Earnings Call: Q4 2019

May 9, 2019

Thank you very much for joining us for the presentation of FY 'eighteen Financial Results and the Midterm Management Plan of Anikon Corporation. My name is Oka. I'm the Senior Executive Vice President and CFO. I would like to explain the actuals of FY 2018 and forecast of FY 2019. I will start with overview of financial results for FY 'eighteen. Operating profit was JPY82.6 billion, JPY26.4 billion up year on year. If we exclude the restructuring relevant expenses, it would be JPY84.4 billion, JPY19.5 billion up year on year, because the one off cost is lower by 6,500,000,000.0 yen With our imaging products, although we focused on high value added products, including new launched Z mount full frame mirrorless cameras such as Z7 and Z6 against the background of shrinking market. Operating profit suffered due to substantial decline in sales volume, especially in entry and mid DSLR. With regard to Precision Equipment, operating profit was substantially lifted by the brisk sales of large sized FPD lithography systems. In addition to the one off profit, approximately JPY15 billion excluding additional relevant expenses from settlement of patent litigation in semiconductor lithography business. Against the previous forecast, operating profit was up by 2,600,000,000.0 yen For the imaging product, we did not meet the plan due to severe market condition in the fourth quarter. Other businesses including precision equipment overachieved the plan and offset the downturn of imaging products. Profit attributable to owners of the parent was JPY7.5 billion, up from forecast, thanks to higher profit before income taxes and lower than expected tax expenses, mostly in Japan. ROE was 11.2% and this would have been 9.4% if we exclude the one time profit from litigation settlement. Annual dividend is JPY60 unchanged from the forecast. This is JPY24 increase from the JPY36 from the previous year. Now I would like to explain about the specific numbers starting with total company consolidated revenue and profit and losses. Highlighted in yellow, you can see the full year result of FY 'eighteen. Revenue was JPY708.6 billion, down by JPY8.4 billion or 1% year on year. Operating profit was 82,600,000,000.0 yen major increase of 47% or 26,400,000,000.0 yen Against the previous forecast, revenue was lower by JPY11.4 billion and operating profit was higher by JPY2.6 billion. Net profit was increased largely year on year by 31,800,000,000.0 yen to 66,500,000,000.0 yen which is higher than the previous forecast by 7,500,000,000.0 yen Free cash flow was JPY43.5 billion, down by JPY46.7 billion year on year and lower than the previous forecast by JPY16.5 billion. And this reduction was mostly due to the changed payment terms for domestic partner companies. Year on year, the exchange rate for dollars remained constant and the euro was 2 yen higher, impacting negatively the revenue by 3,800,000,000 and operating profit by 3,700,000,000.0 yen Compared to the previous forecast, dollar was 1 yen lower, euro remained constant and provided a positive impact of 2,900,000,000.0 yen for revenue and negative impact of 600,000,000 yen for operating income. Moving on to performance by segment. Numbers in parentheses for operating profit shows the figures excluding the restructuring relevant expenses. And you can find the details by business segment in the following pages. Starting with the Imaging Products business, revenue was at 296,100,000,000.0 yen down by 64,000,000,000 year on year. Operating profit was at JPY22 billion, down by JPY8.2 billion. Due to shrinking DSLR and compact camera markets, the sales volume of interchangeable lens cameras was at 2,060,000.00, down by 21% year on year and sales of interchangeable lenses was 3,170,000.00, down by 21%. For compact camera, the volume was 1,600,000.0, down by 36%. By focusing on high value added products, ASP of each product category increased, but revenue decreased due to declining sales volume. And there was a significant impact by the decline of entry and mid models of DSLR. Sales volume and revenue for full frame camera continued to grow for two years in a row, thanks to the impact of the launch of full frame mirrorless camera. With regard to operating profit, although we try to decrease the sales expenses, we could not really offset the negative impact of declining profit due to declining revenue. And restructuring revenue and expenses was lower than the initial plan by 400,000,000 and stood at 600,000,000. One time expense of suspension of operation in the Chinese factory in the previous year was billion. So if we exclude these one time expenses for restructuring, this number is JPY22.6 billion, which is down by JPY13.4 billion year on year. The fourth quarter market was tougher than expected and we did not meet the target for