Nitto Denko Corp
TSE:6988

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Nitto Denko Corp
TSE:6988
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Price: 2 596.5 JPY 1.25% Market Closed
Market Cap: 1.8T JPY
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Earnings Call Analysis

Summary
Q4-2019

Nitto Denko's 2019 Outlook: Strategic Growth Amidst Declining Profits

In 2018, Nitto Denko reported a net profit decrease of 23.8%, with projected revenues falling 2% to JPY 790 billion in 2019. Despite challenges, Industrial Tape sales are expected to grow by 1.3%, contributing JPY 360 billion with a notable profit increase of 28.7% to JPY 40 billion. Life Science revenue is forecasted to drop by 11.5%, while Optronics faces a 4.7% decline. The company aims for stable operating profits of JPY 100 billion by 2021, emphasizing niche strategies and sustainable practices. Additionally, the dividend will rise to JPY 200 per share for 2019, reflecting a commitment to shareholder returns.

Earnings Call Transcript

Earnings Call Transcript
2019-Q4

from 0
H
Hideo Takasaki
executive

Good afternoon, ladies and gentlemen. My name is Takasaki from Nitto Denko Corporation. First of all, thank you very much for attending the annual investors meeting 2019. And I would also like to express my gratitude to all the institutional investors, security analysts who are present today. Thank you very much for paying your attention to our business and business management. Thank you very much for your honest comment and advice. I would like to express my sincere gratitude to you all.

Now I would like to present the consolidated result for FY 2018, business plan for FY 2019 as well as the mid- to long-term business plan.

First of all, please allow me to report to you on the consolidated result for FY 2018. On 26th of April this year, we have presented the result, but let me once again report to you. Net sales compared to FY 2017, down by 5.9%. It was JPY 806.5 billion. Operating profit, down by 26.2% year-on-year, JPY 92.8 billion. Net profit down by 23.8% year-on-year, and it was JPY 66.6 billion.

Now I would like to report to you on changes in operating profit from FY 2017. Due to sales volume, we had negative JPY 19 billion change due to price reduction, streamlining minus JPY 6.5 billion due to fixed cost, minus JPY 8 billion and due to technical support fee, plus JPY 6 billion. Others, including product mix, minus JPY 5 billion. Altogether, profit was down by JPY 32.9 billion from the previous year.

Now I would like to explain about our business plan for FY 2019. Net sales compared to FY 2018 is coming down by 2%, JPY 790 billion. Operating profit, down by 8.4%, JPY 85 billion. Net profit year-on-year, down by 6.9%, JPY 62 billion. This fiscal year's FX assumption is JPY 110 for USD 1.

Next, I would like to report to you on the business plan by segment in FY 2019, starting with Industrial Tape. Net sales compared to FY 2018 is going to grow by 1.3%, JPY 360 billion. Operating profit, up by 28.7%, JPY 40 billion.

Next, Optronics. Net sales, down by 4.7%, JPY 410 billion. Operating profit, down by 19.3%, JPY 50 billion.

Next, Life Science. Net sales, down by 11.5%, JPY 26.5 billion. Operating profit, flat.

Next, I would like to talk about the business outlook, business plan as well as the focus growth theme for every segment. Starting with the Industrial Tape. In Industrial Tape, we are targeting at creation of niche top products, environmental contributions and productivity improvements to achieve further growth and high profitability. We have Sanshin activity, 3 new activities. And we have core technologies such as adhesive, coating, polymer function control as well as polymer analysis and evaluation. And based on core technology and the core competence, we would like to promote the growth strategy and we would like to constantly improve the operating margin of 8.7% that we achieved in FY 2018.

Based on this approach, we are going to focus on the following activities in FY 2019. As for functional base products, we are going to improve the sales in double coated tapes for smartphone assembly and we are going to increase the profitability of the semiconductor-related materials. As for the transportation business, we are going to promote optimization of global systems and we are going to improve the profitability by enhancing the yield, which was one of our challenges in FY 2018. At the same time, we will be working on motorization, autonomous driving and we are going to enhance the product systems.

The growth theme of the industrial theme is the next-generation mobility, and please let me touch upon that. We have motor insulating material, internal pressure adjustment material, radio wave absorber. Other than those Industrial Tapes, we have vehicle display, in-vehicle display and other information fine material. In FY 2018, these products represented about 20% of the total consolidated sales. We believe next-generation mobility can grow in the future, and that is one of our focus area where we are aiming to attain further growth.

