Maxell Ltd

TSE:6810

Earnings Call Transcript 2023-Q2

[中村 啓次 (なかむら けいじ), executive]

I'd like to present the financial results of the first half FY 2022.

Summary of today's presentation First, as for the FY 2022 second quarter results overview. Sales decreased due to a decline in sales of rechargeable batteries and B2C product as well as the intended shrinkage projector business. And profit decreased due to the soaring raw material costs above our expectation.

Second, as for the future outlook, we made downward revision of business forecast in light of soaring raw material costs and other business environment. But we will improve profitability by the end of this fiscal year, including response to the macro environment. In particular, we decided drastic reform of BtoC business structure.

Thirdly, to achieve the target of MEX23, we will create new growth drivers.

Results overview. This slide shows summary. Net sales were JPY 65.2 billion, down JPY 4.1 billion year-on-year, and operating profit was JPY 2.5 billion, down JPY 3.7 billion year-on-year. As for sales, despite an increase in sales of products for automotive mainly lens and the DMS for semiconductor market. Total sales decreased due to lower sales of rechargeable batteries and BtoC products in addition to the impact of projector business downsizing. As for profit, in addition to the sales decrease, soaring material costs outweighed the cost-cutting effort and the pass on the cost increase to the price delayed and profit decreased. Foreign exchange gains have a positive impact on ordinary profit and net profit.

Net sales changes. Sales decreased from JPY 69.3 billion to JPY 65.2 billion, down JPY 4.1 billion. Quantity variance was minus JPY 9.8 billion. Energy segment sales decreased by JPY 4.9 billion, mainly due to demand decrease in rechargeable batteries caused by shortage of semiconductors. In Optics & Systems segment, compared to the previous year, projector business was downsized, and that led to sales decline. In Life Solutions, which is the most challenging segment for us, in addition to the prolonged stagnation in the consumer market, our mainstay business of health care and hygiene was also sluggish and sales decreased substantially. As for price variance, we revised the selling price corresponding to soaring material costs and the exchange variance, depreciation of yen served positive.

Operating profit year-on-year changes. It decreased JPY 3.7 billion. As for quantity variance, the sales impact by rechargeable batteries, projector and BtoC with the volume decline were substantial. And the material cost increase was minus JPY 2.7 billion. Its surge was above our expectation. On the other hand, plus JPY 1.9 billion was posted through selling price revision. And with the benefit of exchange variance, operating profit ended at JPY 2.5 billion.

Review by segment, starting with Energy segment. Net sales decreased JPY 2 billion affected by lithium-ion battery, and operating profit was down JPY 1.6 billion year-on-year. Consumer lithium-ion battery was sluggish, but primary micro battery for automotive and medical equipment were firm.

Functional Materials segment. Sales increased due to strong order of adhesive tape and industrial rubber, but material costs soared, and the selling price revision is delayed. And operating profit decreased by JPY 0.7 billion.

Optics & Systems segment. Net sales were JPY 18.3 billion, down JPY 1.6 billion year-on-year. Excluding the projector business impact, the sales actually increased. Operating profit decreased JPY 0.4 billion. There was a onetime income of projector business towards the business downsizing last year. And excluding this, this segment profit increased. It is backed by the strong in-car optical components and semiconductor DMS demand.

Life Solutions segment. Net sales were JPY 14.1 billion, down JPY 1.7 billion year-on-year. Operating profit was minus JPY 0.6 billion, down JPY 1 billion year-on-year. BtoC product sales were sluggish, and the depreciation of the yen squeezed the profit of the products brought from overseas for domestic sales, adding more cost.

Future outlook. This is a revised consolidated financial forecast for FY 2022. Net sales are JPY 135 billion, up JPY 5 billion from the previous forecast with foreign exchange benefit. Operating profit is JPY 5.5 billion, down by JPY 4 billion with soaring material cost and the sluggish business performance. Dividend forecast remains unchanged in line with the dividend policy.

