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

This is Keiji Nakamura, President of Maxell Holdings. I will go over the financial results for fiscal 2020 and forecast for fiscal 2021. Please turn to the first page. Efforts towards new business phase covering up to fiscal 2019 through fiscal 2021 and beyond. We designated fiscal 2019 as business scale seeking phase and focused on expanding the business scale and increase the number of businesses. Regrettably, we recorded a decline in profitability due to an increase in the number of unprofitable businesses. During fiscal 2020, designated as the business reform phase, we executed selection and concentration of businesses through financial discipline while reviewing the business portfolio. Fiscal 2021 is designated as the value creation phase following the business reform phase, and we are to carry out profit growth by business replacement. We are to expedite the launch of new businesses that will drive the growth. Here's the summary of today's presentation. There are 4 points. First, outline of financial results for fiscal 2020. Sales, JPY 139.1 billion, down JPY 6 billion year-on-year. Operating profit, JPY 3.8 billion, up JPY 3.9 billion. And net loss of JPY 9.4 billion. Second, overview of fiscal 2020. I will describe drastic business reform that we carried out. Third, forecast for fiscal 2021. Net sales, JPY 125 billion, down JPY 14.1 billion year-on-year. Operating profit of JPY 6 billion, up JPY 2.2 billion. And net profit, JPY 3.5 billion, an improvement of JPY 12.9 billion year-on-year. Fourth, management efforts in fiscal 2021, I will talk about returning to profit growth track. Let me start with the outline of financial results for fiscal 2020. Consolidated financial results for fiscal 2020 were: net sales, JPY 139.1 billion, down JPY 6 billion year-on-year. Operating profit, JPY 3.8 billion, up JPY 3.9 billion. And net loss, JPY 9.4 billion. Sales were down year-on-year on a full year basis, although they were on the recovery trend beginning in the third quarter. Operating income increased due to recovery at each business division, as well as cost reduction measures centering on fixed cost reduction. We recorded extraordinary loss associated with business reform for the growth in and after fiscal 2021. Next, net sales changes from JPY 145 billion in fiscal 2019, down JPY 6 billion, resulting from quantity variance, minus JPY 5 billion; price variance, minus JPY 0.6 billion; and exchange variance, minus JPY 0.3 billion to finish at JPY 139.1 billion. Main factors, as shown on the slide included quantity variance, mainly in automotive-related due to COVID-19. Next, operating profit changes, up JPY 3.9 billion coming from quantity variance, minus JPY 1.6 billion with Energy, Industrial Materials and Electronic Appliances and Consumer Products, each posting a decline. Price variance, minus JPY 0.6 billion; exchange rate variance, plus JPY 0.1 billion, and cost reduction, plus JPY 6 billion, resulting mainly from fixed cost reduction in Energy, JPY 1.4 billion; Industrial Materials, JPY 1.7 billion; and Electronic Appliances and Consumer Products to JPY 2.9 billion to finish at JPY 3.8 billion. Next, results by segment. In Energy, net sales were JPY 37.8 billion, down JPY 0.4 billion. And operating profit was JPY 3.3 billion, up JPY 0.8 billion. As for sales, consumer LIB increased due to continued stay-at-home demand. Automotive-related products felt the impact of COVID-19 during the first half, but were on a recovery trend from the third quarter. As for operating profit, sales increase of consumer LIB from the stay-at-home demand contributed to profit. In Industrial Materials, net sales were JPY 50.8 billion, down JPY 3.6 billion, and operating profit was JPY 1.4 billion, up JPY 0.5 billion. Sales of the products for the automotive market were down year-on-year on a full year basis, while they recovered starting in the third quarter due to the recovery in the automotive market. Sales of embedded systems relating to semiconductors increased due to the recovery trend in the semiconductor market. Operating profit of the products for the automotive market decreased due to sales decline, but overall operating income of the segment made improvement due to sales increase of semiconductor-related embedded systems. Electronic Appliances and Consumer Products posted net sales of JPY 50.4 billion, down JPY 2 billion and operating loss of JPY 0.9 billion, which represented a year-on-year improvement of JPY 2.6 billion. Sales increased for health-related products due to growing hygiene awareness. While sales decreased for projectors due to market shrinking and the impact of COVID-19. Operating profit increased due to sales increase of health-related products, while fixed cost reduction of projectors contributed to profit improvement. Moving on to major impacts on net profit. We're showing extraordinary income and loss. Extraordinary income, the company recognized JPY 6.6 billion of gain on sale of noncurrent assets, including transfer gain coming from transfer of land. Among extraordinary loss, impairment losses of JPY 4.7 billion was recognized, reflecting impairment losses at domestic and overseas subsidiaries relating to noncurrent assets. Business restructuring expenses of JPY 7.3 billion was recognized coming from the downsizing of projector business and the implementation of early retirement support program. And litigation expense of JPY 7.1 billion was recognized as expense associated with appropriate compensation for the infringement of intellectual property. Altogether, the company recorded JPY 11.5 billion as extraordinary loss associated with the implementation of business