Maxell Ltd

TSE:6810

Earnings Call Transcript 2020-Q1

[中村 啓次 (なかむら けいじ), executive]

This is Nakamura. Thank you very much. Please refer to the handout. Page 2 is the agenda for today: business results, effects of COVID-19, management initiatives for FY 2020 and new management direction.

Next page, consolidated business results. Page 4, please. Review of the first quarter. For the first quarter of fiscal year 2020, sales were JPY 30 billion, down JPY 6.5 billion year-on-year. Operating income was negative JPY 300 million, down JPY 600 million year-on-year. Ordinary income was also negative JPY 300 million, down JPY 600 million year-on-year. Net income was negative JPY 500 million, down JPY 700 million year-on-year. The exchange rate was JPY 110 last year. And this year, it was JPY 108 to the U.S. dollar. As I will explain later in my presentation, both sales and profits were affected negatively by the coronavirus outbreak.

Please go to Page 5, net sales. For the first quarter of fiscal year 2019, sales were JPY 36.4 billion. In comparison, quantity variance was negative JPY 5.9 billion, exchange variance was minus JPY 300 million and price variance was minus JPY 200 million, resulting in net sales of JPY 30 billion for fiscal year 2020.

As for the breakdown of quantity variance, as you can see to the top, we have micro batteries, minus JPY 1.7 billion, affected by COVID-19; coated separator, JPY 1.3 billion negative; and other optical components, minus JPY 1.3 billion. The net effect of COVID-19, as shown in the right, is estimated at JPY 4.6 billion, which is reflected on quantity variance.

Exchange variance was minus JPY 300 million, and price variance was minus JPY 200 million. As a result, net sales were JPY 30 billion.

Moving on to Page 6, operating income. It was positive JPY 300 million for the same period of the previous year. Quantity variance was minus JPY 2.6 billion, and the main factors were minus JPY 900 million for micro batteries, minus JPY 300 million for coated separator and minus JPY 600 million for optical components. And this includes the effect of COVID-19, as you can see to the right, of JPY 1.7 billion. After exchange variance, price variance of minus JPY 200 million and a positive effect of cost reduction of JPY 2.2 billion.

Shown in blue, operating income was JPY 300 million. The breakdown of cost reduction is shown at the top: Energy, JPY 600 million, consisting mainly of fixed cost reduction; Industrial Materials, JPY 600 million; and electric appliances and consumer products, JPY 1 billion.

Now I'd like to take you through the results by segment on next page onward, starting with the Energy segment. Net sales for the first quarter of fiscal year 2020 was JPY 8.4 billion, a decrease of JPY 1.5 billion year-on-year. Operating income was JPY 300 million, down JPY 300 million from the previous year. As a background, as you can see below, sales of consumer lithium-ion batteries, or LIBs, increased due to increased demand for video games and communication equipment amid COVID-19 pandemic. Sales for coin-type lithium rechargeable batteries for hearing aids are also increased. However, sales of heat-resistant, coin-type lithium batteries decreased due to the downturn of the car market, leading to a decline in total sales compared with the same period of the last year. As for operating income, profit of consumer lithium-ion batteries increased driven by increased sales as well as reduced fixed expenses, while profit of heat-resistant, coin-type lithium batteries decreased due to the decreased sales volume.

Next page, please. Industrial Materials. Sales for the first quarter of fiscal 2020 were JPY 11 billion due to -- down JPY 2.5 billion from the same period of the previous year. Operating income was negative JPY 100 million, down JPY 200 million year-on-year. As for the background, sales of embedded systems increased due to the recovery of the semiconductor market. However, sales of optical components and coated separators decreased due to the downturn of the car market. Operating income was negatively affected by the sluggish car market, which caused sales of optical components and coated separators to decline year-over-year.

