Konica Minolta, Inc. (4902) Earnings Call Transcript & Summary

Good evening. Thank you for attending our earnings presentation today. I will explain our financial results, which were disclosed at 3 p.m. today. Page 2, first. On April 1, I was appointed President and CEO of the company, and we started a new executive structure. We have been struggling for the past several years, and we are faced with management challenges. In this backdrop, as President and CEO, it's my responsibility to bring Konica Minolta back to a growing company again. I will explain management policies and basic stance for the current fiscal year and beyond. Under the long-term management vision of Imaging to the People, we will continue to deliver socially meaningful value based on our imaging technology. That does not change. On the other hand, the environment in and outside of Japan has changed significantly since fiscal 2020 when we presented our current medium-term management plan, DX2022, and it is necessary to review our current policies. Sensing, Materials and Components, Healthcare, particularly Modality and Industry Printing, these businesses are making progress in line with our midterm plan DX2022, and we will aggressively seek ways to accelerate growth by acquisition, additional investment and strategic CapEx spending through our genre-top strategy or category top strategy. We will enhance value propositions in our differentiated products and services. On the other hand, the urgent issue is to rebuild the profitability of the Office business and Production Print business, whose profitability has been declining due to the external environment and internal reasons. We will do our best to increase supplies, make more efficient operation for higher quality through our structural reform so that we start feeling the effect of these efforts from the second half of this year, that should generate cash to support company growth. Under these circumstances, in the business segment of Sensing, Materials Components, Healthcare and Industry Printing, we will continue to aim to achieve the numerical targets for the current fiscal year, the final year of midterm plan of DX2022. But we have to admit that we will not reach our goals in all other businesses, and we will review the numerical target for the entire company. With regard to the transformation of our business portfolio, we will continue to aim for completion by FY 2025, including progress in our Industry business and use of external capital, particularly in strategic new businesses and low profit businesses. In the long term, toward the year 2030, we will realize value creation for the 5 materiality issues we have identified: improving fulfillment of work in the corporate dynamism, supporting healthy and high-quality living, ensuring social safety and security, addressing climate change and using limited resources effectively. Our basic stance on performance target is that there can be no plan without stretches. But by setting and implementing achievable target, we hope to restore the confidence of our employees and regain and earn the trust of our external stakeholders. We will then focus on improving our sluggish financial performance with an emphasis on cash flow generation. Our field force is very strong. It's never weak, and has overcome many difficulties in the past. Entrusting such field work and sharing reality and the current position of the company, we will strive to improve our management and corporate value through honest dialogue with our stakeholders. Now I will explain our business performance in FY 2021. Page 4. For the full year, amid a recovery from FY 2020 when demand was hit hard by the COVID-19 pandemic, revenue was essentially unchanged from the previous year, mainly due to tight semiconductor supply, longer logistics, transportation time, accidents at our toner plant. Operating loss was JPY 22.3 billion, a JPY 6 billion deterioration from the previous year. Although there were some negative factors such as higher logistics and materials cost, the loss narrowed from the previous year due to improved gross profit, excluding the JPY 10.9 billion impairment loss. Looking at the fourth quarter only. Excluding the impairment loss recorded at the end of the period and the downward adjustment of account receivables, we were in black for the first time in 3 quarters. Cash flow was negative due to continued losses and an increase in inventories caused by supply delays. The year-end dividend will be JPY 15 per share as previously announced. Page 5, please. Despite these results, we made progress in some areas as planned, which is summarized on this slide. As for what we were able to accomplish, as I mentioned at the beginning, the Sensing and Materials and Components drove our business in the industry segment. And the Industrial Printing and Healthcare business also achieved the increase in revenue and profit in line with our plan. While maintaining SG&A expenses at the JPY 100 billion level for the quarter, the company reduced fixed costs in the office and production print, thanks to the reform implemented in the previous fiscal year while promoting a shift to growing businesses. Demand for office and production print showed a solid recovery as expected and orders