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

I am Nakamura. I'd like to present the midterm plan MEX23. This slide shows the summary of today's presentation. There are 3 points: business reform, theme of MEX23, and toward a value-creating company. As for business reform, we have taken countermeasures in 3 unprofitable businesses, namely consumer lithium-ion battery business, projector business and health and beauty care products business. And we implemented early retirement support program as well. Lessons learned from the previous midterm plan will be reflected in MEX23. And reforms will continue to achieve further profit growth, but we deem that certain business reform was completed in the last fiscal year of FY 2020. As for the theme of MEX23, it is to commit to value. MEX was formulated with an eye for the feature to be realized in 10 years from now, 2030. We will fully utilize strengths of analog core businesses. In particular, resource investment will be prioritized in value-generating, high-potential 3 focus areas: health care, 5G and IoT, which includes those 4 semiconductor business that underpins 5G and IoT; and mobility. And as for toward a value-creating company, we will drive value creation via both of clarified segment growth strategy and management foundation enhancement strategies. As for the target for FY 2023, operating profit is JPY 12.5 billion, profit margin is 10% or more and ROIC is 7% or more. This slide shows positioning of the midterm plan MEX23 that I described today. Through backcasting from 2030, we set up the midterm plan with 3 phases within 10 years, along with respective measures, starting from 2020. And during MEX23, we will expand growth businesses that were prepared in the previous midterm plan of MG20R. New businesses, which were seeded in the previous midterm plan will be prepared for the second phase following MEX23. During MEX23, we will establish structure for the profit growth in the second phase up to 2026 and the third phase up to 2030 with due investment so that we can realize maximum excellence in 2030. Target operating profit margin for 2021, the initial year of this midterm plan is 5%. And in the final year of FY 2023, we aim for 10%. In the following Phase 2 and 3, we'd like to attain even higher OP margin. Next, I'd like to explain the review of the previous midterm plan and the feature to be realized in 10 years. As for the new midterm plan, MEX23, we reviewed the previous midterm plan where we missed the target to learn lessons. And at the same time, the feature to be realized in 10 years was envisaged to formulate MEX23. Firstly, let me explain the review of the previous midterm plan. This slide shows the conceptual change of corporate value from 2019 through the current midterm plan up to 2023. In FY 2019, operating loss and net loss were incurred to our great regret. During this period, we realized that we excessively focused on expanding business scale and number of businesses. And the governance on profitability was not sufficient. Based on those learnings, in FY 2020 last year, in order to establish business foundation, we conducted business reform. Selection and concentration of business was executed through financial discipline and the business portfolio was reviewed. As for FY 2021 and onward, during the current midterm plan, going through business reform in FY 2020, we will aim to achieve profit regrowth. This will be the phase of value creation. We will achieve profit growth through business replacement, preparing new businesses that will become new growth drivers. And we'll be closer to the feature to be achieved in 10 years. Vision, policy, business portfolio and operations in the review of the previous midterm plan and countermeasures in MEX23 are shown in this slide. As for vision and policy, in the previous midterm plan, we had a short-term view and placed excessive focus on sales. In this midterm plan of MEX23, we'd like to pursue MVVSS, which includes mission, vision and value that I'll elaborate on later. From the mid- to long perspective, we'd like to pursue the feature Maxell aspires to have, focusing on value, especially on corporate value, which is accompanied by profitability. As for business portfolio, during the previous midterm plan, strong discipline was lacked, and we sticked to existing businesses even if they were loss-making.In this midterm plan, we would ensure thorough financial discipline and using quantitative targets such as ROIC. Even for existing businesses, if their profitability is down, we will take actions. As for operations, previously, we had sectional organization and resource allocation was diversified. In this midterm plan, in the cross-divisional organization, we would optimize resource allocation. Another approach to formulate midterm plan is to conceive the feature to be realized in 10 years. Let me explain the feature to be realized in 10 years. This slide shows mission, vision, value, spirit and slogan of Maxell that we worked out in the previous year. As for the mission that Maxell must carry out, we defined it as to contribute to a sustainable society by innovating unique, original technologies as a company that is indispensable in the sustainable society. Vision is a feature Maxim wants to realize to achieve mission. It is to create maximum excellence for employees, customers and society by leveraging unique analog core technologies. This will be the foundation for the feature to be realized in 10 years: value, spirit and slogan as described on the slide. This slide shows the value Maxell commits to provide and the feature that Maxell aims to realize more in detail. We will provide maximum excellence to stakeholders of Maxell. For shareholders, in order to offer adequate return on investment, we will sustain and raise share price and dividend