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

Good afternoon, and thank you for joining us at our FY 2023 Business Briefing. We are excited to share our strategy for the entire company with you. Today's briefing will cover 4 main points. First, we will discuss business forecast for FY 2023. Second, we will recap the midterm business plan, MEX2,3, basic policy, which is ending at the end of this fiscal year. I will elaborate on our policy and strategies under MEX23 as a reminder of the plan. Third, we will discuss our progress so far, both successes and failures. And finally, we will cover materiality. That's the content of our briefing today. Next slide, please. Let me start with the business forecast for fiscal year 2023. The slide shows the forecast already announced to the market. If you could look at the chart from left to right, we have FY 2022 results, MEX23 plan for FY 2023, which was formulated at the beginning of the midterm plan in FY 2021, and FY 2023 forecast and its changes from last year and MEX23 plan. Net sales are projected to be JPY 133 billion, which is an increase of JPY 0.2 billion compared with the last year. Operating profit is JPY 7.5 billion, which is an increase of JPY 1.9 billion compared to last year, but a decrease of JPY 5 billion compared to the initial guidance. The table also shows other KPIs adopted by the company such as ROIC, which is an important KPI we are focusing on at the moment as a measure for various initiatives. ROIC is projected at 4.8%, compared with the 7% target at the beginning of the midterm period. The gap is around 2 percentage points compared with the initial target. ROE is 6.2%, 3.9% percentage points lower than the initial plan. So the gap is mainly due to the larger-than-expected shareholders' equity. In summary, the overall performance was below the expectations of the initial midterm plan. This is attributable to both external and market factors as well as internal factors. So let me discuss the details. External factors include the impact of COVID-19 pandemic, which slowed down the market over an extended period of time. That is the first reason. The second reason is rising prices of raw materials as well as power costs, especially during FY 2022. We did not expect such a significant increase in procurement costs when we formulated the midterm plan. On the other hand, the year-on-year performance has improved, driven by several factors such as sales expansion of growth businesses, which compensated for the drop in domestic B2C business. The B2C business is something I would like to elaborate later in my presentation. We are transferring some of the sales to our partner and our sales will drop to a certain extent. And another is increasing trend of OP, operating profit, that is another factor, which was partly helped by price hike action taken to mitigate part of raw material and energy price increases as well as internal cost reduction efforts. So regarding this point, we are taking action and we are making internal efforts to reduce costs and are also explaining the situation to customers so that we can take corrective measures. That's why we are expecting an increase in operating profit. Next is forecast for FY 2023 by segment. From the top, we have Energy segment projection. Net sales of JPY 40 billion and operating profit of JPY 1.7 billion. Net sales projection is about JPY 10 billion higher compared with the original expectation of JPY 29.3 billion because, first, micro battery business performed more strongly than we had expected, as did the consumer use lithium ion battery business, where some decline was expected, mainly for game consoles. So those are factored in. On the other hand, OP forecast is JPY 1.7 billion compared with the target of JPY 4.4 billion, which is expected despite the year-on-year decline in net sales expected for FY 2023, meaning that we have a serious gap in operating profit. This is partly attributable to the slow progress in our cost reduction program, which started 2.5 years ago, affected by the difficulty in obtaining customer approvals amidst the slower economic activities. The lower operating profit is also attributable to the higher development cost for all-solid-state batteries incurred due to faster-than-expected progress in our product development activities, which I will elaborate later in my presentation. Secondly, Functional Materials segment. Projection is net sales of JPY 33 billion, and this is higher than the initial guidance of JPY 28.5 billion, driven mainly by the expanded demand for functional materials in general. On the other hand, the operating profit forecast would have been in line with the guidance without the weaker performance of coated separators for automotive batteries, which are affected by slower automotive demand. So that's the factor behind the gap in operating profit. The third segment is Optics & Systems, which is overperforming on both sales and profits compared with the original plan. This segment is driving the overall performance of the company and strongly performing compared with the other segments. Sales forecast is JPY 38 billion, vis-a-vis the initial guidance of JPY 34.3 billion. A major reason for the sales growth is the strong performance of the lens business for automotive headlights. So the lens business as a whole is performing well. The overperformance in operating profit is driven not only by the sales growth of the lens business, but also by the improved profitability of the projector business, for which we have implemented downsizing to address the portions of the business that were negatively affecting the segment performance and we ended up achieving more improvements than what was anticipated 2.5 years ago. Last