Next, I would like to talk about actions for area needs. In FY 2012 , we bought current Nitto Denko in Turkey, which we believe is a growing market in area. Their main business is hygiene business. And hygiene business is run in Turkey, Middle East area, Europe such as France, Spain, Czech, Egypt, Morocco, Algeria, Southern Africa, Pakistan, Thailand and China. We are selling hygiene products to the customers in those area. In FY 2018, we were able to grow the sales by 3x compared to the timing of the acquisition. We are going to capture the needs in those specific areas so that we can create the area niche top products and attain further growth.

Next, I'd like to talk about our contributions to the environment. In the 14th Environment Excellence award to be granted to technology and products recognized for their protection and improvement of the quality of the environment, Nitto's completely solvent-free, double-coated tape received an excellent prize. And this tape is used for the products with high needs for low VOC, for example, TV sets, air conditioners and refrigerators and other consumer electronics and interior of vehicles and home building materials in large amounts. And also in Europe and the U.S. where environmental needs are heightened, we launched high-performance multilayer glass or glaze protection materials. And so we are going to promote our businesses that are conscious of contributions to the environment further.

Next, I'd like to talk about contributions to the improvement of productivity. Nitto, by supplying adhesive release functions products to the manufacturing size of the customers, contribute to the yield and productivity improvement. Sticking well, cutting and shaving and other minute processing is made possible with our products. On the other hand, we are making it easily release -- to be released by heat and UV. We are contributing to improvement of productivity, waste reduction, automation and other various needs in manufacturing by providing solutions to satisfy the customers.

Next, let me talk about the future business prospect for Optronics and business plan for this segment, highlighting the growth themes especially. In Optronics, there is polarization of large product market and further evolution of displays. And technological and business model transformation are focused on to realize the creation of values in large high-end markets, differentiation by ultrathin polarizer will be promoted. And in commodity market, we will use Alliance IP and other business models to strengthen our profitability and earnings power. On the other hand, in the segments like mobile, ITO and printed circuits, the market has been matured and we're expecting the production volume to hit the ceiling.

On the other hand, the foldable functions and other display evolutions are expected to happen. So in this context, sales per device is to be increased and we will follow display evolution with our technological capabilities. And furthermore, we would use sputtering and printed circuit technologies and other proprietary technologies of Nitto to create the components and materials for new products.

Under such approaches, we are going to focus on the following initiatives in fiscal 2019. In information fine materials, sales volume reduction and price cuts are expected to lead to revenue drop while we will refine our industry-leading technological capabilities and follow new display changes such as foldable and rollable displays. And in the printed circuits, we would further increase the share in hard-disk drive application and also thoroughly streamline our operations to improve our profitability.

In the growth theme for Optronics, the response to the foldable display or display evolution is the next topic I like to talk about. As more displays became foldable, folding, bending and wrinkles and other new technological needs are expected to increase. And we are going to respond to these challenges with our technological base. And in the conventional smartphones, most of the components were individually designed. But as displays get more complex, we are required to be able to make proposals for the products or various films in an integrated manner. So through these initiatives for new needs, we're going to seek ultimate displays and provide new plans.

As you know, IoT utilization and further advancement is expected. And in this context, wireless data communication is going to realize high speed and high capacity in the future. However, automotive sensors and 5G communications in the smartphones, as you can see in these, there are more usage for millimeter and microwave band. And there are challenges in that. One of them is that you cannot use aluminum plate, an important metal for luxurious appearance. For example, in the case of smartphones, it used to be that aluminum plate was used. But this would block the radio wave due to the nature of the metal. The aluminum is now being replaced with plastics. Therefore, on our part, Nitto has been using the sputtering optical design and adhesive designs that we have developed for over the years to present the metal texture and luxurious appearance and yet transmit radio wave in the degraded films for high-capacity communication. So with this product in the matured smartphone market, we can provide value added products by expanding options through differentiation in designs.

