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

[Interpreted] I now explain the financial results for fiscal 2025. Four major points, outline of the full year financial results for fiscal 2025, full year forecast for fiscal 2026, the impact of the situation in the Middle East on business performance and shareholder returns. First, the outline of financial results for fiscal 2025. These are the consolidated results. Net sales for fiscal 2025 were JPY 129.4 billion. Operating profit was JPY 7.9 billion. The shareholders' equity ratio was 48.2%, ROIC was 4.6% and ROE was 9.3%. The exchange rate was JPY 151 per U.S. dollar. As indicated in the comments, net sales increased in primary batteries, mainly for medical devices and infrastructure as well as an increase in licensing revenue. However, overall sales declined due to lower sales of rechargeable batteries, semiconductor-related products and health and beauty care products. Operating profit decreased due to lower sales of semiconductor-related products and health and beauty care products in addition to the impact of soaring raw material prices, particularly silver in the energy sector. Net profit increased mainly due to the recording of extraordinary income associated with the equity transfer of the consolidated subsidiary. Next, I will explain the changes in the net sales from fiscal 2024 to fiscal 2025. Overall change was JPY 0.4 billion. From the fiscal 2024 sales of JPY 129.8 billion, quantity variance was JPY 0.5 billion. Price variance was negative JPY 0.2 billion and exchange variance was JPY 0.3 billion, resulting in JPY 129.4 billion. As shown on the right, the quantity variance reflects increase in primary batteries, adhesive tapes, coated separators, automotive optical components, licensing revenue and hydraulic tools. On the other hand, decreases in rechargeable batteries, semiconductor-related products and health and beauty care products were negative factors. Price variance was negative from sales price changes due to lower cost of some raw materials. Exchange variance was positive JPY 300 million due to monthly exchange rate fluctuations, although the yen appreciated overall during the year. Next, the operating profit changes. This was down by JPY 1.4 billion year-on-year. From JPY 9.3 billion in fiscal 2024, quantity variance was JPY 0.2 billion, while material cost was negative JPY 1.1 billion, price variance was negative JPY 0.1 billion. Cost reduction was negative JPY 0.1 billion and exchange variance was negative JPY 0.2 billion. As shown on the right, following sales, quantity variance reflects increases in primary batteries, adhesive tapes, coated separators, automotive optical components, licensing revenue and hydraulic tools, while decreases in rechargeable batteries, semiconductor-related products and health and beauty care products were negative factors. Price variance reflects the impact of sales price changes due to lower raw material costs. Also for material costs, soaring silver prices resulted in lower profit. Cost reduction includes an increase in fixed cost, the recognition of inventory valuation losses. Exchange variance was negative due to the appreciation of the yen. Next, cash flow changes. Starting from JPY 33.1 billion, cash flows from operating activities were JPY 8.9 billion. Cash flows from investing activities were negative JPY 15.1 billion. Cash flows from financing activities were JPY 2.9 billion, and exchange variance was JPY 1.7 billion, resulting in cash and cash equivalents at the end of fiscal 2025 at JPY 31.6 billion. From here, I will explain the key points of the financial results by segment. First is the Energy segment. Net sales were JPY 42.5 billion, unchanged from the previous fiscal year. Operating profit was JPY 2.1 billion, down JPY 0.3 billion year-on-year. As written in the comments, net sales increased in primary batteries, mainly for medical devices and infrastructure applications, particularly overseas and remained steady overall. However, rechargeable batteries declined due to the discontinuation of prismatic LIB production in May last year. For all solid-state batteries, which are expected to drive future growth, customer adoption is steadily increasing. Operating profit was impacted by sales figures and also by the sharp increase in silver prices negatively impacting primary batteries, especially silver oxide batteries. Losses in rechargeable batteries have been reduced following the discontinuation of prismatic LIB production, although some losses remain. For all solid-state batteries, we are intentionally increasing development costs toward higher capacity and greater heat resistance. Next is the Functional Materials segment. Net sales were JPY 32.6 billion, up JPY 0.8 billion year-on-year. Operating profit was JPY 1.5 billion, up JPY 0.3 billion year-on-year. In terms of the breakdown of the changes, sales for adhesive tapes increased, driven by tapes for construction and semiconductor manufacturing processes, which are key focus areas in our medium-term plan. Industrial Materials also increased, supported by strong performance of coated separators for HEVs. Operating profit increased in line with the growth in sales. Next is the Optics & Systems segment. Net sales were JPY 36.4 billion, up JPY 0.5 billion year-on-year. Operating profit was JPY 3.5 billion, down JPY 0.9 billion year-on-year. In terms of the breakdown of changes, automotive optical components secured sales growth despite