Maxell Ltd

TSE:6810

Earnings Call Analysis

Optics & Systems Drive Profits Amid Sales Dip

Despite a sales forecast reduction from JPY 133 billion to JPY 130 billion, the company's operating profit remained on target at JPY 7.5 billion, backed by a strong Optics & Systems segment and improved profitability in the Life Solution segment. Net income stood at JPY 5.8 billion, aided by foreign exchange gains. The company is committed to achieving its initial forecast in the final year of its current midterm plan, with a revised exchange rate at JPY 143 to $1.

A Steady Financial Performance with Noteworthy Segment Growth

In the first half of FY 2023, the company experienced a positive shift in financials. Net sales marginally increased from the previous year's JPY 65.2 billion to JPY 65.6 billion, with operating profit surging by JPY 2.1 billion to JPY 4.6 billion. This strong operating profit growth was primarily fueled by the Optics & Systems segment and the improved profitability within the Life Solution segment. Additionally, foreign exchange gains had a favorable effect, contributing to a boost in ordinary profit to JPY 6 billion and net profit to JPY 4.9 billion.

Segment Analysis Reveals Mixed Bag of Performance

A closer look at the performance by segment provided a mixed perspective. While the Energy segment's operating profit took a hit, declining by JPY 0.8 billion due to subdued sales in primary batteries, the Raw Materials segment saw a JPY 0.2 billion increase in operating profit. The star of the show was the Optics & Systems segment, which boasted a notable increase in net sales by JPY 3.8 billion and operating profit by JPY 1.7 billion, thanks both to a recovery in automotive optical components and the early recognition of licensing revenues. Life Solution's net sales did witness a significant decline due to business reforms; however, these very reforms, coupled with improved product mix and cost reduction strategies at overseas plants, translated into profit growth despite lowered sales.

Future Outlook: Maintaining Operating Profit Amidst Sales Adjustment Expectations

Looking to the future, while the company's overall sales forecast experienced a downward revision from JPY 133 billion to JPY 130 billion, the operating profit target remains firmly in place at JPY 7.5 billion. This steadfast focus on achieving the initial operating profit forecast comes even in the face of expected lower sales, emphasizing the company's commitment to financial stability and growth as it approaches the final year of its current midterm plan.

Anticipated Second Half Trends: A Preparation for Reduced Sales and Profits

In the second half of FY 2023, the company anticipates a decrease in net sales by JPY 1.2 billion and a more pronounced fall in operating profit by JPY 1.6 billion, stemming from the early recognition of licensing revenues. A projected appreciation of the yen is predicted to lead to foreign exchange losses, with additional costs associated with B2C business reforms expected to impact the net profit negatively.

Earnings Call Transcript 2024-Q2

[中村 啓次 (なかむら けいじ), executive]

I'm Nakamura. I'll explain the financial results of the first half FY 2023. Summary of today's presentation contains 3 points. First, as for FY 2023 first half results overview. Net sales and operating profit increased due to the strong performance in Optics & Systems segment as well as improvement in the profitability of Life Solution segment. Foreign exchange gains positively impacted ordinary profit and net profit. Second, as for the future outlook, after scrutinizing the varied performance of each segment, we keep operating profit focused unchanged from the initial plan while revising the sales forecast downward.

Third, as for towards the progress for medium to long term as just released, we developed the cylindrical all-solid-state battery, which is applicable for the use as a main power source, and I'd like to explain intellectual properties and licenses. FY 2023 first half results overview. As shown here, net sales increased from JPY 65.2 billion in the previous year to JPY 65.6 billion this year, up by JPY 0.4 billion. As shown below, sales increased as higher sales of automotive optical components and licensing revenues brought forward more than offset lower sales due to the transfer of the domestic consumer product sales business.

Operating profit was JPY 4.6 billion, up by JPY 2.1 billion year-on-year. As explained at the Q1 meeting, licensing revenues were brought forward, and we saw the impact of reform in Life Solution segment. Overseas manufacturing plants for Life Solution segment promoted cost reduction, and they contributed to the profit growth. Ordinary profit was JPY 6 billion and net profit was JPY 4.9 billion, and they were positively impacted by foreign exchange gains.

