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

I am Nakamura. I'd like to present the financial results of the First Half FY 2024. Summary of today's presentation consists of 3 points. First, FY 2024 first half results overview. I will elaborate on this later. Net sales were JPY 63.2 billion. Operating profit was JPY 4.2 billion and net profit was JPY 3.1 billion. Second, regarding future outlook, operating profit will be on track with the initial plan while conditions have been changing in business. Third, portfolio reform has been accelerating, and we will change the reporting segment. I will share with you these 3 points. FY 2024 first half results overview. Summary of the review on the first half FY 2024. Net sales were JPY 63.1 billion, down by JPY 2.5 billion year-on-year. Operating profit was JPY 4.2 billion, down by JPY 0.4 billion year-on-year. Ordinary profit was JPY 3.9 billion. Net profit was JPY 3.1 billion, and exchange rate was JPY 153 to $1. Sales decreased by JPY 2.5 billion due to a decrease in rechargeable batteries, semiconductor-related products and licensing revenues despite increase in primary batteries, adhesive tapes and health and beauty care products. Operating profit was affected by the onetime licensing revenue in the previous year on a year-on-year basis in addition to the sales impact. Ordinary profit and net profit were impacted by the foreign exchange losses. Although they were ups and down by segment, for the entire company, they were mostly in line with the initial plan. Net sales changes from the first half FY 2023 to the first half FY 2024. Net sales decreased from JPY 65.6 billion in FY 2023 to JPY 63.1 billion in FY 2024, down by JPY 2.5 billion. Quantity variance was minus JPY 3.9 billion. As shown on the right, sales in primary batteries, adhesive tapes and health and beauty care products increased, but sales in consumer lithium-ion battery, automotive optical components, in-car camera lens unit, semiconductor DMS and licensing revenues, which marked the reactionary decline from the onetime revenue in the previous year decreased. Price variance was minus JPY 1 billion. Prices decreased with the recent cost decrease for certain raw materials as we adopted the price formula. Exchange variance was plus JPY 2.4 billion. Depreciation of yen contributed to sales. Operating profit changes. Operating profit decreased from JPY 4.6 billion in the previous year to JPY 4.2 billion in this year, down by JPY 0.4 billion. In the breakdown, in quantity variance, as mentioned in the sales part, profit increased with sales increase in primary batteries, adhesive tapes and health and beauty care products, but rechargeable batteries in-car camera lens unit, DMS business and the licensing revenues impacted adversely. Price variance was minus JPY 1 billion. Sales price changes due to cost decrease in certain raw materials impacted. Exchange variance was plus JPY 0.9 billion. Material costs decreased in some raw materials and served as plus JPY 0.2 billion. On the other hand, cost reduction was minus JPY 0.2 billion. Although cost reduction is progressing with profit contribution, expenses related to customer bankruptcy proceedings are included in this item of cost reduction. I present the review by segment. Starting with Energy segment. Net sales were JPY 17.7 billion, down by JPY 0.3 billion year-on-year. Operating profit increased from JPY 0.2 billion to JPY 1.3 billion, up by JPY 1.2 billion. Regarding net sales, sales of primary batteries increased due to stable demand for automotive applications and increased sales of primary batteries for medical devices. On the other hand, consumer lithium-ion battery sales have been sluggish and their sales decreased. In operating profit, along with the sales increase, profit of primary batteries increased substantially as well as the effects of yen depreciation. On the other hand, due to the decreased sales, rechargeable batteries are recently in tough condition, but we managed to minimize the impact of sales decline through the minimum operation, mainly in Chinese production basis. Moving to the second segment, Functional Materials segment. Net sales were JPY 15.4 billion, up by JPY 0.8 billion year-on-year, and operating profit was JPY 0.3 billion, down by JPY 0.2 billion year-on-year. Regarding net sales, sales of adhesive tapes increased centering on the strong tapes for semiconductor manufacturing process. In Industrial Materials, industrial rubber sales were on the declining trend with worsened product mix caused by sluggish sales of high-margin products. But we sustained the previous year's level of sales of coated separators, which has a high potentials. In operating profit, in addition to the sales impact, profit from industrial materials decreased due to sluggish sales of industrial rubber products, although profit from coated separator increased. Moving to the third segment of Optics & Systems segment. Net sales were JPY 17.6 billion, down by JPY 4.5 billion year-on-year. And operating profit was JPY 1.6 billion, down by JPY 1.9 billion year-on-year. Regarding net sales, LED headlamp lenses continue to be robust, but in-car camera lens unit sales have been sluggish and sales of automotive optical components decreased. Sales of semiconductor-related products decreased due to the impact of customers' inventory adjustment, which lasted longer than our expectation. Licensing revenue decreased due to the reactionary decline from the onetime revenue in the previous