Maxell Ltd

TSE:6810

Earnings Call Transcript 2023-Q3

[中村 啓次 (なかむら けいじ), executive]

I am Nakamura. I'd like to present the financial results of the third quarter FY 2022.

Summary of today's presentation. As for the FY 2022 third quarter results overview, sales decreased due to the shrinkage of the project business as variance decline in sales of rechargeable batteries and BtoC products. As for operating profit, we are accelerating efforts in cost reduction and pass on the rising material cost to price, but mainly due to the soaring raw material costs in the first half and the profit decreased. Second, as for changes from the first half to the third quarter, although station vary by division due to different factors affecting performance, profitability recovered in the third quarter as a whole. Lastly, third, as for the future outlook, due to the drastic external environment changes on which I will elaborate later, we keep the full year forecast unchanged.

FY 2022 third quarter results overview. This is a summary. Net sales for the cumulative third quarter were JPY 99.2 billion, down by JPY 5.3 billion year-on-year. As shown below, despite an increase in sales for automotive and semiconductor markets, total sales decreased due to lower sales of rechargeable batteries and BtoC products, in addition to the impact of the large-scale projector business downsizing implemented in the previous year. Operating profit was JPY 4.6 billion, down by JPY 4 billion year-on-year. While we were accelerating cost reductions and selling price revisions for pass-through of the soaring material cost, we were not able to fully absorb the soaring material cost increase progressed mainly in the first half yet.

Foreign exchange gain benefited ordinary profit and net profit. Net sales changes from the third quarter FY 2021 to the third quarter FY 2022 this year. Sales decreased from JPY 104.6 billion to JPY 99.2 billion, down by JPY 5.3 billion. Quantity variance was JPY 14.4 billion. As shown on the right, in Energy segment, the impact of reduced production at customers for rechargeable batteries due to shortage of semiconductors affected. In the Optics & Systems segment, sales of in-car camera lens unit increased year-on-year, but due to large sales decline caused by the downsizing of the projector business, segment sales decreased. In Life Solutions segment, health and beauty care products have been sluggish. Price variance was JPY 2.7 billion. And the selling price revision for the soaring material cost was JPY 2.9 billion, as shown on the left. Foreign exchange contributed to sales by JPY 6.3 billion through the benefit of depreciation of yen. Operating profit changes year-on-year. Operating profit decreased from JPY 8.6 billion in the previous year to JPY 4.6 billion this year, down by JPY 4 billion. By factor, quantity variance includes minus JPY 2.5 billion in Energy segment due to sales decline, mainly in rechargeable batteries as mentioned before. And Optics & Systems segment profit decreased JPY 1.1 billion. This is due to the absence of the onetime gain related to the projector business downsizing recorded in the previous year. However, main state optical components in-car camera lens unit increased profit.

Profit of Life Solutions segment decreased due to sluggish health and beauty care products. As for cost reduction, price variance and material cost increase, we were not able to fully absorb the soaring material cost that progressed mainly in the first half, and we are striving for the recovery now. As for exchange variance, conditions vary by segment, but it had a slight positive impact as a whole.

Review by segment. Let me start with Energy segment. Net sales in the third quarter were JPY 27.1 billion, down by JPY 2.8 billion year-on-year. As shown below, micro battery or primary batteries for [indiscernible] sensor for automotive and medical equipment were robust. But consumer lithium-ion battery rechargeable batteries demand continued to decline due to shortages of semiconductors and the sales decreased year-on-year. Operating profit decreased from JPY 3.4 billion in the previous year to JPY 1.6 billion this year, down by JPY 1.8 billion. It is due to the very tough sales of rechargeable batteries as mentioned. And including the micro primary batteries, while cost reductions and selling price revisions are improving profitability, we were not able to fully absorb the soring material cost progress, mainly in the first half, and that led to the profit decrease year-on-year.

Functional Materials segment. Net sales were JPY 22.2 billion, up by JPY 1.5 billion year-on-year. As shown below, demand recovered for adhesive tape for construction and sales increased. And sales for Industrial Materials also increased due to strong sales of industrial rubber products. Operating profit decreased from JPY 1.6 billion in the previous year to JPY 0.7 billion this year, down by JPY 1 billion. Here also, cost reductions and selling price revisions are making headway, but we were not able to fully absorb the soaring material cost that progressed mainly in the first half and the profit decreased year-on-year.