Next, I'd like to talk about growth strategies in printed circuit market. For the past -- over the 20 years in the past Nitto, we have developed our highly precise circuit formulation technologies in HDD market. And this has been recognized in the market. And by launching this product or technologies in markets other than HDD to change the portfolio to realize the growth in the future. As a market in cell phones and for other applications, we are going to launch the theme for highly precise substrate as soon as possible. In order to promote this growth strategy, we are going to increase our production capacity through establishing new factories by executing new capital investment.

Now let me talk about business plan and new growth themes that we're working on in Life Science. In fiscal '19 -- 2019 rather, we're going to focus on the following initiatives. In the nucleic acid drug discovery, in the area of fibrosis and refractory cancer therapeutics, we are going to promote R&D and clinical trials so that it will be developed as a new pillar for the business. And also for nucleic acid drug contract manufacturing, in order to respond to the active market, we are going to increase the share through developing new customers so that we can [indiscernible]

The growth theme in Life Science, which is a nucleic acid drug contract manufacturing is our next topic. In the nucleic acid drug market, the number of clinical trials is on the increase and the outsourcing of the manufacturing industry is expected to further increase in the future. Therefore, the new entrants are increasing in number in the market and the existing competitors are now increasing their products and capacity. So in this market, what we are doing is to provide various services to the new drug development processes of the customers so that we can support the nucleic acid drug industry and grow together.

With regard to the nucleic acid drug contract manufacturing, we are capturing the approved drugs and clinical development projects steadily. And if you look at contract manufacturing share in terms of the number of clinical trials, we increased from 57% in fiscal 2017 to 63% in 2018. Those differentiating strategies will be steadily promoted so that we can contribute to further revitalization of nucleic acid drug industry.

Next, I'd like to talk about the Lonasen transdermal patch formulation. Lonasen was developed by the Dainippon Sumitomo Pharmaceutical for the indication of schizophrenia and it was launched in Japan in 2008. And in order to further stabilize the pharmacokinetics of Lonasen and improve the medication adherence by patients, since 2010, we have been engaged in joint development of transdermal patch formulation. And last year, Dainippon Sumitomo Pharmaceutical has applied for the approval in marketing in Japan. And in this fiscal year, it obtained approval and we're expecting this to contribute to our performance.

Next, I'd like to ask my CTO, Umehara, to talk about initiatives to new businesses.

U
Unknown Executive

That was the presentation on the result of FY 2018 and also the business plan for FY 2019. Next, Umehara, who's the CTO, will be presenting the technology strategy.

T
Toshiyuki Umehara
executive

Good afternoon, ladies and gentlemen, my name is Umehara. I would like to present to you our initiatives for new business and also would like to cover technology strategy. It's been 30-plus years since I joined Nitto Denko Corporation. And for more than 10 years, I was a part of the engineering production department and also for the rest of my career, I was in business side of the department. And about 2 years ago, I assumed the responsibility for the entire corporate-wide technology and its strategy.

And this page gives you the idea regarding our R&D-related organization. To your left, you'll see corporate R&D division. And this division is in charge of our core technology such as our tape and also new energy. Environmental is the responsibility of sustainable technology research center. This is something that other companies are working on. And we rolled out this technology initiative to outside of Japan.

So we have new business development department and nucleic acid medicine divisions to support each business unit. R&D, when it comes to the cost-effectiveness is, in a way, slow. And in order to improve the efficiency, we are working on specific theme in 2 different divisions. We are mainly working on materials, but the production process is very important. So in the technology department, it contains a process technology division. And this process technology division is looking at the production process, production technology. And all together, working together, we are concurrently working on R&D. And also a patent is very important from intangible asset perspective. So intellectual property division is sitting inside the corporate R&D sector. So there are 6 divisions working hand-in-hand to create new value. This represents Nitto's conventional strategy. We offer 13,500 products across more than 70 industries as an intermediate materials and manufacturer. That's the positioning of our company in the past 100 years. And this is a very important business for us and our DNA is Sanshin activity, 3 new activity. And we have global niche product areas, niche product where we have registered a trademark. However, next 100 years, in order to survive and win in coming 100 years, we need something else other than conventional strategy. So starting several years ago, we decided to work on new initiatives.

This is the same supply chain diagram. So we are a intermediary materials manufacturer. And we've been always running our business in this particular domain. But now, as you can tell from the slide, we are working on materials upstream side and also we are expanding our business to the downstream towards the products. Our competitive manufacturers or players in different segment -- I mean we are now trying to expand our business domain to the peripheral areas and we are trying to generate additional business opportunities. And that's what we've been looking into in the past years. And I would like to present to you 4 examples.