Revised consolidated financial forecast by segment. In Energy segment, lithium-ion battery is tough, but micro battery business is robust and operating profit is slightly up by JPY 0.1 billion from the previous forecast. In Functional Materials segment, price revision after cost increase is slightly delayed. And acquisition of the new high value-added product business is slightly delayed. And operating profit is down by JPY 1.3 billion compared to the previous forecast. In Optics & Systems, in-car components were robust, but PC demand decreased. And the profit decreased in electro fine forming, EF2 business for semiconductor was substantial, and the profit declined from the previous forecast. Life Solutions business has been very sluggish, mainly in BtoC business. And operating profit forecast was revised down by JPY 2.3 billion from the previous forecast.

Major impacts on operating profit by business segment. Exchange rate soaring raw material cost and on demand side, semiconductor shortage, declining PC demand and other own factors are listed here. Foreign exchange worked positive in primary battery and in-car optical components, where the overseas sales are substantial. And it was negative in terms of cost in rechargeable battery and adhesive tape for material cost and Life Solution. And combining them, it was mostly very balanced for plus JPY 0.4 billion. As for soaring raw material costs, both for the primary and rechargeable battery cost impact in minerals such as lithium and cobalt was prominent and oil-derived and naphtha-derived resin robot materials. In Functional Materials, negative impacts were also notable, and the negative impact was JPY 2.7 billion. And we try to offset that with selling price reflection and the resulting gap was JPY 1.6 billion.

On demand side, due to semiconductor shortage, mainly in lithium-ion rechargeable battery, negative impact of JPY 0.7 billion was recorded. PC demand decline impact was about minus JPY 0.6 billion, and it was in semiconductor-related electroforming products. As for the own factors, in Functional Materials, there was a partial delay in exploring new customers and structural difficulty in Life Solutions segment, which worked at adversely. But in Optics & Systems, in-car optical components and the semiconductor-related products were strong. And in total, that impact was minus JPY 1.5 billion.

I will comment more in detail by factors, starting with exchange rate. As mentioned before, in Energy and Optics & Systems segment with high overseas sales ratio, it worked positively. But in Functional Materials and Life Solutions segment, it worked negatively. And in total, it almost balanced with plus JPY 0.4 billion. As for soaring raw material costs, in Energy segment, raw material costs surged above our expectation. And we continue to reflect on selling prices by formulization to achieve price reflection of 100% by March 2023. In Functional Materials segment, as the cost of crude oil-derived raw materials are stabilizing, we assume that time lag to reflect our selling prices will be narrowed, and we'll accelerate our initiatives.

Chart below shows the soaring raw material cost and selling price reflection with initial forecast and the results in cumulative for each quarter compared with the previous year. Including the first and the second quarter, raw material cost hikes were higher than our forecast, as shown by the right 2 bars for the results. But when you refer to the third and fourth quarter, raw material cost hikes in brown arrow and price reflection in blue arrow, price reflection will be bigger than the cost hikes. From the fourth quarter and onward, we plan to recover the cost increase through price reflection. However, cumulative losses remain in the fiscal year. And we'll strive to eliminate past accumulated losses in the next fiscal year and onward.

This slide shows soaring raw material cost. Red line is market price. And there is a time lag between market price and our purchase and also between purchase price and price reflection. So it was difficult to reflect in price when the raw material costs was soaring recently. But we began to see the sign of moderation from the third quarter. So we would recover through price reflection.

Semiconductor shortage and the decline in PC demand. Component shortages for lithium-ion battery is beyond what we can manage. And we try to maximize profit with the current received orders and sales, and we'll pursue cost reductions through leveled production. And we will make mid- to long-term projection as well. Demand recovery in PC seems difficult recently, and we will increase sales by acquiring new customers quickly and steadily.

As for own factors, in Functional Materials segment, we recover sales for high value-added products, which was in delay. In our strong Optics & Systems, in particular for automotive and semiconductor-related products, reflecting demand recovery, we will increase our sales of products with high share of market. In semiconductor-related products, DMS sales will be growing through cooperation with customers and the suppliers, so that the component availability will be improved. Life Solutions segment is now in toughest condition, and we will implement drastic reforms of business structure.

