Maxell Ltd

TSE:6810

Earnings Call Transcript 2022-Q3

[中村 啓次 (なかむら けいじ), executive]

This is Nakamura. I will present the financial results of the third quarter FY 2021. Summary of today's presentation, I'll walk you through the outline of consolidated business results, risk impact and countermeasures and thirdly, toward the progress for mid- to long term.

Outline of consolidated business results. Review of the consolidated summary. As shown in the table, cumulative net sales for the third quarter were JPY 104.6 billion, up by JPY 1.2 billion year-on-year. Operating profit was JPY 8.6 billion, up JPY 5.7 billion year-on-year. Sales increased due to demand recovery in automotive and semiconductor markets despite negative factors such as sluggish consumer market and the shrinkage projector business.

Operating profit increased due to sales increase in these main businesses as well as business reform implemented in the previous year, which improved profitability.

The entire company has been promoting sales price optimization in response to recent rising raw material costs to maintain profitability.

Net sales changes. Net sales in FY 2020 were JPY 103.3 billion, as shown in the left from the base in this fiscal year, quantity variance was plus JPY 1.1 billion, with notable sales growth in Energy and Functional Materials, which rebounded in post-COVID era. Exchange variance was plus JPY 2.7 billion and application of the new accounting standard for revenue recognition led to minus JPY 2.4 billion variance. And with price variance, net sales were JPY 104.6 billion in this fiscal year.

Starting from operating profit in FY 2020, JPY 2.8 billion. Sales increase mentioned before, generated variance of plus JPY 2.4 billion, and business reform implemented in the previous year affected plus JPY 2 billion. Cost reduction improved profit by JPY 2.9 billion. Adding the exchange variance and the material cost increase impact, operating profit was JPY 8.6 billion.

From here, let me review results by segment. Starting from Energy segment. Third quarter cumulative sales in FY 2021 was JPY 30 billion, up JPY 1.1 billion year-on-year. Operating profit was JPY 3.4 billion, up by JPY 1.1 billion. As for sales topics, due to COVID, demand in the previous year was tough, but in this year, such advance impact subsided and sales of heat-resistant coin-type lithium battery for automotive increased. As a new addition, sales of coin-type lithium rechargeable batteries mainly for hearing aids increased. On the other hand, sales of consumer lithium-ion battery decreased slightly due to customers' order decrease caused by supply shortage of semiconductors.

As for operating profit topics, soaring raw material costs affected adversely the entire Energy segment. But operating profit increased because of solid cost reduction measures and sales increase of primary batteries, including heat-resistant coin-type lithium batteries. Unfortunately, profit of consumer lithium-ion battery decreased due to sales decrease.

Functional Materials. Third quarter cumulative sales in FY 2021 were JPY 20.7 billion, up JPY 0.7 billion. Operating profit was JPY 1.6 billion, up by JPY 0.9 billion.

As for sales topics, as was in the case of Energy segment, with market recoveries in post-COVID in adhesive tapes and industrial rubber products, their sales increased. In appearance, the sales of coated separate decreased due to the application of the accounting standard for revenue recognition, but actual sales increased by approximately 30% year-on-year.

As for operating profit, despite the adverse influence of sowing material cost for adhesive tapes and the industrial rubber products, profit growth was secured due to sales increase by market recovery and optimization of sales prices. Profit of coated separator increased due to its sales expansion.

Optics & Systems. The third quarter cumulative sales were JPY 29.5 billion, up JPY 1.2 billion. And operating profit was JPY 2.8 billion, up JPY 4.8 billion year-on-year.

As for sales topics, as already press released, with the termination of projector sales in Americas, Europe and part of Asia, sales or project decreased. On the other hand, sales of optical components for automotive such as in-car camera lens unit and LED head-up displays recovered from the COVID-related demand decline since last year and maintained a sales increase. Due to the latest strong demand for semiconductor-related embedded systems, their orders increased due to the market expansion.

As for operating profit, profitability improvement by the business reform for projectors contributed to a substantial profit increase. Sales increase in optical components contributed to profit increase. Sales increase in semiconductor-related embedded systems also resulted in the profit increase.

Life solution. The third quarter cumulative net sales in FY 2021 were JPY 24.3 billion, down JPY 1.7 billion year-on-year, and operating profit was JPY 0.7 billion, down JPY 1 billion year-on-year, showing tough results. As for sales, sales decreased due to the across the board sluggishness of consumer market, and sales of health-related products decreased due to the slowdown of antibacterial deodorizer demand in Japan as well as business transfer implemented last year.

As for operating profit, as mentioned before, sales decrease of consumer products, including beauty care products pushed down profit. And the profit decreased due to sales decrease of antibacterial deodorizers, whose demand slowed in Japan.

Full year forecast for FY 2021. The total is shown at the bottom in yellow part. Net sales are JPY 136.5 billion, and operating profit is JPY 9.5 billion, and they are kept unchanged from the previous announcement on 28th of October.

As explained so far, business up to the third quarter has been performing well. But the latest business environment on which I will elaborate from now has been uncertain and tough, both in terms of sales and demand and cost with raw material cost surge. However, that said, the entire company will strive to achieve the announced operating profit target of JPY 9.5 billion.

Risk impact and countermeasures. This slide shows 4 major risks anticipated in the fourth quarter. First, with the latest global expansion of Omicron variant cases, including Japan, demand may weaken due to orders and production decline on the side of customers and production suspension on the side of Maxell, and they represent risks.

As for delays in receiving parts and materials, including semiconductors, in addition to the risk that our orders may fall due to customers' impact, but even with orders received, due to parts and material shortage on our side, production may be delayed.