expanded, while DW-DX business continued its business revenue growth trend driven by workflow solutions and managed IT services. Revenue contribution is yet to come, but our partner strategy is making its way. For example, in the DW-DX business, a joint venture with Change Corporation was established to support local Japanese government's operation through the use of DX. While in Healthcare business alliances and collaborations with Canon Medical, Siemens and Olympus were developed. And in Care Support we formed a joint venture with Marubeni Corporation, and we are expanding the number of collaborations and partners, including a strategic collaboration with SoftBank using FORXAI. On the other hand, areas of underachievement are also listed here. Mainly in the office and production print sectors, we suffered from tight semiconductor supplies, prolonged logistics lead time, sporadic underutilization at production sites due to COVID-19 and toner supply shortage caused by the factory accident all resulted in decreased sales revenue, increased order backlog and inventory, particularly onboard inventory. The increase in logistics and materials costs could not be fully absorbed despite self-help efforts and price adjustments and continued air shipment to make up for toner supply delay caused by the factory accident also led to increased losses. In Precision Medicine, the expected growth was not achieved because patients' hospital visit recovery and resumption of clinical trials by pharma companies were slow in the fourth quarter due to the resurgence of COVID-19 mutation strain in the U.S. In addition, progress on leveraging external capital for low profit businesses was also delayed. Page 6 shows revenue and operating profit by business segment with details of year-on-year changes explained in the following pages. Page 7, please. In digital workplace, despite the effects of structural reform, improved gross profit margins and favorable FX impact, income declined by JPY 3.5 billion mainly due to an JPY 18 billion impact from semiconductors, JPY 4 billion impact from the toner plant accidents and a JPY 4 billion impact from logistics lead time. On the other hand, the Professional Print business reported an increase of JPY 8.9 billion despite impact of the toner plant accident of JPY 7.5 billion and goodwill impairment of JPY 1.5 billion, which were more than offset by improved gross profit due to increased sales, foreign exchange effect and cost reductions. For Office and Professional Print segment cost reduction effect of JPY 13.5 billion, including service cost reduction was achieved, thanks to structural reform in FY '20. In Healthcare segment, modality recorded higher sales and profit, but Precision Medicine posted a decline of JPY 13.9 billion due to JPY 9.2 billion decrease in account receivables and JPY 2.5 billion in expenses related to the preparation for IPO. In Industry, despite goodwill impairment of JPY 9.4 billion, the majority of the gross profit contributed to the increased profit as the profit from increased revenue was $11.5 billion. If I may repeat, the items in blue bold font on this slide, industrial plant, industrial print, healthcare modality, sensing, materials and components, these segments support growth of the company. Page 8. The previous forecast for operating profit was JPY 12.0 billion. I will explain the gap from this forecast. We deviated from this forecast due to onetime factors such as the JPY 10.9 billion goodwill impairment and JPY 9.2 billion reduction in account receivables and the gap from our forecast was about JPY 12.0 billion in Digital Workplace and about JPY 2.0 billion in Precision Medicine. In the Digital Workplace business, the order backlog increased due to longer lead time, especially in the U.S. in the fourth quarter, it even got worse. It was prolonged by 3 weeks than usual. In the worst case from Asia to West Coast of U.S., it took as long as 90 days. And accordingly, there was a decrease in sales-related solution -- Office Solution business for DW-DX. Those are main reasons for the gap. The company was also affected by the fact that the sales of assets, which was expected as part of the structural reforms was not completed by the end of the fiscal year that is included in this JPY 12 billion gap. As for Precision Medicine, I have already explained. Recovery in the number of patient visits to hospitals were slow in U.S. because of Omicron strains leading to JPY 2 billion gap from the plan. Next, on Page 9, I will explain the outlook for FY 2022. Taking into account the recovery in demand and market growth I have explained, strengthening of our investment and measures in growth areas and supply constraints due to the external environment, we have revised our outlook significantly from the JPY 55 billion in operating profit forecast in the midterm plan. Although we managed to increase in both in sales and profit, the revenue will be JPY 980 billion, JPY 15 billion operating profit and JPY 5.5 billion in profit attributable to owners of the company. We expect the Shanghai lockdown to have a significant impact in the first quarter, and we expect to post a loss during the first half due to onetime expenses for structural reforms in the second quarter. Cash flow is expected to