Maxell Ltd

TSE:6810

Earnings Call Transcript 2021-Q2

[中村 啓次 (なかむら けいじ), executive]

Thank you for joining us. First, let me explain the position of this year, FY 2020, and review the previous year as well.

In the previous year of FY 2019, Maxell Group incurred losses. In FY 2017 and '18, given the very stern growth of existing businesses, we have been through M&A to grow businesses. And although we achieved a certain sales growth as initially expected, the business scope and the product portfolio expanded. And the governance of earnings deteriorated, and loss was incurred. In this year of FY 2020, changing course from the constraints up to FY 2019 will be in the new phase. Business reform phase under the new management that I, Nakamura will be leading. This is a preparation period to establish business foundation to achieve business growth in FY 2021 and onward.

As mentioned, in FY 2020, we will carry out drastic business reform. As explained at the first quarter results meeting, we are implementing business portfolio reform by restructuring the business segment and grow business based on Maxell's strengths and allow core technologies. And we are concentrating our resources on value-creating businesses.

Secondly, for 3 unprofitable businesses of consumer lithium-ion batteries, projector and health and beauty care products, we set up project to accelerate the implementation of countermeasures. We complete the specific countermeasures by the end of this fiscal year. Finally, to enhance financial discipline, we introduced ROIC and through ABC/XYZ and PIPJ, which have been implemented so far to improve profitability further.

Summary of today's presentation. There are 4 points. First one is the outline of consolidated business results. In the first quarter, we suffered severe impact of COVID-19. But in late second quarter, mainly COVID-related business returned to recovery track and positive profit in the first half. However, interim dividend will not be paid as FY 2020 is a year of business reform, as mentioned, and I'll elaborate on it later.

Second point is a full year forecast of FY 2020. Operating income was revised to JPY 1.5 billion, up JPY 1 billion from the previous forecast. And net income was revised to minus JPY 3.4 billion, assuming business transfers, and the major expenses are shown below.

Thirdly, on business reform, we will carry out 2 business transfers, and we will implement our retirement support program as well.

Fourthly, towards the mid- to long-term growth, we'd like to announce the new midterm plan in May 2021.

Firstly, I will explain the first half business results. Net sales were JPY 63.6 billion, down by JPY 10 billion year-on-year. Operating income was JPY 0.8 billion, up JPY 0.1 billion year-on-year. And net income was minus JPY 0.8 billion, down by JPY 1.7 billion year-on-year. As for the background, sales were adversely affected by sluggish demand mainly for automotive due to the spread of COVID-19.

Regarding operating income, there were some relatively robust businesses despite overall severe business environment. And we enhanced fixed cost reduction, and that also contributed to positive operating income.

Net income was negative due to tax expenses for newly consolidated domestic subsidiary. This slide shows waterfall chart for net sales changes. Change was minus JPY 10 billion. Major factor of decline was volume, especially those of micro batteries, coated separator and optical components for automotive. We could not offset the automotive demand decreases.

As for operating income, against the profit decline due to sluggish automotive business, we had drastic cost reduction of JPY 3.8 billion, mainly in fixed cost to improve profit. As a result, profit increased JPY 0.1 billion year-on-year.

Let me comment by segment, starting with Energy segment. Net sales were JPY 17.7 billion, down by JPY 2.8 billion year-on-year. Operating income was JPY 1 billion, down JPY 0.5 billion year-on-year. As for sales, consumer lithium-ion battery maintained its sales by demand increase for communication equipment and COVID-19 impact. Demand of heat-resistant lithium-coin battery while recovering recently, but in the first half, business was sour and sales went down year-on-year.

As for operating income, we were able to adjust our production capacity flexibly to match consumer lithium-ion battery demand increase, as mentioned, and its profit increased. On the other hand, automotive profit decreased, mainly due to heat-resistant lithium-coin battery.

Next, let me explain the Industrial Materials. Net sales were JPY 23.4 billion, down JPY 3.9 billion year-on-year. Demand recovery in semiconductor-related products pushed up the sales. But the sales of mainstay automotive products, especially lens products, went down, and segment sales decreased year-on-year.

As for operating income, in line with sales, semiconductor-related products profit increased, but automotive demand was sluggish and profit decreased year-on-year.