but not least, Life Solutions segment. When the initial guidance was formulated around the end of FY 2020 or beginning of FY 2021, we were in the middle of the COVID-19 pandemic and we expected significant demand in sales from antibacterial deodorizer and other antibacterial products in the consumer market. In fact, in FY 2022, we generated significant earnings from antibacterial deodorizers. In contrast to our assumption, however, towards the end of FY 2023, at the moment, we are experiencing a significant decline in the demand for antibacterial deodorizer products due to the ending of the COVID-19 pandemic. That's why, as mentioned last year, we are promoting restructuring of the business together with our partner and transferring about JPY 10 billion worth of sales to the partner organization, resulting in a decline to around JPY 22 billion for FY 2023. We should have achieved positive earnings within FY 2023, through the ongoing structural reform is going on. But due to such restructuring costs, we have negative earnings forecast for FY 2023. That's why we have negative results. We will continue to implement the structural reform to turn around the business into positive earnings going forward. Overall, as against the initial guidance of JPY 125 billion and JPY 12.5 billion with 10% profit margin, our full year forecast is JPY 133 billion, and JPY 7.5 billion due to factors just explained. This, however, represents an increase in operating profit compared with FY 2022. In other words, we managed to secure a positive year-on-year growth in the final year of the midterm plan. This chart shows a variance analysis between FY 2023, MEX23 guidance and the forecast. The initial guidance was JPY 12.5 billion. The first factor is an increase in raw material costs, mostly in Energy, Battery and Functional Materials, many of which are oil related. There was a significant rise in those prices, and this factor is responsible for JPY 7.2 billion. We have been addressing this issue by implementing price hikes at the moment, and the price action is expected to recover all of the JPY 7.2 billion by the end of FY 2023, as you can see on the right-hand side bar chart in this chart. Another factor is unachieved cost reduction, which reduced operating profit by JPY 3.2 billion, which is broken down to JPY 1 billion additional development cost for next-generation all-solid-state batteries, which is the strategic decision mentioned earlier. Business reforms with our partner is another factor and we have achieved cost reduction as well. We worked very hard on cost reduction together with our partners. However, due to the significant increase in raw material costs as well as slow progress on technological collaboration during the pandemic, we could not achieve the targets. So the total gap is around JPY 3 billion. The other factor is quantity variance in the Life Solutions segment of JPY 4.5 billion. After FX variance, which was a positive factor, the full year forecast for FY 2023 is JPY 7.5 billion. The next page shows a metrics chart summarizing external and internal factors mentioned earlier that affected the achievement of FY '23 guidance. There are 4 external factors and 3 internal factors. The chart shows which factor affected which business segment. The first factor is changes in demand after COVID-19 pandemic, which affected antibacterial deodorizer and other products in Life Solutions segment. Another factor is delivery delays due to shortages of semiconductors, which led to unfilled orders of customers in the Energy segment, specifically for lithium-ion batteries, automotive components, where it led to a lower production output and the DMS business for embedded semiconductors. So we had such a negative impact. Although their sales and profits exceeded the guidance, we could not deliver on all of the demand that we saw with customers due to semiconductor shortage. So we could not secure enough supply of semiconductors on our side. Semiconductor shortage also affected the Electro-forming business such as metal masks due to slow semiconductor production activities. In summary, semiconductor shortage affected both Energy and Optics & Systems segments. The next factor is soaring raw material prices. Although the ongoing price hike action is expected to offset all of the impact from this factor, this factor affected all of the 4 business segments. The yen's depreciation affected the Functional Materials and the Life Solutions segment, where we were importing products and the components in foreign currencies and selling them in Japan. The cheaper yen pushed up our costs and impacted those businesses. As for internal factors, despite very intense cost reduction efforts internally, especially in the beginning, the cost reduction we have achieved was less than the target, which affected the profitability of the Battery and Energy and Functional Materials and Life Solutions segments. Another factor is customer acquisition. During the pandemic, we had a limited customer access and visits, especially with overseas customers. And as a result, we suffered from reduced sales, especially in overseas markets. Last but not least, as I said earlier, there was onetime expenses incurred for the business reforms of the Life Solutions segment, which is factored into the earnings forecast for FY 2023. From this point on, let me give you a recap on the midterm plan MEX23 basic policy. First, for MEX23, which stands for maximum excellence, the basic policy is a commitment to value, and we have management focused on corporate value and profit growth. Under this policy, the company has a segment growth strategy to accelerate business portfolio transformation, strengthen sales and profitability of growth