As Takasaki presented to you just now, Life Science business, we are trying to -- I mean we are generating operating income almost flat as in 2018. That's our plan for 2019. We have a technology platform. We have a nucleic acid medicine drug discovery technology. And for nucleic acid medicines, we use San Diego research division working on 3 main themes: liver cirrhosis is one. Another is lung fibrosis. For liver cirrhosis, we are licensing out our development through the pharmaceutical company and have completed the interim analysis in Phase II for this liver cirrhosis project.

Beyond 2024, we believe this project will start making profit contribution in stable manner. In January this year, KRAS mutant cancer and we've started clinical trial for KRAS mutant cancer. So now, we are finally entering into oncology area. Last month, we made a news release. Close to patients working together with academia and researchers, we are running a joint research. We are partnering with Osaka International Cancer Institute and we set up the joint research team. And currently, we are running joint research in refractory and orphan cancers to meet the clinical needs. So those are the 3 programs that have been initiated.

Having said so, we are not specializing on medicines, Life Science. So in order to make a sustainable social contribution in Life Science business, we need to establish DDS platform technology. And at the same time, contract the manufacturing service needs to be strongly established. These 2 will be especially important for us. So those will be our focus. And number 2, as I mentioned earlier, we have a main product lineup. And at the same time, we would like to make a better use of intangible values in our actual business. And this slide is giving you one of the examples. Already, this has already been presented. Panel -- TV panel production is now shifted in China. And against such background, how can we run our business. Traditionally, we set up our own factory in China and we run our own factory there. But this time, we are forming an alliance with local company. So we offer our engineering capability. We're going to set up a necessary production line and then we will receive compensation. And this scheme has already been initiated. This is one of the business model, which is very much different from what we had before.

I think you have heard of this story many times already, but let me present this to you once again. So while running our core business successfully, we would like to make better use of our patent to create a new business. This is within the service and management business domain. This is role 2 panel business. Simply, this can make good profit contribution and also has positive impact on our balance sheet. And the customers' production line and our production line will be connected. So our investment can be benefiting our customers. We would like to create this type of model more and more because we believe this will become another important pillar for us. And we have specific projects and initiatives going on. But by using IoT-sensing technology, we are applying a similar concept as well to panel in the area of livestock sector to make business contribution.

This is about creating business by collaboration with incubator. Three years ago in Ibaraki in Osaka, inovas who does a human resource training and R&D. And already, 300 open innovation theme were worked on together with the other external companies. And currently, we have 30 ongoing projects. Incubators are mainly overseas incubators in the area where we are seeing a lot of changes. How can we effectively find out the seed? That's our approach. In Silicon Valley, within our Life Science business category, we are trying to find out the seed trying to match up the identified seed with our existing technology. MBC BioLab, this is an incubator, and we are making investment into this company. And we screen various theme to identify the promising theme in the future. This represent Nitto's new strategy. So I have given you 4 examples just now. But originally, we were positioned as an intermediate materials manufacturer and we were supplying products. But going forward, we would like to expand our business domain.

In coming 100 years, what are we going to focus on? We have identified 3 key areas internally and we have presented them to the market. One is the information interface; two, next-generation mobility; three, Life Science. Those are the 3 focus areas for Nitto and we would like to offer valuable products and services.

Across the entire company, we are working on this theme. I have listed out the main themes. Today, I would like to talk about 2 things. One, plastic optical fiber and also neodymium magnet. So I would like to talk about these 2 projects. As for the plastic optical fiber, September 2017, we made the announcement to enter into this area. We made news release. And we are working together with Keio University. We signed a contract with them and we are promoting academia industry collaboration. Society is changing quite rapidly and the Ministry of Internal Affairs, Communications and NHK are promoting 8K broadcasting. 5G is almost there. And also, we're looking at the autonomous driving and we are now seeing big technology breakthrough in the area of health care. So information is growing. And we would like to play a core role in that area. And now, we are developing plastic optical fiber. In FY 2019, we set up the process line already and we are going to validate, verify what we have produced so that we can start mass production. If you have extra time, please stop by our booth.