interchangeable lens camera and interchangeable lenses in terms of sales volume. Mirrorless Z mount lens shipment was shifted from April to March to some extent, which pushed up the initial cost and had a negative impact on the operating profit by billion. Moving on to Precision Equipment business, revenue was JPY274.5 billion, up by JPY48.2 billion year on year. Operating profit was JPY81.7 billion, up by JPY28.4 billion. FPD Lithography revenue increased due to growth in CapEx for large panels in China and we sold 70 systems, which is an increase of three units year on year. We sold 16 units of fifth and sixth generation systems for smartphone and small to midsize panels, which was a reduction of 18 units. We sold 37 units of seventh and eighth generation systems for TV and large panel, which is an increase of seven units. And we sold 17 units of 10.5 generation with higher unit cost, which is an increase of 14 units. And increase in the revenue of large panel more than offset the decline in revenue for small to midsize panel. Videos can be found on Page 31. For Semiconductor Systems business, revenue increased due to steady growth of CapEx increase by our clients. We sold 21 new systems, which is an increase of four units and 20 refurbished systems, which is an increase of seven units. As per Slide 31, we sold seven units of Immersion Systems, up by two units and 11 units of Airfa Dry system, which is up by three units. Semiconductor system business posted profit for two years in a row, even excluding the profit, coming from the litigation settlement, which is JPY15 billion. And it is showing that due to restructuring now they can generate profit. Against the forecast, the refurbished system sales increased by nine units, but because of the change in the product mix between FPD and semiconductor, revenue was lower by JPY 2,500,000,000.0. For FPD and semiconductor, profitability has improved and therefore the operating profit was higher by JPY 2,700,000,000.0. Moving on to Healthcare business, revenue was JPY65.4 billion, up by JPY8.6 billion year on year. Operating profit was negative JPY1.9 billion, but showed JPY1.3 billion improvement. With regard to revenue, in the Bioscience field, sales grew for Biological Microscope in North America and China. For Ophthalmological Diagnosis field, Sales grew, thanks to the introduction of new products such as Optus retinal diagnostics imaging system. Both biological microscope and retinal diagnostics imaging system posted record sales. Strategic investment to expand the business for Digital Medicine and the Regional Diagnostics Imaging System continues, but, thanks to the increased profit in Biological Microscope and, Optus Retinal Diagnostics, Imaging System, the deficit shrank both year on year and against the forecast. Finally, Industrial Metrology business and others. Revenue was 72,500,000,000.0 yen down by 700,000,000 yen year on year and operating profit was 6,900,000,000.0 yen up by 1,900,000,000.0 For Industrial Metrology business, the revenue was down due to business transfer of CMM conducted in the previous year and softer market. We saw revenue increase in other businesses, but for the segment as a whole, revenue was down. Restructuring revenue expenses was JPY600 million lower than the original plan by JPY400 million and excluding this expense, profit was JPY7.5 billion. In the previous year, there was a onetime expense related to the CMM business transfer. So excluding the restructuring relevant expenses, this was down by JPY 300,000,000 year on year. Against the previous forecast, due to decelerated CapEx investment by customers, our sales plan for the fourth quarter did not get achieved, but, thanks to the improvement of profit in other businesses and reduction in one time expenses, operating profit was up by 900,000,000 yen Moving on to FY 'nineteen forecast. Restructuring, which began in November 2016, achieved expected results and therefore this program will be concluded. But we will continue to implement initiatives for stronger company management. And starting from this fiscal term, we will pivot our focus to growth. Under the new medium term management plan, overview of restructuring as well as the new medium term management plan will be explained by Mr. Omadate, present later on, but we expect the coming year to be quite tough for us considering the environment that surrounds our business. So please understand that our forecast actually reflects our assessment of this situation. Starting with our full year forecast highlights. Revenue is expected to stand at JPY $670,000,000,000, which is down by JPY 38,600,000,000.0 year on year. In the Imaging Products, as we see the shrinking digital camera market, we will focus on expanding sales of mirrorless cameras and Z mount lenses. However, the unit sales for the existing products