improve mainly due to profit improvement and inventory optimization by eliminating backlog of orders. Showing the factors impacting business segment from FY '21 to FY '22, I will focus on operating profit. Excluding JPY 20.1 billion in onetime expenses from the JPY 22.3 billion operating loss in FY '21, Digital Workplace is expected to see a recovery in demand, elimination of backlog and price revisions has positive factors, but higher materials and logistics cost and air transportation costs, onetime expenses and net effect of a structure reform will result in overall increase of JPY 9.7 billion. Professional Printing is expected to grow due to recovery of toner supply, sales growth, including effects of new products and increased demand for digital printing including industrial printing and price revision. But we expect increase in logistics and material costs, which will result in operating profit of JPY 2.5 billion increase in this segment. Healthcare is expected to increase by JPY 4.6 billion including modality due to an improvement business environment in U.S. for Precision Medicine and the reduction in capital policy expenses. In Industry, we expect an increase of JPY 2.0 billion due to higher sales mainly in the Materials and Components business despite higher material and component cost investment in human resources and other expenses. If I may repeat once again, items in the blue bold font, they show our growth drivers. We will not stick to the number of revenue, JPY 1 trillion, but they will be the profit source for our future growth. They are our priority in development and investment CapEx and genre-top strategy to enhance our value. Let me return to the FY 2021 result on Page 11, starting with the Industry business, which continues to perform well. Overall, sales and profits have continued to increase since FY '19, before COVID-19. In Sensing, there was additional demand in the first quarter, mainly for light source color measurement instrument for smartphone and manufacturing and inspection, and some advanced shipments were made in the fourth quarter. Sales and profit continued to increase, including object color measurement instruments. In the Materials and Components business, sales of functional materials continue to be high for functional films for large TV displays and ultrathin functional films for laptops and mobile devices and sales of inkjet components increased for industrial applications and sales of lenses for industrial applications progressed steadily in the optical component business. Both sales revenue and profit increased. In the imaging IoT Solutions business, the development of solutions utilized in MOBOTIX video management system was delayed after the acquisition of MOBOTIX and the recent decline in the IP camera market in the pandemic, supply constraint for semiconductors and other components and the situation in Eastern Europe, in Russia and Ukraine also caused delays in recovery compared to expectations. Therefore, we posted impairment of goodwill. In fiscal 2021, IP cameras recovered compared to the thermal camera, which had experienced special demand due to the COVID-19 pandemic. Going forward, IP camera market is expected to recover from pandemic and grow in future through a technology alliance between MOBOTIX high-performance AI cameras and the company's FORXAI. We will improve profitability by strengthening our ability to process -- to propose value through image analysis solution in high security areas such as the [indiscernible] prevention, along with manufacturing, logistics and education by expanding sales worldwide. In the FORXAI business, we have agreed to a strategic collaboration to interconnect SoftBank's platform and make available the most appropriate AI model and device according to needs and applications, which will expand this business going forward. Also, although not mentioned here, the Imaging Solutions business which develops, manufactures and sales planetariums and their contents as well as provide services and operations experienced an increase in trend in revenue with the opening of Japan's first directly operated LED dome [indiscernible] in Nagoya and Yokohama. Page 12 is about Healthcare. Japan drug modalities and medical IT and Asia, including India, also grew. On the other hand, we launched mobile X-ray system, which enables dynamic digital radiography ahead of the world that enables X-ray imaging at bedside and others. We expect high value-added solutions to drive this business, increasing our margin for precision medicine. As I touched upon earlier a bit, I'd like to explain about the reduction of accounts receivables. As we discussed in November -- as we disclosed in November last year about the reduction of accounts receivables, REALM IDX, which has Ambry Genetics and Invicro under its umbrella is preparing for IPO. As part of preparation for listing REALM, the recoverable amount of accounts receivables for Ambry Genetics has been revised based on the recent actual recoverable rate, resulting in reduction in accounts receivables and revenue at the end of this fiscal year. Let me explain the background. Since around 2020, there has been an increasing trend of U.S. private insurance companies setting conditions that insurance reimbursement