Nikon Corp

TSE:7731

Earnings Call Transcript 2020-Q1

[Masashi Oka, executive]

Thank you indeed for your precious time for our financial results for the first quarter of the year ending March 31, 2020. This is Oka, the Senior Executive Vice President and CFO of Nikon Corporation.

First, do allow me to explain the overview. In the first quarter, revenue and the operating profit dropped JPY 24 billion and JPY 9.7 billion, respectively, year-on-year due to the reduced sales volume in entry and mid DSLR cameras and FPD lithography systems.

Operating profit resulted in JPY 9.3 billion, down 51% year-on-year, yet it is still proceeding almost accordingly to our full year forecast. As has been already reported, we had a buyback in operation of 6,667,200 shares for the value of JPY 10 billion, which accounted for about 1.7% of the outstanding shares from May 10 to June 20, 2019.

As for the first half and the full year forecast, and thanks to the actual performance in Q1 almost on the plan, we have not changed our forecast from the previous time for revenue, operating profit and profit attributable to owners of the parent. ROE is expected to be 7%. Annual dividend is JPY 60 and interim dividend, JPY 30, unchanged from the previous forecast based on our new policy for shareholders' return.

We are starting a share buyback. The average number of the stocks is expected to decline, so we plan to reduce the expected payout ratio by 0.5 points to 56.1%.

Next, I will explain the first quarter numbers. Allow me first to explain the consolidated revenue and profit. The actual numbers for the first quarter are shown in the column in the yellow box. Revenue was JPY 142.9 billion, down JPY 24 billion. Operating profit was JPY 9.3 billion, down JPY 9.7 billion year-on-year, respectively. Profit attributable to owners of the parent was JPY 8.2 billion, down JPY 8.1 billion. Free cash flow was negative JPY 700 million, down JPY 28.3 billion year-on-year.

Note, we had a patent litigation settlement with ASML, besides the profit decline, we had a reduction in the advances received as well as the changes in the payment terms for the domestic partner companies and others.

As for exchange rates, we had a JPY 1 depreciation to the U.S. dollar and JPY 6 appreciation to euro in the first quarter. As such, the impact on revenue was negative JPY 1.9 billion, and its impact on operating profit was negative JPY 900 million year-on-year.

This shows the numbers by segment. I will give you details of each segment in the following pages. Corporate profit and loss not attributable to any reportable segments improved by JPY 3.6 billion, but it does include the gain from sales of the unused land of JPY 3.8 billion.

First, Imaging Products Business. Revenue was JPY 67.3 billion, down JPY 11.8 billion. Operating profit was JPY 3.5 billion, down JPY 8.9 billion. Due to the declining markets, the units sold declined in all the products categories. Digital camera and interchangeable lens type went down 21% to 450,000 units year-on-year. Interchangeable lenses were down 17% to 740,000 units and compacted DSC was down 37% to 270,000 units.

In the segment of digital and camera interchangeable lens type, our mirrorless camera launched last year made a contribution and unit sales of the high-end full-frame camera increased mainly in Europe and the United States. However, entry and mid-DSLR cameras declined, particularly in China and Asia. Interchangeable lens, mirrorless and camera lenses increased driven by the 2 new products launched in April. However, the growth did not cover the loss in the DSLR lenses and units sold.

In the previous fiscal year [ handycam 850 ] and high-end DSLR camera made a great contribution to the revenue. However, this year, the revenue declined and we had to unveil with the high initial development costs for new mirrorless camera lenses, pushing down both the revenue and the profit greatly year-on-year.

The mirrorless cameras and the dedicated lenses we launched in September last year are contributing firmly to the revenue, but the market started shrinking, starting from the latter half of the previous year and the situation has been accelerating. And its impact on our sales volume of DSLR, the body lenses, is continuing, and I am afraid that this tough situation is going to continue for some time to come in second quarter and onwards.