and we will enhance corporate value. Through these measures, we'd like to make Maxell a company that attracts continued support. Next is about employees. Maxell's approach to employees to provide them with values such as compensation commensurate with their value contribution, challenging work and comfortable workplaces. Maxell's vision as a company, which we are trying to achieve by providing these values, is to become an attractive company where all employees can take on more and more challenges to achieve aspirational goals. Next, as for the value for our customers, since we are a manufacturer, we would like to provide high value-added products and services through innovation of unique and original technologies in a timely manner. Through the provision of such values, we want to become an indispensable company for our customers through the development of high value-added products. So through the provision of such values, Maxell aspires to become an indispensable company for the realization of a sustainable society by providing a variety of products, services and solutions to help solve social issues. This is the new definition of what we want to be in 10 years. In order to realize the vision I just mentioned, Maxell will operate businesses that generate values. Since last year, we have discussed and defined internally what our strengths are and we will continue to revise this question. As a result of our discussions, we have identified the 3 analog core technologies listed here. They are: mixing & dispersion, fine coating and high-precision molding & forming. These are the analog core technologies. We believe that it is important to connect analog and digital technologies because there are complex and delicate areas of manufacturing that cannot be reached by digital technology alone. Analog core technology is an indispensable differentiating technology for our company. Our company has a delicate optimizing technology for concurrent engineering that cannot be realized only with digital technology. This is one of Maxell's greatest strength. In mixing & dispersion, we have the technology to mix materials evenly, regardless of their size, hardness and viscosity. In fine coating, we have the technology to apply adhesives and the paints of all viscosities with the uniform thickness over wide area. Then in high precision molding & forming, we have developed a precise mold manufacturing technology and a precision molding technology that we have cultivated through the production of discs and lenses. We use these 3 analog technologies to manufacture the product shown on the right-hand side of the slide, and we have positioned these as growth drivers in the current midterm period. When we formulated our midterm plan for these analog core technologies, we projected the megatrends 10 years from now and formulated a growth plan by backcasting from these forecasts. We analyze the megatrends in terms of people, environment, industry and consumption. We then drew up a scenario in which we would grow our business by providing value in the form of concrete products based on our core analog technologies. This is how we formulated our midterm plan. The slide shows the megatrends related to people, environment, industry and consumption as well as the social issues and the potential demands arising from them. Considering these social issues and the potential demands, there are 3 focus areas: health care, 5G/IoT and mobility. In health care, as the need for health maintenance and preventive medicine increases, small sensing devices and wearable devices will widely be adopted, and strong demand for small-sized power supply and long-life power supply is expected. These are the megatrends we are anticipating. In the environmental and industrial fields, 5G and IoT-related products and semiconductor products that support them are expected to expand. In terms of infrastructure monitoring and disaster prevention, our strength in this area are high-precision control systems and high-quality adhesives, and we will be able to take advantage of these. In the field of mobility, demand for enhanced car safety functions and connected cars will increase. To meet this demand, we have strength in high reliability optical components and the safety driving support systems. We have identified these 3 areas as our focus areas and will promote the business growth in these areas. The next slide shows the focus areas I mentioned earlier on the left, analog core technologies on the right and elementary technologies in detail in the middle. The combination of these elemental technologies constitutes each product that is positioned as a growth driver. The main products are shown on the left. For example, we have batteries for health care, semiconductor-related materials for 5G and IoT and optical components for mobility. These are defined as growth drivers. This slide shows the categories that will drive the growth in the midterm plan, MEX23, in the areas of health care, 5G/IoT and mobility. These are 13 product categories in total, including coin-type lithium batteries and the rechargeable batteries. So there are 13 areas in total. From this slide onward, I will explain the business strategy of MEX23 commitment to value. First, I will explain the policy under the midterm plan. Again, we are committed to value. In particular, we will promote management that emphasizes corporate value based on profit. In terms of specific strategies and tactics, we would like to promote management based on 2-legged approach, a business growth strategy by segment and the strategy to strengthen the management foundation. First of all, with regard to the growth strategy by segment, we would like to continue to promote business replacement based on last year's business structure reform and will firmly expand growth