Nikon Corp

TSE:7731

Earnings Call Transcript 2022-Q3

[Muneaki Tokunari, executive]

Hello, everybody. This is Tokunari, CFO. I would like to thank you for your precious time despite your busy schedule to attend Nikon Corporation's financial briefing. I am delighted to explain the third quarter results and the full year forecast for the year ending March 31, 2022. The top half of the page shows the actual numbers for the third quarter and the bottom half shows the cumulative numbers for Q1 through Q3. The actual revenue for Q3, October through December, declined, but operating profit grew year-on-year. The bottom half of the page, in terms of the cumulative basis up to Q3, shows big growth over JPY 80 billion, both in revenue and operating profit.

Slide 4 shows the major financial numbers for the third quarter for the consolidated basis. Actuals shown in the yellow fields compared with the previous year in the far left end operating profit, profit before income taxes and profit attributable to owners of the parent show a growth of about JPY 4 billion to JPY 5 billion, respectively. As shown in the far right, for your reference, compared with the profit level for October through December in FY 2020, 2 years ago, the latest profit grew almost 3x, meaning we were able to go greatly above the pre-COVID actuals.

Slide 5 shows Q3 actuals by segment. We achieved a positive operating profit in all the segments. And as shown in the right-hand column, year-on-year basis, profit grew in all segments, except for the Precision Equipment business.

Slide 6 shows the cumulative numbers in actual, the third quarter, namely for 9 months from April to December. As shown in the yellow fields, the cumulative numbers from Q1 to Q3 revenue, profit and free cash flow show a sharp improvement over the last year's actual. In terms of the comparison to pre-COVID 2 years ago, not the revenue, but the profit level got expanded about 2x. Since the last year, Nikon started its efforts to address the COVID pandemic issues and the structural reforms in parallel. These efforts gave us a lower breakeven point, making Nikon as a whole, more resilient and elastic.

Slide 7 shows financial highlights from Q1 to Q3 by segment. As you see here, all the segments enjoyed operating profits. As shown on the right hand, all segments had growth both in revenue and profit year-on-year.

From Slide 8 and onwards, I will go through the details by segment for October through December Q3 numbers. First segment is Imaging Products numbers. October through December period usually turns out to be a peak in revenue with the Christmas shopping spree. However, this year, we were not able to supply enough products due to the shortage of components. So our sales volume declined sharply from the previous year. Our revenue also stayed lower than the previous year. Though the overall sales volume declined, but with our efforts to supply mid- and high-end models, our ASP steadily rose. Of particular notice is the mirrorless flagship Z9, which was launched in December, made its great contribution to our profit. Thanks to the benefits from the reduced business costs, we were able to generate JPY 6.3 billion in operating profit only in 3 months of the third quarter.

Slide 9 shows the Pression Equipment business. With the sales volume down both for FPD and the semiconductor lithography businesses vis-à-vis Q3 previous year, both revenue and operating profit were down year-on-year. In contrast, service business grew firmly, backing up the company profit. Thanks to the strong semiconductor market, our customers maintained a high level of utilization of the lithography systems we had installed. With this, we are expecting to see a firm service opportunities for maintenance and supplies.

Please refer to Slide 10. Health care business enjoyed good growth, both in revenue and profit, thanks to the strong demand for biological microscopes and retinal diagnostic imaging systems well known as a fundus camera, mainly in the North American and European markets. October through December operating profit was JPY 1.9 billion, a record high on the quarterly basis in the history of health care business.

Slide 11 is a Components business. For the 3 months of October through December, revenue was JPY 13.9 billion, and operating profit was JPY 6.7 billion. This great contribution came from the EUV-related components, which finally enjoyed a good performance this year. We also had a good business with a non-EUV optical parts for semiconductor-related products as well as in quarters for industrial equipment. The same goes to photomask substrates for FPD. Year-on-year, we achieved a great growth, both in revenue and profit.

The last segment is Industrial Metrology business and others. Others include some production affiliates. Industrial Metrology business benefited from the strong semiconductors and electronic components industries. Sales for metrology equipment and industrial microscopes drove sales. For October to December quarter, revenue was JPY 8.9 billion and operating profit was JPY 1.7 billion. We enjoyed growth both in revenue and profit year-on-year.