businesses, focusing resource allocation to high potential businesses that can lead the growth of the entire company and focus on the 3 core areas identified by back casting from where we want to be in 10 years future based on the market trends and the company's core competitive advantages and allocate adequate resources to support those 3 areas. So that's the intention. To support the segment growth strategy, the company also formulated a management foundation enhancement strategy to promote portfolio management, encourage cross-divisional product development and sales and marketing activities as part of the organizational transformation and reinforce financial discipline. Overall, this framework was defined so that we can promote value-oriented management with clear strategies. Now the 3 core areas were identified based on our technological advantages, the 3 areas are mixing and dispersion, fine coating and high-precision molding and forming. This mapping was created back in 2020 and 2021. We use these advantages in our engineering, product development and manufacturing to achieve higher performances in mixing and dispersion by importing and high procedure molding and forming operations and differentiate our products such as batteries, tapes and the molded components and so forth. These are the areas where we are using our differentiated technologies. Based on this mapping, we have been conducting our activities, including product development. Based on that, during the past 3 years, as part of the general business transformation and the business portfolio restructuring, we have decided to transfer our B2C business to our partner. The decision was made because it became clear that we were not able to adequately reflect our technological competencies of mixing and dispersion, fine coating, high-precision molding, and forming technologies in the comprehensive competitiveness of the end products. In the meantime, we decided to leverage and further develop our advantages in the B2B business centering around parts and materials. That was a decision we have made. As a result, our B2C business share of sales was reduced from around 20% back in FY 2015, to 5% in FY 2023, reflecting our intention to become a B2B player from FY '23 onwards. We will continue with our commitment to value, trying to maximize added value and profit in the B2B market. And even within the B2B market, we will clearly articulate which businesses we are further strengthening and which businesses we are restructuring. Our target markets will remain the same, namely mobility, 5G and IoT, and health care. Last but not least, we are transforming our organization at the same time into the 1 that can strongly support the B2B businesses. Next, I would like to review the latest decisions from the viewpoint of the medium-term plan I have just touched upon. In regard to the initiatives we have taken so far, first, do allow me to go through the business replacement. This shows the overall picture for the progress of accelerated business replacement and showing initiatives we have been engaged in from FY 2021 to FY 2023 this year. FY 2021, well, in the previous year, FY 2020, we had a major structural reform. Starting from FY 2021, we wanted to grow firmly in the new midterm plan. For 1 thing, we worked on to downsize the projector business, which had a very tough profit situation. Yes, it was quite a challenging effort in FY 2021, but we reduced the business size dramatically. As I mentioned earlier, the Optical Health Systems segment grew in profit more substantially than we originally planned. Downsizing the projector business was 1 of the factors behind this growth. The second, FY 2022. As I have explained this earlier, we decided to reduce B2C business substantially. Here, we entered a new scheme with Denkyosha Co. Ltd. brands. Maxell and Izumi brands are the targets. We agreed in principle that Denkyo will be responsible entirely for the product planning and development and sales of Maxell brands. As for Izumi brands, Maxell Group or the Maxell Izumi will be responsible only for product development. With this new scheme, we are aiming to grow company businesses by leveraging the strength each party has. As for the tough businesses and well downsizing or exiting from the market, we decided to launch our new businesses as strongly as possible. As has been announced on many occasions, we would like to be ready for the volume production of all-solid-state batteries. Within the current fiscal year FY 2023, we'd like to aim for a full business opportunity and aim at the scale of JPY 30 billion in 2030, making a major business pillar. Next, I would like to explain our plan to strengthen our sales and the profitability of growth businesses as well as our plan to concentrate on 3 focus areas. This shows the latest progress we have made so far. There are 13 growth businesses to drive Maxell's business growth. Energy segment, tire puncture sensor in use as well as the heat resistant coin batteries. This is very strong. Next, the third 1, this is for healthcare. This CR coin batteries are also quite strong. On the other hand, sales of cylindrical lithium batteries for infrastructure and meters as well as for the hearing aids, coin type lithium ion batteries for recharging are somewhat behind in target in terms of sales expansion. Next, on Functional Materials, tapes for the construction process and the semiconductor processing in those high value-added areas, we are almost right on the plan, though some delays are observed partially. On the other hand, we are having a somewhat tough time in the industrial process. Behind this was the COVID-19 pandemic, resulting in the slow performance in developing and exploring activities