Fujifilm Holdings Corp

TSE:4901

Earnings Call Transcript 2019-Q1

[Unknown Executive]

I would like to present FUJIFILM Holdings' Financial Results for the First Quarter of the Fiscal Year ending March 2019.

Let me explain the main points for the first quarter of the fiscal year ending March 2019. In the first quarter of the fiscal year ending March 2019, both revenue and operating income proceeded according to the initial target planned at the beginning of this fiscal year. Compared to the previous fiscal year, revenue remained at the same level, while operating income increased.

Regarding performance by segment, sales continued to increase in the medical systems and electronic materials, though sales decreased in the document business due to reduction of low-profit, low-end printers and due to a change in an accounting method for recognizing revenue from purchased products. If these negative impacts are excluded, the overall revenue had increased. Operating income increased in the medical systems, electronic materials and document business.

As for the special note, the structural reforms of Fuji Xerox, announced in January this year, made good progress. In June 2018, Irvine Scientific Sales Company and IS JAPAN, leading companies for cell culture media, became consolidated subsidiaries. Our Board of Directors at its meeting today decided to conduct a buyback of the company shares of JPY 100.0 billion.

From the fiscal year ending March 2019, the classification of the retirement benefit cost other than service costs was changed from operating expenses to nonoperating income or expenses in accordance with the update of U.S. accounting standards. The change of the classification has also been applied retroactively to the fiscal year ended March 2018.

Let's move on to detailed performance information. Consolidated revenue in the first quarter of the fiscal year ending March 2019 totaled JPY 564.9 billion, down 1.2% from the previous fiscal year, reflecting such factors such as sales decrease in the document business due to a reduction of low-profit, low-end printer business, while sales increased in such businesses as the photo imaging business, medical systems business and electronic materials business.

Operating income increased with improvements in profitability in such businesses as the medical systems business, electronic materials business and document business to JPY 36.9 billion, up 8.2% from the previous fiscal year.

Income before income taxes came to JPY 45.8 billion, down 20.5% from the previous fiscal year. Net income attributable to FUJIFILM Holdings totaled JPY 28.3 billion, down 35.3% from the previous fiscal year. These reductions are because of a profit of about JPY 20 billion gained from the stock valuation booked in the previous fiscal year at the time of consolidating Wako Pure Chemical Industries Limited.

Let's move on to segment-specific information. The Imaging Solutions segment recorded revenue of JPY 87.9 billion, up 3.5% year-on-year. Operating income totaled JPY 12.2 billion, down 2.2% from the previous fiscal year due to upfront R&D investment for next-generation processors and sensors for digital cameras.

The Healthcare & Material Solutions segment recorded revenue of JPY 235.9 billion, up 2.6% year-on-year. Operating income totaled JPY 18.1 billion, down 2.2% from the previous fiscal year due to a negative impact of JPY 0.7 billion from such factors as increased raw material price of aluminum and so on.

Within the Healthcare & Material Solutions segment, the health care business recorded revenue of JPY 101.8 billion, up 11.5% year-on-year. Operating income totaled JPY 0.8 billion, up JPY 1.9 billion from the previous fiscal year.

Document Solutions recorded revenue of JPY 241.1 billion, down 6.0% year-on-year, mainly due to the reduction of low-profit, low-end printer business. Operating income totaled JPY 14.9 billion, up 43.4% from the previous fiscal year.

First, I would like to present the results for our Imaging Solutions segment.

In the photo imaging business, sales were strong for instant photo systems such as the instax series and instax films. The sales volume of the instax series totaled 1.75 million units in this quarter. Sales increased with instax SQUARE SQ6, the instant camera with a simple and stylish design which adopted a square format launched in May 2018. Wall Decor, Photobook and other value-added printing businesses also expanded and contributed to revenue.

Regarding instax, we've revised the targeted annual sales volume upward from the previously announced 9.0 million units to 10.0 million units, estimating a sales increase both in the U.S. and Europe, where sales are strong and in emerging countries.

In the electronic imaging business, overall revenue increased due to solid sales of the X Series such as FUJIFILM X-H1, a flagship model launched in March 2018; and FUJIFILM X-T100, an entry-level model launched in June 2018; and interchangeable lenses. Professional photographers and camera enthusiasts have given high praise to our proprietary technology which enables impressive depictions such as unrivaled, superior color reproduction and the extensive lineup of 39 lenses.

