Nikon Corp

TSE:7731

Earnings Call Transcript 2023-Q2

[Toshikazu Umatate, executive]

My name is Toshikazu Umatate, President and CEO of Nikon Corporation. Thank you very much for taking time out of your busy schedule to attend our financial results briefing today.

I will explain our current business situation and specific progress in our growth strategy. In April this year, we presented our medium-term management plan, which includes a vision of what we will be in 2025. Thanks to your support, we believe we are off to a good start overall.

The medium-term management plan defines the Imaging Products Business and the Precision Equipment Business as our main businesses and sets forth a policy to stabilize earnings. Of these, the Imaging Products Business is expected to generate higher-than-expected earnings this year, thanks to the support of customers for mirrorless cameras and other products.

The Precision Equipment Business is expected to be weaker than expected due to the slowdown in the semiconductor and FPD markets and the postponement of the installation of a lithography system. But we believe that this business can be expected to be a stable source of earnings in the mid- to long term as we move towards a digital society.

On the other hand, the three businesses defined as strategic businesses in the midterm management plan, Healthcare, Components and digital manufacturing are all performing well. The Healthcare Business is expected to achieve record high sales and profits this fiscal year. And the Components Business is also performing well, especially in semiconductor-related component parts. In addition, significant progress was made in the digital manufacturing business during the first half of this fiscal year. Specifically, in September to October, we announced investments and acquisitions in three companies, including the proposed acquisition of SLM Solutions Group AG, a German metal additive manufacturing company. All three companies are engaged in businesses related to additive processing using laser beams.

SLM is one of the world's leading metal additive manufacturers having delivered more than 750 machines to over 150 customers in the aerospace industry, including Airbus and Rolls-Royce and the automotive industry, including Porsche and BMW.

Hybrid Manufacturing Technologies Global, Inc. is a U.S.-based manufacturer, specializing in detachable heads for machine tools. The company develops and manufactures heads that can perform additive and removable processing as well as metrology and inspection in a single device.

Optisys Inc. designs and manufactures high-speed communication antennas for aerospace applications using metal additive manufacturing.

Nikon hopes to bring innovation to the world of manufacturing and to create a new ecosystem by collaborating with these investees in the area of material processing in the digital manufacturing business.

We would like to report on the progress of the SLM transaction, in which we plan to acquire SLM by injecting a large amount of funds equivalent to JPY 84 billion. As stated in the material, the TOB is progressing smoothly in accordance with the original schedule and the acceptance period ended on November 1 with 86.17% of the shares capital secured on a fully diluted basis. We are currently in an additional acceptance period, after which we plan to complete the public takeover offer during the second half of this fiscal year, subject to the approval of the relevant authorities in each country.

Furthermore, in the digital manufacturing business, in the area of riblet processing, Nikon has also achieved cooperation with a Japanese company in the first half of this fiscal year. Specifically, ANA or All Nippon Airways, started operation of ANA Green Jet in October. And Nikon started collecting data by test fitting films with a shark skin processing on the ANA Green Jet. Biomimetics is a new technology, this riblet processing. This could be theoretically improve aircraft fuel efficiency by 2% and reduce carbon dioxide emissions. We will continue to collaborate with other companies on the further usage of riblet processing, including for applications other than aircraft.

As seen in these examples, Nikon intends to promote its contribution to sustainability through its core technologies and its business strategy as an integrated whole.

Furthermore, as part of our human capital management, we have revised our wage system, including an increase of up to 20% of annual salary for the parent company employees, effected from October of this year. Our policy is to reward our employees' activities more than ever and to continue to secure a diverse workforce with a high level of expertise. In this way, Nikon will steadily implement the policies set forth in our medium-term management plan to achieve growth. I would like to ask for your continued understanding and support.

Now, CFO, Tokunari, will explain the contents of the interim financial results and the outlook for the full year.

[Muneaki Tokunari, executive]

Thank you very much for your attention. My name is Muneaki Tokunari, Executive Vice President and CFO. I would like to take this opportunity to welcome investors and analysts.