such as DSLR is expected to go down a lot to see a huge drop in revenue. Precision Equipment, the sales increases in the Semiconductor Lithography business, which offsets the sales drop in FAD lithography business. Operating income will go down by JPY30.6 billion year on year for the whole company to be JPY52 billion. Imaging business, we will further streamline the business operation cost to reduce the impact of net profit decline driven by the revenue decline, but there's an increase in initial cost burden. So we expect to continue to have that decline in profit. In Precision Equipment, there's a unit volume drop in FPD lithography business and there will be no more one off gain of JPY15 billion and that was posted last year due to litigation settlement. So we expect to see a substantial drop in profit, but there is an increased profit by increased revenue of Semiconductor Lithography business. This can alleviate the negative impact by the FPD Lithography business sales drop. Also corporate P and L non attributable to any reporting segment is expected to improve a lot by including the idle land sales of JPY 3,900,000,000.0. Net income is expected to be JPY 42,000,000,000, down by 24,500,000,000.0 yen year on year. Our effective tax rate will be around 24%. So let me go over specific numbers. First of all, let me go through the company wide full year forecast. Please take a look at the numbers in the yellow box. Revenue will be JPY $670,000,000,000, down by JPY 38,600,000,000.0, which is a decline of 5%. Operating income will be JPY52 billion, down by JPY30.6 billion year on year, it's a 37% decline. Net income will be JPY42 billion, down by JPY24.5 billion year on year. It is a decline of 37%. Free cash flow full year forecast will be JPY40 billion. There will be a substantial decline in our net income. However, there is a litigation settlement fee inflow to minimize the decline in free cash flow compared to the previous year. ForEx assumptions, we expect JPY105 to $1 and JPY125 to €1 compared to the previous year, yen appreciates JPY6 against dollar and JPY3 against euro. Year on year FX impact on revenue is expected to be negative 16,400,000,000.0 yen on operating profit negative 3,200,000,000.0 yen The FX sensitivity for JPY change to $1 and a euro are listed on Slide 34 on our reference document. So impact on revenue would be around JPY 2,400,000,000.0 against dollar and roughly about JPY 600,000,000 for euro. The impact on OP would be around JPY 400,000,000 to $1 and roughly JPY 300,000,000 for euro. And let me go over the business forecast by different segment. The assumptions for such business forecast for each business will be explained in the following pages. Starting with MSN Products business, Due to the shrinking market, we expect to see a decline in unit sales in each product category to expect a drop in revenue and profit. The revenue will be going down by JPY36.1 100,000,000.0 year on year to be JPY $260,000,000,000. We continue to see a shrinking digital camera market. The unit volume is down by 15% for interchangeable lens type digital cameras, down by 14% for interchangeable lenses and down by 27% for compact DSCs. In our digital camera unit sales volume for each products will be also affected by the shrinking market. The interchangeable lens type digital camera will go down by 22%, interchangeable lenses will go down by 18%, compact DSC will go down by 37%. Focusing more on high value added products and expanding sales for mirrorless cameras and Z mount lenses, we expect ASP to go up continuously. However, the impact of declined unit sales volume for the entry and mid model DSLR as well as compact DSCs will be quite huge that we have to plan a decline of revenue. Operating profit will go down by 10,000,000,000 yen to be 12,000,000,000 yen We will streamline SG and A and R and D spending to minimize the expenses in order to offset partially such a profit decline driven by the revenue decline. But we're going to have to also invest to reinforce product lineups for Z mount lenses. So we expect to see a profit decline for two years in a row. The market is shrinking more than expected. While we expect to have more spending and investment into mirrorless line of enhancement, and that put us in a difficult condition when it comes to for this fiscal year forecast profit numbers. So we will need to hurry up to convert our business structure for not depending too much on the Imaging Products business. But at the same time, we also work on reviving the profitability of Imaging Product business, which is one of our core businesses. And we recognize that as one of the important missions led by the management. So far, in the Imaging Product business, during this structural reform period, we have optimized more than 4,000 headcounts as well as about JPY 15,000,000,000 worth