Nikon Corp

TSE:7731

Earnings Call Transcript 2021-Q3

[Muneaki Tokunari, executive]

This is Tokunari, CFO. I highly appreciate your precious time despite your busy schedule to attend our financial briefing.

On January 29, we had a timely disclosure, including the revised forecast for the current fiscal year. Today, I am pleased to have this opportunity to share its details. Allow me first to explain the highlights for the third quarter from October to December.

Revenue was JPY 150.6 billion, down JPY 2.8 billion year-on-year, showing a slight decline. Operating profit was positive JPY 9.9 billion, up JPY 5.9 billion year-on-year. This is the first surplus on the quarterly basis since October to December last year, first time in 4 quarters.

For your [ fund ] information, all the segments had positive numbers in substance in all the segments. Imaging Products, we had a record quarterly sales for mirrorless and cameras. Revenue declined year-on-year, but the deficit shrunk despite the decline in revenue, thanks to the improved product mix and reduced business cost. This segment was profitable in real terms, excluding factors such as the restructuring-related expenses. Precision Equipment, both revenue and profit increased, thanks to the increased sales of FPD Lithography Systems supporting Nikon's overall profit. Healthcare business turned profitable, thanks to the record high sales of retinal diagnostic imaging systems on the quarterly basis.

Slide 3 shows a table describing the major consolidated numbers for the third quarter from October to December. As you see here, revenue declined slightly year-on-year, but all the profit items became profitable, including operating profit, profit before income taxes as well as profit attributable to owners of the parent. The surplus numbers surpassed the October to December numbers last year before COVID-19. Free cash flow became positive, JPY 22.5 billion, up JPY 21.7 billion year-on-year due to the increased revenue, et cetera.

Slide 4 shows in actual numbers by the segment for the third quarter. Operating profit in the middle column shows JPY 9.9 billion as the consolidated total in the bottom line one and above shows the positive operating numbers in all the segments, except for the Imaging Products business. Imaging Products business will turn profitable in real times if we exclude extraordinary costs such as restructuring-related costs and others. The right-hand side shows the positive operating profit increased in all the segments year-on-year.

Slide 5. Here now I would like to explain in actual cumulative numbers for Q1 to Q3 on Slide 5. The middle column shows all the profit items in the second row and below are showing the loss in all the segments, but those numbers are actually better than the numbers explained in the interim briefing. We had a loss in the first quarter, greatly impacted by COVID-19. We also had a loss of JPY 29.6 billion at the -- as the onetime cost for the impairment of the fixed asset in Imaging Products business, and this number was depressed by the profit generated in the third quarter. Free cash flow became positive, JPY 10.4 billion on the cumulative basis at JPY 5.7 billion year-on-year.

Slide 6 is the summary of performance by segment. Details will be covered later. Please look at -- in corporate P&L not attributable to any reportable segments. Corporate expense is included here. It shows minus JPY 11.6 billion, but it improved by JPY 5.8 billion year-on-year as shown on the far right. As described in the bottom of the slide, the actual improvement was JPY 7.9 billion, reflecting the effects from the cost reduction effort in the corporate expenses and others.

From this Slide 7 onward, I will then explain our performance segment by segment. First segment is Imaging Products. The first row shows the revenue of JPY 70 billion for the third quarter last year. Operating profit was minus JPY 800 million. This time, revenue was JPY 52.3 billion, down JPY 600 million.

Though revenue went down throughout the year, but we had the same level of profit as the one last year. This was realized because we had a good shift to the models for pro and hobbyist, resulting into a steady increase in the unit sales price. Average selling price for additional camera interchangeable lens type reached the highest level this year, showing in the highest level in the past 10 years for bodies and interchangeable lens.

As for mirrorless and cameras, currently in our focus products, the new product, Z 6II and Z 7II as well as mirrorless lenses became popular. Both bodies and lenses reached a record high for quarterly sales volume and the revenue. We intend to further expand the lineups in mirrorless and cameras.

As for cost, we further reduced the business and operational costs in advance. With this done, Imaging Products business became profitable in substance for the third quarter.

Slide 8, this shows the Precision Equipment business. Both revenue and profit grew for the third quarter year-on-year. Revenue was at JPY 14 billion and operating profit was up JPY 1.4 billion. Installations in the FPD Lithography Systems were carried out well in advance, particularly in China. The units sold were higher than last year, resulting in increase both in revenue and profit. In contrast, Semiconductor Lithography Systems resulted in decline in profit, mainly caused by the disposal and write-down of inventory despite we had rather good sales of new products.