And Electronic Appliances and Consumer Products, net sales were JPY 22.6 billion, down by JPY 3.3 billion year-on-year, and operating income was minus JPY 0.3 billion, up JPY 0.9 billion year-on-year.

As for sales, the demand of projector is declining. And additionally, COVID-19 cut the demand significantly. Consumer product sales also declined with less activities of consumers. As for operating income, I mean, the severe business environment of projector, drastic fixed cost reduction was implemented, mainly in manufacturing companies. And the products mix change to increase the proportion of added barrier products, such as the solid-state light source product, contributed to secure minimum profit.

Ozone. Ozone antibacterial deodorizer made profit contribution with the increased interest for public health due to COVID-19.

I explained the outlying business results. Now I'd like to explain our latest view for COVID-19. In Energy segment, lithium-ion batteries will continue to be robust, supported mainly by communication equipment and gaming equipment. Micro batteries, while suffering mainly in the first quarter but began to recover from late second quarter. And the recovery is expected in the third quarter and beyond. So it might be a little difficult to achieve the initial forecast.

As for Industrial Materials, demand for semiconductor-related products will continue to be firm. But we continue to monitor cautiously the U.S.-China trade frictions and their risk. Optical components, mainly for auto, is tough. But we began to see the sign of recovery recently for which we do have expectation.

Finally, in Electronic Appliances and Consumer Products, i.e., health and beauty care products, we continue to have high expectation for ozone antibacterial deodorizer with higher interest for public health. Initially, we planned, assuming that COVID-19 impact would last up to the second quarter, not to the third and -- third quarter and beyond. But now we assume, unfortunately, that certain impact will be observed mainly in automotive products in the third quarter and beyond in our planning for future.

To address financial concern, we secured the liquidity on hand by enlarging commitment lines and additional funding, as shown here. And even under such circumstances, we reduced expenses drastically throughout the company to ensure financial soundness. We continue to monitor the situation closely and act with agility.

Second point is a full year forecast for FY 2020. This slide shows the revised forecast this time. Net sales were JPY 133 billion, down by JPY 7 billion from the previous forecast. Operating income is JPY 1.5 billion, up JPY 1 billion from the previous forecast. Net income is minus JPY 3.4 billion, down JPY 3.6 billion, reflecting the increased structural reform-related expenses.

Sales forecast includes the continued impact by COVID-19. But under such circumstances, we continue the fixed cost reduction, and the robust businesses will continue to be the key driver for the whole company. And operating income was revised upward. Net income was substantially revised downward due to extraordinary loss in relation with the execution of business reform, as mentioned.

This slide shows a full year forecast by segment. Sales and operating income of Energy segment were revised upward, but sales and operating income of Industrial Material and Electronic Appliance and Consumer Products segment were revised downward. As for background, in Energy segment, as mentioned before, demand for communication equipment and gaming equipment will be firm, and the sales and profit were revised upward from the initial forecast. Automotive-related products showed some recovery, but they will continue to be tough, and that prospect was included. In Electronic Appliances and Consumer Products, profitability of project in-house is improving, but very tough market condition was included in that revised forecast.

Third point is business reform. We will carry out drastic business reform in FY 2020. For 3 unprofitable businesses of consumer lithium-ion battery, projector and health and beauty care products, we are executing concrete measures. This slide shows content and schedule of business reform, including the disclosed information. As individual business, consumer lithium-ion battery, projector and health and beauty care products are listed.

In consumer lithium-ion battery business, as explained before, we will shift a part of resources to Vehicle Energy Japan for automotive application to reduce fixed cost, and we will accelerate this initiative. As for laminated lithium-ion battery, not the prismatic battery, we have been developing products for the expected demands for drones, industrial robots and the electric bikes. But the launch of the business seems difficult. So we decided to transfer laminated lithium-ion battery business this time.

In projector business, fixed cost is being reduced drastically, mainly in manufacturing companies, and we narrowed down development partners. And we will increase new light source product sales as well to improve profitability.

In health and beauty care products business, we continue to increase product competitiveness by improving product model mix and enhance the products, which can leverage the strengths of Maxell. To improve profitability, we decided to transfer massage chair and health water businesses, so that transferee can create synergy and grow business further.