requires application approval by physicians in advance. And this move has widened. We are responding to this change. Application processing is more complex for Ambry, which has a wide range of genetic testing options. On top of that, the administrative burden on physicians increased, partly because of the COVID-19 pandemic. As a result, there were application errors and some physicians missed the deadline. In the end, some payments from insurance companies to us stagnated or payments were rejected and we were able to collect less accounts receivables. That led us to reduced accounts receivables. We responded to such a situation appropriately by reviewing accounts receivables based on the latest track records. As additional measures for the future, we will offer application processing support software to physicians, provide application support and accelerate the rollout by sales reps and support staff. With such efforts, we would like to address the situation thoroughly. Next page, 13, is on Digital Workplace. In office, despite a recovery in hardware demand, there were supply shortages and an increase in order backlog. And order backlog expanded from JPY 39 billion at the end of Q3 to JPY 46.5 billion at the end of Q4. On the other hand, non-hardware order backlog in Q4 recovered to 86% of pre-COVID level, almost in line with our expectations. Order backlog at the end of the fiscal year was JPY 51.5 billion, including hardware and non-hardware. Please take a look at the graph at the right bottom. In Q2 and Q3, there was a very big gap between hardware supply and actual demand. But in Q4, against the order of 97%, the actual revenue recovered to 93% versus 2019. We'd like to eliminate the gap promptly to reduce back orders and generate revenue exceeding orders. This will be our initiative in 2022. What we will be doing in 2022 in DW-DX, we were not able to grow sales and installations of office multifunctional printer solution as we had planned. Furthermore, managed IT service is also procuring from outside, but with a tight supply and demand of PCs and servers. IT service businesses themselves could not be closed. This is the reason why we could not grow as we wanted to. However, in fiscal 2022, recurring revenue has grown about 15% already, demonstrating a stable increase, although still very small. Although Digital Workplace revenue was flattish and profit decreased by JPY 3.5 billion. Page 14 is Professional Print business. Demand recovered for both hardware and non-hardware contributing to increase in revenue and profit. Please take a look at the graph at the right bottom. The biggest gap for hardware was in Q2 again. And in Q4, orders received and shipments became almost even. On the other hand, for toners, in Q2 and Q3, supply was not sufficient compared to the demand. But in Q4, they became almost even and recovered up to 93%. For toners and hardware, just like for office, there were impacts from shortage of semiconductors. However, as production print has larger impact on consumers and customers, we decided a policy as a company to prevent supply failures of production print. As a result, we were able to secure increase in revenue and profit year-on-year for production prints compared to office. For Professional Prints. Industrial print performed strongly and nonhardware grew sufficiently. As a result, demand shifted from analog print to digital print, achieving record high revenue and, furthermore, achieved the forecast released at the beginning of the year. In marketing service, consumer behavior has changed, especially in North America and Europe due to prolonged COVID, which accelerated the shift to online. Our customer store front campaigns and events were canceled, causing demand for planning and services of printing to shrink. As such, we expect delay in recovery of the investments made, thus posted impairment loss of goodwill at the end of the fiscal year. Excluding such factors, we are maintaining the trend of revenue and profit growth for marketing service. Next, I'd like to explain the assumptions for the earnings forecast for fiscal 2022 and priority initiatives. Page 16, The ForEx assumption, which would be the basis of forecast, is assumed to be JPY 110 to a dollar and JPY 125 to a euro. Compared to the current, yen's value is lower, but since there are many uncertainties ahead, we'd like to stay conservative. As for the impact of COVID-19, compared to fiscal 2021, we expect economic activities to normalize in many countries, but uncertainties will remain, owing to variants. We need to closely monitor the impact of lockdowns in China, zero COVID policy. We also need to keep in mind that there are risks we cannot anticipate there as well. With demand expansion, production will continue to be hindered by semiconductor shortage, but we expect gradual recovery to continue. Logistics lead time and logistics cost remain to be very high now, and we believe this situation will continue through fiscal 2022. In terms of direct impact of Ukraine on our P&L, it is minimal. But rising crude oil and energy prices triggered by it needs to be monitored. Page 17 is about assumptions for markets and supply and demand for each business. In Digital Workplace, many countries are finally going back to offices. The impact will show with an increase in demand for a non-hardware. On the other hand, demand for hardware has recovered, but the top line will be determined by how much can be supplied. This is how we see it now. For DW-DX, we expect needs to continue increasing for our preparing IT environment in offices and for DX. For Professional Print, both commercial and industrial prints, there will be accelerated shift to digital print. And mainly at overseas markets, economic activities will normalize, leading to demand increase. 