Maxell, Ltd. (6810) Earnings Call Transcript & Summary

Let me start my presentation. This is Katsuta speaking. Thank you very much for joining us today. Please turn to Page 2, which shows the agenda for today. There are 5 major items. From my side, I will cover from 1 through 3 up to business forecast for fiscal 2020. We have already disclosed all those numbers on May 13, so I'd like to be brief. And Mr. Nakamura, who is the incoming President at the Shareholders' Meeting at the end of June, will talk about the new management structure. Now let me start with the outline of consolidated business results. Please turn to Page 4. This is a summary. If you take a look at the table, let me start with the fiscal 2019 results. Net sales, JPY 145 billion, down by JPY 5.5 billion; operating loss, JPY 0.1 billion, down by JPY 5.6 billion. The fourth row from the top, net income, we booked a major net loss of JPY 10.5 billion. Shareholders' equity ratio, 50.6%. Free cash flow is positive JPY 2.1 billion. Exchange rate is JPY 109 to the dollar. Concerning the operating income, as you see at the bottom of this page. Throughout the year, U.S.-China trade friction led to the downturn of semiconductor and car market which gave us a major impact. And the third bullet point at the bottom shows that despite our plans, there were delay in development of new sales channels and the productivity improvement, which led to the poor business results. In the second half of the fiscal year due to the new coronavirus, there was a stagnation of production at overseas factories and sales. Operating income number decreased by JPY 5.6 billion. As for the net income decline, I will talk about this on the following page. With the financial policy that we have implemented in fiscal 2019, we reached the equity ratio that we wanted to achieve, and we maintained the financial stability. Turning to Page 5. This shows the major impacts on net income. First 2 points are related to the extraordinary loss. First is loss from revision of business plan for consumer lithium-ion battery, which was about JPY 1.6 billion and impairment loss of goodwill for Maxell Izumi is the second point In March to April, the new coronavirus spread in Western countries and we evaluated this based on the assumption that this will remain in the future. So we recognized the impairment loss of JPY 7.5 billion. So those had the major impacts. We are very sorry for this. Turning to Page 6. This shows the analysis of net sales changes. Net sales declined by JPY 5.5 billion year-on-year. Quantity variance was JPY 20.6 billion, JPY 4 billion due to the coronavirus. The major factors are listed there. The sales of micro batteries increased, but the optical components and embedded systems in relation to cars and semiconductor were down. And also, we lost our market share in China in projector. On the right-hand side, we are showing the MBP or Maxell Business Platform of JPY 17 billion. Some of them started in fiscal 2018. But in 2019, we had a full year effect. Main factors include Maxell Izumi, Maxell Kureha and Ube Maxell Kyoto. So this was the increase of JPY 17 billion. Turning to Page 7. The operating income changes. The fiscal 2018 operating income was JPY 5.4 billion, and prior cost, at the beginning of the year, we expected JPY 2.5 billion, but the development cost increased, especially in relation to the order for the head-up display. For the mass production, we expanded our development cost. Quantity variance was negative JPY 6.6 billion, JPY 2 billion was in relation to the COVID-19. The main factors, as I mentioned, is in car and semiconductor. That was JPY 3.1 billion. And in addition to that, the projector and electronic appliances and consumer products were also down. The positive factor is cost reduction of JPY 4.4 billion. Mostly, this is the reduction of the fixed costs. And we offset with this positive factor, and we ended with JPY 0.1 billion operating loss. Next page is cash flow change. We offset a major operating loss with the improvements of depreciation and CCC or cash conversion cycle. And we maintained the positive free cash flow of JPY 2.1 billion, which is shown in the middle. Now let me move on to the review on fiscal year 2019 and efforts in 2020. I'm going to skip the review by segments. Please turn to Page 13. This shows the review of the fiscal 2019 and efforts in fiscal 2020, which I would explain later. The third row from the top shows the midterm plan, which was modified last year. The net sales of JPY 173 billion and operating income of JPY 10 billion were not reached. We are resetting the management plans so that we can build a groundwork for the growth in coming years. Management efforts in fiscal 2019 are listed there. We are working on them, but regrettably, we could not realize much outcome. We're very sorry for that. But in fiscal 2020, we are determined to implement all of those. I will