For 3 businesses, we continue to take actions, as mentioned. And for other individual business as well, with financial discipline as mentioned at the beginning, we continue to pursue selection and concentration of business. In whole company, we decided to implement early retirement support program this time. And to show the commitment of Board members to carry out the reform, Board members' compensation will be reduced. Including projects which are under consideration now, we will carry out the business reform by the end of FY 2020 to ensure business growth in FY 2021 and beyond, as mentioned at the beginning.

This slide shows a content at business reform disclosed today. There are 3 cases. And the first one is business transfer of laminated lithium-ion battery. Its objective is to utilize resources and know-hows of transferee company and create synergy. On our side, we concentrate resources on the development of unique products of new material batteries and super small batteries. Transferee is the Furukawa Battery Co. Ltd., and we plan to complete business transfer in April 2021.

Second one is business transfer of a part of health and beauty products. Here also, its objective is to utilize resources and know-hows of transferee company and create synergy. On our side, we will accelerate selection and concentration in the remaining health and beauty product business to strengthen profitability. Transferee is a Fuji Medical Instruments Manufacturing. Co. Ltd., and we plan to complete business transfer in February 2021.

As for early retirement support program, we try to improve profitability through selection and concentration without expanding business scale, and we need to strengthen the management base. To reduce the fixed cost is a part of our efforts to that end. Application period is from mid-November to the end of December. For these initiatives, we plan to spend JPY 3 billion to JPY 3.5 billion in FY 2020, as shown below.

This slide shows impact of business reform on the performance from FY 2021 and onward, comparing to those in FY 2019. Combining business transfer of laminated lithium-ion battery, business transfer of a part of health and beauty products and early retirement support program, sales will decrease by JPY 1.8 billion, but operating income will increase by JPY 2 billion to JPY 2.5 billion.

Finally, toward the medium to long-term growth. I talked about this in the first quarter results meeting as well to show the future direction of Maxell. Showing the renewed definition, mission, vision, value, spirit and slogan, we will make social contributions through our unique strengths, analog core technologies. As our vision, we create value at maximum excellence for stakeholders, of employees, customers and society. As of our value, we respect technology, customer and the society as shown here. Spirit is a partial rephrasing of corporate cred to contribute to society. By carrying out mission and realizing vision, Maxell will be an indispensable company in a sustainable society, then will be within the future. Bearing those in mind, we'd like to carry out business reform.

I would like to explain the analog core business here and value creation business here in the business portfolio reform briefly. Analog core technologies are as shown below, technology that connects analog and digital. And there are some complex and delicate differentiation technologies in Monozukuri manufacturing, which cannot be achieved only by digital technologies. They are the technologies that Maxell values: one of them is mixing and dispersion; second, fine coating; and high-precision molding and forming. These differentiation technologies cannot be available only through digital technologies. And they are what Maxell will continue to value.

We make the analog core business based on these technology, the pillar business growth of Maxell and value-creating business, which have synergy with them, such as brand value and the business that contributes to ESG and SDGs, positioned as value co-creation business. These are also the business Maxell continue to value.

This slide shows examples of analog core technologies, dicing tape and LED headlamp lens. Dicing tape and adhesive tape uses unique technologies of mixing and dispersion, fine coating and high-precision molding and forming to roll the finished goods. And it has a worldwide leading share. LED headlamp lens provide that uniform coating on the lens service and the molding and forming. We can leverage our strengths. This product also keeps worldwide top share, and they have unique strengths and enjoying high profitability.

We will carry out demanding business reform this year and achieve business growth in the following year and onward through redefined MVVSS, which represent future ideal at Maxell, and the strengths of Maxell will be born again as value-creation company. We are currently having in-house discussion on Maxell after 10 years. In discussion, we found that we'd like to achieve double-digit operating margin through continuous business restructuring and accelerated the selection and concentration. We need to grow business consistently, and we need to review organizational structure from scratch.

Having those in mind, we'd like to announce new midterm plan of the 3 years in May 2021. We are now making preparation in-house. And in May, we'd like to explain the future of Maxell.

That concludes my presentation.

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