being in a gap period for new development with no new models introduced. Semiconductor-related products declined due to weakness in the general purpose semiconductor market. Although AI demand is strong globally, our semiconductor DMS business is mainly general purpose products. It did not benefit from this trend and sales declined. Licensing revenue increased year-on-year. Operating profit was down due to the sales conditions as well as the recording of inventory valuation losses, resulting in a year-on-year decrease of JPY 0.9 billion. Next is the Value Co-creation businesses segment. Net sales for fiscal 2025 were JPY 17.9 billion, down JPY 1.7 billion year-on-year. Operating profit was JPY 0.8 billion, down JPY 0.5 billion year-on-year. In terms of the breakdown, hydraulic tools increased, supported by strong domestic and overseas sales. On the other hand, health and beauty care products declined mainly due to the impact of U.S. tariffs that occurred in the first half, making it difficult to recover sales for the full year. Operating profit followed the same trend with hydraulic tools increasing and health and beauty care products decreasing. As mentioned earlier, the impact of U.S. tariffs was relatively limited in other segments. But in this segment, although performance gradually recovered from the third quarter in line with demand recovery, the full year results were still affected. Next is a summary of the reasons for the gap from the initial operating profit forecast. For the Energy segment, the initial plan was JPY 1.8 billion, and the result was JPY 2.1 billion with an achievement rate of 115%. Although the result exceeded the initial plan, as mentioned earlier, profits have been pressured since the second half due to the sharp increase in raw material costs, particularly silver. Next is the Functional Materials segment. Initial plan was JPY 1.9 billion, and the result was JPY 1.5 billion. Achievement rate was 77%. Adhesive tapes progressed in line with the plan, mainly in construction and semiconductor-related areas, which we want to grow, while industrial rubber products showed some recovery from the previous year, but did not reach the initial plan. Then the Optics & Systems segment, initial plan was JPY 5 billion, and the result was JPY 3.5 billion. The achievement rate was 71%. Semiconductor-related products struggled throughout the year. We expected recovery from the second half, but now we expect full recovery in fiscal 2026 onward. Also, inventory valuation losses were recorded in the second half, resulting in a challenging achievement rate for this segment. Finally, the Value Co-Creation business segment recorded operating profit of only JPY 0.8 billion with an achievement rate of 63% due to the inability to recover from the impact of U.S. tariffs over the full year. Overall, on a consolidated basis, operating profit was JPY 7.9 billion against the plan of JPY 10 billion with an achievement rate of 79%. Next, I explain the full year forecast for fiscal 2026. Net sales will be JPY 143 billion, aiming to grow JPY 13.6 billion from fiscal 2025. Operating profit will be JPY 10 billion, aiming to grow JPY 2.1 billion from fiscal 2025. Net profit will be JPY 6.7 billion, down JPY 1.6 billion due to the absence of extraordinary income recorded in the previous year. ROIC forecast is 5.5% and the ROE, we will aim for 7.5% despite the absence of the previous year's special factors. The assumed exchange rate is JPY 150 per U.S. dollar. For investments, we expect capital expenditure of JPY 10 billion, depreciation of JPY 6.5 billion and R&D expenses of JPY 6 billion. As noted in the comments, net sales include the contribution from Maxell Sakura, whose business has been newly transferred and added to our company. Operating profit is expected to rise due to the contribution from Maxell Sakura as well as the recovery in semiconductor-related products and health and beauty care products. Net profit is expected to decline compared to fiscal 2025 when extraordinary income was recorded from the equity transfer of consolidated subsidiary. Next, the net sales changes from fiscal 2025 to fiscal 2026. Quantity variance is to be JPY 11.5 billion. For quantity variance, we expect big growth in the Energy segment of JPY 9.1 billion. Price variance is to be JPY 2.2 billion, including JPY 1.5 billion in the Energy segment. Exchange variance is expected to have minimal impact at negative JPY 0.1 billion, resulting in a target of JPY 143 billion in net sales. Next, operating profit changes. From the fiscal 2025 result of JPY 7.9 billion, price variance will be JPY 2.2 billion, including JPY 1.5 billion in Energy and JPY 0.4 billion in Functional Materials. Quantity variance is to be JPY 1.3 billion, mainly from Functional Materials, Optics & Systems and Value Co-Creation businesses, leading to profit increase. Material costs are to remain more or less unchanged year-on-year at JPY 0.1 billion. Cost reduction is expected to be negative JPY 1.7 billion, reflecting progress in cost reduction, enhanced HR investment, higher depreciation and the impact of goodwill of Maxell Sakura. All told, we aim to achieve operating profit of JPY 10 billion in fiscal 2026. This is the full year forecast by segment. Fiscal 2026 forecasts are shaded in yellow. In the Energy segment, net sales should be up by JPY 10.5 billion and operating profit up by JPY 1 billion. In Functional Materials, net sales should be up JPY 2.1 billion and operating