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

I would like to thank you now for your precious time to attend the Konica Minolta's financial briefing. As we announced on 3:00 p.m. today, now allow me to explain the results for FY 2022 as well as the midterm business plan starting from FY 2023. Now Page 3, please. I will explain the summary for FY '22 performance. As for the full year, we achieved a record high revenue since the management integration of Konica and Minolta in FY 2003 up JPY 10.4 billion over the last forecast. As for profit, business contribution and profit an indicator of business earnings power, it was JPY 29.7 billion. In addition to the growth in gross profit driven by the higher sales. SG&A in real terms, excluding FX impact, improved its efficiency to the level of the previous year. As for operating profit, it became a large loss with an impairment of JPY 116.6 billion, which was announced on May 10. But excluding the impairment loss, it was JPY 21.5 billion profit, up JPY 6.5 billion over the original forecast of JPY 15 billion. Free cash flow was negative due to the increased inventory. Now Page 4. This page shows revenue and operating profit by segment. Digital Workplace and Professional Print grew dramatically year-on-year. I will explain the factors for this growth on the next page. Healthcare & Industry had impairments. But excluding those impairments, in terms of the real basis, Medical imaging in Healthcare was firm, and the precision medicine improved in profit. Industry, Sensing and IJ components were firm, but Performance Materials declined both in revenue and profit due to the impact of adjustment in the market inventories. Moving on to Page 5. This shows the factors of increase and decrease of operating profit. The big increase in revenue was driven by the increase in sales volume. In Digital Workplace, the backlog of orders was further eliminated by strengthening production and supply capacity. The backlog of orders that I have just mentioned here is referring to the carried over orders due to the semiconductor in shortage continuing since 2021, though we had demand from the market, we were not able to catch up with our suppliers and we're able to improve the situation and moving toward the end of the fiscal year. Here, we are referring to this as eliminating the backlog. In Professional Print, hardware and the sales grew besides the recovery we had in non-hardware business, those are the major factors. On top of the manufacturing cost factor, driven by the increased production capacity, we had negative factors as much as JPY 25 billion respectively, due to the spike in components expenses as well as the increased logistics expense. But thanks to the increased sales and the price adjustment, both Digital Workplace and Professional Print grew profit JPY 15 billion plus, respectively. Now moving on to Page 7. Here now I would like to explain earnings forecast for FY 2023. Before I go through the numbers, please note the 3 points for FY '23 performance. Point 1, increasing our feasibility of the management target in FY '25 by achieving the target of the first fiscal year of medium-term business plan, which I will explain later. Point 2, we will invest for growth by clearly prioritizing our investment and expenses in a strict manner. The allocation will be made in accordance with the businesses, we plan to strengthen as defined in the medium-term business plan. Point 3, mainly by the reducing inventories, we will increase operating cash flow. Thus, we will improve our free cash flow. Based on these 3 points, FY '23 earnings forecast are: revenue, JPY 1,140 trillion, a slight increase year-on-year. Contribution profit being JPY 24 billion, operating profit being JPY 18 billion, profit attributable to owners of the company being JPY 4 billion, free cash flow being positive JPY 24 billion. Operating profit forecast being JPY 18 billion. Excluding impairment loss we had in FY '22, the real-term number here is JPY 21.5 billion. I will explain the reason in details for this decline in profit in the next page. Here may I remind you again that, since the last year and after I became President, I keep saying we will stop business planning, which will only be realized only when we had the best of the best situations and we are definitely working on this. As for FY '22, we succeeded in this trajectory in real terms, excluding the impairment loss. We do believe we definitely need to go for a big growth in order to regain our confidence as well as trust. With this, the gross profit, the SG&A, we need to keep an eye on the solid bottom line. So it will be a decline in profit year-on-year for these reasons. We are having some of the tough observation. This will give us a solid launch pad, so to speak, to go for those targets. Now Page 8. I will expand on the points I have just shared. Allow me first to explain the situations in FY '22. Special factors in FY '22 are shown on the left side, the right side shows the change ups and downs, excluding special factors. We had the toner plant accident in 2021, which pushed up air freight and logistics expenses as well as the structural reform expenses. They were temporary in FY '22. So those expenses will be gone. At the same