Nikon Corp

TSE:7731

Earnings Call Analysis

Earnings Call Transcript 2025-Q2

[Muneaki Tokunari, executive]

Good afternoon, everyone. I am Muneaki Tokunari, President of Nikon Corporation. Thank you very much for taking time to join us today.

I will explain the progress of our medium-term management plan. Please look at Slide 3. The current medium-term management plan spans a period of 4 years, and we now have 1.5 years to go. As stated at the bottom of the slide, our performance in areas other than the Imaging Products Business is behind our expectation of earnings. The recovery in demand for semiconductor-related business has been slower than expected, and the situation remains difficult, but we will work on measures to restore profitability, including self-help efforts from the second half of the year onwards.

On the other hand, since I took office as President in April, I have also started to strengthen the management base with the aim of achieving our Vision 2030, and we have already seen some results in our growth strategy. Today, I will report on these, among others.

First, I will explain the progress in each of the 5 business segments using Slide 4. For the figures shown on the left, I will rely on the presentation from Deputy CFO, Ohmura, later, and I will talk about the main business topics on the right.

In Imaging Products Business, we completed in April, the acquisition of RED, a specialist manufacturer of cinema cameras, which will form the core of our future video strategy. In the Components Business, we have also begun restructuring of the former Industrial Metrology Business, we expect to incur onetime expenses of around JPY 2.5 billion in the second half. But from next fiscal year onwards, we expect to see an improvement in operating profit of around mid JPY 1 billion range.

Slide 5 summarizes the progress we have made in building the management base for future growth. Among these, in manufacturing, shown second from the bottom, a new headquarters building and innovation center was launched, which consolidate R&D functions and enable diverse workstyles, a new building at Mito plant, which was built to expand production capacity in the Components Business, was completed in August.

Please move to Slide 6. This slide shows the progress of the 5 growth drivers required to enhance future corporate value of Nikon set out in the medium-term management plan. Regarding the contract cell manufacturing, or CDMO, for the Healthcare Business, the number of cell therapies moving from clinical trials to the commercialization has increased and this has grown to become a business with close to JPY 1 billion in operating profit for this fiscal year. We plan to grow it even further to make it into one of the future pillars of earnings.

In the Precision Equipment Business, we have started developing digital lithography system for advanced packaging, which is expected to expand in line with the development of AI, and we plan to fully enter the back-end process. Deputy CFO, Ohmura, will explain these in more detail later.

Please turn to Slide 7. In the basic policy on management that is conscious of cost of capital and stock price that we announced in mid-2023, we clarified our policy of dividends of JPY 60 share in the final year of the medium-term management plan and additional share buyback of JPY 30 billion or more during its period. Based on this policy, on October 31, we announced that we would be buying back, in canceled shares, worth up to JPY 30 billion, which is 8.7% of the total number of shares issued. Furthermore, in order to ensure that this share buyback will not affect growth investments such as R&D and capital investments, we plan to use the proceeds from the sale of cross shareholdings to fund this.

As I said, we are currently challenged with our performance, but we will steadily promote policies out in our medium-term management plan such as improving our management base and developing growth drivers with the aim of becoming a company that supports a society where humans and machines co-create seamlessly, expected to arrive in 2030. We ask you, as shareholders and investors, for continued understanding and support.

[Yasuhiro Omura, executive]

I am Yasuhiro Ohmura, Deputy CFO. I will explain the first half financial results and the full year forecast. First, the key points of the first half financial results. Revenue was JPY 332.7 billion, operating profit was JPY 5.8 billion and the profit attributable to owners of the parent was JPY 2.9 billion. Compared to the first half of the previous year, revenue increased by JPY 1.5 billion. Although sales of semiconductor lithography systems and EUV-related components decreased, sales of digital cameras and FPD lithography systems increased. And together with weaker yen, the total revenue increased.

As for profit, in addition to decreased revenue from semiconductor lithography systems and EUV-related components, one-off expenses for relocation of the head office pushed down profit. Compared to the previous forecast announced in August, in addition to the downside, due to the postponement of sales of semiconductor-related products, profit attributable to owners of parent was significantly behind, affected by exchange rate fluctuations which caused the valuation of foreign currency denominated assets to fall due to ForEx conversion, leading to increased ForEx losses and losses on valuation of investment securities.

Slide 10 shows the main consolidated figures for the first half that I just explained and comparisons to the year before results and August forecast. The free cash flow, which was deeply negative in the previous year has improved, this is because despite the costs related to the acquisition of RED and the new head office, operating cash flow turned significantly positive mainly due to increased advanced payments received.

Slide 11 shows consolidated revenue and profit and loss for the 3 months from July to September. Operating cash flow for the second quarter was positive for the fourth consecutive quarter, and free cash flow was also positive at JPY 7.8 billion.