profit up by JPY 0.4 billion. In Optics & Systems, net sales should be down JPY 0.7 billion and operating profit up by JPY 0.4 billion. For the Analog Core Businesses as a whole, we expect net sales of JPY 123.4 billion, up JPY 11.9 billion and operating profit of JPY 8.9 billion, up JPY 1.8 billion. Add to that Value Co-Creation businesses, and we will aim for total net sales of JPY 143 billion and operating profit of JPY 10 billion. Here are the key points of the Analog Core Businesses. In the Energy segment, primary batteries continue to be significantly impacted by rising raw material costs, particularly silver. We are determined to implement price pass-throughs to reflect these cost increases. However, there is a time lag for that and profitability is expected to improve gradually with some delay from the raw material cost increases. For medical devices, we are investing in capacity expansion and the new production line is expected to start up in the second half, contributing to both sales and profits. For rechargeable batteries, we discontinued the production of prismatic lithium-ion batteries last fiscal year. So we expect those losses to start to be eliminated. Meanwhile, for all solid-state batteries, which will be a key future pillar, full-scale sales will be accelerated. Development of general purpose modules for FA applications is expected to be completed in June. For Functional Materials, we have been investing in a new production line in Kobuchizawa for adhesive tapes for construction. We shall ensure its operations to start up during fiscal 2026 in order to meet increased orders from major customers. Semiconductor-related products, which have been struggling, showed recovery in the latter half of fiscal 2025, and we plan to further expand sales in fiscal 2026, mainly for AI-related applications. For industrial materials, coated separators are currently performing strongly, and we expect sales to continue to grow next fiscal year. So we want to ensure higher sales and profit. In the Optics & Systems, we plan to increase both sales and profit, driven by expanded sales of next-generation lenses for automotive optical components. We will also promote the development of new nonautomotive applications. For semiconductor-related products, demand recovery in the DMS business has begun to emerge from the fourth quarter, and we aim to increase orders and secure both sales and profits in fiscal 2026. In addition, as previously announced, the plan to transfer the EF2 Electro Fine Forming business to Sonocom around July have been reflected in these numbers. Next, I will explain the impact of the situation in the Middle East on our business performance. As noted in the comments, raw material costs such as crude oil and naphtha are soaring, and there is a risk of several hundred million yen in operating profit in Q1. We will implement price pass-through and make every management effort to minimize the impact. Also, in addition to price increases, we are starting to see the risk that some raw materials will become more difficult to procure. To address this, we will respond across the entire Maxell Group, including group companies through measures such as intergroup supply sharing and work to minimize impact. These are our key initiatives. The table below shows the potential impact on each segment, including cost increases, production constraints and decrease in orders from customers indicated by symbols, circle, triangle and X. Items with significant negative impact are marked with an X. And overall, the Functional Materials segment is expected to be most affected, particularly in terms of cost increases and production constraints. On the other hand, the impact on Optics & Systems segment will be relatively minor, but we reflect the increased raw materials, energy and transportation cost in selling prices with thorough explanations to customers to minimize their impact on profit. Regarding production constraint, the current environment is very fluid, but we will secure inventory and consider the use of alternative parts and materials when they are in short, collaborating with customers. And through intergroup sharing, we will minimize the impact of constraints. Regarding the decrease in orders, we will strengthen coordination with customers and adjust production in line with sales through minimum cost operations. The fourth point is shareholder returns. As described here, all treasury shares acquired on November 19, 2025, are scheduled to be canceled on May 29, 2026. In FY 2025, last fiscal year, we implemented share buyback of JPY 13.2 billion in addition to ordinary dividends, steadily carrying out the total payout ratio of over 100%. In FY 2026, this fiscal year, ordinary dividends are planned at JPY 56 per share, up by JPY 6 year-on-year. Directors and executive officers. We will have deliberations at the Annual General Meeting on June 25, 2026. And Mr. Sugimune will be appointed as a new Director. And Ms. Aoki will be appointed as a new outside director. With them, as shown on the right chart, ratio of independent outside directors will be over 50%, 57.1% through our effort to enhance governance. And the ratio of female directors will increase to 28.6% in this new structure. Executive Officer structure is shown on the left. Each executive officers under my leadership will be responsible for the operation of each business segment. This concludes my presentation on the financial results. Now let us move to another