year, as mentioned, but we achieved the full year target of licensing revenue. In operating profit, it is in line with the sales trend. Regarding licensing revenue, we maintain a certain level of profit. Finally, Life Solutions segment. Net sales were JPY 12.4 billion, up by JPY 1.5 billion year-on-year, and operating profit was JPY 0.9 billion, up by JPY 0.6 billion year-on-year. In net sales, strong sales of OEM products in health and beauty care products contributed to sales growth. In operating profit, besides strong sales, the business reform implemented in the previous year continued to be effective. Future outlook. Key points for the second half by segment. In the Energy segment, in primary batteries, following the first half, sales for medical devices will continue to exceed expectations. For automotive and infrastructure applications, sales will progress steadily. In rechargeable batteries, we anticipate further sales decline in the second half, and we will strive to minimize the impact on profit through minimum operation. In Functional Materials segment, in adhesive tapes, sales of tapes for construction will not reach the initial plan, although they are on the growth trend. Tapes for semiconductor manufacturing process will continue to progress firmly. In Industrial Materials, Industrial rubber products will not reach the full year plan, while we have a certain visibility of a recovery in the second half. Sales of coated separators will increase gradually with further shift to EV. Third, in the Optics & Systems segment, sales of in-car camera lens unit are sluggish, as mentioned, and the tough condition will continue in the second half. While LED headlamp lenses continue to progress steadily, centered on overseas demand. In semiconductor-related products, customers' inventory adjustment for semiconductor DMS is taking longer time than expected. But we see signs of recovery for the late fourth quarter, though overall tough condition will continue. EF2 sales are expected to recover in the second half of this fiscal year onward. In the Life Solutions segment, in Health and Beauty Care OEM business, OEM products centered on shavers are expected to continue robust performance, though they may slow down slightly compared to the first half. In hydraulic tools, both ODM and own brand products are expected to progress in line with the initial plan. As a whole, businesses which are expected to grow have been steadily progressing, though there are some businesses facing short-term challenges. I will explain the revision of the full year forecast. In Energy segment, in the previous forecast for FY 2024, net sales were JPY 32.5 billion, and operating profit was JPY 0.7 billion, as mentioned. A robust performance of the primary batteries will continue in the second half, but consumer lithium-ion battery will be tougher slightly. And all in all, we revised that operating profit will increase by JPY 1.5 billion from the previous forecast, JPY 2.2 billion. In Functional Materials segment, net sales were revised from JPY 32.4 billion to JPY 31.9 billion, and operating profit is revised from JPY 1.6 billion to JPY 0.8 billion. Semiconductor-related businesses where we expect to grow are progressing steadily. But as industrial rubber products and some adhesive tapes are in tough conditions, we made this revision. In Optics & Systems segment, net sales are revised from JPY 40.2 billion to JPY 35.3 billion, and operating profit was revised from JPY 4.7 billion to JPY 3.6 billion. This revision is mainly due to the in-car camera lens unit and the semiconductor-related business, which are not progressing in line with the initial plan as mentioned. In Life Solutions segment, net sales are revised up from JPY 22.9 billion to JPY 24.3 billion, and operating profit is revised up from JPY 1 billion to JPY 1.4 billion. Finally, I will explain changes of reporting segments in line with the portfolio reform. This slide shows a digest. First, the medium-term management plan, MEX26, is progressing as planned. Growth investment toward the ideal feature to be realized in 2030 are on track, and I will elaborate on them later. Future projects are also being prepared as planned. The enhancement of shareholder returns is progressing as planned. We pay an interim dividend of JPY 25 for FY 2024 and executed a share buyback of JPY 5 billion. The performance for FY 2024 is generally progressing in line with the plan, though there are some ups and downs by business. Bearing the ideal feature to be realized in 2030 in mind, we are determined to accelerate portfolio reform, accelerating growth by clarifying business distinctions. We are currently considering changing reporting segments. We will realize high profitability by concentrating investment on analog core businesses, which are based on the strength of the company, analog core technologies. That will lead to maximizing corporate value by improving capital efficiency. To be specific, we will change reporting segment in line with the portfolio reform effective from FY 2025. This was released on June 5, overview of the current medium-term plan starting from 2024. It is to enhance corporate value through two-pronged approach of business strategy and financial strategy. In existing businesses, we will thoroughly promote the business portfolio reform. In new business, we will launch new businesses centering on all solid-state battery while launching new themes for the future. In sales, we will strengthen human resources to pursue