Maxell Ltd

TSE:6810

Earnings Call Transcript 2019-Q2

[Yoshiharu Katsuta, executive]

Allow me to begin my presentation. On the outline of financial results for the First Half of Fiscal Year 2018. First, summary of the first half financial results, net sales, JPY 70.6 billion, down JPY 2.4 billion or 3% year-on-year. Operating income JPY 2.7 billion, down JPY 1.9 billion or 41%. Net income, JPY 2.1 billion, down $2 billion year-on-year. The exchange rate assumption was JPY 110 to the dollar, which represents the yen's appreciation of JPY 1 to the dollar.

Variance analysis of net sales, compared with net sales of JPY 73 billion recorded for the first half of fiscal year 2017, quantity variance lowered net sales by JPY 3.3 billion, while price down further pushed down sales by JPY 0.4 billion. These were partly compensated for by portfolio improvement and exchange gain. The net result was JPY 70.6 billion.

Variance analysis of operating income. Compared with operating income of JPY 4.6 billion for the first half of fiscal year 2017, quantity variance lowered operating income by JPY 1.2 billion, investment for growth JPY 0.8 billion, including launch of laminated Lithium-ion batteries and business development.

Raw materials JPY 0.5 billion and the price down JPY 0.4 billion. These were partly compensated for by a portfolio improvement of JPY 0.4 billion and the cost reduction of JPY 0.6 billion. The net results was JPY 2.7 billion, down JPY 1.9 billion year-on-year.

Segment overview. For the energy net sales was JPY 20.1 billion, down JPY 2 billion from JPY 22.1 billion year-on-year. Sales of coin type lithium batteries for the automotive market and cylindrical lithium batteries for smart meters increased, and a Specialty Business was added newly to the portfolio pushing up sales, which was more than canceled out by the decline in Lithium-ion batteries for consumers.

Operating income was down to JPY 1.8 billion and operating income margin was down to 9% due to the lower sales of Lithium-ion batteries for consumers despite strong performance of coin type lithium batteries.

For Industrial Materials we had a year-on-year increase in sales and a year-on-year decrease in profit. Sales are up JPY 0.7 billion year-on-year, thanks to the full-year contribution of embedded systems, which were integrated into the company in the middle of the previous year as well as the increase of adhesive tapes.

Operating income was JPY 1.4 billion, down JPY 0.1 billion year-on-year with OP margin down to 5.6% despite favorable sales of LED lenses. The decline was due to the temporary increase in mass production cost of masks for organic EL panels.

The Electronic Appliances and the Consumer Products segment was down in both sales and profit. Sales were down JPY 1.1 billion due to the decrease in beauty care products and other consumer products, though the projector strength showed a sign of bottoming out. Operating income was down JPY 0.6 billion year-on-year due to the decrease in beauty care products and other consumer products as well as cost incurred for the development of HUDs or head-up displays.

Let me move on to the revision of full-year forecast for fiscal year 2018. We have made a downward revision to the full-year forecast announced in April.

Net sales forecast is unchanged at JPY 152 billion. Operating income forecast is JPY 6 billion, revised down by JPY 3 billion from the April forecast.

Net income forecast is JPY 4.9 billion, revised down by JPY 1 billion from the April forecast. Capital expenditure, depreciation and R&D expenses for the first half are as shown on the slide. Full-year forecasts are kept unchanged, so is the dividend for both interim and the full-year periods at JPY 18 per share and at JPY 36 per share respectively.

Let me move on to the full-year forecast by segment.

For Energy, the forecast for net sales is down JPY 6.3 billion to JPY 39.3 billion.

The forecast for operating income is down JPY 2 billion to JPY 2.4 billion. The comment in the box at the bottom of the slide are on year-on-year comparison, however, the downward revision is also due to the lower sales of Lithium-ion batteries for consumers.

For Industrial Materials, the forecast for net sales is up JPY 0.7 billion and that for operating income is down JPY 0.8 billion. Increased cost of raw materials and development cost incurred for mass production of new products are factors behind the revised operating income forecast by JPY 0.8 billion.

For the Electronic Appliance and Consumer Product segment, net sales forecast is revised up by JPY 5.6 billion and operating income forecast is revised down by JPY 0.2 billion. There was a decrease in sales of beauty care products and other consumer products, however, thanks to an increase in new Maxell Business Platform or MBP, sales forecast is revised upward.

For the second half, despite the recovering trend of projectors, we kept the forecast JPY 2 billion, lower than the April forecast. For the full year, however, operating income forecast is revised down by JPY 0.2 billion. These are the factors behind the downward revision of operating income from JPY 9 billion to JPY 6 billion. Consumer Lithium-ion batteries decreased the profit by JPY 1.9 billion, investment for growth by JPY 0.7 billion and beauty care products by JPY 0.9 billion. And Maxell Brand Platform or MBP increases the profit by JPY 0.5 billion, the revised forecast is JPY 6 billion.