of fixed costs. We will recognize the difficult business environment to come even under the rapidly declining market. We will make sure to generate profit securely by reviewing all aspects in development, production and sales and building a solid business structure. And next is on Precision Equipment business. The revenue for the Precision Equipment is expected to go down by JPY 4,500,000,000.0 year on year to be JPY $270,000,000,000. The unit sales for FPD Lithography System is expected to go down by 33 units to be 37. We see a moderation in CapEx for the mid and small sized panels. Also, the CapEx for large sized panel is now shifting from seven and eight generation to 10.5 generation. Fifth and sixth generation system will be reduced from 16 units to five units. Seven and eight generation system will go down from 37 units down to 10 units. On the other hand, high ASP 10.5 generation system is expected to increase from 17 to 22 units. More details will be listed in our reference document on Slide 31. Semiconductor lithography system sales volume, including refurbished systems will go up by four units year on year to be 45 units. Of them, the new system will increase by 10 units to be 31 units. This is due to a strong CapEx taking place at our customers. As you see on Slide 31, the sales volume for ARF Immersion and ARF Dry system will increase from seven to twelve and eleven to 13, respectively. Operating profit is expected to go down by 25,700,000,000.0 yen year on year to be 56,000,000,000 yen The decline profit for FPD will be partly offset by the increased profit of Semiconductor Systems. By excluding one off profit by mitigation settlement, we expect the profit will go down by about JPY 10,700,000,000.0 year on year. Since the March 2019, we have been disclosing the corporate level of backlog at the end of the fiscal year. The backlog is for the orders taking more than one year from order taking until the sales booking. At the March 2019, we had a backlog of about JPY450 billion. And more than 95% of the corporate backlog is coming from Precision Equipment business. Next is in Healthcare business. Revenue is expected to go down by JPY400 million year on year to be JPY65 billion. Biological Microscopes and Regional Diagnostic Imaging Systems will continue to perform solidly, mainly in overseas. However, revenue will stay almost flat due to negative FX impact. Investments continue in regenerative medicines and ophthalmological diagnosis, but through focused investments deficit will be reduced almost by half to be JPY 1,000,000,000. So it's expected to shrink as planned. There is no change to our plan to be profitable next fiscal year. Industrial metrology and others, revenue is expected to go up by 2,500,000,000.0 yen year on year to be 75,000,000,000 yen Industrial metrology business, we have X-ray inspection equipment and non contact three d metrology systems, which are highly appreciated by customers. By expanding market share, we expect to grow our revenue. Operating profit is expected to go down by 900,000,000 yen to be 6,000,000,000 yen The previous year had restructuring related expense was 600,000,000 yen By excluding them, apple to apple comparison will result to be a profit decline of 1,500,000,000.0 yen Industrial Metrology business will see improved profitability through restructuring. And we will continue to make investment into component business and future growth, so overall segment is expected to see a profit decline. Lastly, let me touch on our shareholder return policy. Fiscal March twenty nineteen annual dividend was JPY60 with payout ratio of 35.7%. That policy to maintain 40% or higher was not met because of a substantial upside of a net profit. Based on this net profit upside, we are conducting the share buybacks up to JPY 10,000,000,000. The share buybacks will be exercised in FY March 2020. Including this buyback, the total return ratio for March 2019 will exceed 50. We expect profit decline this fiscal year and still the annual dividend of 60 yen and interim dividend of JPY30 is planned as in fiscal twenty nineteen to maintain stable dividend payout. To exercise more flexible return to shareholders, The policy is revised from dividend payout ratio of 40 or higher to total return ratio of 40% or higher as accumulation of medium term plan period. And we will maintain annual dividend of JPY60 investment for growth strategy, additional return to shareholders is judged with agility and flexibility to maximize shareholders' interest. If any unexpected change occurs in the management environment, this policy may be revised based on the remaining capability for growth investment and a capital structure. From the mid and long term perspectives, we will pursue both stable return to shareholders and capital efficiency improvement. This concludes my explanation.