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

Thank you for joining us today in our business briefing session on the update of the midterm plan, MEX23. Here's the agenda. The first item is summary of the midterm plan, MEX23. Here is the midterm plan policy. In FY 2020, structural reform was carried out. Since then, with strong commitment to value creation, we have been implementing various initiatives. Our focus is corporate value and profit growth. That's what we are promoting under the midterm plan policy, which is carried out under 2 strategies: one is segment growth strategy and the other is management foundation enhancement strategy. Under the segment strategy, we will promote turnover of businesses, strengthen sales and profitability of growth businesses by allocating adequate resources and define and focus on 3 priority areas in implementing initiatives defined under the midterm plan. Under the management foundation enhancement strategy, we will promote portfolio management to effectively manage the large number of businesses through turnover and replacement of businesses; review the organizational structure from the existing decentralized business unit-based structure to a more centralized structure for overall optimization for such functions as development, manufacturing and sales to allow company-wide optimization through cross-functional collaboration; and last, not at least, enhance financial discipline. These are midterm targets formulated in June last year. We have net sales, JPY 125 billion; operating profit, JPY 12.5 billion with OPM of 10%; and ROIC of 7% as targets. As I will explain later, compared with 12 months ago, external environment and other conditions have changed dramatically. Nevertheless, we are still committed to achieving these targets by fiscal year 2023 through concerted efforts of all members. Now let me move on to progress on segment growth strategy. I will start with a review of our growth businesses. We have 13 businesses in 4 segments as shown on the left-hand side. These are the core businesses driving future growth of Maxell. In Energy, we have automotive and social infrastructure-related products such as small and micro batteries. For Functional Materials, our reliability and durability are well received and recognized in the market. So our tapes for construction and dicing and other tapes for industrial processes should be able to attain solid growth in this market. In Optics & Systems, we are focused on growing in-car camera lens units and semiconductor-related embedded systems, which are in brisk demand at the moment. Last but not least, Life Solution is an area which can create value in combination with our analog core technologies. Growth businesses in this area include health care products, beauty care products and hydraulic tools. These 13 growth businesses have been identified last year when we formulated the 3-year midterm plan by backcasting from the 10-year megatrends. We can grow these businesses by applying our analog core technologies, particularly in the 3 focus areas of health care, 5G/IoT and mobility. In each of these areas, we believe we can promote growth. This slide shows progress so far after the first year for each of the 13 businesses, as mentioned earlier. Most of them are progressing well while others are slightly delayed. Overall, however, we are doing reasonably well towards achieving the plans as defined last year. So as I said, we remain focused on achieving these targets. Some businesses are behind the schedule, such as #11, health care products in the Life Solutions segment, due to faster slowdown in demand compared with our original expectation for the COVID-19-related offerings; #2, cylindrical type lithium battery in the Energy segment for smart meter infrastructure getting behind the schedule by about 1 year compared with our original expectation due to the situation of the customer. On the other hand, Functional Materials, including construction materials, are progressing well in line with the original schedule; while Optics & Systems, which is lens business for automotive application, is performing more strongly than expected. Especially, semiconductor-related embedded systems are enjoying strong demand. That's why there are 2 sun symbols here on the slide amidst the favorable business environment. We are receiving large orders at the moment. All in all, with both positive and negative factors, we decided to keep the original plan unchanged. In view of what I've just talked about, here is the current performance trend vis-a-vis targets and the past trends summarized on this page. Sales for FY 2020 was JPY 139.1 billion. Our plan was to let it go down towards FY 2023 because our intention is to reduce exposure and withdraw from unprofitable businesses, as you can see on the right-hand side of the slide, setting the target at JPY 125 billion for FY 2023. Examples of these businesses include projectors, which are down significantly at the moment, and lithium-ion batteries for consumer applications. The lower panel shows the trends in operating profit, starting with JPY 3.8 billion for fiscal year 2020. Actual for FY 2021 was JPY 9.3 billion, and the forecast for 2022 is JPY 9.5 billion. We are still committed to the target for FY 2023 of JPY 12.5 billion and operating margin of 10%, as I explained earlier. In the current midterm plan, MEX23, we are focused on profitability, including optimization of business portfolio rather than business expansion or sales expansion at this moment. In the next midterm plan however, starting in FY 2024, we will be focusing on new businesses such as AR H-U-D, or HUD, all-solid-state battery, aerial display and electromagnetic wave-absorbing material and others that we are preparing right now. So during MEX23, we are making