presentation deck. Taking about 15 minutes, let me present the updates on the midterm management plan. Executive summary covers progress on quantitative target, business strategy and financial strategy. Progress on quantitative target is partially delayed. Sales and profit were down in FY 2025 year-on-year due to soaring silver prices, raw material for small batteries and delays in the market recovery of the semiconductor-related products, mainly in DMS business. On the other hand, we'd like to realize increase in sales and profit in FY 2026 year-on-year by leveraging synergies through integration of the primary battery business acquired from Murata Manufacturing as well as offsetting increased costs through cost reflection in price and cost reduction measures. Regarding progress on business strategy, we identified our strengths and implemented the growth strategy centered on the core energy business while improving efficiency in the Optics & Systems business and deciding business transfer of tough EF2 business to best owner. In new businesses, we advanced the development and application exploration of all solid-state batteries, which will be the next-generation pillar. We expect that small battery business will continue to drive overall growth as a main driver in FY 2026 and onward. Progress on financial strategy was also smooth. In addition to the targeted growth investment, we fulfilled the promise with shareholders to achieve total payout ratio of over 100%. We continue targeted growth investment and proactive shareholder returns in FY 2026 and onward. Overview of MEX26 whose final year is FY 2026. Let me start with the progress on quantitative target. Numbers in gray are results in FY 2025. Numbers in red columns are forecast for FY 2026 and year-on-year comparison and FY 2026 original plans shown at the right hand. Numbers shown in bold in the red column are forecast for FY 2026. Net sales are JPY 143 billion. Operating profit is JPY 10 billion, OP margin is 7% ROIC 5.5% and ROE is 7.5%. Compared to the previous year, net sales are up JPY 13.6 billion. Operating profit is up JPY 2.1 billion, and OP margin is up 0.9% year-on-year. ROIC is up 0.9 point. ROE is down 1.8 point as the net profit was boosted with a special upside in the previous year. Sales and operating profit by business segment. Total sales are JPY 143 billion and operating profit is JPY 10 billion, as mentioned in the previous slide. In Energy segment, which we intend to grow, we plan to achieve sales of JPY 53 billion and operating profit JPY 3.1 billion with JPY 10.5 billion and JPY 1 billion increase year-on-year. We aim to achieve higher than the original plan of JPY 38.5 billion and JPY 2.5 billion, as shown on the right. In Functional Materials segment, net sales will be JPY 34.7 billion and operating profit will be JPY 1.9 billion with the increase of JPY 2.1 billion in sales and JPY 0.4 billion in operating profit. In Optics & Systems segment, net sales will be JPY 35.7 billion. Operating profit will be JPY 3.9 billion and sales will be down by JPY 0.7 billion year-on-year, but profit will be up by JPY 0.4 billion. In Value Co-Creation business segment, net sales will be JPY 19.6 billion. Operating profit will be JPY 1.1 billion and sales will be up JPY 1.7 billion and operating profit will be up by JPY 0.3 billion. We expect that the small battery business will lead overall growth as a main driver, and will achieve stable growth in other segments, ensuring thorough financial discipline. Progress on business strategy. In business strategy, we firmly manage existing business portfolio with a strong growth of new business. To that end, we will also strengthen sales activities as well as enhancing management foundation. Overall progress is smooth. But on the sales front, we'd like to expand customer touch points further through new initiatives. In existing business portfolio reform to accelerate the positive momentum, we established a corporate guideline, positioning the small battery business as a main growth driver, and we acquired the primary battery business from Murata Manufacturing. We formulated a front-runner strategy to become the global #1 in the small battery sector. On top of the primary battery business acquired from Murata Manufacturing, we are capturing advanced technologies through VC investment. In managing business portfolio, in the business where the growth seems to be difficult and where we strive to minimize the negative factors, we ensure thorough financial discipline in businesses other than small battery business. We transferred the optical lens unit business to a subsidiary to improve business efficiency in the process of reducing negative and increasing the positive factors. We also transferred EF2 business to the best owner. In new business, we are accelerating the growth of the all solid-state batteries by development of modules integrated with peripheral circuits. In sales, we continue to expand the customer touch points and we will strengthen management foundation as well. With an aim to be a frontrunner in the small battery sector, we established the corporate guideline, positioning the small battery business as a main driver of growth. Our byline is Micro Batteries Maximum Impact. Its key messages that our small battery parts and materials will provide solutions for customers and will become an indispensable company. We will move forward with the strategy of becoming the frontrunner in the high-reliability