take the leadership and devote myself to execute in drastic business reform in fiscal 2020. The third point is business forecast for fiscal 2020. Please turn to Page 15. This shows the fiscal 2020 forecast. Net sales is expected to decline by JPY 5 billion. Operating income is expected to increase by JPY 0.6 billion. We plan to make a small but positive profit. Capital expenditure was JPY 7.0 billion; depreciation, JPY 5.5 billion; R&D expense, JPY 8.5 billion. CapEx and R&D expense numbers are large, but under the current circumstances, we will be implementing them in a selective manner. As for the dividend forecast, we are determined to implement the business reform in fiscal 2020, but the effect of those efforts are not going to be a major one in fiscal 2020. We start to see the effect in fiscal 2021 and onwards. Therefore, we plan to pay 0 dividend for fiscal 2020. This is a plan, but we're very sorry for this, and we'd like to ask for your understanding. Page 16 shows segmental information. In Energy, in fiscal 2020, demand of lithium-ion battery is relatively strong, but will be slower than fiscal 2019. And there are difficulties in car industry. So demand for TPMS will be lower. So much lower sales and profit forecast. In Industrial Materials, we expect struggle of optical components for automotive market. But in semiconductor-related business, we are starting to see the signs of recovery. So actual demand is also recovering. So based on that, almost flat sales and slightly lower profit is expected. In Electronic Appliances and Consumer Products, with the increase of new light source ratio, project sales -- projector sales are expected to be better. But in home appliances, for example, Maxell Izumi business is struggling. So flat sales is expected. As for the operating income, there was a major loss in the previous year. And since the improvement of projector profitability and the reduction of the fixed costs expected, we expect the recovery, but still loss is forecast. Page 19 shows the net sales changes. The quantity variance, excluding the effect of COVID-19 is positive, JPY 3.9 billion. Major factors, our demand increase for embedded systems and sales increase of projector. As for the exchange variance, our assumption is JPY 105 to the dollar. So it's down by JPY 2.3 billion. The negative effect of COVID-19 is JPY 6.6 billion. In Energy segment, we expect a little more than JPY 2 billion. In Industrial Materials, including lens, rubber products and adhesives, about JPY 2 billion. In Electronic appliances and Consumer Products, including Maxell Izumi, we also see some impact from the coronavirus on projector. So JPY 2 billion here. So total is JPY 6.6 billion. Page 20 is operating income changes. Starting with the prior costs, we do not expect any major brands switch-related cost. So it's positive JPY 0.7 billion. Quantity variance, positive JPY 0.4 billion. COVID-19 impact, JPY 2.4 billion negative. As I mentioned, this is in all segments: Energy, Industrial Materials and Electronic Appliances and Consumer Products. Cost reduction is positive JPY 2 billion. This is mostly the reduction of fixed costs. And with that, we expect JPY 0.5 billion operating income. Page 17 and 18 show effect of COVID-19. Let me start with Page 17, which talks about the market. As for the upside potential, the stay home and health consciousness are key words. And we do not expect any major impact from them, but those are the products and reasons, which can be considered as an upside. As for the downside risk, downturn of our car market and stagnation of the economy listed. In terms of our business performance, we expect the major impact mainly in the first half. But in the winter of Northern Hemisphere, it is possible that we have remaining impact that is in the second half. So we are considering some countermeasures. Page 18 shows the operation status of sales and production basis that we announced as of 13th of May. Domestic production bases are operating almost at a normal level. There are some concerns about the stagnation of the material supply, but they are operating. As for overseas production basis, Malaysia factory and also Indonesia, they are under control order of major movements. So we are starting to see some impact. As for the sales and administrative basis, we are promoting teleworking. None of our employees tested positive and we are taking sufficient precautions to make them safe. And we are also following the each country's government orders. And also, we monitor the market situation so that we can respond quickly to the changes. As for the financial management, as you see at the bottom, we are aware that this is an emergency situation. So we will enhance the liquidity on hand and we'll be selective in making new investments. That's all for myself. And now I would invite Mr. Nakamura, incoming President, to talk about the new management structure.