Now please look at Slide 9. Healthcare business in the third quarter shows growth both in revenue and operating profit year-on-year. Retinal diagnostic imaging systems reached a quarterly high in sales. Biological microscopes performed well in sales, pushing up the overall results for this segment. Operating profit, partly thanks to the cost control efforts, turned out to be positive from the loss of JPY 400 million in the previous year.

Slide 10 shows Industrial Metrology business and Others. In the third quarter, Digital Solutions, which are included in Others, had a good component business particularly. With the expense restraints and effect in place, the segment as a whole shows growth both in revenue and profit.

Next, I will move into our forecast for the full year ending March 31, 2021. Slide 12 shows the highlights. Revenue was revised upward JPY 20 billion from the previous forecast to JPY 450 billion. As for details, Imaging Products segment was revised upward JPY 5 billion, reflecting the improvement in the third quarter. Precision Equipment business was revised upward JPY 15 billion, reflecting a good recovery in sales units of FPD Lithography Systems.

Operating profit revised upward JPY 10 billion from the previous forecast. It is expected to stay at minus JPY 65 billion. As for details, Imaging Products revised upward JPY 5 billion, driven by the increased revenue as well as the advanced reduction in business examples. Precision Equipment and FPD Lithography Systems growing in revenue, outweighing disposal and the write-down of inventory. With this, it was revised at JPY 3 billion. Corporate and P&L non-attributable to any reportable segments revised upward JPY 2 billion, thanks to the headquarters cost reduction and others.

Profit before income taxes was also revised upward JPY 10 billion, the same amount as the operating profit. Profit attributable to owners of the parent revised upward JPY 8 billion to make the full year loss to be around minus JPY 42 billion. Annual dividend, JPY 20, is going to be maintained.

Please look at Slide 13. Here now I'd like to explain the differences from the forecast we made back in November, the loss of JPY 75 billion for the year ending March 31, 2021. So allow me to go through these details.

First, we are expecting to have an improvement of JPY 7 billion for the full year coming from the improved profit in Precision Equipment business. We are still having travel restrictions into China and others, but it could be more likely to have much less impact from the COVID-19 pandemic than we had expected.

Next, we expect to have improved operating profit in Imaging Products business as much as JPY 3 billion. This is coming from the good sales of mirrorless and cameras and bodies and lenses and others. In terms of new products, they turn out to be quite popular, resulting into more ration of high-end products than we had expected, resulting into better product mix.

Next is the benefit of JPY 2 billion coming from additional expense reduction in Imaging Products business. We are not having this effect because we are advancing to execute our original benefits cost reduction earlier than we had planned. On top of that, we can expect to have a total of expense reduction at headquarters given as much as JPY 3.6 billion for the full year. That's the disposal and the write-down of the semiconductor equipment and other inventory as much as minus JPY 5.6 billion we had in the third quarter now will push down operating profit.

All in all, we are forecasting operating profit for this fiscal year ending March 31, 2021, would become minus JPY 65 billion or around. This is our latest forecast.

The graph on the right shows a true or on a pure operating profit, excluding impacts coming from COVID-19 or onetime costs and other special factors. We had assumed the COVID-19 impact would be as much as minus JPY 55 billion at the time of the interim report, but now the impact is now suppressed by JPY 7 billion to be reversed to be minus JPY 48 billion. Onetime cost is now calculated to be a total of minus JPY 35.2 billion coming from minus JPY 29.6 billion we allocated in the first half as well as the evaluation loss of JPY 5.6 billion in the third quarter, then we have minus JPY 5 billion for structural reform-related costs. And if we are to eliminate those factors, then we can calculate the true or on a pure operating profit.

Slide 14 shows a table of financial highlights for the full year ending March 31, 2021, including changes year-on-year and the previous forecast. I have already explained the outline.

Here, I would like to explain our full year forecast by segment. I will skip the summary page. Slide 16. First, Imaging Products business. The left bars in red show revenue being JPY 145 billion, revised up by JPY 5 billion from the previous forecast. Besides the market shrinkage, COVID-19 is pushing down the units sold greatly, but we're raising our forecast for the revenue, reflecting by mirrorless and new products' popularity in the third quarter. We expanded our mirrorless lineup to 6 cameras and 18 lenses. We advanced our shifting toward pro and hobbyist models. And because of this, our selling price has been steadily improved.