time, the order backlog caused by semiconductor and other material shortage was solved in FY '22. So gross profit in this area will come down substantially. So putting FY '21 and FY '22 into balance, we came to our conclusion that we have to look at our true performing strength. I think we need to do so. Yes, we can expect to grow our gross profit in all the business lines thanks to the increased sales volume. But at the same time, we need to fully appreciate the possible cost increase coming from the increasing cost of materials and energy as well as labor. And SG&A does include the cost increase coming from sales increase as well as launching new products and R&D for future growth and industrial business development. In addition, we are having the risk responding factors for our forecast for gross profit and SG&A, taking into account the unstable economic situations. We are also looking into onetime cost for making sales activities more efficient in some parts of Europe. Please refer to the numbers on Page 9 and Page 10 for our forecast for revenue, operating profit and the contribution profit by segment. Starting from FY '23, we are working on adjustment for head office expenses. Some part of the expenses regarding the whole corporate have been transferred to 8 business segment until FY '21 and that will not be transferred in FY '23. The figures in the table are the ones and after adjusting the cost allocation of FY '22 results to FY '23 base as a reference, so we try to become a lot more in the realistic going through the actual or the usage of those in the funds. So in the past, some of those expenses have been assigned to each business as the corporate expenses. We would like to truly appreciate the real business capability by excluding those factors, it is critical for the corporate side to actively understand if the remaining funds are truly utilized appropriately. Moving on to Page 11. Finally, I would like to explain our shareholder return policy. Although the free cash flow is expected to be positive in FY '23, based on the basic policy of the medium-term business plan, aiming at improved financial softness, we will reduce the dividend compared to FY '22 to an annual dividend of JPY 5 per share. We feel deeply sorry for our shareholders, but we would like to ask for your continuing support for our company. In the following pages, I will explain our midterm business plan, which begins in FY 2023. Slide 13, please. This shows our philosophy and vision. Konica Minolta has its philosophy, the creation of new values. Our vision is imaging to the people. By bringing vision to reality, and Konica Minolta has an aspiration to be supported and needed by the global society. Through imaging generation and imaging processing, we would like to offer our solutions, which are wanted by users working inside companies as well as solutions to be used by the final users by meeting with individual needs of this types. Needs to see, we will aim at solving social issues. There is no change as for this. Moving on to the next page. Here now I'd like to expand on our social significance and the material issues. Social issues such as demographic change, climate change and resource depletion becoming more apparent Konica Minolta has identified 5 material issues in order to respond to individual needs to see. Based on these material issues, we will contribute to solving the social issues through its business activities, thereby enhancing its corporate value over the medium and long-term basis. Next slide shows value creation process in order to achieve this important point. By leveraging our intangible assets such as relationship with customers, technology, integration and diverse human capital will pursue material issues through co-creation with our customers and contributed to solving social issues, particularly in the going forward, priority business areas need to be strengthened, be a decision or the potential, we would like to think together with our customers or we should be able to bring in our proposals going beyond customers' ideas. Upstake is a set of values to fix issues and problems. Next, I will review the past 3 years, what we call the DX2020 (sic) [ DX2022 ] using several pages. As we have already reported on May 10, due to the large impairments we had, we were unable to achieve possibility in operating profit or its ratio. We also missed our financial health target as you see here. Moving on to the next slide on priority policies and the results. As for individual targets, we aimed for a recovery of operating profit in office businesses to the FY '18 level. Although we were unable to achieve this goal due to the impact of the COVID pandemic and the toner accident. We implemented the corporate-wide structural reforms, and we achieved some results. Furthermore, the cost and target was to maintain the total fixed cost at the FY 2020 level, which was achieved, excluding FX impact. In portfolio transformation, although the factors deferred in precision medicine, DW-DX and Imaging-IoT Solution businesses, which were positioned as our strategic new businesses. The plan was to generate a profit from the loss of JPY 21 billion in FY '20. It actually wasn't leaving us with a major issue. We wanted to accelerate