Net sales changes. Net sales increased JPY 0.4 billion year-on-year. Quantity variance was JPY 3.2 billion as a negative factor, primary battery sales decreased due to sluggish demand in electronics equipment in China and global market. Life Solution showed negative impact by JPY 3.5 billion, and it was due to the business reform in the previous year, intentional sales decline. On the bright side, we marked good sales of automotive optical components and semiconductor-related products, including dicing tape, which is used for semiconductor production.

Recognition of licensing revenue, which had been planned in the second half were brought forward. Price variance pushed up sales by JPY 1.6 billion, soaring raw material costs in the last few years have been reflected in the prices with some time lag. Exchange variance was JPY 2 billion with a positive impact of the depreciation of yen. Operating profit changes. Quantity variance was already explained in the net sales changes. Material cost increase served negative minus JPY 0.3 billion. Recently naphtha and oil derivative raw materials costs have been slightly increasing. Price variance was JPY 1.6 billion. We are able to reflect the soaring raw material cost in prices, securing the profit. Business reform effect was JPY 0.9 billion through cost reduction with the transfer of a part of Life Solution business to Denkyosha. Cost reduction, product mix improvement and exchange variance benefited us and the operating profit grew to JPY 4.6 billion.

Now I will explain by segment. Let me start with Energy segment. Net sales were JPY 18 billion, almost flat year-on-year. Operating profit decreased from JPY 1 billion to JPY 0.2 billion, down by JPY 0.8 billion. As for the reason, as already mentioned, profit decreased due to the lower sales of primary batteries though profitability of rechargeable batteries improved, and we recorded expenses for developing all solid-state battery. Putting these 3 factors together, unfortunately, profit declined by JPY 0.8 billion.

Thanks to Raw Materials segment. Net sales in the first half FY 2023 were JPY 14.6 billion, almost flat year-on-year. Operating profit increased from JPY 0.3 billion to JPY 0.5 billion, up by JPY 0.2 billion. In sales, adhesive tapes as a whole, struggled year-on-year, but the sales of adhesive tape for semiconductor was strong, and the sales recovered slightly. In Industrial Materials, demand recovery is slow. As for operating profit, in addition to the development in line with the sales, with the recovery in orders for adhesive tape, we were able to reflect the soaring raw material cost in our selling prices, and that positively contributed profit.

Third, Optics & Systems segment. Net sales increased from JPY 18.3 billion to JPY 22.1 billion, up by JPY 3.8 billion year-on-year. Operating profit increased to JPY 3.5 billion, up by JPY 1.7 billion. As I said at the beginning, sales increased substantially due to the recovery in automotive optical components, especially In car camera lens unit. Sales of semiconductor-related products were maintained the same level as the previous year. Though entire market condition is not good yet, through our effort to counterpart shortage, which is still partially ongoing, we sustained the flat sales year-on-year.

Sales increased also due to the licensing revenue recognition brought forward from the second half. As for operating profit, in line with the net sales, optical components were strong. Especially in the case of currently robust In car camera lens unit, the proportion of added value product is high. So profitability improved. As the sales of semiconductor-related products were almost flat year-on-year, profit was also maintained. And licensing revenue recognition was brought forward from the initially planned second half.

Finally, Life Solution segment. Net sales decreased from JPY 14.1 billion to JPY 10.9 billion, down by JPY 3.2 billion, showing the considerable decline. This is due to the reform in consumer health and beauty product business with a business transfer to Denkyosha. As for operating profit, in addition to the reform effect due to the progress in cost reduction at overseas production plants in China and profitability improved. Improved product mix in health and beauty care products with higher proportion of high profitability contributed to profit growth.

