Nikon Corp

TSE:7731

Earnings Call Transcript 2021-Q1

[Toshikazu Umatate, executive]

This is Umatate, President and CEO. I do appreciate your precious time despite your busy schedule to attend our financial briefing.

In order to prevent a further surge of COVID-19, following the last time, we are again holding this session today online. I know it is not necessarily the best format for you, but I hope you understand this and collaborate with us.

Today, we would like to report to you the financial results for the first quarter of the year ending March 31, 2021. We also would like to report to you our forecast for full fiscal year ending March 31, 2021.

Last time, this was treated as undecided. We are also unhappy to report to you our forecast for dividend. Details will be explained by Mr. Tokunari, CFO, later. So do allow me in the outset to share just briefly the outline of the report.

First, full year forecast. It is quite regrettable to report to you that operating profit forecast being a loss of JPY 75 billion. Profit forecast attributable to owners of the parent being a loss of JPY 50 billion. As for dividend per share, it is JPY 20 for the full year, JPY 10 for the first and second half, respectively.

Yes. It is a fact. In the background is the COVID-19 and pandemic, which we have never experienced before. But I would like to offer our sincere apology to all the in-house stakeholders, including shareholders, investors and customers. Because we, executives, are clearly responsible for this forecast since it is us who are at the helm of the business management. In order to clarify who is responsible for this, we decided not to pay bonus to the directors and officers and reduce their monthly compensation.

Going forward, we will make further efforts to advance the structural reform in Imaging Products Business, which is the most urgent area in order for us to become profitable again in the next fiscal year. We will update to you on our recovery journey as soon as possible.

Now I will have Tokunari to go into details.

[Muneaki Tokunari, executive]

This is Tokunari, CFO. Now allow me to explain the results for the first quarter as well as our forecast for the full fiscal year.

Slide 3 shows the summary for the first quarter of the year ending March 31, 2021. Revenue was JPY 64.7 billion, down JPY 78.2 billion year-on-year or 55%. Yes, it is a big drop.

Operating profit was a loss of JPY 20.5 billion, down JPY 29.8 billion year-on-year. On the quarterly basis, this is the largest operating loss in our history. The COVID-19 impact was so enormous, forcing us to have declines in revenue and operating loss in all the segments.

Please give me Slide 4. The first line from the top. Profit attributable to owners of the parent was JPY 13.5 billion, down JPY 21.7 billion year-on-year. Free cash flow became negative JPY 18.2 billion due to a big decline in profit.

Exchange rates. Yen appreciated both against the dollar and euro year-on-year. Its impact on revenue was JPY 1.7 billion, and its impact on operating profit was JPY 300 million, both had negative impact.

Slide 5 is a summary sheet of the segment-specific performance, which I will cover after this slide. So allow me to skip this page.

Slide 6 shows the first segment, Imaging Products Business. Revenue was JPY 25.1 billion, down JPY 42.2 billion year-on-year.

With the markets continue to shrink, this segment was doubly affected by COVID-19. Sales in China recently recovered to the last fiscal year's level. Other regions hit the bottom in April and are trying to recover gradually. But all the categories, including digital camera, interchangeable lens type show big decline from the previous year as shown on the slide. Though we made our efforts to control sales expense and others, but the final operating profit ended up with a loss of JPY 8.1 billion.

Slide 7 is Precision Equipment Business. Revenue was JPY 19.6 billion, a big decline of JPY 32.2 billion year-on-year. FPD Lithography System revenue was 0 because we simply could not resume installations locally. During the 3 months in the quarter, we sold nothing because our Japanese engineers simply could not go overseas due to the restrictions in travel.

In the Semiconductor Lithography Systems Business, some of the systems were installed in the previous year because some customers asked us to do so. Furthermore, due to the restricted overseas travel, we sold only 2 new systems, way down from the previous year. All in all, operating profit for the entire Precision Equipment Business became a loss of JPY 5.1 billion.

Please look at Slide 8. Healthcare Business was JPY 10.3 billion in revenue, down JPY 2.6 billion year-on-year. And operating profit became a loss of JPY 2.4 billion. With the lockdown carried out in the major cities overseas, we suffered from declines in orders starting from February, which pushed down both revenue and profit in the first quarter. The number of biological microscopes sold went down particularly in the Americas. Right now, the diagnostic imaging systems were affected due to the slow recovery of the major markets of the U.S. and Europe.

Slide 9 shows Industrial Metrology and Others. This segment consists of Industrial Metrology Business and Digital Solutions Business, Custom Products Business and Glass Business. Revenue here was JPY 9.5 billion, down JPY 1.3 billion year-on-year. Operating profit was a loss of JPY 400 million year-on-year.

Even before COVID-19, we had expected our customers in China and other Asian countries would restrict their CapEx, particularly in Industrial Metrology. But with the surge of coronavirus, orders were postponed and our sales activities have been restricted and deliveries have been postponed. All in all, everything pushed down revenue and profit.