I would like to explain our financial results for the first half of the fiscal year and the outlook for the full year. First, let me give you the key points of the first half results. Revenue was JPY 288.3 billion, operating profit was JPY 24.4 billion and profit attributable to owners of parent was JPY 18.8 billion. Compared to the first half of the previous year, revenue increased by JPY 15.3 billion. Thanks in part to the effect of a weaker yen, revenue increased in all segments, except the Precision Equipment Business. On the other hand, operating profit decreased by JPY 7.7 billion. This was mainly due to a significant decrease in operating profit in the Precision Equipment Business, reflecting a decline in unit sales of highly profitable FPD Lithography System.

Compared to the previous forecast announced in August, revenue increased by JPY 13.3 billion, operating profit by JPY 1.4 billion and profit attributable to the owner of parent by JPY 1.8 billion. The increase in operating profit compared to the previous forecast is due to the fact that all segments, except for the Precision Equipment Business, exceeded the plan, despite a downturn in the Precision Equipment Business and an increase in expenses related to the SLM acquisition due in part to the fact of yen depreciation.

In the yellow box on Slide 10, we list the main figures on a consolidated basis for the first half of the year. Free cash flow was negative but this is due to factors, including the acquisition of SLM shares prior to the TOB and a buildup of inventories in preparation for sales in second half and beyond, as described in the text at the bottom of the slide.

Slide 11 shows the first half results by segment. In the yellow box, the upper row for each segment shows the revenue and the lower row shows the operating profit. Compared to the previous year, the Imaging Products, Healthcare, Components and Industrial Metrology and Others segments achieved double-digit revenue and profit growth while the Precision Equipment Business saw significant declines in both revenue and profit. Corporate P/L non-attributable to any reportable segments decreased by JPY 8.4 billion year-on-year, mainly due to the absence of the gain on sale of land recorded in the previous year and expenses related to the acquisition of SLM.

Slide 12 shows consolidated revenue and profit and loss for 3 months from July to September, showing an increase in sales and decrease in profit compared to the same period last year.

I will now explain the first half results by business segment, starting with the Imaging Products Business. First, in the Imaging Products Business, revenue increased JPY 25.3 billion year-on-year to JPY 114.5 billion, and operating profit rose JPY 9.7 billion to JPY 22.2 billion. In addition to the effect of yen depreciation, the shift to mid- to high-end models for pro hobbyists continued, resulting in an increase in average sales price per unit. As a result, revenue increased a substantial 28% year-on-year and the operating profit margin was nearly 20%.

Slide 14 shows the Precision Equipment Business. Revenue decreased JPY 35.9 billion year-on-year to JPY 83.3 billion. Operating profit was JPY 6.2 billion, a decrease of JPY 21.3 billion year-on-year. 13 units were sold in the FPD lithography business in this first half, but this represents a decrease in both revenue and profit compared to the first half of the previous year when 30 units were sold after installation, which have been delayed by COVID-19 preceded all at once. In the semiconductor lithography business, revenue and profits increased year-on-year due to an increase in the number of new units sold.

Slide 15 in the Healthcare Business. Sales of biological microscopes and retinal diagnostic imaging systems were strong, especially in North America, and the effects of a weaker yen also contributed to a significant year-on-year increase in both revenue and profit with revenue of JPY 46.6 billion and operating profit of JPY 3.6 billion.

Slide 16 shows the results from the Components Business. Revenue was JPY 26 billion, and operating profit was JPY 9.8 billion. Both revenue and operating profit were much higher than the previous year due to increased sales of EUV-related components and optical parts and components for semiconductor-related products.

Slide 17 shows the results for Industrial Metrology and Others. In the Industrial Metrology business, sales of metrological instruments such as video measuring system and industrial microscopy were strong, resulting in a year-on-year increase in both sales and profits. In addition, operating profit improved significantly due to higher utilization rates and production subsidiaries included in others. As a result, the segment reported revenue of JPY 17.6 billion and operating profit of JPY 1.5 billion year-on-year increase in both revenue and profit and returned to profitability after last year's deficit.