Next, allow me to go through our forecast for the full year. Slide 14 shows the highlights. Full year forecast for revenue is now revised up to JPY 550 billion, further up JPY 15 billion from the November official forecast. Emerging Products segment is now revised at JPY 5 billion, thanks to the improved product mix and the FX impact. Precision Equipment is now revised up JPY 3 billion, reflecting the increased service revenue and the FX impact and others. Health care is now revised up JPY 3 billion. Components business is now revised up JPY 4 billion, driven by a strong EUV-related components business.

Full year operating profit is now further revised to JPY 47 billion, further up JPY 13 billion from the November forecast. Details are described in the slide here. On top of the increased revenue while keeping eye on the further expense control, we have now revised up our operating profit forecast in 4 businesses: Imaging products, Precision Equipment, Health Care and Components. Profit attributable to owners of the parent is now revised up to JPY 39 billion for the full year, up JPY 10 billion from the November forecast. ROE is expected to become around 7%.

As for shareholder returns, as of now, we are planning to have annual dividend being JPY 40. We have a policy of total payout ratio of 40% or higher, so we'll make an appropriate judgment based upon the final performance.

Please refer to Slide 15. If I may here, and I would like to expand using the slide on the background for our latest forecast for a significant upswing for operating profit. First, please look at the far left. Operating profit was forecasted to be JPY 34 billion for the full year as of November. The first factor behind it is the expected improvement as much as JPY 1 billion from the U.S. pension. As described in the bottom and rather small letters, sorry about this, but this is having to do with the technical factors due to the changes in the pension systems of the several affiliates we have in the U.S.

Next factor is FX as much as JPY 2.5 billion on the positive side. Our assumption for the exchange rates were JPY 105 to the U.S. dollar and JPY 125 to the euro for our performance forecast. This time, we have changed our FX transaction. We are now using the actual rates up until the third quarter and for the fourth quarter, our assumed rates of JPY 115 to the U.S. dollar and JPY 130 to the euro. So its impact is assumed to be a positive JPY 2.5 billion.

There are 3 business factors. The first factor is the expected benefit coming from the increased sales and improved product mix as much as JPY 4.5 billion. We are enjoying firm sales in each business. And on top of that, the shift to mid- and high-end products in the Imaging Products business has been accelerating. Also, there is a sense of shortage of products, thus ASP tends to go up. With these factors, we are expecting to have big growth in profit.

The second business factor is the expected onetime service growth, particularly in Precision Equipment business, it is as much as JPY 2 billion. Last factor is the benefit coming from expense control as much as JPY 3 billion in profit. Yes, it is still difficult to see the future outlook with certainty, but we are here determined to make further efforts to improve our future forecasting insight.

Our full year forecast are shown in the yellow fields on Slide 16. For the full year basis, for the comparison vis-à-vis the previous year, please look at the column to its right. As you see, we are now forecasting to have a big improvement at around JPY 100 billion in revenue, operating profit, profit before income taxes. Far right-hand shows the changes from the previous forecast back in November. They are clearly in big upward revisions. I have already explained these details.

This slide shows the history of operating profit for the past 10 years. Excluding the last year and when we were affected by COVID-19 and the cost for the structural reform, the average operating profit for the past 9 years was JPY 46.5 billion. For the current fiscal year, we do expect it to recover up to the level of pre-COVID-19 average.

Next, please look at Slide 18. This slide shows our focus for the full year and together with actual numbers last year as well as the last forecast we made. The key takeaway here is that each segment shows higher numbers over the previous year's actuals and the previous forecasts. I will now go through details by segment.

Slide 19. First, Imaging Products Business. Revenue here is JPY 180 billion, up JPY 5 billion from the last forecast in November. Past procurement constraints are now affecting the entire camera industry, though there is a strong demand from customers, but each company is having a difficulty in fulfilling supplies. As a result, as shown in the bottom left, the units sold is expected to be lower than forecast made. This is the case both for the entire industry as well as Nikon. Having said that, Nikon has its strategy to focus on mid to high-end cameras and lenses centering around mirrorless products where we have a firm demand.