reform. Next, cash flow change. Cash and cash equivalents at the beginning of the period was JPY 22.4 billion. Operating cash flows, positive JPY 13 billion; investing cash flows, positive JPY 8.1 billion; free cash flows, positive JPY 21.1 billion; financing cash flows, negative JPY 11.9 billion. And exchange rate variance, positive JPY 1.2 billion, resulting in the cash and cash equivalents at the end-of-period at JPY 32.8 billion. Moving on to the overview of fiscal 2020. The company carried out a drastic business reform in fiscal 2020, consisting of business portfolio reform, counter measures on 3 unprofitable businesses and emphasis on financial discipline. In terms of business portfolio reform, as described in the previous earnings briefings, we focused on our strength in analog core business, promoting mixing and dispersion, fine coating and high-precision molding and forming. We executed flexible resource allocation by clearly defining our strength area, focusing on the analog core business and value co-creation business, which has synergy with the analog core business. By so doing, we have made a certain achievement in reforming the business portfolio for growth. We implemented measures to adjust 3 unprofitable businesses, namely the consumer LIB business, the projector business and health and beauty care products. In the consumer LIB business, we drastically reduced fixed cost by shifting the resources of consumer LIB to automotive sector and achieved a certain result as planned. Furthermore, we transferred the unprofitable laminated lithium-ion battery business and eliminated that unprofitable business. In the projector business, we implemented a thorough reduction of fixed cost and development costs and decided to terminate the sales activities in Europe, Americas and Asia, except China and South Korea, so as to focus on areas where we enjoy strength. Here again, certain actions were implemented and completed. In health and beauty care products, we strengthened profitability by improving the model mix of health and beauty care products and transferred massage chair and health water business deemed either unprofitable or had little growth potential. Overall, we implemented drastic business reform to transform the company into value-creating business structure for growth in and after fiscal 2021. In the area of disciplined financial policy, in ROIC, return on invested capital we designated fiscal 2020 as the implementation phase and started utilization at all business divisions and accelerated section-level activities by penetration of mindset throughout the divisions, including the frontline people as well as introduced the ROIC perspective in settling employee targets as well. In the ABC-XYZ initiative to visualize profitability improvement by business, we worked on the improvement of unprofitable businesses and executed measures to improve [ Y ] or low-profit businesses by the end of calendar year 2020. And we decided to shrink withdraw or sell off businesses that were not likely to improve. All in all, we liquidated 15 businesses, including downsizing and withdrawal. Here again, we managed to achieve a certain result. In PIPJ, the profit and loss improvement by model project, we worked to reduce loss by profit and loss management of about 8,000 models. In fiscal 2020, we implemented measures on worst 117 models. Here again, we achieved a certain result. Furthermore, we shared information on successful examples so as to spread the initiative to other divisions as well. Overall, if I could repeat myself, we managed to achieve a certain result in this area as well. We will continue to strengthen the business structure by maintaining the thorough financial discipline in fiscal 2021 and beyond. Shown here is the status of the effects of business reforms and improvement efforts. Business portfolio reform, counter measures on 3 unprofitable businesses, disciplined financial policy and implementation of early retirement support program are expected to have an impact on the operating profit in the amount shown here in fiscal 2021, as we proceeded in line with the plan in the previous fiscal year. We are moving along the planned transformation to value-creating business structure. Next fiscal 2021 forecast. Net sales projected at JPY 125 billion, down JPY 14.1 billion year-on-year. Operating profit, JPY 6 billion, up JPY 2.2 billion. And net profit, JPY 3.5 billion, an improvement of JPY 12.9 billion year-on-year. Capital expenditure, JPY 6 billion; depreciation, JPY 4.8 billion; and R&D expenses, JPY 6.8 billion. In terms of dividend forecast per share, regrettably JPY 0 in fiscal 2020. But for fiscal 2021, we forecast ordinary dividend of JPY 24 per share. In terms of factors for projected year-on-year net sales decline of JPY 14.1 billion. Quantity variance minus JPY 10 billion, including the effect of business withdrawals. And accounting factor, minus JPY 3.4 billion due to changes in revenue recognition accounting standards. Price variance, minus JPY 0.7 billion to total JPY 125 billion. In terms of operating profit changes, up JPY 3.8 billion. Quantity variance, price variance and higher material prices are expected to push down profit. But with the effect of business reform efforts in fiscal 2020 and cost reduction efforts, we project the operating profit to total JPY 6 billion. With business reform efforts having been largely completed in fiscal 2020, we plan to embark on several specific measures in fiscal 2021 with a view to driving further growth. First is the changes to the business segment. On the left is the current business segments up to fiscal 2020. And on the right is the new business segment from fiscal 2021. Specifically, optical