Nikon Corp
TSE:7731
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Earnings Call Analysis
Q2-2024 Analysis
Nikon Corp
Nikon, steered by Representative Director and President Mr. Umatate, has shared its journey in the midst of a challenging environment characterized by an underperforming semiconductor market and the tail end of the FPD business cycle. Despite these headwinds, Nikon revised its revenue forecast upward to JPY 690 billion, thanks to a weaker yen, which has bolstered sectors like Imaging Products and Healthcare. Conversely, the operating profit forecast has been adjusted downwards to JPY 34 billion.
In the face of a global economic maze, Nikon's Imaging Products business has been a bright spot, with significant revenue growth driven by strong sales of mirrorless cameras, such as the Z8. Healthcare has also seen revenue upticks with its expanded digital microscope lineup. However, Precision Equipment and Component businesses have been grappling with challenging market conditions, dampening profitability despite efforts for organizational revitalization and customer development.
CFO Mr. Tokunari detailed the mixed picture of Nikon's first half: a revenue increase to JPY 331.2 billion, boosted by digital cameras and semiconductor systems, but facing a decrease in operating profit at JPY 13.6 billion. Notable declines came from the lucrative FPD lithography systems and Component businesses, with additional expenditure stemming from the SLM acquisition. Despite currency benefits, one-time expenses in Healthcare and Digital Manufacturing restructuring weighed on profits.
The Imaging Products segment excelled with a surge in revenue and operating profit, owing to the high demand for new high-end models. Precision Equipment managed to grow revenue with new hardware like ArF lithography systems but experienced a profit drop due to declining service revenue and a trough in FPD lithography systems. Healthcare displayed robust revenue growth, yet faced a profit decrease due to customer-related provisions. The Components business took a hit from a sluggish semiconductor market and the Digital Manufacturing segment encountered both gains and amplified losses due to new acquisitions and investment shifts.
Nikon's revised annual outlook reflects a balance between sector successes and market adversities. The Imaging Products business continues its upward trajectory, while Precision Equipment has scaled back its new equipment projections. The Healthcare segment projects a revenue boost, tempered by component costs. The Components and Digital Manufacturing businesses are recalibrating expectations due to market stagnation and investment plan alterations. Overall, Nikon foresees a decrease in operating profit by JPY 9 billion to JPY 34 billion for the full year, underscoring the caution needed amid unpredictable semiconductor markets and macroeconomic risks.
With an eye on the future, Nikon aims to mitigate the persistent turbulence in semiconductor demand, fortify customer relations to capture market rebounds, and bolster the newly acquired SLM Solutions. Despite facing a loss in the Advanced Manufacturing business, Nikon envisages a revenue spike and a return to positive EBIT by FY 2025. These strategic steps are set against a backdrop of potential second-half risks such as prolonged semiconductor market weakness, geopolitical uncertainties, and interest rate hikes. Nevertheless, Nikon remains determined to navigate these waters with agility and continuous investor and stakeholder support.
I am Umatate, Representative Director and the President of Nikon. Thank you very much for taking time out of your busy schedule to join us today for our earnings call. I will discuss the current business situation and the specific progress of our growth strategy.
In April last year, we set out our Vision 2030 as a key technology company and a global society where humans and machines cocreate seamlessly. In the first half of the major term management plan, which runs through fiscal 2025, we aim to grow our business and increase our corporate value by becoming a company that provides products and services optimized to meet our customer needs. This year, in the second year of the medium-term management plan, the external environment is becoming more challenging as the FPD business is at the bottom and the semiconductor market remained sluggish for a prolonged period. We have revised downward our operating profit forecast to JPY 34 billion from the OP number we shared in August.
On the other hand, we made upward revision of our revenue forecast to JPY 690 billion, partly due to a weaker yen. Although not shown on this slide, we have increased our first half dividend JPY 5 year-on-year, to JPY 25 and maintained our full year dividend forecast of JPY 50, which is no change from our original forecast. Our CFO, Mr. Tokunari will explain the details of the numbers later.