7% to 8% -- 10% hardware market growth in our focused mid production and heavy production are expected. For Healthcare, in modalities and medical IT, we expect advanced usage of imaging utilizing AI to interpret images and dynamic digital radiography and others for sure. Furthermore, for Precision Medicine, we can expect the number of patients to increase and stepwise resumption of clinical trials are assumed. For Industry, we expect smartphone market recovery, growth in large display market and increase in demand for high-performance ultrathin film for mobile applications. We also expect recovery from COVID for IP cameras. We are expecting recovery, especially in our focus area, the U.S. But the impact from Eastern Europe, Ukraine and Russia needs to be incorporated. Supply environment is as described here, but I would like to mention one point. Toner shortages will be resolved, but safety inventory should be held in the market. This is essential for the business. To that end, in fiscal 2022, we will continue to ship toners by air to rebuild market inventories. Furthermore, we are planning to increase capacity by 10% compared to before the explosion for toner production towards the end of the year. Page 18. Amidst such a business environment, I will explain important points about what we need to do this fiscal year to shift our portfolio. First, office production print positioned as business with stable profit will continue to improve sales efficiency and higher quality. To that end, we will simplify the organization to lead to generation of capital for DW-DX. As such, we are planning a structural reform. Transient cost will be posted in Q2 and considering front-loading a part of it in Q1, the impact of this on this fiscal year is JPY 3.5 billion and full year impact is expected to be approximately JPY 6.5 billion. I cannot touch on the details now, but looking at medium to long term, we'd like to advance with manufacturing strategy, including partner strategy, taking into consideration geopolitical risks. In businesses positioned as core businesses, growth areas in each business, for example, in Sensing, appearance measurement, expansion of application to growth areas of ESG, such as recycling application, utilizing hyperspectral imaging. For Performance Materials, not only shall we focus on face different films, but increase genre-top positions in optical film area for displays using performance films, leveraging our production technology. Inkjet components can be used for industrial application. In Healthcare, dynamic digital radiography, AI image interpretation support, upsell to departments where we have connections too can be done continuously. We will continue to enhance business rollout to such areas. To that end, in Sensing, we will proceed with M&A, expand capacity by capital investments for Performance Materials and generate impact by strategic alliance with peers in healthcare. We will enhance personal investment in these areas at the same time and also allocate cash. In strategic new businesses, we will continue to prepare seeking the optimal timing for IPO in Precision Medicine. We will seek group synergy utilizing other businesses assets and Image IoT solution. We will accelerate business growth, capturing the digital print trend while maintaining momentum in industrial print. What is common across them will be that we will focus on generating results based on upfront investments for personnel and technology while being selective for upfront investments or technology for the future. For businesses with low profit, we will concentrate resources to the upstream of the value chain while keeping in mind the usage of external capital. Page 19 is revenue and operating profit by segment. Please refer to it as your leader. Profit expansion centering around industry is the highest priority, as we can see from the forecast of operating profits by business. Last of all, I'd like to explain about our shareholder return policy. This time, we partially revised our dividend policy. We will clarify our stance to prioritize cash. Based on this, dividend for this fiscal year is expected to decrease from JPY 30 per share in fiscal 2021 to JPY 20 per share in fiscal 2022. Last of all, to transform our business portfolio, we will make sure to execute what we need to do and prioritize performance improvements. I do not believe it is meaningful to hold explanatory sessions just for formality without substance. Therefore, I would like to explain on a different occasion after we have been able to confirm the feasibility of strategic themes. Therefore, I would like to refrain from giving explanations myself in the near future. My presentation was a bit long, but that is all for me. Thank you very much.