In the mirrorless category, on top of ZF, which is enjoying a rather good sales supported by young and female consumers, we launched our flagship Z9 toward the end of last year. The Z9 was of the world's best order forecast capability as well as the long or 8K video shooting function. This product has been in the future and ranked #1 in camera magazines and reveal size. We are honored by the high valuation given to this product. Z9 has been so popular in terms of the actual sales and reservations. We have a plan to increase the number of the Z mount lens up to 30 lineups. This is just one example to clearly indicate that Nikon mirrorless products are expanding their popularity, particularly among pro and hobbyists.

With Nikon's classificate products capability and our ASP continues to improve, yes, we are still restricted in supplies due to the shortage of components, but we still have a forecast for improved revenue on a full year basis. Operating profit is expected to be JPY 20 billion, driven by the increased revenue as well as the reduced operating costs. We are almost certain operating profit margin to go above 10%.

Slide 20 shows the Precision Equipment business. Revenue is revised up to JPY 220 billion, up JPY 3 billion from the November forecast. As shown in the bottom left, the Photography systems, both for FPD and semiconductors are selling as we had planned back in November. Lithography Systems, we have delivered to our customers are highly utilized, so maintenance and supplies and other service-related revenue is being so firm. We can expect to generate onetime revenue this fiscal year. So we are making upward revision for the revenue opportunity. Operating profit is now revised up to JPY 25.5 billion, up JPY 2.5 billion from the last forecast.

Now please turn to Slide 21, Health Care business. Biological microscopes have been strong in demand. Right now, Diagnostic Imaging System sales has been higher than our expectation. So now revenue is revised up by JPY 3 billion to JPY 73 billion. Operating profit is also revised up JPY 1.5 billion to JPY 3.5 billion. This is going to be the very first profit on the full year basis since its inception.

Next slide is our components business. Revenue is revised at JPY 4 billion to JPY 42 billion on a full year basis. On top of the better-than-expected revenue with EUV-related components business vis-à-vis the November forecast, non-EUV optical parts for semiconductor-related products and industrial corners and others have been rather stronger than we had assumed. So we are making an upward revision for the full year.

Operating profit is also revised up to JPY 12.5 billion for the full year and reflecting the increased revenue as well as the expense control. As for the components business, we started disclosing this fiscal year, we have our business and the concept that it is not final products rather than we should have customers back, offering the kind of parts and components that are meeting with customers' needs. Nikon does believe that this Components business continues to become one of the important profit-generating pillars moving into next fiscal year and onwards.

Last slide is about Industrial Metrology Business and Others. Full year revenue forecast has not been changed, remaining at JPY 35 billion from the previous forecast. In this Industrial Metrology business, metrology equipment and industrial microscopes are strong, and we expect this revenue and operating profit are expected to grow year-on-year.

Now allow me to wrap up my presentation. Imaging Products business, with the structural reform done, we lowered our breakeven point. Wireless Z series products are quite popular among our customers. We had lost 2 years in a row, but now we expect operating profit reaching at JPY 20 billion level. Precision Equipment business performance, both for FPD and Semiconductor Lithography Systems, has been rather strong including service revenue. Health care business is sure to become profitable for the first time. Components business, centering around EUV-related business, is now accelerating our growth, and this has become so clear in the third quarter.

As you see, all the business segments are advancing firmly. With this in mind, we now forecast profit attributable to owners of the parent to be JPY 39 billion. And ROE, the third line from the bottom right side is expected to be around 7%. Operating profit for the fiscal year ending March 2022 is forecast to be JPY 47 billion. This profit number is the average level we used to have before COVID-19. We believe Nikon has now become a more resilient, elastic and a tougher company, thanks to COVID-19 and the structural reforms we have executed.

Next challenge is next growth. Currently, we are developing Nikon's next medium term management plan, which starts from April this year, involving outside directors. We are happy to set up a meeting with you, so that the President Umatate can explain the plan.

Moving into the next fiscal year, which is the very first year for the next medium term plan, we have to pay full attention to several factors, including the loss of the onetime profit we had in the current fiscal year, recurring components, inflation pressure as well as resurgence of COVID-19. We should not be complacent with the recent good performance. We will tighten our belt so that we will succeed to extend the current momentum into the next fiscal year, and we also need to drive a series of efforts for our future growth. So I would like to ask our shareholders and investors to rely on Nikon and solicit for your further support going forward. I would like to thank you for your kind attention.