Next, I will explain our outlook for the full year. Please refer to Slide 19. I will first explain the exchange rate assumptions at the bottom of the slide. We had previously assumed JPY 120 to the dollar and JPY 130 to the euro but in consideration of recent fluctuations, we have changed the exchange rate assumptions to JPY 135 to the dollar and JPY 135 to the euro for the second half of the fiscal year. Combined with the first half results, the full year exchange rate will be JPY 135 to the dollar and JPY 137 to the euro.

As stated at the top of the material, due in part to the effect of the change in exchange rate assumptions, we have revised our full year revenue forecast upward by JPY 20 billion from the previous forecast to JPY 645 billion. Operating profit is JPY 55 billion, unchanged from the previous forecast. Profit attributable to owners of parent is expected to be JPY 42 billion, unchanged from the previous forecast. ROE is expected to be 6.9%, although not stated in the slide. As for shareholder returns, the annual dividend remains unchanged from the previous forecast at JPY 40 per share for the full year and JPY 20 per share for the interim dividend. The dividend payout ratio is 34.6%. Regarding share buybacks, we have repurchased 10.65 million shares for JPY 16.1 billion by the end of October. We will continue to repurchase shares up to JPY 30 billion through March 24, 2023.

The full year operating profit forecast of JPY 55 billion remains unchanged between the previous and current announcements, but there is a composition change in the forecast. I will explain this in the figure on Slide 20. In this figure, the total JPY 5.5 billion of FX impact, including the operating profit of each business is shown on the right side of the slide. The left side of the slide shows the estimated full year operating profit forecast for each business, excluding the FX impact compared to the previous forecast as of August 4, 2022.

As you can see, while the three businesses of Imaging Products, Healthcare and Components are expected to exceed the previous forecast, the Precision Equipment Business has been revised downwards significantly, mainly due to the postponement of the installation of some FPD and semiconductor lithography system to next year. In addition, others includes approximately JPY 2 billion of acquisition-related expenses for SLM, which were not included in the previous forecast. As a result of these positive negative factors in each business and headquarter-related expenses, and taking into account the impact of FX, the forecast for operating profit of JPY 55 billion has been left unchanged.

Please see Slide 21. This slide lists the main figures of the full year forecast, including the comparison with the previous forecast and the year-on-year comparison. An overview had already been given to you.

Slide 22 shows a list of full year forecast by segment, along with the comparisons to the previous year and also to the previous forecast. I will explain the details for each segment later.

First, let us look at the Imaging Products Business. Revenue is revised upward by JPY 15 billion from the previous forecast to JPY 230 billion, reflecting the results of the first half of the year and changes in FX rate assumptions. Compared to the previous year, we expect a significant increase in revenue of JPY 51.8 billion. While the market is recovering, we will continue our strategy of focusing on mid- to high-end cameras with an emphasis on profitability and maintained the previous forecast of 700,000 units in terms of sales volume. Although the planned sales volume remains unchanged, ASP are steadily improving, especially for mirrorless cameras and interchangeable lenses and revenue is expected to increase from the August forecast.

Operating profit is expected to be JPY 33 billion, JPY 6 billion higher than the previous forecast due to the increase in sales. Compared to the previous year, operating profit is expected to increase by JPY 14 billion. In the second half of the fiscal year, we expect expenses for sales enhancement and R&D to increase. But we believe that the increase in profits due to the sales growth will outweigh these expenses.

Slide 24 shows the Precision Equipment Business. Revenue are projected at JPY 230 billion, a JPY 10 billion reduction from the previous forecast. Compared to the previous year, it is expected to increase by JPY 18.8 billion. The FPD Lithography System market is expected to shrink from the previous year as well as from the previous forecast to 80 units due to a slowdown in investment and installation delays caused by the decline in panel prices. As for Nikon, due to the delay in parts procurement, the completion of installation of one large panel system will be postponed to the next fiscal year, and the annual sales volume is expected to be 30 units. There are concerns that the FPD market will remain sluggish into the next fiscal year.