and pace for the building businesses that will be the next mainstay business after office business. Sensing, IJ Components, Professional Print, and Medical Imaging grew. And the operating profit was up JPY 26.3 billion from FY '20 to FY '22. This contribution to profit is a major driving force for us to renew the next 3-year in a midterm business plan and to define our specific policies. Moving on to Page 19 on ROE fluctuation, since the integration between Konica and Minolta. ROE for FY 2018 was 7.7%. There are many factors, but just looking at the results. Both our net profit and the total asset turnover deteriorated. As for FY '22, we're supposed not to postpone risk to future years, we decided to have impairment loss. ROE was negative 20% or around. But excluding this impairment loss, the level of the real-term profit we believe is on the recovery track. Just one word on Page 20. For the past 1 year, I personally have given a deep thought, what are the strategical issues and try to come up with prioritization for the initiatives. What I kept in mind during this process, exploring into the future years. Besides in having positive discussion, I wanted to have a strong will -- not to be stuck with the history of the past. I wanted to have a strong will to break away from the past, so that we can make a good judgment. I have also given such guidance to the executive officers and have taken the time to develop their resilience as Board of Directors and build an organization that can flexibly respond to changes in the environment. We are having many discussions with the Board of Directors, not only on the regular basis, but also in informal meetings, what we call the directors' roundtable. Last week, we announced the big impairments loss. I believe that we are kind of pushed back by the external auditors in this regard. It's time for us to say goodbye to the past and it shows our strong determination among the [ tip ] officers. And when it comes time for us to do, we have to do it. We are looking into the opportunity on the strategical business and also we are working on the selection and also the concentration. And also, it's very important for us to looking into the balance sheet and cash generation capabilities as soon as possible. It's very important for us to learn from the past experiences. And our mission is to put Konica Minolta back on the growth trajectory. This is going to be the most important part for us to make the best effort. Now allow me to move on to the main topic, the midterm business plan. First, I will expand on the basic policies, if I may. We are using this phrase since year. Challenging and achievable management. Well, it was -- well it was first well received internally, but some concise it because they associated the phrase with the process of shrinkage. May I remind you that this phrase is not talking about shrinkage. Rather, it clearly indicates in our determination to break away from the past. It means we have to abolish the plan, which is going to be based upon nothing, but the best of the best possible scenarios. It means that we will make achievable plans, and we have to go for it. And we need to actually get outcomes. And by having a series of dialogues, our employees will gain confidence and we can regain trust from our external stakeholders. With this philosophy, I have rolled down to 3 major points for the execution of the midterm business plan. One is business selection and the concentration and reallocation of resources and strengthening businesses and furthermore, maintaining profitability in office business, strengthening business profitability through these efforts. This is the first point. The second point is structural reforms to be implemented to reinforce revenue foundation. The third point is reinforcement of business management system. I have selected down to these 3 points in order to go back to a highly profitable business within this midterm business plan, we recorded impairment losses to reduce balance sheet risk. With this as the starting point, we will select and focus on the specific businesses in FY '23 and FY '24. Then we aim to establish a foundation for growth in FY '25. It means we will change the so-called [ moss ] during this 3-year process. Since the integration of Konica and Minolta, we came up with specific namings in the midpoint. But this time, we will not do that intentionally. Rather, we will make sure to complete the process of selection and concentrate within 2 years. Then on top of that, we will go for the process for growth. We'll keep an eye on the future. Page 23 now explains our goals by main financial indicators. The financial indicators we aim to achieve in FY '25 include revenue in strengthening businesses is JPY 500 billion. Business contribution profit ratio is 11% to 13% range, maintaining or slightly improving the current level. Company-wide side, revenue being JPY 1.2 trillion; business contribution profit ratio being 5% or higher; ROE being 5% or higher. Profitability in the strengthening businesses is relatively high, and they will become the backbone of Konica Minolta's business by increasing the weight of these businesses and to be strengthened. Konica Minolta intends to increase its profitability of the entire