Although earnings are stagnant this fiscal year, we are making steady progress with our strategic development in line with our plan. This slide shows a very brief summary of our progress in the first half, the 2 businesses in quality of life and 3 businesses in the industry. Both Imaging Products business and Healthcare business in the quality of life segment are progressing well. In the emerging products business, we expect to achieve better earnings than last year by rolling out mirrorless cameras with cutting features such as the Z8 and the ZF and continue to expand the lineup of interchangeable lenses, including super telephoto lenses and other high value-added products. In the Healthcare business, we are making steady progress in expanding our lineup of digital microscopes that support life science research and medical practices as well as services related to drug discovery support services for pharmaceutical companies and bioventures.
Next, in the industry, the Precision Equipment and the Component businesses are facing more difficult environment than previously expected due to the sluggish semiconductor market. The Precision Equipment business created with the FPD Lithography business unit and Semiconductor Lithography business unit combined in April this year. We will respond to changes in the business environment by horizontally integrating each function and revitalizing the organization. The Component business has been affected by the current semiconductor market conditions, but we are making steady progress in developing new customers and our long-term growth story remains unchanged.
In the Digital Manufacturing business, we established the Advanced Manufacturing business and established the division's headquarters in the United States, first in the quarter in the United States for Nikon to promote the full expansion of the Materials Processing business. In September, we made SLM Solutions of Germany, a wholly owned subsidiary, laying the groundwork for business development in Japan, the U.S. and Europe.
As you can see at the bottom of this page, we recognize the post-acquisition integration of overseas subsidiaries is an important management focus, and we will continue to improve and strengthen our management and control system. As I mentioned earlier, in the second year of the medium-term measurement plan, we expect a decline in profit year-on-year. While the overall performance is within assumptions of the midterm management plan, there are some variations by segment. The Imaging Products business significantly exceeds the plan, but semiconductor-related businesses are progressing slower than expected.
We are currently reviewing our plans for each segment and will present new numerical targets for the second half of the midterm management plan in the spring of this year. Nikon is committed to generating diverse revenues from common core of optical and precision technology and to responding to risks in order to achieve sustainable growth. We look forward to your continued understanding and support.
Now our CFO, Mr. Tokunari will now explain the first half financial results and outlook for the full year. Thank you very much for your attention.
Good afternoon, everyone. I am Tokunari, CFO. Nice to meet you all. I would like to discuss the first half results and the outlook for the full year. Firstly, the highlights of the first half results. Revenue was JPY 331.2 billion. Operating profit was JPY 13.6 billion, and profit attributable to owners of parent was JPY 9.8 billion. Revenue increased by JPY 42.9 billion compared to the same period the previous year. Revenue grew on the strong business of the digital cameras and ArF or lithography systems for semiconductors with additional revenue of newly consolidated subsidiary, metal 3D printer manufacturer, SLM solutions. On the other hand, OP and profit attributable to owners of parent decreased due to the lower revenue in the highly profitable FPD lithography systems and the Components businesses with higher expenses resulting from the SLM acquisition.
Compared with the forecast now in August, revenue increased by JPY 6.2 billion, partly due to the cheaper yen, but OP and products with attributable owners of parent decreased partly due to provisions in the Healthcare business and expenses related to the structural reform of Morf3D in the digital manufacturing business.
Slide 9 shows the consolidated financial highlights for the first half this year compared to the same period last year and the previous forecast we made in August. Please take a look at Slide 10. It shows the segment results for the first half. In the yellow line box for each segment, the upper row is revenue, and the bottom row is operating profit. Compared to last year, revenue and profit increased in the Imaging Products business, while profits decreased in other 4 businesses.
Slide 11 shows the consolidated revenue and the profit and loss for the 3 months from July to September. If you look at just 3 months, both revenue and profit increased compared to the same period previous year. This was due to the increased revenue and profit in the Imaging Products business and the Precision Equipment business. I will now explain the first half results of each segment, starting with the Imaging Products business. Imaging Products Business revenue increased by JPY 23.1 billion year-on-year to JPY 137.6 billion, and operating profit increased by JPY 3 billion to JPY 25.2 billion. Revenue of mirrorless cameras and lenses for mirrorless cameras was strong, led by Z8 launched in May of this year. The average selling price of both bodies and lenses were up due to a focus on mid- to high-end models and the weaker yen also contributed to a 20% year-on-year increase in revenue. In addition, the operating profit margin exceeded 18%.