Operating loss shown in the gray in the left improved by JPY 5 billion from the last forecast. It is expected to be minus JPY 40 billion. Business cost is planned to be reduced as much as JPY 63 billion during the current midterm plan, which will come to end in the next fiscal year, of which we will advance to reduce JPY 2 billion. So we plan to reduce as much as JPY 22 billion. The cost for the structure of reform for the current year is going to be JPY 5 billion.

Imaging Products business, with the high-end shifting and structural reforms, aims to be profitable even when revenue is less than JPY 150 billion. This is a part of our effort to improve our financial strength. Consolidation of plants of subsidiaries was reported this week by the media as part of this effort. We are recently making sure progress and becoming profitable, excluding special factors. And we will continue our efforts to generate profits as long as possible.

Slide 17 shows the Precision Equipment business. Revenue, actually in left in blue, caught on being JPY 190 billion, up JPY 5 billion from the November forecast. FPD, due to the stay-at-home phenomenon, CapEx for small and midsized panels is recovering and CapEx for large panels is also firmly progressing. With the travel restrictions, we are still faced with the restricted working environment, but installations are progressing earlier than we had expected.

Sales volumes are increased 6 units versus previous forecast of 22 units we made in November. We now expect to have a total of 28 units to be installed. This should be done by the end of March. In contrast, we are still having a tough time in Semiconductor Lithography Systems. Major customers have already done the first round of investment and some customers are affected by COVID-19, resulting in delayed deliveries and orders. The number of units sold has declined greatly.

Operating profit for the entire Precision Equipment business is now revised at JPY 3 billion, and it is expected to become JPY 4 billion. FPD is increasing, particularly the revenue opportunities, but the disposal of inventory and asset and the write-down will kill some of the improvements. So the increase is going to be expected to be in net JPY 3 billion.

In Precision Equipment business, services business is the basic source of revenue. We will make further efforts, moving into peripheral business opportunities such as measurement and inspection equipment, and we will make efforts to explore new customers within the space of the lithography business operations.

Please look at Slide 18. Healthcare business has not changed. Both revenue and operating profit from the previous forecast, shown in green and gray, respectively, which then our order-taking had effectively resumed, both in biological microscopes and the retinal diagnostic imaging system. We are on the recovery track in the second half, but it was not big enough to offset the magnitude of the revenue decline we had in the first half. The contract cell manufacturing is progressing well in multiple projects next year, and production will scale up and it is expected to make its contributions to the performance. In light of these factors, we do believe we can achieve a profit in the Healthcare business in the next fiscal year.

Lastly, Slide 19 on Industrial Metrology business and Others. And Others include Digital Solutions and the Glass business. We have not changed our forecast for the full year revenue and operating profit from November numbers. In this Industrial Metrology business, electronic components, semiconductor-related as well as automotive are on the recovery trend. We do expect to have a decline in revenue year-on-year. Others include our business collaboration with DMG MORI Company Limited as well as Velodyne lidar Inc., including lidar sensor production and components business and others.

Operating profit. We had an actual impairment of fixed assets as much as JPY 3.2 billion in the first half. With this, we expected to have a loss of JPY 2 billion. But excluding this onetime cost, we are now having a surplus in substance, and this should give us a good leeway into the next year's profit. That's all as for my explanation.

Here now I'd like to summarize the third quarter. We generated a profit or the possible profit by excluding special factors in all the segments. For Nikon Corporation as a whole, we generated a positive JPY 9.9 billion, returning to operating profit baseline since the last quarter. Free cash flow on the cumulative basis was up in the third quarter. We are able to confirm the recovery trend in the third -- 3 months period. But as we described this on Slide 20, we still have many issues we need to address in order to achieve sustainable growth.

In order to improve the balance sheet, we have conducted a thorough checking into our assets. We had a large amount of impairments and write-off we have not done yet here. We will further continue our efforts here in the fourth quarter as well in order to further reduce low profit-making assets and others.

Imaging Products business is going well recently, but we need to make further efforts in order to stably generate profit because it seems that we have just been helped by the market recovery. For Precision Equipment business, while FPD is going well, we have to work hard so that we can generate revenue in semiconductor equipment in a stable manner.

In order to make sure our stocks will recover, we believe it is important that we can show our future growth pillars as clear as possible. Building a platform for growth is going to be a top priority. As you'll see, there are still many issues and a tough journey is still ahead of us, but we would very much like to leverage the most recent recovery and we'll go for profit to be generated in the entire segments and for the entire company at Nikon Corporation. We need to move into the next growth.

May I solicit for your continuing understanding and the support with our shareholders and investors. Thank you, indeed, for your kind attention.