consolidated group business. Next slide indicates the positioning of each business. In the past, the plan was to position as a portfolio shift. Dividing businesses into 4 quadrants based on the growth potential and profitability and expanding each quadrant in somewhat generalized manner. However, this midterm business plan does not take an all-encompassing approach. But clarifies the expectations and roles of each business and shows the selection and the concentration and direction for the judgment. We believe that this will lead us to realize the value of our original business assets and contributed to improving our corporate value. The business has to be strengthen our Professional Print, Industry and Medical Imaging and Healthcare field. And based on the success of the previous midterm business plan. Going forward, we will create our future by a collection of expanding business operations. In maintaining profit business area, we have office business, which will generate cash in a stable manner.

The non-focused businesses are categorized as marketing services, precision medicine and non-industry-related optical components. These are businesses that we will determine from the perspective of the best owner, while recognizing the growth potential of the market and the value of the business contribution to society and also considering the use of third-party capital. As the first step, we have made the decision in the end of March to deconsolidate the marketing service company in Japan. That is the first step of the action. The direction changing businesses include the Imaging-IoT and DW-DX businesses, which were previously referred to as strategic new businesses. They are still in the red. So the direction for growth will be redefined partially or entirely based on how the FY '23 budgets have been achieved. The next page, image breakdown of business contribution profit in FY 2025. Since we have already mentioned the planned figures for the revenue, we will now explain the composition of business contribution profit, which in FY '22 was JPY 29.7 billion, with a business contribution profits ratio of 2.6%. In FY '25, we will expand this ratio to be more than 5%. The driver of growth will be our strengthening business, which is expected to grow at a compound annual growth rate of 10% and we will especially increase strengthening business in the industry. We need to increase this king color part of the pie chart. This is a very big point. In addition, we intend to increase profitability by reducing the negative factors of business contribution profit through improving the profitability of direction change in business and reducing corporate allocated expenses. As I mentioned, in the FY '23 forecast presentation, how we can reduce the gray part of the bar chart is the point for FY '25. Page 26 is the cost structure reforms a plan that relies solely on business growth is not enough. When there are changes in the external environment, we need to have a backup plan to achieve expected result. In this regard, we will closely examine cost of goods sold, depreciation expenses and SG&A expenses and with these items, we will make sure to improve the business contribution profit ratio by 1 percentage point. Moreover, we will enhance this improvement of this one point and for that, we have already appointed an executive in charge and have moved on to specific actions. Page 27 and onwards, strengthening financial foundation. First, about improvement of asset efficiency especially to improve the balance sheet. Inventories increased at the end of FY '22. Also, there are semiconductor shortages and impact from bulk purchase of parts, but the inventory will be optimized during FY 2023 and the interest-bearing debt will be reduced. 2 years ago, however, we had an accident with an explosion in the toner factory, we learned and listen from the accident. Toner is a lifeline of our profitability and the previous level of 3-month equivalents of inventory is not enough. So we will increase the inventory level of Toner slightly that should be implemented in the midterm plan, too. Meanwhile, we have also made goodwill risk-free at this point, but will continue to periodically inspect it and optimize assets as necessary. Through these measures, we aim to achieve an asset turnover ratio of 1x. In addition, we hope to lower the DE ratio to around 0.5 to 0.55 a reduction from current 0.8 partly from capital reinforcement. Page 28, capital allocation. We expect cash inflow of JPY 300 billion to JPY 330 billion for the 3-year cumulative period of the midterm management plan. The cash inflow will come from working capital improvement, cash generation from operations. Cash will be prioritized for strategic investment and debt reduction and dividends to shareholders will be paid in a balanced manner. We believe that the immediate priority is to increase cash and capital and we intend to restore dividends in line with the improvement in earnings. We intend to reward our shareholders by increasing our corporate value as well as shareholder returns. The next page and onwards are about business strategy. First, let me begin by explaining our policy in the strengthening area for industrial business. In the environment surrounding the industrial