Next our Precision Equipment Business. Revenue was JPY 50.9 billion, down JPY 8.1 billion year-on-year. Operating profit was JPY 10.1 billion, down JPY 4 billion. FPD lithography systems, Gen 5 and Gen 6 went down by 1 to 2 units. Gen 8, down now in 9 units to 3 units and the Gen 10.5 was 4, same as the last [ year. ] Overall, the units sold went down 10 becoming 9 units. For FPD lithography business, revenue and profit decreased due to a substantial reduction in Gen 8 sales as Chinese manufacturers investment for TV panels and -- have shifted from Gen 8 to Gen 10.5, so both revenue and profit declined as we had forecasted.

On the other hand, semiconductor lithography systems had 2 more units in ArF immersion systems, resulting in 6 units in the new sales, up 3 units. So semiconductor equipments business grew both in revenue and profit year-on-year, offsetting partially in the sum of the negative profit of FPD systems.

Healthcare business. Revenue was JPY 12.9 billion, down JPY 400 million. Operating profit was negative JPY 1.9 billion, showing an improvement of JPY 200 million. Sales of retinal diagnostic imaging systems by the U.K. Optos increased, particularly in the United States, and we achieved the record high sales. In the meantime, overall revenue resulted in a slight decrease as sales of biological microscope declined in other regions, except for the Americas. All in all, deficit was suppressed by improving the biological microscope cost and by focusing investment themes of the long-term growth areas. As for the themes we selected while managing the risk [indiscernible], we are increasing resources appropriately.

Here I'd like to be a bit more specific for your further information. We established our centers in the United States [ for ] pharmaceuticals and biotechnological ventures in order to support new drug development research activities. We are also expanding our business and the capital partnership with Healios in the form of convertible bonds in order to acquire wider business opportunities in the cell production area.

Lastly, I'd like to explain the Industrial Metrology and Others. Revenue was JPY 11.7 billion, down JPY 3.7 billion. Operating profit was JPY 400 million, down JPY 700 million. Revenue was adversely affected by the delayed investment by our customers in industrial metrology and other businesses, but we are able to compensate some of the negative impact in profit by controlling our expenses. Others, namely in our custom products, glasses and [ importers ], had a declines in revenue and profit affected by the postponed CapEx investments by our customers, just like Industrial Metrology.

Next, I will explain our forecast for the year ending March 31, 2020. First, our forecast for the corporation. Please look at those numbers in the yellow box. In light of the actual numbers for the first quarter being within our plan, we have not changed our forecast from the last time. Revenue being JPY 670 billion, down JPY 38.6 billion or 5% year-on-year. Operating profit was JPY 52 billion down JPY 30.6 billion or down 37%. Profit attributable to owners of the parent was JPY 42 billion, down JPY 24.5 billion or down 37% year-on-year.

Having covered these points -- and of course, there are a lot of U.S.-China trade conflicts going on and also on exports control or efforts against South Korea and concerns for the Middle East [indiscernible] and Brexit and consumption tax hike in Japan, slowing down of the global economies and others. Those uncertainties and geopolitical risk factors have been with us for sure. Furthermore, the environment surrounding Imaging Products business has become much tougher since July. So we are fully aware that we need to be more conscious toward the future outlook. At any rate, we will try to fully understand the possible concerns as soon as possible, so we can be truly proactive vis-à-vis those issues.

Our FX assumptions in the second quarter and onwards have not changed JPY 105 to $1 and JPY 125 to EUR 1. As for the full year currencies and assumption based on the actual currencies in the first quarter, JPY 106 to $1 and JPY 125 to EUR 1. Year-on-year basis, the yen is JPY 5 stronger to the U.S. dollar and JPY 3 stronger to EUR 1 from the previous year. FX impact on revenue is negative JPY 15.4 billion, and its impact on operating profit is about JPY 3.3 billion year-on-year basis.

FX sensitivity with the exchange rate fluctuating JPY 1 is shown on Page 31 in the reference data. For revenue side, the financial impact is about JPY 1.9 billion in the U.S. dollar and JPY 500 million in euro. As for operating profit, JPY 300 million in dollar and JPY 200 million in euro.

Next, the forecast by segment. No changes from the previous time. Assumptions for the forecast for each segment will be explained in the following pages.