Next page, please. Page 9. The last segment is Electronic Appliances and Consumer Products. For the first quarter of fiscal year 2020, net sales were JPY 10.5 billion, down JPY 2.4 billion year-on-year. Operating income was negative JPY 500 million, unchanged from the same period of the previous year. As for the details of sales and operating income, as shown below, sales of consumer products declined due to the escalation of the pandemic. Despite such severe environment, profit of some products improved, helped by the reduction of fixed expenses, and profit of health and beauty care products improved due to increased sales.

Now I would like to move on to the second item, the effect of COVID-19. Please turn to Page 11. The impact of pandemic seems inevitable. Here is the update on the potential impacts we had shared with you at the beginning of the fiscal year. First, on the upside, we had such upside factors as people staying home and health consciousness. Stay home was especially positive for our LIBs, which are used for video games and embedded systems related to semiconductors and supported the rapidly expanding trend of telework. Those remain solid upside potentials. Increased health consciousness boosted demands for our micro batteries. Demand increased, but we were able to fulfill it with the expanded production output. We are also increasing the production plan for health and beauty care products, especially ozone bacteria remover deodorizers.

There are downside risks as well, mainly due to the sluggish auto market. Although car manufacturers are gradually resuming their brand operations, it will take some time until a full recovery, affecting our micro batteries and optical components for a little longer.

As for the stagnation of the economy as a whole, due to COVID-19, the effects should remain for the time being during the second quarter onwards, though some economic activities restarted. Supply chain is mostly restored, but it is likely to remain partially unstable due to the second wave of outbreak.

That was my brief summary. We will carefully monitor the situation and take action swiftly whenever the impact is anticipated.

Next page, please. Let me talk about the internal situation within Maxell in the light of the pandemic. First, on internal operations. Our sales and production sites have mostly come back to the normal operations, though they are operating at lower utilizations due to smaller orders being received at the moment. Material supply has generally come back to the normal level, except for some items. The general situation is already stabilized. Sales offices, both in Japan and overseas, are partially affected by travel restrictions and resultant telework.

In order to ensure the safety of our employees and the suppliers, the company intends to operate in full compliance with the policies and the guidelines of respective governments, keep the optimum production and inventory levels through production cuts and adjustments wherever necessary by closely monitoring the market conditions and take other measures, if necessary, assuming the impact of the pandemic will stay longer.

In terms of financial management, we have already secured extended commitment lines and carried out additional financing to secure adequate liquidity for the time being. We will tightly control expenses and rigorously scrutinize investment priorities to maintain financial stability. Overall, we will try to respond quickly to any change in the operating environment.

Next, I will move on to management efforts for FY 2020. Page 14, please. Here are priority initiatives for FY 2020 we have shared with you at the FY '19 earnings briefing. There are 3 priorities, namely: business portfolio reform; response to 3 unprofitable businesses, namely consumer LIB, projector and health and beauty care products; and the financial discipline.

Next page, please. I will discuss the current status of each of the 3 initiatives, starting with the business portfolio reform. As discussed in the previous briefing, we have clarified the definition of each business. One is the business, which centers around analog core technologies, which is our competitive edge to create value. The unique technologies should help us differentiate and grow by providing what is needed by society. When we say analog core technologies, it means mixing and dispersion, fine coating and high-precision molding and forming technologies. We will concentrate our resources on these areas and expand markets. The other business may not be directly related but is synergistic with analog core technologies and adds to our brand value or social attribution, such as our ESGs and SDGs activities. This is defined as value co-creation business. We will focus on and continue only with those businesses. That can maximize corporate value.

Next page, please. The slide illustrates analog core technologies in more precise terms. Those are technologies linking analog and the digital and enables complex and delicate manufacturing, which cannot be attained only with digital technologies. These technologies are hard to replace and hard to copy for our competitors. That's the definition of analog core technologies.

There are 3 technologies as shown to the left: mixing and dispersion, fine coating and high-precision molding and forming. Specific products are shown on the right-hand side of diagram. These analog-based technologies are the drivers of our future growth at Maxell.