Next, I will explain the forecast for the full year ending March 31, 2021. Please look at Slide 11. This shows the highlights of the forecast for the full year.

So far, the forecast was undecided. Yes, the COVID pandemic is still going on, and we are still faced with uncertainties as for the future cost. But we believe information-sharing with investors is critical. So this time, we decided to announce our outlook based upon the information that we can gather with our reasonable assumptions.

That said, our revenue for the fiscal year is forecasted to be JPY 420 billion, down JPY 171 billion year-on-year. By business, as shown here, Imaging Products Business revenue is down 42% year-on-year. Precision Equipment Business is forecasted to be down 28% or higher. Operating profit is down JPY 81.7 billion year-on-year, showing a loss of JPY 75 billion.

The loss for operating profit for our full year is the first time we had since the financial crisis we had back in the year ended March 31, 2010, indicating the biggest loss in our history. By segment, Imaging Products Business is forecasted to be a loss of JPY 40 billion. Precision Equipment Business, which has been greatly affected by the restricted overseas travel, is forecasted to be a surplus of JPY 10 billion.

For your information, this forecast does include a risk buffer of JPY 20 billion for our preparation for the further performance fluctuation risk as well as additional structural reforms are being ready for a possible evaluation loss in fixed assets and inventory.

Though we are faced with a tough time, but our equity capital is expected to remain at 50% or higher. We have secured more than JPY 400 billion in the liquidity on hand for working capital, a total of cash and deposit plus commitment lines of credit and others. With this financial soundness, we intend to overcome the ongoing tough situations we are now faced with.

But here, I would very much like to offer our sincere apology to all our stakeholders, including shareholders, for the big drop in our forecast for revenue and loss and profit.

As for shareholders' return, we would like to make the full year dividend to be JPY 20 per share. We announced our policy of total return ratio of 40% or higher cumulative period of medium-term management plan for the year ending March 31, 2022. With this in mind, in light of the future profit plans as well as liquidity on hand and investment capabilities for growth from next fiscal year onwards, we intend to maintain the interim dividend of JPY 10 or JPY 20 for a full year.

At present, Umatate mentioned in the outset, was the assumed loss for the current fiscal year. In order to clarify management responsibility, we will reduce compensation for directors and officers to, be exact, chairman and president and other executive officers effective, in September this year for the foreseeable future. The monthly compensation will be reduced depending upon the position, up to 20% in maximum. And there will be no bonus to be paid to them for the year ending March 31, 2021.

Slide 12. The second line from the top was the assumed loss of JPY 75 billion in operating profit then a profit attributable to owners of the parent. The first line from the top would be a loss of JPY 50 billion. This final loss number is also the largest in our history.

As for the exchange rate, JPY 105 to the U.S. dollar and JPY 115 to the euro. Based on the actual rates in the first quarter, for the full year, JPY 106 to the dollar and JPY 116 to the euro.

Please refer to Slide 13. Here, I will explain the breakdown of the operating loss of JPY 75 billion. Of the JPY 75 billion, JPY 5 billion is the Imaging Equipment Business' restructuring cost, addition already made. JPY 20 billion is for risk buffer, such as future risk factors, additional structural reform costs as well as a possible loss and evaluation in fixed assets and inventory.

Excluding the total of JPY 25 billion of those special factors, the real or the substantial operating loss would be JPY 50 billion. Of this JPY 50 billion, JPY 20.2 billion has already been booked in the first quarter.

As for the second quarter, since July, overseas travel for FPD Lithography and other Precision Equipment Business resumed one after another, but sales recovery is still weak. And excluding special factors, operating loss is expected to be JPY 18.8 billion.

However, moving into the second half, we do believe the loss number will become rapidly smaller because we should be able to grow our revenue by having more installations at FPD Lithography and others in Precision Equipment Business gradually. Unfortunately, this fiscal year will be stuck with COVID-19 impact, and its total impact is estimated to be JPY 65 billion in operating profit. We are improving our current business process so that we can secure our revenue opportunities as firmly as possible by delivering and installing our products as surely as possible, even though we are still faced with the ongoing restrictions in overseas travel and movement. With this done, we are hoping to generate profit in a more stable fashion from next fiscal year and onwards.

Slide 14 is the financial highlights by segment. Since I will cover them in the next slide onward, so allow me to skip this page.

Slide 15. Here, I would like to start with Imaging Products Business. Revenue forecast for the business for the full year is JPY 130 billion, down JPY 95.8 billion year-on-year. COVID-19 impact hit the bottom in the first quarter. Though recently, we're not seeing some recovery, but still its impact making the marketplaces shrink so great.

Our digital camera interchangeable lens type and interchangeable lens would go down by 51% in sales volume, and compact digital camera would be down by 70%. Operating profit would go down by JPY 22.9 billion year-on-year, and we forecast a loss of JPY 40 billion. Full year operating loss in Imaging Products Business is going to be 2 years in a row.