Slide 12 shows the results by segment for the first half. In the yellow boxes, the top row shows revenue and the bottom row shows operating profit for each segment. I will explain the details for each segment. First, on the Imaging Products Business. Revenue increased by JPY 14.1 billion year-on-year to JPY 151.7 billion, and operating profit increased by JPY 3.6 billion to JPY 28.8 billion due to strong sales of mirrorless cameras, Z8 and Zf as well as the launch of the new Z6III, sales volume of digital cameras, interchangeable lens type increased by 20,000 units year-on-year to 410,000, and interchangeable lenses increased by 40,000 to 650,000 units. The operating profit margin was 19% up year-on-year partly due to the weaker yen. Compared to the previous forecast in August, operating profit was higher due to the weaker yen, improvements in the product mix and postponement of some expenses.

Slide 14 shows the Precision Equipment Business. Revenue decreased by JPY 14.5 billion year-on-year to JPY 81.5 billion, and operating profit decreased by JPY 2.3 billion to JPY 0.9 billion. In FPD lithography systems, due to the recovery in the panel market, capital investments in high-resolution panels increased and sales volume increased significantly from 4 units in the previous year to 16. On the other hand, sales volume of new semiconductor lithography systems fell significantly from 11 units in the previous year to 4 due to the impact of customers cutting back on investments and some installations being postponed to the second half.

Overall, the Precision Equipment Business dropped in both revenue and profit as the increased sales in FPD lithography systems was unable to offset the decline in sales of semiconductor lithography systems. The previous August forecast was missed because the completion of installation of some systems already delivered has been postponed to the second half.

Slide 15 shows the Healthcare Business. Revenue increased by JPY 3.9 billion year-on-year to JPY 55.1 billion. In the second quarter, sales of eye care solutions grew particularly in Europe. And revenue increased in the first half even when excluding the effects of the weaker yen. Operating profit, on the other hand, decreased by JPY 1.4 billion year-on-year to JPY 1.3 billion due to an increase in upfront investments such as R&D expenses.

Slide 16 shows the Components Business. Due to the impact of the delayed recovery in the semiconductor and factory automation markets, sales of EUV-related components and encoders decreased and both revenue and profit decreased year-on-year. In addition, due to the delay in the market recovery, the business environment in the second quarter remained challenging, and demand did not recover. The previous forecast in August was missed due to postponed sales of EUV-related components and reduced sales of encoders.

Slide 17 shows the Digital Manufacturing Business. Sales increased significantly by 42% year-on-year due to strong sales of NXG series, large-format metal 3D printers from SLM Solutions. In addition to the increased revenue at SLM Solutions, the disappearance of onetime costs of restructuring recorded in the previous year as well as the cost reductions also contributed to a reduction in the operating loss.

Next, I will explain the full year forecast. We have revised down our revenue forecast by JPY 25 billion to JPY 725 billion. due to the postponement of customer investments, which has shifted sales and related products in the semiconductor lithography and components business into the next fiscal year or later. Operating profit has been revised downward by JPY 13 billion to JPY 22 billion, with the Imaging Product Business revised upward by JPY 2 billion, while Precision Equipment, Healthcare and Components businesses being revised downward by JPY 6 billion, JPY 2 billion and JPY 9 billion, respectively.

The forecast for profit attributable to owners of parent has been revised downward by JPY 14 billion to JPY 16 billion. But with regard to shareholder returns, the interim dividend will be JPY 25 per share, and the annual dividend will be increased by JPY 5 to JPY 55 per share, as previously forecasted. In addition, as President Tokunari said earlier, we will perform share buyback up to a maximum of JPY 30 billion. The exchange rates for the second half are unchanged from the previous forecast at JPY 145 to the dollar and JPY 155 to the euro.

Slide 20 shows the changes in the operating profit forecast from the announcement in August. The main factor behind the downward revision was a JPY 12.5 billion decrease in revenue due to postponed sales in the Precision Equipment and the Component businesses. In addition, there was a total of JPY 3.5 billion onetime costs for the restructuring of the former Industrial Metrology Business, which is included in the Components Business and for the Healthcare Business.

Please refer to Slide 21. The main figures for the full year forecasts are shown in the table, including year-on-year and previous forecast comparisons. The overview has already been explained.

Slide 22 shows a list of full year forecast by segment, including year-on-year and previous forecast comparisons, I will explain the details for each segment. First, the Imaging Products Business. The forecast for revenue remains unchanged from August at JPY 305 billion. We plan to launch Z 5II this month following the Z6III in June, leveraging the cutting-edge functions of Z 9. We will continue to strengthen our mirrorless camera product lineup. We have raised our operating profit forecast by JPY 2 billion from August based on the first half results.

Compared to the previous year, we expect to see an increase in operating profit of JPY 0.5 billion to JPY 47 billion due to an increase in profit from the expansion of the strong mirrorless camera business, offsetting an expected increase in expenses such as acquisition-related costs for RED, which we acquired in April and R&D costs.

