 billion or down 37%. Profit attributable to owners of the parent was JPY42 billion down JPY24.5 billion or down 37% year on year. Having covered these points, of course, there are U. S.-China trade conflict going on and also on exports control efforts against South Korea and concerns for the Middle East affairs and Brexit and consumption tax hike in Japan, slowing down of the global economies and others. Those uncertainties and geopolitical risk factors have been with us for sure. Furthermore, the environment surrounding Imaging Products business has become much tougher since July. So we are fully aware that we need to be more conscious toward the future outlook. At any rate, we will try to fully understand the possible concerns as soon as possible so we can be truly proactive vis a vis those issues. Our FX assumptions in the second quarter and on worsen have not changed, yen 105 to $1 and 125 yen to €1 As for the full year on currencies and assumption based on the actual currencies in the first quarter are 106 yen to $1 and 125 yen to €1 Year on year basis, the yen is 5 yen stronger to the U. S. Dollar and 3 yen stronger to a euro from the previous year. FX impact on revenue is negative 15,400,000,000.0 yen and its impact on operating profit is about 3,300,000,000.0 yen year on year basis. FX sensitivity with the exchange rate fluctuating 1 yen is shown on Page 31 in the reference data. For revenue side, the financial impact is about JPY 1,900,000,000.0 in the U. S. Dollar and JPY 500,000,000 in euro. As for operating profit, JPY 300,000,000 in dollar and JPY 200,000,000 in euro. Next, the forecast by segment. No changes from the previous time. Assumptions for the forecast for each segment will be explained in the following pages. First, Imaging Products business, revenue no change, yen $260,000,000,000 down 36,100,000,000.0 year on year. Unit forecasting by additional camera and categories. Additional camera interchangeable lens type down 22%, interchangeable lenses down 18%, compact DSC down 37%. Operating profit is forecasted to be 12,000,000,000 yen down 10,000,000,000 yen While making further efforts to reduce the expense and improve efficiency of R and D activities, so we plan to compensate for the loss in profit caused by the decline in revenue. But I'm afraid we expected to have a profit deterioration two years in a row due to the increased development cost to further expand the product portfolio such as lenses and for mirrorless cameras. Although our efforts will be in a continuous manner to focus on high value added products, expand the sales of mirrorless cameras and Z mount lenses. It is most likely that the poor market conditions appear to be continuing since July, and we simply cannot avoid a tougher competition, particularly in our core full frame mirrorless camera segment. So now we will revisit our overall business strategy to secure our profitability even when we are faced with a shrinking market conditions. We should be more proactive and we shall implement our new ideas after the next earnings call. Next, Position Equipment business. Revenue forecast has not changed, yen $270,000,000,000, down 4,500,000,000.0 year on year. FPD Lithography and Systems units and forecast has not changed, 37 units down 33. Gen five and Gen six equipments five units down 11%, Gen seven and Gen eight, ten units down 27, Gen 10.5 expected to be in 22 units up five units. Forecast for the units including used equipment year on year basis up four to 45 units. Of that new equipment are expected to grow 10 to 31 units, no change. ARF Immersion up five to 12 units. ARF and Dry is expected to increase two to 13 units. Operating profit unchanged, billion down JPY25.7 billion year on year basis. FPV and Lithography Systems are expected to decline in units greatly, but we intend to strengthen our resources into materials processing business, which is one of the core themes for the new mid term management plan. In the previous fiscal year, we had one time profit from the litigation settlement as much as about JPY15 billion. So excluding that, we forecast our profit to be down by about JPY10.7 billion Next is the Healthcare business. Revenue forecast is 65,000,000,000 yen down 400,000,000 yen year on year, no change. Both biological microscopes and retinal diagnosis imaging systems are performing steadily, yet flat revenue is expected due to the negative FX impact. More focused investment is conducted in regenerative medicine and ophthalmological diagnosis fields. So we aim to have the deficit to be JPY1 billion and we plan to be profitable in the next fiscal year. Industrial Metropolitan Business and Others, revenue forecast unchanged JPY75 billion, up JPY2.5 billion year on year basis. In the Industrial Metrology business, we intend to increase our market share in external inspection systems and non contact three d metrology systems, which are highly appreciated among our customers. Operating profit forecast JPY 6,000,000,000, down JPY 900,000,000. We had JPY 600,000,000 for the structural reform. So if we are to exclude that, it is going to be down by 1,500,000,000.0 yen We received an order for mass production of LiDAR sensors from Velodyne in The U. S. Where we invested $25,000,000 We plan to start the production in the second half. So we do expect this segment is going to make its contributions to our profit starting from two fiscal or later years. As I have mentioned, lastly, the business environment surrounding Nikon has been tough. And we are fully aware of this fact, and there is an increased concern about our Imaging Products business. Yes, we are fully aware of that. We decided not to change our full year forecast because our first quarter and outcome was almost within the plan. That said though, we are fully and are conscious that second quarter and onward business outlook is going to have more uncertainties. So we management has to tighten our belt with a very strong sense of crisis. In order to incorporate such a tough business environment, we will have a much deeper sessions to discuss how to address these issues. Specifically, we will address and to perform overall cost structure as fully as possible in order to secure our profitability. We will identify additional measures to drastically address the Imaging business as well as to strengthen our new revenue streams such as Materials Processing. I plan to share our specific journey to go for those improved plus filtering in the next earnings brief for the first half. With this, I conclude my explanation. Thank you for your kind attention.