Nikon Corporation (OTCPK:NINOY) Q2 2023 Earnings Conference Call November 10, 2022 2:30 AM ET
Company Participants
Toshikazu Umatate – President and Chief Executive Officer
Muneaki Tokunari – Executive Vice President and Chief Financial Officer
Conference Call Participants
Toshikazu Umatate
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 and 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 mid-term 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 acquisition 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 a detachable heads for machine tools. The company develops and manufacturers heads that can perform additive and removable processing as well as meteorology 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 JPY84 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 share’s 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 corporation 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 for 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 tool. 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 affected 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
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 JPY288.3 billion, operating profit was JPY24.4 billion and profit attributable to owners of parent was JPY18.8 billion. Compared to the first half of the previous year, revenue increased by JPY15.3 billion.
Next 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 JPY7.7 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 increase by JPY13.3 billion, operating profit by JPY1.4 billion and profit attributable to owners of parent by JPY1.8 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 effect 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 and 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 PL non-attributable to any reportable segments decreased by JPY8.4 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 three 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 JPY25.3 billion year-on-year to JPY114.5 billion and operating profit rose JPY9.7 billion to JPY22.2 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 to substantial 28% year-on-year and the operating profit margin was nearly 20%.
Slide 14 shows the Precision Equipment business. Revenue decreased JPY35.9 billion year-on-year to JPY83.3 billion. Operating profit was JPY6.2 billion, a decrease of JPY21.3 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, proceeded all at once. And the semiconductor lithography business revenue and profits increased year-on-year due to an increase in the number of new units sold.
Slide 15 and 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 JPY46.6 billion and operating profit of JPY3.6 billion.
Slide 16 shows the results from the Component business. Revenue was JPY26 billion and operating profit was JPY9.8 billion. Both revenue and operating profit were much higher than the previous year due to increased sales of EUV-related components and optical parts & 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 systems and industrial microscopic were strong resulting on a year-on-year increase in both sales and profits. In addition, operating profit improved significantly due to higher utilization rates at production subsidiaries included in others. As a result, the segment reported revenue of JPY17.6 billion and operating profit of JPY1.5 billion year-on-year increase in both revenue and profit and return 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 JPY120 to the dollar and JPY130 to the euro, but in consideration of recent fluctuations, we have changed the exchange rate assumptions to JPY135 to the dollar and JPY135 to the euro for the second half of the fiscal year. Combined with the first half results, the full-year exchange rate will be JPY135 to the dollar and JPY137 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 JPY20 billion from the previous forecast to JPY645 billion, operating profit is JPY55 billion unchanged from the previous forecast. Profit attributable to owners of parent is expected to be JPY42 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 for the previous forecast at JPY40 per share for the full-year and JPY20 per share for the interim dividend. The dividend payout ratio is 34.6%. Regarding share buybacks, we have repurchased 10.65 million shares for JPY16.1 billion by the end of October. We will continue to repurchase shares up to JPY30 billion through March 24, 2023.
The full-year operating profit forecast of JPY55 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 JPY5.5 billion of FX impact, including in 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 JPY2 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 JPY55 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 has 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 JPY15 billion from the previous forecast to JPY230 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 JPY51.8 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 maintain 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 JPY33 billion, JPY6 billion higher than the previous forecast due to the increase in sales. Compared to the previous year, operating profit is expected to increase by JPY14 billion. In the second half of the fiscal year, we expect expenses for sales enhancement in 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 JPY230 billion, a JPY10 billion reduction from the previous forecast. Compared to the previous year, it is expected to increase by JPY18.8 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 and panel prices. As for Nikon, due to the delay and 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 of 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 JPY10 billion for the Precision Equipment segment as a whole.
Operating profit forecast is also lowered by JPY5 billion from the previous forecast to JPY30 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 JPY9.4 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 JPY13 billion from the previous forecast to JPY93 billion. This is a significant increase of JPY19.8 billion year-on-year, and we are 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 JPY8 billion and upward revision of JPY2 billion from the previous forecast due to the effect of increased sales. This represents an increase of JPY3.7 billion year-on-year.
Slide 26 shows the outlook for the Component business. We have not changed our August forecast for revenue, which we expect to be JPY53 billion, up significantly JPY12.2 billion from the previous year. Operating profit is expected to be JPY18 billion, an upward revision of JPY1 billion from the previous forecast reflecting the strong first half performance. This represents an increase of JPY5.3 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 Other. Others include the figures from our production subsidiaries. Reflecting the first half results, we have revised upward previous forecast for this business segment by JPY2 billion to JPY39 billion. This represents an increase of JPY3 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 and others are expected to increase. Operating profit is expected to be JPY4.5 billion an upward revision of JPY0.5 billion from the previous forecast due to the effect of increased sales. This represents an increase of JPY1.6 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 for the full-year is based on the assumption that the exchange rate will be JPY135 to the dollar as well as to euro. Based on this assumption, we expect operating profit of JPY55 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 this presentation, we will proceed with a 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.
Question-and-Answer Session
Q –
Muneaki Tokunari
We ask for your continued understanding and support from our shareholders and investors.
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