Full year forecast. Revision of the full year forecast. Net sales are revised downward from the initial forecast of JPY 133 billion to JPY 130 billion, down by JPY 3 billion. Operating profit will be sustained at JPY 7.5 billion, in line with the initial forecast despite the downward revision of sales of JPY 3 billion, especially this year is the final year of the current midterm plan. So we'd like to achieve the initial forecast by any means. Net income is JPY 5.8 billion and foreign exchange rate is revised to JPY 143 to $1.

As for comparison with the previous forecast, sales of Optics & Systems will continue to be robust, but sales of Energy segment centering on rechargeable batteries and functional materials will be sluggish to be short of the initial plan. And sales were decreased from the initial forecast by JPY 3 billion. As for operating profit, we will strive to offset the sales decline with our effort and achieve the initial target.

Performance transition from the first to the second half, including the revision. Net sales will be down by JPY 1.2 billion in the second half compared to the first half. Operating profit will be down by JPY 1.6 billion half-on-half. It is affected by the licensing revenues brought forward to the first half. As for operating profit, as described below, in addition to the impact of licensing revenues for Optics & Systems being brought forward, special factors planned for the second half, such as temporary expenses related to B2C business reforms are included in the forecast.

As for net profit, as appreciation yen is expected from the end of the first half to the second half, foreign exchange loss in the second half is expected. And the temporary expenses related to B2C business reform is expected to weigh on the net profit. This is a revised net sales and operating profit by segment. In terms of net sales, variance was largest in Energy segment with a decline of JPY 4.5 billion due to the rechargeable batteries, the consumer lithium-ion battery, which have been rather struggling.

Demand is recovering in adhesive tapes recently in Functional Materials, but compared to the initial plan, sales are revised down by JPY 2.4 billion. On the other hand, Optics & Systems segment has been robust. And in Life Solution segment, net sales variance is small, but we are going to improve profit. Key points of forecast revision. In primary batteries, orders recovery for electronic devices is slow in China, Europe and Asia. In rechargeable batteries orders for lithium-ion battery application have been low since the second quarter. Functional Materials are showing a trend of recovery, but are short of the initial plan. Industrial Materials in Functional Materials segment includes coated separators and due to delay in orders recovery from some customers, sales tend to decline.

In Optics & Systems, automotive optical components, strong performance will continue in the second half onwards due to improved installation rate in addition to automotive production recovery. In semiconductor-related products, DMS remains strong, whereas EF2 are slightly struggling. In Life Solution, profitability improves as a result of B2C business reform and improvement of productivity at overseas production plants. As a whole, on sales front, recovery is slower than the initial expectation. But currently, as we observed the recovery trend, we secured sales and profit without missing the opportunity.

Third point is towards the progress for medium to long term. First is about the all-solid-state battery. So far, we have been promoting the development and mass production of coin type or solid-state battery. But with the further application of these technologies, we now develop the cylindrical type all-solid-state battery. As shown by the photo its diameter is 23 millimeters and height is 28 millimeter. And its capacity is 200 milliampere hour. And compared to the conventional 401010, the capacity increased 25x. With such capacity, its application will be expanded to the main power source. And as this output is prominently enhanced, it can be used for telecom equipment as well.

With the extensive application, this enabled us to make a great technological step forward. We like to progress toward further technological development and customer acquisition. I explained the licensing revenue planned in the second half rolled forward to the first half. Currently, as shown here, we have 8,000 patents in Japan and overseas. As shown on the right, with the expansion of new business-related patent and accelerated technological development every year, we are increasing the patent acquisition.

Continuous technological development lead us to patent acquisition, and that is connected to increased revenue through licensing. Thus, generated revenue will be contributing to new technological development in that cyclical manner. Through that cycle of IP and revenue, we will explore the new opportunities of licensing, leveraging the IP from the past and secure a certain level of revenue.

So far, I have walked you through the first part. And in the second part, I'd like to explain the action to improvement management that is conscious of cost of capital and the stock price with the analysis of current situation. Based on the requested initiatives presented by Tokyo Stock Exchange, we will analyze the current situation, formulate and disclose a plan and implement the initiatives, and that will be connected to the analysis of current situation through PDCA.