businesses, including strengthening of sales and profitability. To this end, we will concentrate our resources on the 3 focus areas. In addition, we will promote company-wide portfolio management for the management structure and infrastructure that supports such business and growth strategies. The key functions such as development and sales, for them, we will accelerate company-wide integration and optimize the allocation resources. In addition, as mentioned at the beginning, we will continue our efforts to ensure financial discipline. Next, I would like to talk about the specific management targets for FY 2023: net sales, JPY 125 billion; operating profit, JPY 12.5 billion; OP margin, 10%; and ROIC over 7%. Those are our targets. Our benchmark dividend payout ratio is 30% to 40%, in line with the existing policy. This slide shows net sales and operating profit by segment. From FY 2021, we have changed our business segments from 3 to 4, namely: Energy, Functional Materials, Optics & Systems and Life Solutions. Those are the 4 segments. Now each business segment corresponds to a specific business unit, the unit for promoting business within the company. We have created a system that enables business management that is thoroughly focused on securing profit. As for the company as a whole, we are aiming for net sales of JPY 125 billion and operating profit of JPY 12.5 billion. This slide is a waterfall chart that shows the variance between the actual results for fiscal year 2020 and the target of JPY 12.5 billion for the final year of MEX23. First of all, the effects of the business reform implemented last year are positive JPY 2.5 billion, while the reorganization of portfolio has a negative impact of JPY 0.5 billion. In terms of the breakdown, projectors will improve significantly compared to FY 2020. Prismatic LIBs related to staying home and AV accessories, which will continue to be strong in 2021, will see a negative impact of JPY 0.5 billion overall due to a decline in demand. We will continue with the reorganization of the portfolio. In addition, the expansion of growth businesses, which I will explain in detail later, is expected to contribute approximately JPY 6.7 billion, boosting the growth to achieve an operating profit of JPY 12.5 billion. The chart shows the breakdown by segment. Compared to JPY 3.8 billion in FY 2020, we will secure growth of JPY 1.1 billion in Energy and JPY 2.2 billion in Functional Materials. In addition to that, we plan to increase operating profit by JPY 4.7 billion in Optics & Systems and finally, by JPY 0.7 billion in Life Solutions. More specifically, I'll explain the growth strategy by segment. This slide shows the vision of 4 growth business divisions or categories in their respective growth businesses or products. In Energy segment, its vision is to continue to contribute to the development, safety and security of society through innovations in batteries and systems based on unique technologies. Growth businesses are medical use coin-type lithium battery, coin-type lithium rechargeable battery, cylindrical-type lithium battery and heat-resistant coin-type lithium battery for tire pressure monitoring system. In Functional Materials, its vision is to aim to be an excellent supplier of converting products. Growth businesses are tape for construction, tape for semiconductor manufacturing process and tape for industrial processes. In Optics & Systems, its vision is to enhance analog core technologies and contribute to people's lives and society with optical and system component products, shifting from products to services. Growth businesses are LED headline lens, in-car camera lens unit and semiconductor-related embedded systems. In Life Solutions, its vision is to enrich people's minds through the creation of safe, comfortable and smart spaces. And it will grow through the health care products, beauty care products and hydraulic tools. As for the specific strategy overview by segment, let me start with Energy segment. This segment will achieve operating profit growth of JPY 1.1 billion from FY 2020 to FY 2023. As I said before, unfortunately, the latest stay-home demand will contract significantly in FY 2023, and the profit decrease of JPY 2.8 billion is incorporated in the plan. Based on that decline, we plan the profit increase in battery for medical use, rechargeable battery, cylindrical battery and heat-resistant CR battery. And in FY 2023, operating profit will grow to JPY 4.4 billion. Detailed growth strategies are described on the right. Battery business is mainly B2B business. And through strong partnership agreement with major customers of our batteries, we will have certain visibility for the future demand, and that will support our future growth. As for the key product of coin-type lithium battery for medical use, demand for continuous blood glucose meter, CGM, is expanding drastically due to the increase in diabetic patients. And with this, we will grow our business. Also in the same health care business, in FY 2020, rechargeable battery for hearing aid slowed slightly, partly affected by COVID-19. But from FY 2021, this business will grow strongly as initially expected. We'll invest to increase production capacity to secure demand based on contracts. As cylindrical-type CR battery will be in use for a long time, over 10 years or so, requirement level for safety and security in this market is remarkably high. And adoption of our products took some time. But the reliability of our product is now well verified in the market. And from FY 2021, in line with the market growth, we will aim to achieve the strong growth of our business. As for heat-resistant coin-type lithium battery for tire pressure monitoring system, demand related to new regulation in China seems to be saturating around FY 2021. But as a fast mover in this