overseas. So it is in this area we could have done better. But when it comes to optics and systems, as has been pointed out, we had a good performance in the camera lens for LED and headlamp as well as for automotive. Semiconductor-related embedded systems were also very strong. Lastly, our Life Solutions. As I have mentioned in the outset, due to the COVID-19, health care and beauty care products suffered from a much smaller demand than originally forecasted. We executed our structural reform. So this business will be taken out from the Maxell businesses. In contrast, we have a growth driver in this segment. Hydraulic tools by Maxell Izumi are expected to recover strongly in the North American market. So we'd like to leverage this as our growth driver going forward. Next, please. I have just explained the alleged situations of those 13 businesses. Yes, positive and less positive mixed together to some extent. Overall, this shows the changes in the overall sales competition of the 13 growth businesses and other businesses. The blue portion is the 13 growth drivers for the entire company. As you see here, it grew firmly from FY 2021 to FY 2023 in terms of the growth rate. Just comparing FY 2021 and FY 2023, we can aim at 10% plus in growth. Next please. This shows an operating profit. The blue is the 11 growth businesses. The red is Life Solutions related businesses where we had some changes in the business environment. So we have separated these 2 products, 2 businesses. Other businesses are shown in the gray bar. The most important point here is the blue bar, which shows 11 out of the 13 growth businesses can grow from JPY 4.5 billion to JPY 6.5 billion, showing a steady firm growth. For FY 2021, we had a big operating profit of JPY 9.3 billion. Behind this is other businesses. This contains onetime profit when we had a big shrinkage of projector business. Another special factor is we had a moderately good performance in the consumer lithium ion batteries in 2021. So these special factors are included here. But anyway, what I want to emphasize here is that we were able to grow operating profit of those businesses which we wanted to grow. Though it is a simple calculation, it grew more than 40% comparing FY 2021 and FY 2023. Nex, please. We would now like to expand on the growth areas, namely in healthcare, 5G and IoT and mobility. These areas grew in competition from 60% in 2021 to 70% as of now. It means that we are making a smooth shift into those 3 focus areas. Next, please. We would now like to touch upon our strategy to enhance management foundation. But allow me to touch upon cross-divisional operation in development and sales. This shows the overall picture. FY 2021, the first year of the current midterm management plan, sales and development. Each division had its own sales and development, but we initiated our efforts to change that into a cross-divisional structure for the entire company. Now the result, sales and marketing division, in old system, we had different sales people visiting the same car manufacturers, for example, or the different customers with the same applications or the common use cases. We implemented this transition from product-oriented sales to account-oriented sales. We decided to go for the maximum possible usage of our sales resources. Then we implemented a new business producing division. Back then, we had about 11 major themes. If these themes are worked on within each division, while working on development and the business opportunities in parallel, each division is going to suffer from a major issue of limited resources. Now we put all these resources into this new business producing division for 11 teams. And now we can assign the needed development resources to the most expected growth areas. Results. This new business producing division is now working to develop all-solid-state batteries. This used to be worked on by the limited resources within Energy business division. Now we can put company-wide resources for development. The development work made good progress. They were able to look into volume production technologies. And as a result, we are advancing this all-solid-state battery business launch a little ahead. Next, on the sales side, which in cross-divisional integration, we can expect to have a bigger synergy, including cross-selling. Now this, we have to address the rising cost of raw materials. Now we can be united as a whole company to have tenacious negotiations for our selling price. This can be possible because we are now having all sales resources working under the 1 roof of the sales and the marketing division. In the past, our sales reps had to pay special attention to the kind of relations developed out of the long history in the past, make it more difficult or less difficult for the price increase negotiation. But now united in the entire company to go for it, being able to go for the major policies collectively which resulted in our capacity to reflect the rising price of materials into our increased price. We are now seeing many benefits, thanks to the cross-divisional organization we created since 2021. And the previous fiscal year, in FY 2022, we applied the same to Human Resources and General Affairs department, Finance and Accounting. And this year, FY 2023, it was further extended to procurement and supply chain management division. Since 2022, through cross-divisional operation of development, we are enjoying a variety of efficiency and improvement, and we are truly united in this journey. Lastly, I would like to expand on the management foundation or the promoting portfolio management and enhancing financial discipline. We are sharing this information for some time. That stake is how we are improving