In the optical device business, sales increased, reflecting steady performance of various industrial-use lenses such as those for vehicle cameras. Fujifilm is the pioneer of 4K lenses for use in broadcasting with highly valued image quality and is seeking to increase its market share with a diverse lineup of 8 models.

In the Imaging Solutions segment, revenue increased due to strong sales in all businesses, while operating income remained at the same level due to such factors as upfront R&D investment for next-generation processors and sensors for digital cameras and so on.

Next is our Healthcare & Material Solutions segment. In the health care business field, the medical systems business enjoyed brisk sales in such business areas as in-vitro diagnostic, IVD, systems, x-ray imaging diagnostics and endoscopes.

In the pharmaceutical business, overall sales increased due to the supply of the Avigan Tablet, the anti-influenza drug, to a national stockpile in Japan. Also Fujifilm decided to make Toyama Chemical a wholly owned subsidiary and to merge the company with FUJIFILM RI Pharma to form FUJIFILM Toyama Chemical as of October 2018 in order to accelerate the development of new diagnostic and therapeutic drugs.

In the Bio CDMO business, the contract manufacturing of cultured animal cells and microbes progressed favorably. The expansion of facilities, which has been conducted since last fiscal year, contributed to sales increases. In the regenerative medicine business, sales increased due to the acquisition of Irvine Scientific Sales Company and IS JAPAN in June 2018.

In the life science business, revenue increased due to strong sales of products including ASTALIFT WHITE cream for skin whitening and ASTALIFT BB cream of a base makeup series as well as supplements such as the Metabarrier Series.

As for the highly functional materials business field, though the overall sales decreased mainly due to the decline in demand for WV film, sales of products related to touch panels were strong in the display materials business. Among the industrial products, the sales of EXCLEAR and Prescale delivered good results.

In the electronic materials business, sales increased mainly for advanced products of photo resists and peripheral materials related to photolithography. As the semiconductor market expands, Fujifilm aims to achieve growth that exceeds the market rate with its extensive product lineup.

In the fine chemical business, sales of each major product were in line with the previous fiscal year.

In the recording media business, sales decreased due to inventory adjustments of magnetic tape for data storage and other factors.

In the graphic systems business, sales decreased due to a decline in total demand for graphic arts film and CTP plates.

In the inkjet business, favorable sales were seen in industrial inkjet printheads, mainly in the ceramics field. Fujifilm plans to expand its sales not only in the existing field but also in new areas such as textile and others by introducing unique products.

In the Healthcare & Material Solutions segment, revenue increased due to strong sales in the medical systems and electronic materials business. Operating income was in line with the previous fiscal year due to a negative impact of JPY 0.7 billion from such factors as increased raw material price of aluminum and so on.

Lastly, I would like to talk about the Document Solutions segment. First, as for the office products business within the office products and printers business. Overall sales volume increased from the previous fiscal year due to strong sales of a newly developed, small-sized multifunction device in China and increased export shipments of new products to the U.S. and Europe. In the office printer business, sales volume decreased due to a reduction of business in low-end printers.

In the production services business, though the overall number of sales units fell, strong sales were seen for an on-demand production color printer called the Iridesse Production Press, as it was launched in the U.S. and Europe following Japan and Asia.

In May 2018, Fuji Xerox opened Future Edge, a hub for open innovation to work together with its customers on transforming communications utilizing printing technologies. The expansion of sales is targeted for the demonstration of enhanced productivity of print operations and work-style innovations.

In the solutions and services business, though the sales of business-specific solutions and existing BPO, business process outsourcing, contracts showed steady growth, overall sales decreased due to a change in an accounting method for recognizing revenue from purchased products.

In the future, Fuji Xerox will, with the new value creation strategy called Smart Work Innovation, expand business with the use of AI, artificial intelligence; IoT, Internet of Things; and IoH, Internet of Humans, technologies to provide innovative solutions and services, facilitating transformation into creative work styles and assisting companies to reinforce their corporate competitiveness.

Revenue in the Document Solutions segment declined due to a reduction in some low-profit, low-end printer business and others. Operating income increased due to such factors as the benefit of structural reforms and improvements in profitability.