Thank you very much. This is Nakamura speaking. As it was mentioned that the situation is very severe, but under management structure, including myself, I would like to act as one team so that we can execute and accelerate the business reform, and I hope to have your continued support. Now please turn to Page 22. This shows the new management structure. There are 2 key points here. First is the -- we have a new president, and we reviewed the structure. The second is that we introduce more diversity in this new management structure. The President will be myself, Nakamura, and I will be responsible for overall management and would aggressively promote the reform of business portfolio. And Mr. Katsuta, the current President, will remain as a director and will be responsible for 3 unprofitable businesses. And he will be leading the measures to complete those efforts in fiscal 2020. New director candidates include Mr. Heywood, Ms. Murase and Mr. Suzuki. So 3 new director candidates. Out of 9 directors, 5 will be in-house and 4 will be outside. We plan to enhance our corporate governance under this new structure. Next page, shows the new director candidates, Mr. Brian K. Heywood. As you can see there, is non-Japanese and is also an investor. So he will bring the global perspectives and he will give us advice how we can improve our corporate value, and he will be supporting in that area. As for Ms. Murase, she has a broad experiences and knowledge in corporate legal affairs as a lawyer. And he would -- she would also bring the diversity to our organization as a woman, and we will make a contribution in the area of corporate governance to improve the corporate value. Mr. Suzuki has been engaged in the accounting and finance for many years at our company, and he has also built a broad experiences of business operation and also as our auditor. So he will bring the appropriate audit and supervision knowledge. So with those new directors, we'd like to make sure that we move forward making the 2020 as a bottom and build the foundation for the growth from 2021 and onwards. Pages from 25 and onwards, talk about management efforts in fiscal 2020 that I would like to share with you. So let me start with the management efforts in fiscal 2020 on Page 25. We have been working on them, but we would like to make sure that we would execute the drastic business reform and complete them in fiscal 2020. There are 3 key points. First is the business portfolio reform. That is, to concentrate on the businesses that create value. So I will take the leadership in this area, promoting the "replacing old with new." And we try to grow mainly by businesses based on the analog core technologies. Second is measures for 3 unprofitable businesses. We have already done the planning for the concrete measures and as a final year, Mr. Katsuta is leading the establishment of the projects for consumer LIB, projector and health and beauty care products. I'd like to make sure that we complete those measures. The third is something that we have been doing since last year, that is disciplined financial policy and aggressive promotion of profitability improvement, including ROIC, ABC-XYZ as well as PIPJ. So we would continue with the efforts that we have started and accelerate them. Business reform towards the medium to long-term growth is already in progress. However, as it was explained earlier, the market conditions are quite severe. So based on the necessity, we need to execute a further reduction of the fixed expenses so that we can improve the corporate value. So I would like to take the concrete measures. Moving on to Page 26. Let me talk about each of those more specifically. The first is business portfolio reform. The number of the businesses have increased. And once again, we would like to define the constitution of the business portfolio. We have divided them into 2 groups so that we can clarify the values of all of those businesses to accelerate our measures. So the first group is shown in pink, that is, businesses create value-based on the analog core technologies. Those are the core businesses for us, which are our driving force. So our unique technologies, as you see there, including mixing and dispersion, fine coating and high precision molding and forming, including the battery products that we have cultivated for a long term as well as tape products and disk and lens products. Once again, those are the core products and core technologies. We'd like to make sure that those technologies will be utilized so that we can start to grow again in fiscal 2021. Second group of businesses are the businesses that create value toward growth of Maxell Group. The businesses that contribute to sales and profit by co-creation of value, together with the analog core technologies. Also businesses that are creating values such as brand value. Value of contribution to the ESG or SDGs, in other words, intangible value as well as profit. So those businesses are very important for us. And we would like to rebuild the business portfolio that creates value. Turning to Page 27. Those are the measures for 3 unprofitable businesses. We have already explained those measures many times. But first, in consumer LIB. Issues include the commoditization and lower prices. So by shifting the resource to automotive LIB, we would like to reduce the fixed cost to make sure that this business can be profitable. And also focus on the small-sized batteries, where the profitability is higher. So we'll continue to take those measures in fiscal 2020 and onwards. Second is for projector, the market condition is tough even before COVID-19 market had been shrinking more than 10%. So first of all, we need to make this business profitable by reducing fixed costs. And with the shift to the new light source, we would like to increase the business value and also consider cooperation with partner. And in the second half of fiscal 2020, we would like to start realizing the outcome. The third is health and beauty care products. We are proud to have unique technologies in this area, but we have not been sufficiently competitive in terms of products and profitability. Currently, we are trying to integrate the design and sales divisions with Maxell Izumi, which has a low-cost operation as its strength. And from fiscal 2020, in addition to the sales, we'll be also integrating product planning so that we can improve our cost competitiveness. And by doing so, we'd like to make sure that this business can be profitable. So we'll accelerate this measure in fiscal 2020. So once again, we are faced with a severe business environment, but we would like to promote those measures and accelerate those efforts so that we can achieve our target. The last and the third is disciplined financial policy. This is something that we have been working on. On this page, if you look at on the right-hand side, by model, we have been reducing the losses, and we have discontinued worst 150 models, which brought us the positive effect of JPY 1.5 billion in fiscal 2019. So we will continue this effort in fiscal 2020 and accelerate it. Second is by product group. We have already established the financial discipline that is ABC-XYZ. So based on this, we will make the correct judgment. And in fiscal 2020, we will be reducing the unprofitable businesses. And by division, we will focus on the return on invested capital or ROIC. In fiscal 2020, we'll be implementing this in the full-fledged manner. And each business division will have a target. And with those 3 perspectives, by model, by product group and by division, we will make the profitability more visual so that we can improve the overall profitability. Last Page 29. So fiscal 2020, we will have a new management structure. And we have clarified what needs to be done. So I am determined to complete all of those measures, and we'll make sure that we can achieve all of those targets to build the groundwork for growth in fiscal 2021 and onwards. And with that, I'd like to end my presentation. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]