small battery sector. We completed the acquisition of primary battery business from Murata Manufacturing effective March 1, 2026. We expand global market share by leveraging mutual strengths to enhance QCD competitiveness and accelerating the progress of development themes. As shown on the left, in addition to the Maxell Ono Works in Hyogo, Maxell Sakura in Koriyama Fukushima plant of micro battery will be added as a production base. They have complementary strengths as Koriyama plant has strength in silver oxide batteries, while Ono Works have strength in other lithium cylindrical and coin-type batteries. As shown in the chart on the right, we aim to achieve sales of JPY 53 billion with 5.8% of OP margin in FY 2026 and will achieve prominent growth in the next midterm management plan. Besides business scale expansion, we will also pursue advanced technology amid the ongoing progress of various technological development. In addition to our own development of advanced technology, we are strengthening collaboration with external parties. As already press released, we decided to invest JPY 1 billion in JAFCO. In the pursuit of advanced technology, we will promote technological development of battery itself and collaborate with battery-related peripheral technologies, including those for charging capabilities of rechargeable batteries to provide solutions to customers. The small battery market, where we aim to become global #1 will grow to JPY 550 billion in 2030. Since 2020, the CAGR has been around 6% to 7%. With these product lineups listed here, we'd like to expand our sales and profit. We will achieve stable growth in businesses other than the battery sector by ensuring thorough financial discipline. In Functional Materials segment, we make proactive investment in Kobuchizawa for tapes for construction, and we will grow tapes for semiconductor manufacturing processes and coated separator businesses as well. In Optics & Systems, with transfer of optical lens unit business to a subsidiary, we will have an integrated business management so that we'll be able to launch highly competitive products quickly in the market. In semiconductor-related products, we'll focus on DMS business, whose demand showed recovery recently, and we transfer EF2 Electro Fine Forming business to the best owner for its further growth. We transferred optical lens unit business to a subsidiary, Maxell Frontier, with the aim of integrated manufacturing system. They will enable us to improve efficiency through consolidation of management resources, which will reduce cost and accelerate technological development. We share technologies and resources between LED headlamp lenses and optical lens unit in the same company to leverage technological synergies. In semiconductor-related business, we aim at optimal allocation of management resources. Regarding EF2 business, though we achieved a technological differentiation with enhanced precision, it was difficult to grow this business substantially in Maxell. As Sonocom has a proven track record in screen printing business, we decided to transfer our business to the company to grow the business further at a transfer price of JPY 930 million. Our efforts for all solid-state batteries include integration of battery in module as well as the development of battery itself as already announced. In expanding and capturing demand as replacing the primary batteries with all solid-state batteries will work effectively, we will expand the sales of all solid-state battery module aggressively going forward. In businesses other than battery, we will strengthen Analog Core Technology of mixing, coating and molding further. As an example, with the growing demand to suppress magnetic noise, we are accelerating our development of EMC countermeasure components to increase their sales and profit. In this April, we started sample shipment for final approval by customers. On financials, basic policy is growth investment and shareholder return. In our original plan of cash inflow, we intended to secure JPY 40 billion cash from business. But after revision due to tougher businesses, we revised the operating cash flow to JPY 27 billion. But for the cash necessary for growth, we conducted debt finance of JPY 20 billion to promote growth investment of JPY 35 billion on the side of cash outflow. We will implement shareholder returns of total payout ratio of 100% or more as promised. Proactive investment of JPY 35 billion is approximately double the amount in the previous midterm plan. And among them, we will make substantial investment over JPY 20 billion in Energy segment. We have already invested in primary battery business for the expansion of Ono Works and M&A for a part of Murata manufacturing business. On top of them, we will invest JPY 10 billion in other segments and JPY 5 billion in R&D, HR and DX to achieve the total investment of JPY 35 billion for further growth. Shareholder return. We announced a total payout ratio guidance of 100%. Cumulative total payout ratio for 3 years is already over 100%. Red part in the bar chart is dividend and the gray part is share buybacks. In FY 2026, we will flexibly consider share buyback in light of the dividend and performance outlook. This is the summary. We'd like to have your continued support as we prepare for the next midterm plan in this fiscal year, final year of the current midterm plan, MEX26. This concludes my presentation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]