As for automotive production decrease, parts and material procurement is slightly delayed compared to the initial forecast, and this is also conceived as a risk.

And the largest risk is the soaring material cost, and we are striving to properly pass the cost increase to selling prices, but the time lag between purchase and sales, among others, would present risk. The impact on lithium-based batteries and adhesive tapes is expected to be material.

On the right, estimated risks for operating profit decline from the third to fourth quarter are described. Maxell tends to have seasonality, slightly weak volume in the fourth quarter, partly due to the reactive downturn from the year-end boom and the production and sales slowdown due to Chinese New Year. Additionally, this year, we observed risks of semiconductor-related parts shortage. And partly, that is linked to the automotive-related demand decline. We also expect that the lithium-based batteries and adhesive tapes will be materially affected by soaring material cost. And encompassing all of these, we project the fourth quarter operating profit of JPY 0.9 billion. But by summary, implementing countermeasures for these risks, we aim to recover from the next fiscal year and onwards.

To address sovereign raw material costs whose impact currently is clearly expanding. The only available solution would be to pass on to selling prices and the entire company is working on this. This is the conceptualized chart to indicate the size of quarterly material cost increase in FY 2021 by gray bar. And the material cost pass on amount is shown by dark blue bar. And as I said before, despite the time lag between purchase and sales, we are steadily and fairly passing the cost increase onto the prices quarter-by-quarter. And in FY 2022, we aim to reflect the raw material cost increase in selling prices 100% to secure profitability. And we are determined to improve profitability in FY 2022.

Now let me briefly talk you through the key points for profitability recovery toward FY 2022. We have 4 responses to business environment.

First, for the spread of Omicron variant of COVID-19, for the directed departments, we implemented work style reforms with telework as a default. And for factory by strengthening infection control, we will minimize risks.

For supply recovery of materials, including semiconductors, we eliminate orders backlogs promptly by thoroughly implementing advanced orders and advanced procurement. And for the parts procurement will be difficult. We consider alternative parts as well.

As for the automotive production, the recovery in the fourth quarter seems to be slower than the initial forecast. But given the solid transition to the recovery track is expected toward FY 2022, we will prepare properly with advanced orders.

For the soaring material cost, we will implement thorough self-help efforts, including manufacturing and other cost reductions. And if they are not sufficient for the price optimization, we'll continue negotiation persistently.

As for business expansion, there are 2 points. The first one is to ensure that growing business make contribution to business results. We will start harvesting the seeded project in the previous midterm management plan, accelerating the project activities and we will improve profitability by cost reduction, among others.

As for the contribution of new business, we move up the schedule. For the competitive products, we will move forward the investment plan of new businesses ahead of the initial plan. With this, we are implementing measures to recover profitability in FY 2022.

Finally, toward the progress for the mid- to long term. This slide shows 13 growth drivers, businesses in MEX23 in 4 segments. Today, I'd like to briefly update the 3 business shown in blue and red square. The first one is heat-resistant coin-type lithium battery in Energy segment. It currently has remarkably high global share. And recently, we received some large new orders in Asia. In FY 2022 and onwards, we will be able to continue to secure its growth trajectory. And we continue negotiations so that the latest soaring material cost will be properly passed on to the selling prices.

Second, as for the semiconductor-related product, as you know, currently semiconductor demand has been strikingly expanding, and we received many orders for semiconductor-related systems for SPE, I mean the strong demand. By procuring parts and accelerating initiatives, we will make sure to reflect them in profit contribution.

As for EF2, electro fine forming, demand for electro forming masks, which are used in the semiconductor producing process has been notably strong now. With CapEx, which is to be completed in February 2022, we achieved a growth in sales and profit.

On the struggling front in Life Solutions segment. In health care products, ozone antibacterial deodorizers which had been through rapid demand growth has faced a backlash and in FY 2021, demand stalled. We are promoting development of new products that much different usage situations so that they make positive contribution in sales and profit in FY 2022. And we expand sales channels in Asian region and globally to promote sales expansion. We will accelerate these measures, and although the progress of each business varies, we are ensured to achieve the plan as a whole.

Finally, prepare the new business. Let me present the all-solid-state battery. Development status is shown on the right. As press released in September 2019, we started sample shipment of sulfide-based coin-type or solid-state battery as one of the pioneering manufacturers of sulfide-type battery that is feasible for commercial use. In March 2021, we developed multiple sulfide-based ceramic packaged or solid-state battery as the first one in the world. In September 2021, we completed development and started sample shipment of sulfide battery bipolar structure specialized for high voltage and high output, and it was also the first in the world. Currently, we develop the mid-to-large-size all-solid-state battery under NEDO subsidy program.

In all-solid-state battery, we can leverage our strengths of analog core technology, mixing and dispersion, and molding and forming. Safety, especially under the high temperature, long life and heat resistant, which are requirement for all solid-state battery are well balanced in your products, and they are highly appreciated by customers.

As shown below, first, we will take a lead in infrastructure and wearable. Then we will expand into FA market with the strength in heat resistance, develop technology for in-car use with high output and expanding to medical market with high-capacity product development. It is said that its market size will be about JPY 300 billion in FY 2030. And we aim to take approximately 10% share of the market with sales of JPY 30 billion by launching this business rapidly.

Currently, we consider advancing the investment plan for the mass production machinery to accelerate preparation for the full-scale mass production. We continue to strive to achieve the target, as mentioned and aim to be the indispensable company in the sustainable society. This is now available in our history channel in YouTube. So I would appreciate if you can spend some time for viewing this. This concludes my presentation.

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