Slide 13 shows the Precision Equipment business. Revenue increased by JPY 12.7 billion year-on-year to JPY 96 billion, yet operating profit decrease of JPY 3 billion to JPY 3.2 billion. Revenue of new equipment totaled 11 units, out of which 9 were ArF lithography systems, a significant increase from the 2 units last year. This shows we are making steady progress in expanding our customer base. On the other hand, service revenue decreased due to lower utilization rates of semiconductor device customers. In addition, revenue of FPD lithography systems decreased significantly to 4 units from 13 units in the previous year as this fiscal year makes the bottom of the business cycle for FPDs, such as LCD panels. In the Precision Equipment business as a whole, the revenue increase of ArF lithography systems could not offset the decline in the highly profitable services business and FPDs, resulting in a year-on-year decline in the profit despite an increase in revenue.
Slide 14 shows the health care business. Revenue increased by JPY 4.6 billion to JPY 51.2 billion due to strong revenue of Life Science solutions, including biological microscopes in North America and China. However, operating profit decreased by JPY 0.9 billion to JPY 2.7 billion due to provisions of JPY 1.4 billion related to transactions of some customers and other reasons.
Slide 15 is the Components business. The Components business had been growing rapidly until the previous year due to the expansion of revenues from EUV and other semiconductor-related business. But in the first half of this year, revenue as well as profit declined due to the impact of sluggish semiconductor market. Revenue declined in the first half, partly due to the delayed segment of EUV-related components and optical components as a result of production adjustment by semiconductor-related customers. Demand for some are consumables, such as optical parts also declined due to lower capacity utilization rate to semiconductor equipment manufacturers.
Slide 16 shows Digital Manufacturing business. This segment consists of the Industrial Metrology business and the newly established Advanced Manufacturing business or ADM business. Revenue was up year-on-year, contributed by the newly consolidated German SLM Solutions in the ADM business. On the other hand, operating loss increased due to SLM's operating loss and amortization of intangible assets of SLM, restructuring expenses as Morf3D's business strategy reviewed as well as upfront investments were made in the Industrial Metrology business.
Next, let me go to the full year outlook. As for the full year forecast, we have raised our revenue forecast by JPY 20 billion to JPY 690 billion, partially due to the FX rate as the revenue increase in Imaging Products and the Healthcare business is expected to outweigh the decline in other businesses. The imaging products of OP forecast was revised upward by JPY 2 billion and corporate expenses, et cetera, was increased by JPY 3.5 billion. While onboard revision of JPY 4 billion in the Precision Equipment, JPY 1.5 billion for Healthcare, JPY 5 billion for the components business and JPY 4 billion for the Digital Manufacturing businesses were made, this making total OP revised downward by JPY 9 billion to JPY 34 billion. The forecast for profit attributable to owners of parent was revised downward by JPY 8 billion to JPY 27 billion. But the shareholders' returns, the interim dividend is increased by JPY 5 from previous year to JPY 25 and annual dividend forecast is unchanged to be JPY 50. The FX assumption for the second half is JPY 140 to $1 and JPY 150 for euro.
Please see Slide 19. You can see a less of full year forecast highlights compared to the previous year and the previous forecast. I already covered the outline. So I will go to Slide 20. It shows a full year forecast by segment with the year-on-year comparisons and the previous forecast. The details for each segment will be explained later. First, the Imaging Products business. We realized our August forecast based on the assumption that the digital camera market will continue to expand in the second half of this fiscal year. as indicated in the lower left, we revised our full year market size forecast for interchangeable lens cameras to 6.3 million units up to 500,000 units from previous forecast and for the interchangeable lenses to 10 million units, up 600,000 units.