Optics & Systems segment. Net sales were JPY 28 billion, down by JPY 1.5 billion year-on-year. As mentioned before, sales of automotive optical components increased year-on-year due to robust orders and production. And semiconductor-related products contributed to sales increase as orders for semiconductor DMS remained strong. But due to the large downsizing of the projector business, overall sales decreased. Operating profit increased from JPY 2.8 billion in the previous year to JPY 2.9 billion this year, up by JPY 0.1 billion. Despite the profit decrease due to the absence of one-off gain in the projector business, robust automotive optical components and semiconductor-related products compensated that decrease and overall profit increased.

Life Solutions segment. Net sales were JPY 21.9 billion, down by JPY 2.4 billion year-on-year. As shown below, BtoC products, especially our [indiscernible] health products, antibacterial deodorizer sales were sluggish and net sales decreased. Operating profit was minus JPY 0.6 billion this year, down by JPY 1.3 billion year-on-year. Besides weak sales, import products for domestic sales were substantially affected by the foreign exchange. In the first half, we made downward revision and explain the business environment. And I'd like to explain the change from the first half to the third quarter. At the second quarter results meeting, I explained 5 factors: exchange rate, soaring raw material costs, semiconductor shortage, demand decline in PC and smartphones, and also our own factors.

Let me give you the update on each factor. First, as for exchange rate, yen depreciated in the third quarter from the first half. First half exchange rate was JPY 134, and it was JPY 142 in the third quarter. In Energy segment, despite negative impact on some imported products, overall impact at the weekend is positive due to high export ratio. While in Functional Materials segment, due to high domestic production and sales ratio using imported material, we can negatively affect it. In Optics & Systems segment, as in Energy segment due to high export ratio of in-car optical components, we can positively affect. In Life Solutions segment, as mentioned before, as we sell imported products in domestic market, we can negatively affect the profit. Second factor is soaring raw material cost. In Energy segment, cost surge for a part of material still continues, but overall cost has been coming down and price revision has been penetrating. Thus, the condition improved. In Functional Materials segment, as the cost increase in materials derived from crude oil calmed down with few exceptions. And price reflection progressed and the condition is improving. So concept chart of soaring raw material costs and the selling price reflection is shown below.

From the second to third quarter, price revision overweighted the material cost increase. As shown on the right, in the third quarter, selling price reflection exceeded raw material cost increase. However, losses remain for the full year as the cumulative gap up to the second quarter was not fully filled by the end of the fiscal year, and we aim to eliminate past cumulative losses in the next fiscal year and onward.

Third factor is on the demand side, semiconductor shortage. As for the consumer lithium-ion battery in particular, despite the solid demand of potential end users, due to the partial shortage of parts, we were not able to produce the planned volume. But as conditions started to recover, the condition in the third quarter improved from the first half. With PC and the smartphone demand decline, our [indiscernible] business for semiconductor has been tough. And unfortunately, market demand remains sluggish, and we continue to struggle.

Finally, our old factor. Let me walk you through by segment. In Functional Materials segment, centering on adhesive tapes. In the third quarter, sales of high-value additive for construction progressed, but demand uptake for semiconductor market weakened and the product mix improvement delayed. Second, in Optics & Systems segment, automobile production is expected to be almost flat year-on-year without prominent growth. But including the new adoption for ADB, order is increasing and overall strong performance continued. In Optics & Systems for semiconductor-related products. Orders for semiconductor DMS continued strong with a sustained strong demand of semiconductor equipment. And we still have some order backlog due to parts and material shortage. In Life Solution segment, with the peak out of antibacterial deodorizer demand, it sales continue to be sluggish. Situation is mixed by segment, but the profitability in the third quarter recovered as a whole.