necessary preparation so that we can develop them into next pillars with solid sales and profits during the next midterm period. Based on what I've just talked about, we would like to achieve the original plan of JPY 12.5 billion in operating profit and 10% in operating margin by FY 2023. As mentioned earlier, the Energy segment, including lithium-ion batteries, is lower than the plan in OP due to the delay in smart meters orders by 1 year, and Life Solution is also lower than the plan due to the weaker demand for antibacterial deodorizers. However, we would like to make a recovery with Functional Materials and Optics & Systems, where structural reform is proceeding and the sales of auto parts and the semiconductor-related businesses are growing. That's how we should be able to achieve the overall midterm targets. Next slide shows the breakdown between the 13 growing businesses and others for FY 2021 through FY 2023. As of FY 2021, the ratio of 13 growth businesses to overall OP was 39%. And this year, for FY '22, we are trying to increase this by JPY 2.7 billion to 67%. Furthermore, for FY 2023, we would like to add another JPY 2.2 billion to make the ratio 69%, achieving JPY 12.5 billion in overall profit. Next slide shows the difference between FY '22 forecast and FY 2023 plans for each segment. It also shows major products for each segment. In order to achieve JPY 12.5 billion in operating profit by FY 2023, we need JPY 1.3 billion in Energy, JPY 0.5 billion in Functional Materials, JPY 0.6 billion in Optics & Systems and JPY 0.6 billion in Life Solution. That's how much we need to achieve JPY 12.5 billion in OP. With the ongoing changes in the external environment, including soaring raw material prices, shortage of semiconductors and other parts leading to production cuts in the auto sector and the geopolitical risks, it is difficult for us to forecast the future outlook at this moment. Nevertheless, as written on the lower right, we would like to detect changes and take actions as quickly as possible with agility and flexibility so we can achieve the targets despite these challenges. Now let me move on to the last part, progress of the management foundation enhancement strategy. This is the same slide as we used 2 weeks ago at the financial results briefing. First of all, in order to strengthen profits and losses management, we will continue to promote the PIPJ project, identifying, closely monitoring unprofitable models, addressing and cutting losses and improving profitability. Also for business-level initiatives, we have ABC-XYZ, which is business-level profits and losses management initiative. We are downsizing or withdrawing from unprofitable businesses and reallocating resources to growing businesses at an accelerated pace. By applying such rigorous profits and losses management on a business level, we are promoting our ROIC, or R-O-I-C, from 1.9% in FY 2020 to 5.5% in FY 2021 and 5.8% in FY 2022 towards the target of over 7% for FY 2023. Such initiatives will be accelerated further on a company-wide basis. As I said at the beginning, we are accelerating cross-functional activities. Last year in FY 2021, sales functions that were distributed across different business units have been centralized, shifting from dedicated sales force for each product area to account-based sales organization, enhancing customer relationship and partnership capabilities so that we can expand our sales going forward. In addition, towards the next midterm, after MEX23, we are preparing new business pillars. To that end, development functions that were distributed across different business units and centralized now to clarify priority among development themes and optimize resource allocation. Especially during FY '22, under the centralized development function, in order to accelerate commercialization of in-house technologies developed through these efforts, we are centralizing other functions such as design, engineering, procurement and quality assurance. By having cross-functional collaboration, we should be able to bring products to market faster than in the past. That's what we are aiming to achieve in the future. Next is financial strategy and cash allocation policy. As you can see on this slide, on top of cumulative operating cash flow of JPY 40 billion, JPY 5 billion is expected from sales of idle assets and strategically held shares. Those are, in turn, allocated to capital investment, growth investment and shareholder return based on our shareholder return policy. We will make sure that we secure adequate return to shareholders. Last part is about ESG initiatives. The slide shows major activities. In the environment, which is a very topical area at the moment globally, we have announced participation in TCFD in October last year and set CO2 emissions reduction target of 50% by FY 2030 compared to FY 2013. Although the target of the national government is 46%, our company intends to deliver more. We have already achieved 30% reduction by FY 2021. To achieve the remaining 20%, we will work on reduction of internal energy consumption and procurement of green energy. Please refer to the slide later for our activities under society and governance. The slide also shows the 7 materiality themes we have selected, and KPIs are under development and should be announced as soon as they are finalized. In summary, the ongoing changes in the business environment are affecting different businesses in different ways. Nevertheless, we will keep our midterm target unchanged and achieve them through united efforts of all members in the 4 business segments with clear focus on value creation. That's all I have for today. Thank you very much for your kind attendance. [Statements in English on this transcript were spoken by an interpreter present on the live call.]