solutions and catering to global customers' needs. In management foundation, we will strive to improve business operation through the standardization of core systems. In financial strategy, as a growth investment, we plan JPY 35 billion of investment, more than double the amount from the previous business plan as a proactive investment in the growing fields. Regarding shareholder return, with a total payout ratio of over 100%, we will improve capital efficiency. We commit to achieve 8% or more of OP margin and 10% or more of ROE within this midterm plan. For business growth, let me refer to a cash allocation plan again. With JPY 40 billion of cash flows from operating activities, we made gross investment of approximately JPY 35 billion and total payout ratio over 100% in shareholder returns and achieved the price-to-book ratio of over 1.0x. We are making 5 major investment in 3 focus areas of mobility, ICT/AI and human social infrastructure today. We have released this externally, and they are in the execution process. For heat-resistant coin-type lithium battery, we are now making approximately JPY 500 million of capacity expansion investment in [Kyoto] factory. Also in Mobility business, approximately JPY 2.7 billion investment is being made to introduce mass production equipment supported with the subsidy from METI, along with increasing demand for BEVs. In ICT/AI business, as mentioned, we will make approximately JPY 2 billion investment in Yonezawa plant for its capacity expansion. The building expansions are already completed, and we will ramp up production equipment to be in line with the demand growth. Finally, in Human/Social Infrastructure, we make approximately JPY 5 billion investment for the expansion of buildings and equipment to meet the increasing demand for primary batteries for medical applications, whose demand was prominently high also in the first half of FY 2024. It is progressing in line with the plan. Another investment in Human/Social Infrastructure business is for tapes for construction. For the highly durable butyl tape, we are making investment of approximately JPY 2.2 billion for capacity expansion of our plant in Kobuchizawa to capture global demand. Regarding shareholder returns, as shown on the left, an interim dividend of JPY 25 per share was decided. We plan JPY 25 of year-end dividend and making the annual dividend per share JPY 50. As shown on the right, the share buyback period was from June 6 to September 6, 2024, and the acquisition of treasury shares for 2,739,600 shares for JPY 5 billion was completed. We plan to cancel all shares acquired on November 29, 2024. With these initiatives, we achieved a total shareholder return ratio of over 100%. We continue to promote the improvement of capital efficiency ratio. As of the end of FY 2023, equity ratio was 54.9%, and it went up slightly during the previous midterm plan, but we set target of 50% equity ratio as a benchmark in the new midterm plan, and we take initiatives to achieve approximately 50% of equity ratio. Finally, for further growth we consider changing reporting segment, as mentioned before. To achieve MEX26 and move towards the future to be realized in 2030, we changed reporting segment to further clarify business distinctions. We identify businesses that should be expanded in others and concentrate investment in expanding businesses as well as efficient operation, and that will lead to accelerated growth and improved capital efficiency, which would maximize corporate value eventually. The ideas behind the changes are shown on the left. We identified the businesses where our strengths can be better utilized with high profitability, and they are defined as businesses to be expanded. In other businesses, we will ensure efficient operations so that they will contribute to the Maxell Group through profit. As purpose of changes shown on the right, we will ensure the achievement of MEX26 target through this change and achieve the feature to be realized in 2030. Specific changes of reporting segments. We define Energy, Functional Materials and Optics & Systems as Analog Core business group that would achieve intensive growth. Making aggressive growth investment in these businesses, the company will accelerate their growth also by exploring growth opportunities through external collaboration and M&A. Other businesses are defined as value co-creation businesses, aiming to contribute to profit and ensure efficient operation. As shown below, some battery-related businesses in the current Life Solutions segment will be transferred to the Energy segment. Three businesses of Energy, Functional Materials and Optics & Systems are defined as Analog Core business group as a key growth driver with high profitability. Here, we will leverage our strength of Analog Core technologies and drive growth with focused investment. That said, even within the group, when the business is unprofitable and shows no prospects for improvement in profit growth and profitability, we will promote business replacement. On the other hand, in value co-creation businesses, we aim for contribution to profit. And to that end, we ensure efficient operation and strive to maximize profitability. Performance figures after the change in reporting segments in FY 2024. Put simply, approximately JPY 5 billion in sales in the Life Solutions segment will be transferred to the Energy segment in the new reporting segment. This concludes my presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]