Imaging Products Business announced its structural reform in November last year, and it is progressing firmly against the target of JPY 50 billion reduction in business costs compared to the year ending March 2019. During the midterm management plan, we executed the reduction as much as JPY 25 billion in the previous fiscal year, 1/2 of the target.

In order to respond to the much faster pace of the market shrinkage, we increased the cost reduction target from JPY 50 billion to JPY 60 billion. We will reduce cost as much as JPY 15 billion in the current fiscal year. Restructuring relevant expense was JPY 2.7 billion in the previous fiscal year. But in the current fiscal year, the number plan is JPY 5 billion particularly in the second half.

Imaging Product Business is now on its way to expand its new product lineup in order to make up for the delay we suffered in the mirrorless cameras market. We plan to make initial investment in the current fiscal year to develop and mass produce mirrorless lens cameras and their dedicated lenses.

Yes. We admit a tough situation continues in terms of revenue, but we are committed to launch the types of products which we will meet with the needs of professionals and hobbyists as shortly as possible. We should be having a full line up next fiscal year. We do hope we can secure a solid and firm share in the so-called bedrock market of professionals and hobbyists.

The latest sales number clearly indicates we are firmly increasing our sales ratio in midrange to high-end cameras with lenses targeting professionals and hobbyists. We will further continue to make a shift toward high value-added products as shortly as possible. We'll accelerate our structural reform and aim to make a profit in our Imaging Products Business as soon as possible.

Slide 16 shows the Precision Equipment Business. Revenue forecast is JPY 175 billion, down JPY 70 billion year-on-year. In FPD, CapEx for small and mid-sized panels are recovering on the customer side. CapEx for large panels remains firm.

We know there is a solid demand. Since February this year, the Japanese engineers were not able to go overseas. But thanks to the help and collaboration from our customers and other people, our engineers are resuming their travel overseas since July.

However, our engineers have to be compliant with 2-week isolation rule for observation upon arriving at foreign countries as well as upon returning to Japan, respectively. With this restriction still inflected upon them, the total number of installation for this year would be 18 systems as of now.

We still have a firm need for FPD Lithography. There are about 40 or more systems awaiting for the local installation as well as the orders we have already received and in the process of manufacturing. Those installations we have not completed this fiscal year will be a part of the revenue for the next and future years.

As for Semiconductor Lithography Systems, our major customer had completed a full cycle of CapEx. COVID-19 caused delay in system delivery or delay in orders to be received. With all of these situations, we forecast the total sales of the new products would be 19 units, down 15 units year-on-year.

With all these cases in place, operating profit for the entire Precision Equipment Business would be up to JPY 10 billion or down JPY 38 billion year-on-year. May I remind you that for this particular business, we need to have R&D efforts on the continuing basis. So we keep an eye on the growth areas for us, and we are increasing our R&D spend for these areas. This is one of the reasons why we are having much more decline in operating profit compared with the decline in revenue.

Slide 17 shows Healthcare Business. Revenue forecast is JPY 57 billion, down JPY 5 billion year-on-year. Both biological microscopes and retinal diagnostics imaging systems are expected to recover in the second half, thanks to the resumed sales activities, but it will not make up for the loss we had in the first half.

The contract cell manufacturing business is moving forward as planned in terms of the facility extension and the progress on the collaborated projects with our customers. With this, revenue in regenerative medicine is expected to grow year-on-year.

Though we originally aimed at operating profit in the current fiscal year, but we had a big impact from the deceleration in the first half. With this, unfortunately, we expect to have a loss of JPY 5 billion. Though it will be 1 year later, we would like to aim at profit in the next fiscal year.

Though it is not mentioned in the materials, the U.S. company, Berkeley Lights, where we made investment, had an IPO in NASDAQ the other day. It is a start-up company specializing in biopharmaceuticals, utilizing its unique OptoSelect technology and genome analysis and cell treatment products and services. Nikon has its exclusive agreement here in Japan to sell Berkeley Lights' Beacon, which is a cell sorting platform.

With it, understand how we plan to book JPY 5.8 billion as the gain on valuation of investment securities in the second quarter. This profit is going to be included in the consolidated financial profit. So it will not affect our operating profit, which you see here, but it should make its contribution to profit before income taxes as well as to profit attributable to owners of the parent.

Slide 18 shows Industrial Metrology Business and Others. Revenue forecast is JPY 58 billion. Despite COVID-19, we are expecting to have the same revenue level as the previous year.

In this business, electronics components and automotive and CapEx recovery is rather slow, so we expect to have a big decline in revenue. On the other hand, in Others, we expect to grow in revenue in the Digital Solutions Business, including precision optical components and others.

Now we are getting results from the early investments we made so far. Operating profit forecast is 0 breakeven.

That's all for me. Though the situation surrounding us continues to be tough and for some time to come, but we will carry out a variety of initiatives for more stable profit, making -- while leveraging the JPY 20 billion we booked as risk buffer.

At the same time, we should make an efficient investment for future growth, so that we can put Nikon back on to the growth track again. I would like to ask for your support and understanding for this.

Thank you indeed for your kind attention.