business category, we continue to secure top position based on contract. Cost competitiveness will be strengthened and profitability will be enhanced through thorough cost reduction. Second segment is Functional Materials segment. We'd like to increase operating profit from JPY 1.1 billion in FY 2020 by JPY 2.2 billion in this segment. Key growth drivers in this segment are shown on the right. As for tape for construction, market of airtight materials for North America has been highlighted and expanding currently. Demand for passive housing for the sustainable society will continue to be firm. And in Southeast Asia, we'll continue to launch new products in response to the spread of the sheet waterproofing method to expand business. As for the tape for semiconductor manufacturing process, latest demand for semiconductor-related product has been growing substantially. And following the demand growth, we will launch highly value-added and unique products to grow our business in line with the market growth. As for tape for industrial processes, in various industrial sectors, new tape application has been expanding, including adhesive tape for high refraction eyeglass lens molding, We continue to launch unique products for new application to grow our business. This slide describes Optics & Systems segment. From the substantial loss of JPY 2.9 billion in FY 2020, we will achieve operating profit of JPY 1.8 billion in FY 2023, with the improvement of JPY 4.7 billion. For business improvement, we downsized loss-making businesses, mainly projector business to improve profitability. And for the growth front, firstly, we'd like to grow automotive lens business firmly. Unfortunately, in FY 2020, partly due to COVID-19, business demand decreased. But from FY 2021 and onwards, demand for automotive will recover, and we'd like to grow our competitive products, LED headlamp lens and in-car camera lens unit in line with the demand expansion. As mentioned before, latest demand for semiconductor-related products has been remarkably strong. With production expansion, we'll grow profit in line with the demand growth. Finally, this slide explains Life Solutions segment. From operating profit of JPY 2.3 billion in FY 2020, we expect demand decrease in recording media of discs among others to impact minus JPY 0.7 billion. But with the growth in other businesses of health care, beauty care and hydraulic tools, we'll achieve operating profit growth of JPY 0.7 billion. Growth strategies are shown on the right. Latest demand environment for the disinfection and deodorization has been remarkably robust due to COVID-19-related demand. In order to secure our position, we'll continue to launch the unique new products, including ozone water and IoT-linked products as shown here. And we expand sales of business-use routes, B2B and overseas sales through collaboration with partner distributors. As for beauty care products, we have established a solid partnership with cosmetics and beauty appliance manufacturers and we'll continue to expand ODM business. And we will jointly develop the high value-added Izumi brand, and we'll double the ratio of high-priced series. At the same time, we'll expand sales channels as well. As for hydraulic tools, leveraging our position of #1 market share in Japan, we'll expand channels into different industries and expand globally as well to grow hydraulic tools business. Following the segment growth strategy, let me explain the basic management foundation enhancement strategy. This slide shows the target for ROIC. After recording 4.9% in 2017, the environment remained very challenging. Unfortunately, in 2019, the operating profit was negative at minus 0.1%. However, with this as the bottom, our ultimate goal is to exceed 7% in ROIC and 6% in WACC by 2023. By setting such numerical targets, we will accelerate our efforts. In order to achieve these goals, we are applying ROIC to performance evaluation for directors and businesses to motivate them to achieve the goals. In order to accelerate specific initiatives, we are promoting company-wide projects and will firmly promote quarterly PDCA management in a disciplined manner. In terms of profit drivers, we will identify growth businesses and ensure that they drive profit growth for the entire company. In terms of investments, we'll gradually increase the ratio of efficient investment. By doing so, we will aim to improve ROIC. As for efficiency drivers, we will optimize working capital, monitor fixed assets and take actions on underutilized assets. As we move forward with these activities, we will simultaneously launch a variety of new businesses. While accelerating the approach of selection and concentration and portfolio replacement, we will discipline and quantitatively manage the life cycle from business start-up to business exit. For each area, we will make appropriate business decisions based on predetermined numerical targets and criteria. As a company-wide initiative, we are also reviewing our organizational structure. In the past, we had a sectional organizational structure centered on business units. There were some benefits to the sectional structure. However, from now on, from the perspective of growth of Maxell as a whole, it is more important to secure synergies through cross-divisional integration. With this in mind, we will create several company-wide integrated functional units. We have started a new structure fiscal 2021. One of the changes is the creation of the new business produce division. In particular, we need to prepare for the future during the MEX23 period. We need to prepare new businesses that will become the pillars during the second phase starting in 2024. We will do this during this midterm business period. As for technology, a company-wide approach is taken, especially for large-scale