components and embedded systems relating to semiconductors are transferred from the Industrial Materials to new business segment called Optics & Systems. And projector is transferred from Electronic Appliances and Consumer to Optics & Systems. There will be 4 business segments altogether, namely Energy, Functional Materials, Optics & Systems and Life Solutions. The intent of this reorganization is to clarify business responsibility and growth strategy by matching the business segments and the business divisions. Next, business forecast for fiscal 2021 by new business segments. For Energy, net sales are down JPY 5.1 billion, operating profit down JPY 0.8 billion. Functional Materials; net sales down JPY 1.5 billion, operating profit up JPY 0.4 billion. Optics & Systems; net sales down JPY 4.6 billion, due partly to the shrinking of the projector business, operating profit up JPY 3.3 billion due to the same reason. Life Solutions; net sales down JPY 2.9 billion, operating profit down JPY 0.7 billion. Total net sales down JPY 14.1 billion and operating profit up JPY 2.2 billion. Highlights of business forecast for fiscal 2021 by new business segments compared to fiscal 2020. For Energy, we expect a decrease in sales and profit in consumer LIB due to the slowdown of stay-at-home demand compared to fiscal 2020. But we will work to secure higher sales and profit for heat-resistant lithium coin battery against the backdrop of recovery in the automotive market. Furthermore, we will drive cylindrical-type lithium batteries for smart meter applications, which is currently strong, so as to minimize a decline in the LIB business overall. In Functional Materials, we expect a decline in sales of coated separator due to changes in the accounting standards for revenue recognition. But we will strengthen competitiveness of coated separators in line with market growth and expand overseas sales of construction tape and curing tape to make up for the difference. In Optics & Systems, we expect order recovery of optical components for automotive applications against the backdrop of demand recovery trend since last summer. We also expect sales expansion linked with booming of the semiconductor market, which are to drive the growth in the segment. As for the projectors, which continue to suffer from difficult environment, we will focus on our strength areas, which will shrink our sales. But we will continue to work on the profit improvement. In Life Solutions, we expect sales decrease due to carve-out of massage chair and health water. But we expect higher sales of Ozone antibacterial deodorizers against the backdrop of growing hygiene awareness. Next, management efforts in fiscal 2021. In fiscal 2021, our theme is return to profit growth. Three areas: optimal allocation of management resources; acceleration of launch of new business by cross-divisional organization; and emphasis on financial discipline, continuing from fiscal 2020. First area is optimal allocation of management resources. We will set up new midterm plan and clarify mid- to long-term portfolio strategy and concentrate management resources into value-creating businesses, centering on analog core business where we have strength, as mentioned earlier. Secondly, we will accelerate launch of new businesses by cross-divisional organization. Conventionally, development themes were selected and management -- and managed by each business division, regardless of the size of the development themes. But going forward, we will now work on the integration of company-wide technologies and realization of synergies through corporate management of large-scale development projects for optimal allocation of development costs and resources, so as to enable early launch of new businesses. Furthermore, regarding the sales and marketing structure, we will change the organization to transcend the boundaries of business divisions into an integrated structure, so as to leverage customer relations and customer channels and market information to be shared on a company-wide basis. Including the support to development efforts, we are to accelerate the launch of new businesses on a company-wide basis. Thirdly, we will emphasize financial discipline and continue with the relevant initiatives from fiscal 2020. And for that, we will reorganize the management. We will merge Maxell Holdings Limited and Maxell Limited after dissolving the holding company structure. The planned date of reorganization is October 1, 2021. Under Maxell Limited, Maxell Frontier Company Limited and other operating companies will be positioned as consolidated subsidiaries in the new structure. Maxell Holdings was established in October 2017, for the structure as shown above, to increase the overall speed of operational execution and the M&A activities. We have concluded that these initiatives have brought about certain results by the end of fiscal 2020. So for fiscal 2021 and beyond, we decided to enhance the synergies within the group. By integrating Maxell Holdings and Maxell Limited, we are to further accelerate the realization of synergies within the group. And this is the lineup of the Board members. After successful execution of business reform in fiscal 2020, we will continue with this lineup toward growth and value creation. We will put together a new mid-term plan for medium to long-term growth. The theme is towards value creation company in which we are to deliver highest value, the maximum excellence to all stakeholders. Our new direction of new management MVVSS will be shared within all members. We plan to announce the new 3-year midterm plan on May 28. That's all for me. Thank you very much for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]