This a plan for consumer business reform. Life Solutions sales scale is approximately JPY 29 billion. And 1/3 of this, about JPY 10 billion is generated in domestic BtoC business. It includes battery and AV equipment and health and beauty care centering on [ Ozone ]. We plan to transfer product planning, development and the sales function to Denkyosha. Remaining JPY 19 billion is sales overseas BtoC -- BtoB for OEM customers and hydraulic tools. We achieved resource integration and the synergy effect materialization within Maxell Group. And we aim to grow -- aim for the growth centering on BtoB business. As for purpose shown below, many analysts suggested that sales capability is a key in BtoC business. And the business growth will be difficult only with sales capability of Maxell. On the other hand, Denkyosha has a strong nationwide sales channel, and they can complement our weakness. And we will share our strengths in planning and development with Denkyosha to achieve business groups. And we'll continue to maximize corporate value, centering on business for OEM with our analog core technologies. They are reflected in the full year forecast.

And this slide shows assumptions and upside potentials. As for assumptions for the full year forecast, exchange rate is assumed at JPY 140 to $1. Soaring material costs will continue, but the conditions will moderate from the third quarter onward. Semiconductor shortage will not be likely to be solved in the short term, and PC demand decline will continue for this fiscal year 2022. As for the upside potentials, raw material cost has been moderating, although still in surge. And that will be the upside potential to boost earnings. And semiconductor is market-driven, but if availability improves, that serves as an upside potential to boost sales. As for automotive, demand has been lately volatile. But given our strong business segment, when the automotive demand recovers, it will be a major potential to increase earnings. Without missing the opportunity for an upturn in the macro environment, we will take actions to maximize earnings for this year.

Return to shareholders and the share buyback. As for dividend, we will pay dividend in line with the initial plan. And as for share buyback, over 2 million shares or approximately JPY 2.8 billion were brought back at present with about 60% progress.

Initiatives for MEX23 and beyond. Development and the customer acquisition in all-solid-state battery are progressing steadily. As mentioned before, we'd like to create the new pillar of Maxell of JPY 30 billion around 2030. As for business negotiation, we receive increasing inquiries from FA infrastructures, mobility and health care segment. Approximately 30 companies have completed our sample variation. We are building production facilities for the real business. Equipment [indiscernible] investment is already decided are being gradually installed. We are achieving steady progress towards the start of mass production and shipment in [ RE ] 2023.

This is a potential application of all-solid-state battery. Current problems of battery users will be solved with our all-solid-state battery of high-temperature property and long life and promote value creation of customers. This is for the backup of encoder. Conventionally, primary battery was connected with a harness as batteries could not be used in the high temperature area near motor. But by replacing it with our all-solid-state battery, harness will not be necessary, and it is maintenance-free, and that will offer the great value. For infrastructure application, for battery users who are not satisfied, we can offer a maintenance-free all-solid-state battery. No need to replace battery, and it will be for the value creation.

For plant equipment on the right, sensor in high temperature need to be connected with harness. But with our or solid-state battery, which can be installed in a high-temperature environment. And through wireless communication, the monitoring will be much easier, and we can offer value. We are promoting variety of development also in the next medium-term plan period. As for-all solid-state battery product of larger capacity can have wider application. And we are working to increase capacity. On the right, our electromagnetic wave observer won the Mobility-Related Parts Award. We set a KPI for materiality to achieve the society with sustainable growth.

Seven materialities and examples of KPIs are shown here. Internal directors, including myself, are serving as a driving force to promote each materiality towards resolution of the issues and achieve KPIs. And we are promoting employees' understanding through e-learning, internal publication and town hall meetings. Under the current extremely challenging environment, all of us are united in accelerating initiatives to tide over 2022 and to achieve that presented midterm plan target. This concludes my presentation.