In the area of semiconductor lithography business, some customers continue to experience delays in preparing for acceptance of installations due to ongoing labor shortages, supply chain disruptions and material shortages. As a result, installation of total four units, two new and two used units, is expected to be postponed from the current fiscal year to next fiscal year. As a result, we have lowered our full year forecast for revenue by JPY 10 billion for the Precision Equipment segment as a whole. Operating profit forecast is also lower by JPY 5 billion from the previous forecast to JPY 30 billion, reflecting the deferral of the installation of FPD and semiconductor lithography system to the next fiscal year. This represents a year-on-year decrease by JPY 9.4 billion.

Although the semiconductor business is expected to see a year-on-year increase in profit due to higher unit sales of lithography system, the FPD lithography business is expected to decrease due to a significant impact of lower units of 10.5G lithography system, which has a higher unit price.

Please refer to Slide 25. Due to strong orders and change in FX assumptions, we have revised upward our forecast for revenue in the Healthcare Business by JPY 13 billion from the previous forecast to JPY 93 billion. This is a significant increase of JPY 19.8 billion year-on-year, and we're aiming for another record high sales in the current fiscal year.

The growth in sales and earnings is mainly due to expanded sales of new products from biological microscopes and development of the private sector market and increased sales of retinal diagnostic imaging systems. Although restrictions on procurement of parts for both biological microscopes and retinal diagnostic imaging systems on the way to being resolved, we will continue to monitor the situation closely and strive to ensure stable supply.

Operating profit is expected to be JPY 8 billion, an upward revision of JPY 2 billion from the previous forecast due to the effect of increased sales. This represents an increase of JPY 3.7 billion year-on-year.

Slide 26 shows the outlook for the Components Business. We have not changed our August forecast for revenue, which we expect to be JPY 53 billion, up significantly, JPY 12.2 billion from the previous year. Operating profit is expected to be JPY 18 billion, an upward revision of JPY 1 billion from the previous forecast, reflecting the strong first half performance. This represents an increase of JPY 5.3 billion year-on-year. Sales of EUV-related components, optical parts and components for semiconductor-related products as well as photomask substrates for FPD have been favorable as of now.

Slide 27 shows the outlook for Industrial Metrology and Others. Others include the figures from our production subsidiaries. Reflecting the first half results, we have revised up our previous forecast for this business segment by JPY 2 billion to JPY 39 billion. This represents an increase of JPY 3 billion from the previous fiscal year.

In the Industrial Metrology business, in addition to strong sales of imaging and measuring systems, sales of x-ray and CT inspection system in others are expected to increase. Operating profit is expected to be JPY 4.5 billion, an upward revision of JPY 0.5 billion from the previous forecast due to the effect of increased sales. This represents an increase of JPY 1.6 billion year-on-year.

Although expenses for R&D and strengthening of the sales structure will be increased in the Industrial Metrology business, the increase in utilization rates of production subsidiaries included in the others category is expected to contribute to the increase in operating profit.

This concludes my explanation, but I would like to say a few words about the first half of the fiscal year. Thanks to the benefits of the weaker yen, our business performance exceeded the plan at the beginning of the term. The forecast of operating profit -- the full year is based on the assumption that the exchange rate will be JPY 135 to the dollar as well as the euro. Based on this assumption, we expect operating profit of JPY 55 billion, the same amount as the previous forecast.

However, there are many risk factors that we need to watch closely during the second half of the fiscal year and into the next fiscal year, such as the sluggish FPD panel market, changes in market conditions for semiconductors, geopolitical risks, rising interest rates and concerns of an economic downturn.

As for strategic investments, as explained by President Umatate at the beginning of his presentation, we will proceed with the consolidation of SLM in Germany in the second half of the year, post-merger integration and the establishment of a new organizational structure to create synergies with our existing businesses.

In the second half of the year, we will aim to achieve our performance targets and steadily implement the various measures in our medium-term management plan, including the promotion of human capital management and DX and preparation for the next fiscal year, which is expected to be more challenging. We ask for your continued understanding and support from our shareholders and investors.

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