We will continue our efforts to expand growing areas such as the solutions and services business and the production service business, while enhancing profitability by accomplishing structural reforms.

Next, let's look at our balance sheet. Assets as of the end of June 2018 totaled JPY 3,508.0 billion, an increase of JPY 15.1 billion from the end of March 2018, mainly due to an increase in goodwill.

Liabilities decreased by JPY 23.5 billion to JPY 1,170.7 billion, while shareholders' equity increased by JPY 38.8 billion to total JPY 2,117.9 billion.

The current ratio increased by 3.6 percentage points to 283.7%. Our debt-equity ratio decreased by 2.1 percentage points to 55.3%, and our shareholders' equity ratio increased by 0.9 percentage points to 60.4%.

Next, with regard to our cash flow. Net cash provided by operating activities totaled JPY 87.0 billion due to a decrease in notes and accounts receivable and other factors.

Net cash used in investing activities amounted to JPY 106.4 billion due to acquisition of Irvine Scientific Sales Company and IS JAPAN and others. As a result, free cash flow was minus JPY 19.4 billion.

Let me talk about our initiatives for structural reforms of Fuji Xerox, a consolidated subsidiary.

As for our initiatives for structural reforms of Fuji Xerox announced on January 31 this year, onetime expenses, including structural reform costs in the first quarter of the fiscal year ending March 2019, totaled JPY 3.3 billion, while the benefit from the structural reforms executed from the previous year was JPY 1.0 billion.

By executing structural reforms, we aim to establish a business space where sustainable growth can be realized by reducing expenses and maintaining profitability and productivity to withstand market changes and competition while reinvesting in new growth areas.

Regarding our consolidated financial forecast for the fiscal year ending March 2019, no changes have been made from the one announced on May 18, 2018.

The consolidated performance of the whole company proceeded as planned during the first quarter of the fiscal year ending March 2019. In the following quarters, we will continue to advance our growth strategy, while promoting further expansion of sales and improvement in profitability in order to achieve our consolidated financial forecast.

Our Board of Directors at its meeting today decided to conduct a buyback of the company's shares of JPY 100.0 billion. The annual dividend for the fiscal year ending March 2019 is expected to be JPY 80 per share, an increase of JPY 5 from the previous fiscal year.

We will strengthen shareholder returns in addition to achieving the operating profit target through business activities.

[Koichi Tamai, executive]

I'm Koichi Tamai, and I've been appointed to President of Fuji Xerox. Today, I would like to explain 3 policies that I intend to implement as President.

First is to enhance the quality of management to build a strong Fuji Xerox. To enhance the quality of management, we will focus on quality rather than scale, profit rather than turnover. As already mentioned in the presentation, we swiftly reduced low-profit businesses, which caused revenue to slightly go down but profit to go up. I would like to accelerate improvement in profitability and ultimately achieve a 2-digit operating margin within the next fiscal year.

The second policy is to realize the innovation of work styles by accelerating our Smart Work Innovation.

Please let me give a few examples of Smart Work Innovation. First, we offer solution services by fully utilizing AI, IoT and IoH. One of the services uploads a large amount of handwritten ledger sheets from customers through optical character recognition, turns it into digital data with very high precision and automates the workflow up to ordering. Secondly, companies that export products globally have to comply with ever-changing regulations in designated countries. Once a regulation changes, great efforts have to be made to modify the products for compliance. Our service instantly provides information on which part of the products have to be modified just by searching a certain keyword in the regulation. This kind of operation is usually limited to those with highly specialized knowledge, but introducing our service can simplify such operations.

The third policy is to develop differentiated technologies, products and services at an overwhelming speed and offer them to customers.

I had been leading the R&D at Fuji Xerox as Vice President since last year, and I succeeded in shortening the development time of new models by at least 15% to 35%. I would like to accelerate it even further so that Fuji Xerox can offer unique products to customers faster than our competitors.

Finally, last month, Fuji Xerox received the highest customer satisfaction rating in the field of color printing for 9 consecutive years. Of course, we would like to achieve 10 consecutive years this year. What is behind this rating is the robustness of our technology. I would like to keep developing and offering products that are durable and easy to operate.

Thank you for your attention.