business management and profitability. The biggest management unit is the business division. This is shown in the segment. We are now monitoring ROIC for each business division, and now are engaged in many initiatives including return on invested capital. Unfortunately, as for FY 2023, ROIC was 4.8%. So we missed the original target of 7%. But looking back, our activities in FY 2022, including a large buyback of treasury shares, we improved our capital efficiency. We accelerated our activities, including the sales of unnecessary fixed assets. As for FY 2023, we intended to continue in the same efforts, trying to accelerate the PDCA process. We're also visualizing the profitability improvement by business under ABC/XYZ. We are now accelerating a variety of initiatives. Last year, we executed these schemes on the B2C business as well as for healthcare and beauty care, including antibacterial deodorizers, actually came out of those monitoring activities, we are now engaged. We'd like to continue this effort in FY 2023 onwards. Particularly, we'd like to increase the competition of AB businesses which had a great sales growth and profit. As for the smallest management unit, model-by-model P&L, we are now fully engaged in PIPJ initiatives. We have many models, as many as 6,000. Some are profitable and some not. Our top priority is to improve profit of those models which are losing or difficult to generate profit. And we need to do this as thoroughly as possible. With raw materials rising in price lately, depending on the models, we may suffer a loss or a drop in the profit. So with this PIPJ initiatives, we would like to improve our efforts to try to reflect the cost increase into our selling price. We'd like to continue this effort in FY 2023 as well. Now allow me to summarize our total initiatives. In the area of the business replacement, we were able to downsize projector and consumer business. On top of it, we succeeded in planting seeds for all-solid-state batteries. Yes, so we still have those businesses, be it consumer lithium-ion batteries or Maxell SMA consumer electronics business, which have more room for improvement. We'd like to advance possible contributions to our business from all-solid-state batteries. Next, our growth businesses. Here, we need to strengthen profitability as well as to concentrate on 3 focus areas. We achieved 10% in growth in FY 2023 from FY 2021, and we need to continue this aiming at a solid growth. Next, in the area of development and sales. Here now we are working on cross-divisional efforts, and we are getting some results. We need to accelerate our efforts to sell more new products globally. We'd like to accelerate these efforts in FY 2023. In regard to net promoter portfolio management, yes, we'll continue this effort. And with the clear ROIC targets, we will accelerate in our efforts here. Our original plan for FY 2023 was 10% in operating profit and 7% in ROIC. The latest forecast is 5.6%. So we are having somewhat tough situation, but we will make a sure recovery in the next medium-term management plan onward. As for details, we should be able to share our next medium management plan with you, say, in around in the first quarter next year. Next, please. Finally, I would like to touch upon materiality. As you know, we had rather a major structural reform in 2020. At that time, we looked into what kind of company Maxell should become. The top management, including me, together with our employees had a good discussion about this. We clearly established this new MVVSS, Mission, Vision, Value, Slogan and Spirit. The strength we have, which I touched upon earlier, should be the basis for our enabling technologies for differentiation and analog core technologies. We should be able to deliver to our stakeholders the greatest possible values. With this in mind, in FY 2020, we established our corporate sustainability vision. And on the extension of it, we identified our materiality in FY 2021, and we established materiality KPIs in FY 2022. And in the current FY 2023, in order to achieve the KPIs, we are now accelerating our activities. Maxell has identified a total of 7 materialities: creating innovation through unique original technologies, solving social issues through our value delivery; organizations and people development to achieve the goal; maximizing on customer value; environmental activities; and strengthen our business portfolio management, including governance. In total, we have the 7 materialities. We executives are responsible for the execution. We have assigned supervisory officers for each area to supervise and manage the execution of those activities. In technologies, including businesses, we have Director Ota. In organizations, we have Director Masuda, our CFO. In sales, to maximize customer value, we have a Director Hashimoto. As for the entire company matters, including momental activities, or in a business portfolio as well as group governance, I, Nakamura is in charge as supervisory officer. So with this officer in charge, we will manage the entire picture. Well, I run rather quickly toward the end, covering FY 2023 outlook as well as the progress and the initiatives we have been engaged as well as the issues for the past 2.5 years or 2-plus years vis-a-vis the midterm management plan. Yes, we still have many areas under our target. But in terms of the initiatives or the approaches or the strategy, it is fair for me to say that we have a reasonably good execution track record so far. So FY 2023 and onward, we, the board members including me, need to be truly united to work on them as surely as possible. So please continue to help us. This concludes my explanation. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]