Our sales volume is also revised up to 800,000 units, up 14% or 50,000 units from last year and interchangeable lenses, 1.25 million, up 8% or 50,000 units from last year based on the strong sales. Due to the upward revision in sales volume and the change in the currency assumptions, the revenue forecast is raised by JPY 25 billion from the previous forecast to JPY 275 billion. On a year-on-year basis, revenue is expected to increase 21% due to an increase in the average sales price per unit in addition to an increase in sales volume.
OP forecast is also revised upward by JPY 2 billion from the previous forecast. The second half forecast reflects higher purchasing prices of components and the selling expenses for the year-end sales campaign.
Slide 22 shows the focus for the Precision Equipment business. Please refer to the lower left. Since the installation of some ArF lithography systems were postponed into next year upon customer request, the sales volume of new semiconductor lithography system is expected to decrease by 3 units to 30 units. On the other hand, the sales of FPD lithography systems, I expect it to increase by 1 unit to 13 units. Considering the sales volume changes and others, we revised down revenue forecast by JPY 5 billion from the August forecast of JPY 200 billion. The operating profit forecast was lowered by JPY 4 billion from the previous forecast in August to JPY 8 billion due to the lower sales and an increase in R&D expenses to strengthen product competitiveness, including the development of next-generation platforms.
Please see Slide 23. Next, I will now explain Healthcare business. Based on the strong performance in the first half, we raised our revenue forecast by JPY 8 billion to JPY 103 billion. We revised the OP forecast down by JPY 1.5 billion to JPY 9.5 billion, reflecting JPY 1.4 billion provision in the first half related to certain customers, transactions and others as well as higher purchasing prices of components, even though we expect a revenue increase.
Slide 24 shows component business. Future investment trends by semiconductor device manufacturers remain uncertain due to the sluggish semiconductor market EUV-related business, which is expected to grow in the medium to long term is also stagnant at present and the timing of recovery is yet to be determined. Production adjustment by semiconductor-related customers are expected to continue for some time and deliveries of some EUV-related components and optical components are expected to be postponed to the next fiscal year. Consumable business, such as optical components is affected by lower capacity utilization rates of semiconductor device makers and expected to be lower than previous forecast. As a result, we revised our revenue forecast down by JPY 6 billion to JPY 47 billion, and our OP forecast is down by JPY 5 billion to JPY 15 billion.
Slide 25 is the digital manufacturing business. Revenue is expected to be JPY 62 billion, down by JPY 2 billion from the previous forecast, mainly because the SLM solutions acquired into the ADM business has been affected negatively by customers' changes in their investment plans. Operating profit is expected to be a loss of JPY 13 billion, down by JPY 4 billion from the previous forecast in August, mainly due to lower revenue in the ADM business that negatively impact restructuring expenses at Morf3D and changes in the product mix in the Industry Metrology business.
That's all for myself. In the summary of the first half. Revenue was up partially due to the weaker yen, but operating profit fell short of the plan due in part to onetime expenses, including provisions in Healthcare and restructuring-related expenses in Digital Manufacturing. For the full year, we revised our OP forecast downward by JPY 9 billion from the previous forecast to JPY 34 billion. Weak semiconductor market conditions pushed down operating profit by JPY 9 billion for the Precision Equipment and the Components business combined.
For the next fiscal year, although we still cannot foresee a recovery in demand for semiconductor-related products, we will continue to make efforts to minimize the impact of the market downturns by making timely and appropriate resources investment through close communication with our customers to make sure that we do not miss the timing of market recovery. During the first half of this fiscal year, we made SLM, a wholly owned subsidiary. Although the ADM business will start the current fiscal year with a loss due to the onetime cost of the acquisition, we aim to double revenue to more than JPY 40 billion in FY 2025 and to return the EBIT positive.
Furthermore, in FY 2026, we plan to return to profitability and operating profit even with the amortization of intangible assets included. There are many risk factors in the second half and into the next fiscal year with longer-than-expected sluggish semiconductor market, geopolitical risks and rising interest rate, but we will do our best to act with agility to accommodate to those changes. We appreciate your continued support of our customers and shareholders and investors.
Thank you very much for your attention.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]