Slide 24 shows the forecast for the Precision Equipment Business. Please look at the bottom left. Due to the delay in the market recovery, some customers have postponed their investments resulting in the postponement of delivery and sales volume of semiconductor lithography systems is expected to decrease by 7 units to 28. In addition, the sales volume of FPD lithography systems is expected to be 38 units as installation of one unit will be delayed until the next fiscal year. Effecting these changes in sales volume, we have lowered our revenue forecast by JPY 20 billion from August to JPY 195 billion.

Compared to the previous year, while we expect a significant increase in sales of FPD lithography systems for high-resolution panels, this will not be enough to offset the decrease in sales of ArF lithography systems and the revenue of the entire Precision Equipment Business will decrease. Operating profit has been revised down by JPY 6 billion from the forecast in August to JPY 9 billion due to declined revenue.

Please refer to Slide 25. I'd like to briefly discuss the digital lithography system for advanced semiconductor packaging applications that we announced last month. Our digital lithography systems will respond to the increasing sophistication and diversification of semiconductors due to the progress of AI. We plan to launch this product in fiscal year 2026, targeting the large-scale chiplet market for data centers where the miniaturization of wiring patterns and the increase in package size are progressing by combining the digital lithography technology, high-resolution technology for semiconductor lithography systems that we have developed to date and high productivity of the multi-projection lens technology for FPD lithography systems.

Please turn to Slide 26. I will now explain the Healthcare Business. In life science solutions, we are concerned about the impact on the revenue of persistently high interest rates in the U.S. and economic downturn in China, but we aim to achieve our forecast by developing the private sector market and strengthening our drug discovery support services. In eye care solutions, we expect to see year-on-year revenue growth due to demand from optometrists and major chains in Europe and U.S. Operating profit is expected to be JPY 2 billion lower than the August forecast due to lower-than-expected sales in life science solutions caused by the delay in the market recovery, an additional JPY 1 billion in onetime expenses related to eye care solutions. Revenue from contract cell manufacturing is expected to increase year-on-year due to expanded orders. As the third pillar of the Healthcare Business, it has entered the stage of sustained product contribution.

Please refer to Slide 27. I will give a brief introduction to our contract cell manufacturing business. Nikon CeLL Innovation, a wholly-owned subsidiary, started its business in 2015 through a strategic alliance with Lonza, the world's largest contract manufacturer, and has grown into Japan's largest regenerative medicine, CDMO. In the area of contract manufacturing of cell therapies utilizing living cells, we already have around 10 projects underway, either in commercialization or clinical trials, with revenue in several billions of yen and operating profit close to JPY 1 billion, and we expect further increases in both revenue and profit in the next fiscal year.

Slide 28 shows the Components Business, although there are signs of a bottoming out in some areas of the semiconductor and factory automation markets, we do not expect to see the kind of recovery in demand that we had initially projected due to the customers postponing their investments. In the semiconductor-related field, sales of EUV-related components have been delayed and sales of video measuring systems used in back-end processes have decreased and sales of encoders for factory automation are expected to decrease.

In light of this, we have lowered our revenue forecast by JPY 7 billion from August to JPY 78 billion. On the other hand, sales of large x-ray systems for the aerospace industry are progressing steadily. And we're also steadily winning orders for semiconductor-related optical components by adding customers. Operating profit has been revised down by JPY 9 billion from August to JPY 8 billion due to the impact of the decrease in revenue and the recognition of JPY 2.5 billion in restructuring-related expenses in the former Industrial Metrology Business, which is now included in the Components Business.

The Industrial Solutions Business unit, newly established this fiscal year has decided to implement restructurings of the former Industrial Metrology business that has been integrated into the business unit, such as the transfer of the 3D laser scanner business, and headcount reduction in order to optimize the organization by reviewing the strategies by product and by region. We will implement the necessary measures during this fiscal year and expect to see an improvement in operating profit from the next fiscal year onwards.

Slide 29 shows the Digital Manufacturing Business. Both revenue and operating profit remain unchanged from the previous forecast in August. Due to increased demand in aerospace and defense industries, orders and sales are progressing steadily, centered on the NXG series of large-format metal 3D printers from SLM Solutions. This fiscal year, we aim to turn SLM Solutions profitable on a stand-alone full year EBITDA basis. There's no change to our policy of any operating level profitability on an SLM Solutions stand-alone basis in the next fiscal year and to turn profitable for the entire Digital Manufacturing Business in March 2027.

That concludes my explanation. In summary, the first half saw results fall short of expectations due to postponement in semiconductor lithography systems and EUV-related components, the full year forecast has been revised down by JPY 25 billion to JPY 725 billion in revenue and by JPY 13 billion to JPY 22 billion in operating profit.

Although it is still difficult to predict the investment trends of semiconductor-related customers or the recovery of demand for related products, we will continue to minimize the impact of market deterioration by making timely and appropriate resource investments through close communication with customers, and we will also strive not to miss the timing of the market recovery.

In addition, we will implement necessary measures such as restructuring of the former Industrial Metrology Business quickly. And aim to further expand growth drivers through efficient R&D investments, leading to a recovery in business performance from the next fiscal year onwards.

We would like to ask for your continued understanding and support from shareholders and investors. Thank you for your attention.

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