Finally future outlook. As for the full year forecast, net sales were JPY 135 billion. Operating profit is JPY 5.5 billion and net profit is JPY 5 billion, and they are kept unchanged from the end of the first half. The background -- the reasons for keeping them unchanged are listed here. Various risks are assumed in the fourth quarter and onward. Regarding net sales and operating profit, decreasing orders due to global recession, production and the sales stagnation on the customer side due to the lockdown in China and recent sharply rising energy costs are included as risks. Regarding net profit, well-off cost might be posted along with the ongoing structural reforms.

In FY 2022, foreign exchange rate has been extremely volatile, and the foreign exchange loss may arise from the rapid appreciation of yen. Therefore, as the external environmental deterioration is also expected, full year forecast announced on October 28 remains unchanged. As for the current risks, those for the whole company includes decreasing orders due to global recession. We already observed a slight sign of decline in demand in micro batteries towards the end of the fiscal year. As for lockdown in China, risks exist on our production side, mainly factories in China. And also on the customer side, the stagnation in sales and energy cost increase is also assumed as a whole company risk. By segment, in Energy segment, although some material costs began to calm down, others remain high or have been very volatile. So soaring material cost will remain as a risk. And automobile-related business currently is getting tougher. So Energy segment might be affected by that.

On the side of customers, concerns for semiconductor shortage still remain. In Functional Materials segment, soaring raw material costs continue, and orders might decline due to semiconductor market downturn. In Optics & Systems segment, orders may decline due to delay in automotive market recovery. And the risk of order decline due to semiconductor market downturn and ES2 business or the [indiscernible] business might be going down.

In Life Solutions segment, in addition to the dampened consumer sentiment due to the ongoing inflation in Japan, TAF-based health and beauty product business are conceived as the continuing were expanding risks. On the other hand, the bright side or upside potential for the next fiscal year includes in Energy segment or re-materialization of the effect of selling price revision in response to the soaring material cost, and that will minimize risks. As the full-scale shipment of new products for medical device launch in FY 2022, its business growth is expected in the next fiscal year. In Functional Materials segment, selling price revision for the material cost surge in this segment took slightly more time than the other segment. But now effects are more apparent and will continue in the next fiscal year as well.

On demand side, new orders are expected to grow for construction use, and this is also the upside potential. We launched new products of industrial process tapes, which is also the upside potential for the next fiscal year. In Optics & Systems, orders will increase for new technologies, including lenses for ADB. We are now building the equipment for additional production capacity of semiconductor DMS. And when they start operation in the next fiscal year and onward, we have potential to increase orders. Currently in semiconductor DMS, due to material shortage, we are not fully able to respond to the orders through the production. Therefore, sales would potentially increase by the normalization of material procurement.

In Life Solutions segment, under the current tuff situation, to strengthen BtoC business, we are promoting the new business alliance with Denkyosha. We have an upside potential through acceleration of these initiatives. Amid the rapid changes in business environment. In addition to the steady response to them by accelerating the concentration of resources and growth businesses and the new businesses we ensure to achieve that mid- to long-term growth.

Finally, appendix for your reference. We are in the process of a share buyback of up to JPY 5 billion or 5.75 million shares from May 16, 2022 to March 10, 2023. We plan to cancel all treasury shares to be bought. As of January 31, the total number of shares bought was 3,391,700 shares were JPY 4.29 billion in value. Share buyback is expected to be completed by March 10 as planned. As topics, we are developing alliances with various partners for the full commercialization of all-solid-state battery. This is a joint initiative with ROHM to accelerate the market adoption of all-solid-state battery. This slide shows jointly developed power module kit for a variation. We combined our ceramic packaged all-solid-state battery ROHM's the Boost DC-DC convertor IC equipped with ultra-low current consumption technology, Nano Energy. All-solid-state battery tends to be low voltage. So by boosting voltage, we aim to gain business quickly replacing 3 voltage primary battery by all-solid-state battery. This is a jointly developed power module kit for evaluation.

We accelerated the pace of customer acquisition towards 2030 sales target of JPY 30 billion. We acquired 3 Star certification in the Nikkei SDG Management Survey, and we started sales of contactless IC card with PET bottle recycling certification mark.

Aiming to be the indispensable company in the sustainable society, we are accelerating these initiatives. This concludes my presentation.