Next page, Page 17, responds to 3 unprofitable businesses. For consumer LIBs, we were to reduce fixed costs by shifting resources to automotive LIBs and to strengthen ultra small-sized batteries through joint product development with customers. Resource shift is progressing well, contributing greatly to business performance and financial results. Development of small-sized batteries is also on track with the adoption of new materials.

Next, for projectors, our priority was to make the business profitable while figuring out the best positioning for the business. We were trying to accelerate the growth of the imaging business as a whole in collaboration with a partner, not on a stand-alone basis. Today, the business' profitability has been improving with a steady growth in the ratio of products with new light sources. The streamlined development pipeline should also help reducing fixed costs and improve profitability. As for accelerated growth, collaboration with the partner is entering into the final stage and going as smoothly as expected.

Lastly, for health and beauty care products. We were to accelerate integration with Maxell Izumi's design and sales functions to drive down the overhead and strengthen the product competitiveness. We have already made Maxell Izumi a wholly owned subsidiary of Maxell and have been generating integration synergy in the areas of distribution channels, technologies and the production sites. In terms of profitability, we've been reviewing the model mix, so that the business can generate positive profit stand-alone.

In summary, we've been making steady progress on those initiatives targeted for completion within FY 2020. And we would like to accelerate our efforts going forward.

Next page, please. Moving on to Page 18. The third initiative is financial discipline. ROIC, R-O-I-C, or return on invested capital, was adopted as a KPI for implementation within fiscal year 2020, the year defined as an implementation phase. Upon the introduction of the new KPI in each division, we are making sure that it is understood clearly by all employees, including the frontline people in terms of the implications of ROIC on their day-to-day activities and behaviors.

Next is ABC-XYZ accounting or P&L management by business. We've been able to address and improve the profitability of each business and especially for those businesses categorized as Y businesses whose profitability was somewhat challenging. We have set the time line within this fiscal year for implementing corrective actions and turning around the profitability. Should any other businesses miss the time line, we will quickly make a decision to scale down, exit or sell the business.

Last but not least, PIPJ or P&L improvement by product model. Eventually, we should be able to address all of the 8,000 loss-making models to reduce losses. For FY 2020, we have selected 170 models to focus and accelerate activities. We will be sharing successful cases and best practices across different divisions to further accelerate activities.

In summary, we've been working on the mindset of employees in building a company that is single-mindedly committed to value creation.

Last part of my presentation is about new management direction. Please turn to Page 20, which summarizes new management direction. We have redefined the company's mission, vision, value, spirit and slogan. These are shared among all members of the company, including myself, and help us work together to fulfill the ultimate goal of value creation. Our mission is to contribute to sustainable society through innovation of unique technologies. After the industrial revolution, Japan and other industrial nations realized affluent society through technological advancement. Along with material wealth came various social issues, such as environmental destruction and the disparity between the rich and the poor, which equally threatens the survival of human kind. Maxell, with its history of bringing happiness to people through the unique technologies, is committed to leveraging our competitive edge to make more direct contribution to sustainable society. That's the intention behind the new mission statement.

On the other hand, vision represents the ideal world we will help create by accomplishing the mission. That is to create maximum excellence for employees, customers and the society by leveraging unique analog core technologies. Again, in order to deliver maximum excellence to our stakeholders, we will work together with all employees and live the vision in our day-to-day activities.

Value consists of technological value, customer value and social value. We are committed to maximizing the corporate value for our stakeholders by pursuing these 3 aspects of value.

Spirit means our corporate creed that is harmony and cooperation, working with heart and soul and contributing to society. Our founding spirit was serving society. We've slightly modified it by replacing the word serve with the word contribute to keep the spirit relevant in today's context so that we can effectively educate our employees.

Slogan is unchanged from the past. It goes, "Within, the future. The future is within."

Altogether, these are defined as MVVSS for the purpose of sharing with all employees.

Lastly, I would like to conclude my remarks by starting -- by stating that towards becoming a value-creating company, we will endeavor to deliver the maximum value to all stakeholders. Thank you for your kind attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]