That was my brief summary of financial results and the forecast as of the end of Q2.

From this point on, I will take you through our plan of how to achieve the medium-term business plan announced this year, now that we have revised the full-year forecast downward.

This graph shows factors behind a deteriorating performance. Fiscal year 2018 is shown by the second bar from right, the blue part is profit-making businesses and the red part, loss-making businesses.

For fiscal year 2017 with a mix of profit-making and loss-making businesses shown by the bar chart, we had a total operating profit of JPY 8.8 billion and this year we are projecting JPY 6 billion, as you can see from the size of the blue bar being shorter. The main factor is the decrease in Lithium-ion batteries, as mentioned earlier.

For Lithium-ion batteries or LIBs, next year and onward, we do not include any significant demand for the game application, as we did for the last year and also for this year to a certain extent. Toward 2020, we will be accelerating such ongoing activities such as; laminated LIB mass production startup and development of value-added applications.

For fiscal year 2017, we had a strong trend in LIBs. In fact, we did anticipate some of downside for FY 2019 and formulated these contingency plans, which are designed to minimize the red portion of JPY 4 billion on the chart by focusing on projectors and the beauty care products businesses.

We are experiencing weakness in the OEM business due to the separation of sales from engineering and the manufacturing functions. We still need to carry out a major transformation of the operation at this stage.

Since the beginning of the second half, with the addition of new light sources, we have been seeing some signs of improvement.

Towards the end of fiscal year, we will address the area responsible for the JPY 4 billion losses with no exception other than those which are developing new businesses for the future, as you can see on the slide.

As shown on the right, LIBs for consumers was a major negative factor for fiscal year 2018. The direct cause for the downward revision, however, was the delayed recovery of the projector and beauty care products.

From fiscal year 2019 onwards, we are planning to introduce new Maxell unique brand product to the market.

Towards fiscal year 2020, we will be aggressively promoting Maxell business platform, while expanding organic businesses. These are the urgent issues we are tackling at the moment. The table shows issues and the status, which we discussed in April at the analyst meeting. As for projectors and the beauty care products, we are experiencing difficulty with the existing OEM business declining sales and declining market share, and a delay in the development of products that meet the needs of customers due to the lack of proximity was caused. These are major causes of underperformance. As for laminated LIBs, we will accelerate mass production startup with less CapEx and development for high added value applications.

Next is conversion to Maxell brand business, which is expected to generate the biggest impact next year onward.

We will introduce direct distribution with the Maxell brand. Our sales and product development personnel will visit customers directly to grasp the customer needs so that the entire organization including engineering, manufacturing and sales functions can respond to such needs in 1 voice in an agile manner while securing the benefit of direct distribution in the form of an expanded margin. As for projectors, we are migrating all of the products to new light sources, which has already been showing some results since the beginning of the second half. We will be introducing these competitive products with proprietary design to all of the lines while promoting discontinuation of unprofitable models and the consolidating models into smaller number, making our product lineup much more profitable and efficient than in the past. As for beauty care products, we will be releasing unique new products under the Maxell brand focusing on such new distribution channels such as; professional and the B2B markets, which are high value-added markets. We will try to generate synergy with the Home Electronics Division of Izumi Products Company, a subsidiary, which was recently acquired consolidating our functions of design and manufacturing, in order to generate synergy.

The next page shows how we are translating these actions into profits. From fiscal year 2018 to fiscal year 2020, there is a major aspirations. Operating income should significantly increase from JPY 6 billion to JPY 15 billion, which is a significant growth to be driven by the following factors; energy, JPY 3.1 billion of which JPY 1.3 billion is from micro battery and JPY 0.5 billion from BEMS or Building Energy Management Systems and LIBs. Industrial Materials should contribute JPY 2.2 billion from optical components, adhesive tapes and embedded systems. Electronic Appliances and Consumer Products will add another JPY 1.6 billion of which JPY 1.4 billion come from projectors, while other consumer products are expected to post losses. MBP will contribute JPY 2.1 billion by front-loading some of the activities from next year to this year. Those are the major factors explaining the OP forecast for FY 2020.

We have a significant gap, but we can fill the gap steadily.

Last but not least, let me give you an update on the Maxell Business Platform. We will build a strong group of companies by promoting co-creation and co-prosperity while growing the existing businesses through synergy.

In August, we have announced a consolidation of Izumi Products company into our group starting in October. Izumi Products company has lines of businesses including electrical, construction tools and beauty care appliances and is expected to bring about synergy with the consumer electronics and energy business. Announced today, whereas the acquisition of shares of Kureha Elastomer, a manufacturer and a distributor of industrial rubber products with strength in rubber parts and large thickness sheets that are missing in our company's portfolio. The company will join our group starting in January next year and is expected to join our effort to develop new products from which substantial synergy is expected. This concludes my presentation. Thank you for your kind attention.