First, Imaging Products Business. Revenue, no change, JPY 260 billion, down JPY 36.1 billion year-on-year. Unit forecast by digital camera and categories, digital camera interchangeable lens type down 22%. Interchangeable lenses, down 18%. Compact DSC, down 37%.

Operating profit is forecasted to be JPY 12 billion, down JPY 10 billion. While making further efforts to reduce an expense and improve efficiency of R&D activities so we can to compensate for the loss in profit caused by the decline in revenue, but I'm afraid we expect to have a profit deterioration in 2 years in a row due to the increased development cost to further expand product portfolio such as lenses and for mirrorless cameras.

Although efforts will be continuously made to focus on high value-added products, expanding sales of mirrorless cameras and Z mount lenses, it is most likely that the poor market conditions appear to be continuing since July. And we simply cannot avoid a tougher competition, particularly in our core full-frame mirrorless cameras segment. So we will revisit our overall business strategy to secure our profitability even when we are faced with shrinking market conditions. We should be more proactive and we shall implement our new ideas after the next earnings call.

Next, Precision Equipment Business. Revenue forecast has not changed. JPY 270 billion, down JPY 4.5 billion year-on-year. FPD lithography systems units in the forecast has not changed. 37 units, down 33.

Gen 5 and the Gen 6 [ recommends ] 5 units, down 11; Gen 7 and the Gen 8, 10 units, down 27; Gen 10.5, expected to be 22 units, up 5 units. Forecast for the units including our used equipment year-on-year basis, up 4 to 45 units. Of that new equipment are expected to grow 10 to 31 units, no change.

ArF immersion, up 5 to 12 units. ArF [indiscernible] is expected to increase 2 to 13 units. Operating profit unchanged, JPY 56 billion, down JPY 25.7 billion year-on-year basis. FPD and the lithography systems are expected to decline in units greatly, but we intend to strengthen our resources into materials processing business, which is one of the corner themes for the new midterm management plan.

In the previous fiscal year, we had onetime profit from the litigation settlement as much as about JPY 15 billion. So excluding that, we forecast our profit to be down by about JPY 10.7 billion year-on-year.

Next is the Healthcare Business. Revenue forecast is JPY 65 billion, down JPY 400 million year-on-year, no change. Both biological microscopes and the retinal diagnosis imaging systems are performing steadily. Yet doing a flat revenue is expected due to the negative FX impact. More focused investment is conducted in the regenerative medicine and ophthalmological diagnosis fields, so we aim to have the deficit to be JPY 1 billion, and we plan to be profitable in the next fiscal year.

Industrial Metrology business and Others. Revenue forecast unchanged. JPY 75 billion, up JPY 2.5 billion year-on-year basis. In the Industrial, Metrology business, we intended to increase our market share in X-ray inspection systems and non-contact 3D metrology systems, which are highly appreciated among our customers. Operating profit forecast, JPY 6 billion, down JPY 900 million. We had JPY 600 million for the structural reform. So if we are to exclude that, it is going to be down by JPY 1.5 billion.

We received an order for mass production of lidar sensors from Velodyne in the U.S. where we invested $25 million. We plan to start the production in the second half. So we do expect this segment is going to make its contributions to our profit starting from 2 fiscals or later years.

As I have mentioned, lastly, the business environment surrounding Nikon has been tough, and we are fully aware of this fact. And there is an increased concern about our Imaging Products business. Yes, we are fully aware of that. We decided not to change our full year forecast because our first quarter outcome was almost within the plan. That said though, we are fully -- and are conscious that second quarter and onward business outlook is going to have more uncertainties. So we -- management has to tighten our belt, with a very strong sense of crisis.

In order to incorporate such a tough business environment, we will have a much deeper decisions to discuss how to address these issues. Specifically, we will address to perform overall cost structure as fully as possible in order to secure our profitability. We will identify additional measures to drastically address Imaging business as well as to strengthen our new revenue streams, such as Materials Processing.

I plan to share our specific journey to go for those improved [indiscernible] in the next earnings brief for the first half.

With this, I conclude my explanation. Thank you for your kind attention.