business, the evolution of displays is changing the development and manufacturing processes of our customers. In the manufacturing scene, there are growing expectations for process minimization, energy conservation and reduction of environmental load. In addition, the semiconductor supply chain is undergoing a major wave of change due to international affairs and other factors. We have strong customer relationships based on B2B business. And based on the relationship, we accumulated knowledge of each business area of sensing, performance material, inkjet component and optics. The basis for that is precision design, processing and material technology related to optics that has been inherited from our founding business. In the midterm plan, industry business is positioned as a very important core business. We will have cross business actions to maximize the customer relationships and technology assets. We will be closer to customers' value chain in our business development. We will generate cash from existing business with high market share and invest strategically into high-growth areas to create virtual cycle of investments and returns for further expansion of businesses. The next page, strength and growth strategies for strengthening areas for industry business. For the industry business, we have selected a medium-scale stable market and build our business with high market share and a high profit margin of 20% or more at our success requirements. We have been practicing value co-creation with our customers through our core precision technologies of materials, Nano-fabrication, Optics and Imaging as well as Frontline capabilities that integrate manufacturing sales and customer support. In Performance Materials, we are the giant leader in the market for phase difference film and protective TAC film for small- and medium-sized displays. In order to strengthen sales of ultra-wide SANUQI film stretched by offline, a further growth driver, we will increase production facilities with 1/2 to 1/3 of the previous investments to meet growing demand. The preparation is already partially completed, and we are now increasing the capacity. Sensing has a 50% share of the light source color measurement field, making it the top of the genre. In addition to meeting the demand for next-generation displays with highly competitive measuring instruments, we will strengthen global development of inspection equipment using the Spanish company, Eines, automotive visual inspections and the Finnish company, SPECIM, hyperspectral imaging technology to help our customers save labor and solve environmental issues. For industrial use inkjet, we will accelerate the ink digitization of manufacturing based on our high durability head and the material alignment technologies. On top of the existing areas I described, we have new strengthening initiatives, I would like to use this slide to explain. In addition to the current Genre-top project and medium-term growth drivers, we will leverage the strength of our customer relationships in each of the areas we are strengthening. Performance Materials, Sensing, Inkjet components and optical components and combine core technologies with frontline capabilities to step up to create new value and promote business development in the display field. We have already launched a business that simplifies customers' manufacturing processes and reduces environmental load by using our inkjet technology in next-generation displays in the mobility field, sensing, inkjet components and optical components are cooperating to co-create value with customers by utilizing our technologies for low environmental load, coating and optical systems for automobiles in the field of semiconductors, we are already engaged in the business of ultra precision optics for manufacturing and inspection equipment still on a small scale in optical components, and we already confirmed in discussion with customers that we can grow this business more. We will also leverage our materials technology to expand into the area of semiconductor processing materials. We would not stop at what each industry business has been doing, but go beyond the border of each business to create value in the area of industry. So what I now described is depicted on Page 33. Number 1 to 5 on Page 32 shows the explanation. First, about industry, we already have high shares in certain areas and going forward, we will expand these areas by capturing growth opportunities. We also have focus areas for mid- and long-term. The left side, you can see the circled ones, number 1 to 5 of the previous slide are growth areas going forward, considering the market growth. We can enter these areas. Also around the middle, you can see hyperspectral imaging or automobile visual inspection. Those are included in our existing business, but we still have a large room to grow. So we will enhance our presence in the dotted line areas, while ensuring the growth in the existing business areas. By having these 2 efforts, we will achieve mid- to long-term growth in industry. The next page, its growth strategy for medical imaging. The environment surrounding medical imaging offers a wealth of market opportunities for Konica Minolta including early detection, minimally invasive