Next is neodymium magnet. In 2016, when we had the investors meeting, I presented this -- Takasaki actually presented this initiative. Since then, our company hasn't made any specific announcement around this and you may be wondering what happens to this neodymium magnet. We had some struggle to a certain degree, but now we are generating some result. Initially, we were targeting at the automotive industry, but we have -- we are now signing the NDA with -- and we are trying to validate the asset, the value of the neodymium magnet that we developed in an objective manner. So first, we are going to work on maglev and servomotor. Servomotor, I mean, we can apply this as a common technology compared to the conventional product. By using neodymium magnet, we can increase the property, improve the property. And that was already proven by test. So working together, we would like to sophisticate our products.

Finally, I would like to talk about the convergence that we are aiming to achieve in the future. Of course, we are trying to promote the cross functional collaboration internally. But we alone cannot achieve many things. So we need to work with the external partner companies so that we can enhance our own strengths so that we can offer good value. Currently, we are engaged in technology collaboration with 11 companies and 26 universities.

That is all for myself. Thank you very much.

U
Unknown Executive

That was the technological strategy presentation. Next, I would like to invite Takasaki back to make presentation again.

H
Hideo Takasaki
executive

Now I would like to present our plans for resource investment. As for capital investment, we're planning a record high JPY 75 billion. And this is for gross investments as well as the postponement of completion of the investments projects planned for fiscal 2018 originally due to demand drop. On the other hand, for R&D expenses, JPY 33 billion is planned and this will be used for promoting and enhancing new business development.

Next, let me explain about shareholder return plan. As for the year-end dividend for fiscal 2018, it will be the same as interim dividend at JPY 90 per share and that will be proposed at the general meeting of shareholders scheduled next month. And for this fiscal year 2019, for the annual dividend, we're going to increase by JPY 20 from JPY 180 per share in fiscal 2018 to reach JPY 200 per share. That is the plan. And our dividend policy is to return profits to shareholders in a stable manner. And every year, in the quarter 4, when you have good insights for the expected year-end results, we review the capital policy, including share buyback.

On the other hand, in order to timely respond to rapid technological innovations that we're seeing in electronics industry and the customer needs, proactive resource investments will be essential. Therefore, with regard to the dividends paid to you, shareholders, the financial position profit level and dividend payout ratio will be all considered in a comprehensive manner to make decisions.

Now let me talk about mid- to long-term directions. We announced midterm plan last year [indiscernible] 2020. But due to changes in the environment significantly, we needed to review the assumptions incorporated. The performance targets that were incorporated in this plan will not be changed as the target that we would like to aim for. But around 2021, we will rebuild business foundation to allow us to earn around JPY 100 billion in operating profits stably. To that end, Sanshin-Activities, a niche stop strategies, another Nitto-specific ways of winning, will be pursued so that we can further promote business portfolio reforms and business structuring reforms and that will be the challenge for our management between 2019 and '21 fiscal year.

And in this context, we're going to pursue the following items as management that Nitto aims for. First of all, niche stock strategies and Sanshin-Activities and other Nitto's unique ways of winning will be further deepened together with the creation of new ways of winning such as new business models and royalty income so that we can produce new ways of winning. And in the structural reform, we're going to enhance portfolio management and review low profit businesses. On the other hand, we're going to expand top share products and create new businesses and new products and work on M&As. And third, we're going to establish high profit base. Strong management infrastructure should be built and involve the low cost structure. Together with that, we have to promote capital cost that is well aware of management and ROE target of 10%. And ESG, conscious management, will be pursued in order to enhance the management quality and safety.

Last but not least, I'd like to talk about ESG conscious management. Affirm the 4 perspectives of environment, society, diversity and stakeholders, Nitto Group will work on ESG management. In terms of environment, we're going to contribute to environment through product and manufacturing in society. We're hoping to become a company to support safer and healthier society. And in terms of diversity, we are going to promote management to make use of diversity of employers -- employees, rather, in the world so that we can remain a company that will continue to provide next wonders to all the stakeholders in the group. The contribution to the short-term business performance will be limited. But in order for Nitto Group to realize corporate growth sustainably, we are hoping to continue to work on these items.

Thank you very much for your attention once again. And I hope through this presentation, analysts and institutional investors would find it -- find their understanding about Nitto deepened. Thank you very much for your attention.

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

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2019
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