technology development projects. The company will secure synergies and allocate resources in an optimal manner and prepare for growth in the next medium-term management plan period by preparing for the development of next-generation technologies. At the same time, a new division, marketing and sales division, will be established through cross-divisional integration to oversee the sales divisions of the entire company. And the division will share market information and accelerate the generation of synergies. In the short term, we will aim to expand sales through cross-selling and improve global sales with a focus on the 4 regions. At present, we have some overseas businesses with weaker sales capabilities. So we would like to use this as an opportunity to expand each business overseas. This slide explains the financial strategy that is essential for us to proceed with the initiatives that I have just talked about. We will target a capital ratio of 50%, made good use of debt while following the existing capital policy of the company with a plan to generate JPY 40 billion in operating cash flow during the current midterm plan. As for the use of cash, JPY 16 billion is allocated to CapEx or investment in equipment. In addition to CapEx, we will rationalize existing businesses or expand production capacities in support of the current MEX23. As for capital policy, we have set the shareholder return target at JPY 7 billion. The remainder will be used as growth investment capacity and will be made available as needed. We will use these funds to create new businesses in Phase 2 and beyond as a step forward to realize our vision defined for 2030. Next, I would like to talk about the fifth item, the realization of the vision for 2030. This slide illustrates the 3 medium-term periods to drive the growth of the company towards our vision for 2030, as mentioned earlier. It shows the products that will drive our growth in each of the 3 midterm plan period until 2030 by focus area. This is an illustration of what products we will focus on in the areas of health care, 5G/IoT and mobility by 2023, which is the period of the current midterm plan. We will promote all solid-state batteries in the health care field, including those for medical use. We would like to grow these batteries as a power source for the IoT devices. In the area of 5G/IoT, we would like to establish a foothold during this midterm plan for the market launch in the future of MID products and absorbing materials. In the area of mobility, AR-HUD products will be launched on a commercial basis within the period of this midterm business plan. In general, the company will continue to contribute to a sustainable society by commercializing the products shown here for 2016, 2026 and 2030. Now let me briefly introduce some specific products that are growth drivers of the medium term and the long term. The first is all solid-state batteries, which I just mentioned earlier and are for special applications, especially for medical and health care-related applications. We would like to secure the power supply for such wearable devices. All solid-state batteries address safety risks that liquid-state Rechargeable batteries cannot easily address and allow for higher voltages and a serial connection of sales. With these features, we hope to secure new demands. We believe that this is a product that is made possible by the combination of our inherent mixing, coating and forming technologies. Let me comment on the electromagnetic wave absorbing materials on the right-hand side. This is for noise suppression for automotive components. The demand for electromagnetic waves will continue to expand. As a material for electromagnetic waves, we would like to offer our technology and promote it as a growth driver. Using our technologies from molded products to sheet products and from rigid products to flexible products, we can cover a wide range of shapes and characteristics. This is a promising area for patent applications as well. So we will utilize our technology for the absorption of electromagnetic waves. The third area is HUD, or head-up displays. For this technology, the market is already ramping up. Demand is expected to exceed 10 million units globally from 2020. Maxell possesses advanced optical technology cultivated in projectors and TVs. Imaginary image distance of more than 13 meters is possible, and this is one of the smallest in the world. We have a great advantage in space efficiency. We hope to launch the product in FY 2021 and make it a major pillar for our future business growth. If you look at the right-hand side, you will see a description of MID. This is a circuit component for 3-dimensional molding. A particularly promising demand is for high-performance 5G antennas. This can be applied to resin molded products that require special connectivity. There is also demand for plating on the antenna product. In this case, our material properties, such as the flexibility with the types of resin or material to be plated is a great advantage. We expect substantial demand for this type of product in the future and hope to make this a pillar of our product business growth in the future. Lastly, I would like to mention our ESG initiatives. Regarding environmental, social and governance issues, as we can see here, the transition to decarbonize society is already underway. Regarding response to the TCFD, we would like to announce our declaration early in FY 2021 and start disclosing information next year in FY 2022. With regard to society, we will promote diversity-oriented management and promote sustainable procurement. Finally, with regard to governance, we will continue to strengthen the foundation of group management and information security. That concludes my presentation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]