Today, I will explain the analysis of the current situation. Trend of business performance after REIT listing and the major initiatives. This slide shows the net sales and operating profit from 2014 onwards. Up to 2013, Maxell was a wholly-owned subsidiary of Hitachi Limited, and the company was relisted in March 2014. Then after 2019, as a REIT listed company, we try to grow our net sales and operating profit. And we might have had a little excessive pursuit at business scale. And as a result, profitability deteriorated due to increase of unprofitable businesses.

Based on that background, we launched business reform to enhance corporate value in 2020 through the fresh start. In 2020, we decisively implemented business reforms through divestment of laminated lithium-ion battery and some consumer businesses, reforms our projector business and early retirement support program for approximately 300 employees. We moved to the new phase of value creation in 2021 onward. And in this year, 2023 is a final year of this phase, value creation. Prior to the Tokyo Stock Exchange request, we have been enhancing corporate value since 2020. And we'd like to take further initiatives to that end.

As an analysis of current situation, we revisited the current situation at this time. PBL and ROE trend are shown on this slide. Since 2020, we have implemented several reforms, but PBL has been below 1 for almost the entire period after REIT listing, showing the tough condition. And as a result, ROE remained at low level despite improvement effort through business reforms for which management has some regret. To uplift PBL more than one time and improve corporate value, we focused on ROE and PL and broke them down to further sub items. ROE was divided into 3 perspectives of asset efficiency, financial leverage and profitability, and PL was analyzed from perspective of medium- to long-term growth expectation.

First, as for the asset efficiency, total asset turnover is shown on the left and nonbusiness assets trends are shown on the right. In total assets turnover shown on the left, since 2018 and '19, we have been through business reforms and sales decreased substantially and assets were reduced in line sales declined to some extent. So although they were not perfect, we made some headway in our initiatives. As shown on the right, nonbusiness assets trends are connected to such background, and nonbusiness assets were 11% in 2018, but it's contracted to 5% currently, showing certain progress.

Going forward, in order to achieve PBL more than 1x, we are aiming for even more efficient asset utilization. Second, as for financial leverage, cash and deposit and days are shown on the left and interest-bearing debt and equity ratio as shown on the right. Our view is that the current cash level is slightly higher than the necessary working capital, as shown on the left. But since FY 2018, we have been actively using borrowings and the equity ratio fell from the initial level of 72.8% to less than 50% currently. We continue to consider the optimum balance between shareholders' equity and borrowings, depending on the business situation.

Third point is profitability. On the left, operating profit ratio by business is shown, though it may be a bit hard to see. Redline is our internal harder rate, 10% operating profit rate. In FY 2020, there were many businesses whose operating profit ratio was below 10%. And also, there were many substantial loss-making businesses. In the plan of FY 2023, we eliminate loss-making business. But there are still some low-profit businesses whose operating profit ratio is below 10%. And they are the grave issues for management. As a result, ROIC has been improving since 2020. But still ROIC is below the company-wide target of 6% of WACC, and this continues to be our issue.

Fourth point is a medium- to long-term growth expectation. Operating profit trends are shown on the left and operating profit differences between the initial forecast and the results are shown on the right. As for the operating profit trend on the left, operating profit has been improving since 2019. But throughout that period since relisting, operating profit remained less than JPY 10 billion. And we were not able to achieve breakthrough of prominent growth of operating profit.

The chart on the right shows the large gap between the initial forecast and the results. And the management are learning the lesson here, we need to address these issues seriously. From the perspectives of PBL onetime and corporate value enhancement, we identified various issues. Out of 4 consideration points, though there remain some issues regarding 1 and 2, asset efficiency and financial leverage. As of today, the greatest issues for management are 3 profitability; and 4 medium to long-term growth expectation. We need to take actions promptly for the improvement in these 2 points. So we will disclose the concrete plans at the briefing of the next medium-term management plan in the first quarter FY 2024. This concludes my presentation. Thank you very much for your attention.

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