treatment, a growing need for medical GX and the growth of the digital market. We use our strength in high value-added diagnostic imaging and IT solutions rooted in its core technologies. Based on its brand and the customer base cultivated over 90 years of working closely with medical professionals, since x-ray films to aim for growth our medical imaging business will provide simple, high-value-added diagnostic imaging and expand revenue from our digital business globally, especially in emerging countries such as Asia. Dynamic analysis is a technology that only we can offer in the world. We would like to use its product and services for a solid mid- and long-term growth. Page 35 is professional print growth strategy. The markets for both commercial and industrial printing is expected to grow by 4% to 6% as the digital ratio grows due in part to opportunities such as the global decline in the number of skilled workers rating resource prices and increasing the environmental awareness, our company has strong contact, not only with printing companies, but also with brand owners logistics companies and others in the entire printing supply chain and the value of our technologies of automation, skill-less and remote operation will be continually provided. We promote our clients' digitization by taking a bird's eye view of the entire printing supply chain and solving factors that impede digitization. At the same time, these efforts contributing to minimizing environmental impact and improving the job satisfaction of those who supply and utilized printing through process saving and high value-added printing. Lastly, I would like to use 2 slides about office. Stable profitability of office business. In FY '19, business contribution of the office business was about JPY 40 billion. However, due to COVID-19 and semiconductor shortages and the plant accident, the revenue and profit both declined in FY '21. In '22, we had a backlog of orders and increased production capacity to resolve it. So the situation recovered from FY '21 to '22. But in FY '25, we expect print volume to fall to 70% of the FY 2019 level and plan accordingly. So we will minimize the impact of the decline in print volume through our unique billing model, sales and service operation reforms and manufacturing cost reductions and strengthening our business foundation as a business that generates stable earnings and cash as a minimal target. On Page 37, based on what I said now, we will expand our service menu One Rate largely and we will reform sales and service operations. About the expansion of One Rate, we do not only use subscription model such as for printing as in the mobile phone business, but for attached software as well. We charge customers from the next month according to their usage or when customers don't need it anymore, we can subtract the amount from the next month. That means according to the needs of the customer, we can flexibly adjust the scheme. We started the scheme from the United States, and we would like to roll this out to the rest of the world too, to make it as a foundation for profitability. Page 38, [ manufacturing ] strategy. While the global supply chain is under pressure to be reviewed, we will build production sites and supply chains that are resistant to change establish and implement technologies as on-site basis to ensure stable supply, lots of sales opportunity, because we could not procure and produce should not happen. We should make a company-wide effort to avoid such a situation. Page 39 is the summary. Towards maximizing corporate value, we have placed the improvement of ROE as our highest priority goal and the driver of this goal is the improvement of profitability, we aim to improve the net profit ratio to 2.5% or more, achieve an total asset turnover ratio of 1.0 and financial leverage of about 2.0 and achieve minimum ROE of 5% in the earlier stage, and we would like to be a company that can achieve 8%. While aiming to have higher level improvement in terms of nonfinancial aspects, we need to improve employees' engagement score and CO2 reduction target. We would like to move out the reduction target by 5 years and contribute to enhanced corporate value nonfinancially as well. Lastly, I would like to say a few words about the point of the midterm plan. In today's presentation material, it's Page 22. First, FY '23 and '24, we will make sure to conduct solid selection and concentration of the business. And based on that, in FY '25, we will establish the foundation for growth. So in these 3 years, we will implement initiatives thoroughly so we can shift the mode on the third year. On Page 24, for 4 main businesses, we explained the positioning of each business, especially profit drivers are the strengthening business and maintaining profit business, non-focused business and direction change in business are currently in the red. And the point for the next 3 years is to make the deficit disappear, but as we implement the budget, when we have to decide that it is difficult for those businesses to make profit on their own. We have to look to other options, so that we can achieve the financial targets for FY '25 that I described today. Thank you very much. With this, I would like to complete the explanation.